A new era of care collaboration.
2019
Annual Report
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A Message from the President and Chief Executive Officer
To Our Stockholders
During 2019 Spok made substantial progress in
and clinical information to care teams when and where it
accelerating the development of our Spok Go® platform
matters most to improve patient outcomes.
and in aligning our resources and focus where needed
most to increase the Company’s long-term growth
Before I get into the details of the full year, I want to
potential. We successfully completed the fourth year
underscore where we are strategically, with respect to our
of our five-year transformation plan, and prior to the
business plan and outlook. We believe our vision to offer
pandemic believed we were well-positioned for continued
an integrated cloud-native platform for mobility, clinical
progress throughout 2020.
alerting, workflows, and contact center solutions is the
right strategy. We have developed the Spok Go platform
As I write this letter we are in the midst of a national
on a foundation of a single, best-in-class architecture built
crisis and major disruptions to our lives and world
on a cloud-native Software as a Service, or SaaS, delivery
economies. The COVID-19 pandemic has clearly created
model. We now expect sales and revenue will come more
an atmosphere of fear and uncertainty, and our thoughts
slowly than we had anticipated due to the pandemic.
and prayers go out to those who have been both directly
However, we are continuing our focus on building the
and indirectly affected by this tragedy. It has also greatly
sales pipeline and adding functionality to our solution.
impacted the financial health of our target customer base
Much will depend on the health of our customers and how
in a very negative way. While the situation is fluid, and
long this novel virus continues to dictate the timeline.
no one is able to predict the duration and severity of this
pandemic, let me assure you that, in the near term, Spok
We also continue to remain focused on the efficient
is positioned to deal with the situation. We have taken the
and effective operation of our wireless infrastructure
necessary steps to provide for the safety of employees
and support systems. Our wireless subscribers provide
in order to ensure the continuity of our operations and
the base that allows for our investment in product
product development. In 2019 approximately 80% of our
development as well as support for our capital allocation
revenues were recurring in nature, coming from either
plan. Over time, we expect software revenue to exceed
wireless usage or software maintenance contracts. This
wireless revenue on a quarterly basis. However, despite
mix is somewhat protective of our top line and this is not
that distinction, our wireless business will continue to be
anticipated to change materially in 2020. We provide a
a significant driver in our success as an organization for
critical function, which will become even more important
many years to come.
in this environment, delivering reliable communications
“
We provide a critical function, which will become even more important in this
environment, delivering reliable communications and clinical information to care
teams when and where it matters most to improve patient outcomes.
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We will continue to evaluate ways to deliver value to
our operations to a cash flow maximization model and
our shareholders from our software business and our
revert to paying a consistent regular dividend and
investment in Spok Go and, as we have indicated in the
year-end special dividends with excess cash.
past, we intend to carefully evaluate good faith proposals
from financially capable parties that fairly value Spok and
the potential for stockholder value represented by our
long-term investment in our enterprise, cloud-native Spok
Go platform as well as our cash, our wireless, and our
software maintenance revenue streams.
We will watch the market closely as the year progresses
for signs it is opening back up for the sale and installation
of our software solutions. While we don’t currently
expect this, if we don’t see significant progress in
the market opportunity and the ability to continue to
generate positive cash flow in the future while still
investing in our platform, we can aggressively right size
As always, creating stockholder value over the long term
remains a key driver of our strategy, along with our focus
on all constituents, including customers, employees,
and the communities in which we live and work. It’s
why we made the pivot in the first place. We believe
our constituents will ultimately be rewarded as our
investments and efforts create a unique and powerful
clinical communication platform, yielding future revenue,
EBITDA, and operating cash flow growth. On behalf of
our entire senior management team, we appreciate the
continued support that our investors have provided us in
this journey.
Cash Returned to Shareholders
Dividends and Share Repurchases
(dollars in millions)
$29.0
$25.3
$23.5
$15.2
$12.3
$16.7
$16.4
$30.0
$25.0
$20.0
$15.0
$10.0
$5.0
$0.0
2013
2014
2015
2016
2017
2018
2019
Dividend Distribu�on to Shareholders
Share Repurchases
The dividend distribu�on to shareholders for 2017 includes the $5.2 million special dividend that
was declared in December 2016 and paid in January 2017
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CASE STUDY
VCU Health
The challenge
Now, the health system leverages the
latest options for secure messaging across
The health system was struggling with inefficient
smartphones, pagers, and computers, as well as
workflows that impacted not only physicians
contact center technology that supports a single,
and nurses, but also other care team members
centralized location for 225 agents.
and contact center agents. Clinicians were also
frustrated by delayed messages and the inability
VCU Health’s EHR system has also been
to reach one another easily for necessary patient
integrated with its communication workflows
care communications.
The solution
to encompass the broader care team, which is
essential for quickly sharing and acting on patient
test results and changes in vitals status.
VCU Health turned to Spok, its health IT partner
of 20 years, to resolve these emerging trouble
The results
spots in their enterprise-wide communication.
Spok solutions have had a far-reaching impact
The solution: an integrated technology
that extends from clinicians and contact center
agents to patients. Not only can time-sensitive
patient alerts reach the care team quickly, but
clinicians can also interact with ease. In fact,
the success of VCU Health’s project led it to be
named a Spok Innovation Award Winner.
approach that touched all areas.
"Spok has been a terrific partner
in solving our communication
challenges because it’s been able to
be at every point of communication
where we’ve needed them."
- Sean McKenna, M.D., Interim
Chief Medical Information Officer
for VCU Health
Reduced average
call-handling
time by
15%
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Business Review
Spok consolidated 2019 revenues were on plan and
and emergency notification to both new and existing
totaled $160.3 million, down approximately 5.4% from
customers.
2018, reflecting continued, planned erosion in our paging
base and a year-over-year decline in software revenue,
as we focused on developing our new cloud-native and
integrated communication platform. During the year,
we continued to invest in our business to enhance our
product offerings and maintain a strong balance sheet.
At year end, our cash, cash equivalents and short-term
investments balance was $77.3 million with no debt. Our
ability to generate cash allowed us to make key strategic
investments for long-term growth and execute against
our capital allocation plan. In 2019, Spok returned $16.4
million to stockholders in the form of dividends and share
repurchases. Spok also generated nearly $12 million in
net cash provided by operating activities during 2019 that
partially offset cash returned to stockholders and capital
expenditures.
In 2019, we continued our investments to grow our
software solutions capability, while maintaining our
valuable wireless revenue stream. Software revenues
totaled a little over $72.1 million, down 4.1% from 2018.
The decline in year-over-year software revenue was
primarily due to lower license revenue, and associated
equipment revenue, as a result of our software
operations bookings being slightly lower, and the mix of
software bookings being more heavily skewed towards
services. While this had the positive impact of increasing
our software backlog, it did not result in the immediate
revenue recognition of license and equipment bookings.
We saw a continuing trend of very strong renewal
rates on software maintenance contracts. Also, our
pipeline of marketing qualified sales leads continued
to grow throughout the year. Our sales engineering
team was also very busy in 2019 as they performed
approximately 120 customer demos, helped frame
nearly 400 Statements of Work (SOWs), and completed
more than 50 RFPs. Demand for our solutions remained
strongest in North American markets, specifically among
hospitals and other healthcare organizations where we
sold solutions for smartphone communications, contact
center management, secure texting, clinical alerting,
Wireless subscriber and revenue trends continued to
improve in 2019 as we again exceeded our expectations
for gross additions, net unit churn, revenue, and ARPU.
Noteworthy in 2019 were the 112,000 new units that
were added to our subscriber base. We were particularly
pleased to see many of the gross placements come from
takeaways from a key competitor in this space with the
result of increased market share for Spok.
Our year-over-year rate of paging unit erosion was
consistent with prior year levels, as the net number of
units lost during the year totaled 54,000, down 5.4%
from the prior year. Our year-over-year rate of wireless
revenue erosion was a new record-low of 6.5% for 2019,
a 30-basis point improvement from the prior year and a
sharp reduction from the double digit declines we saw
prior to 2016. We were especially pleased to see these
positive trends continue in our top-performing healthcare
segment, our best performing market segment, with the
highest rate of gross placements and lowest rate of unit
disconnects.
For the full year 2019, operating expenses increased to
$176.1 million, compared to $172.6 million in 2018. 2019
adjusted operating expenses, which exclude depreciation,
amortization, accretion, and impairment, were down
2.4% from 2018 and were slightly below the mid-point
of the guidance that we had provided at the beginning
of the year. Noteworthy was that our team was able to
achieve this performance with a nearly 13% increase
in product research and development (R&D) expenses
over the same period in order to support our investment
in the Spok Go platform. Net of product R&D costs, the
declines in year-over-year operating expenses reflected
a cost structure that is fully aligned with the demand
levels we saw during the year. We continue to manage
operating expenses closely, and the efficiencies we
have been able to implement across our cost structure
provide a solid financial platform as we continue to make
investments in areas that support our strategy for long-
term growth.
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Other key operating metrics for 2019 included:
• Software backlog totaled $50.6 million at December 31, 2019, compared to $40.4 million at the end of 2018.
• The revenue renewal rate for software maintenance in 2019 continued to exceed 99%.
• Annual wireless paging unit erosion totaled 54,000 units, or 5.4%, in 2019, down from the prior year level
of unit erosion of 57,000 units. Paging units in service at December 31, 2019, totaled 938,000, compared to
992,000 at the end of the prior year.
• Total paging ARPU was $7.34 in 2019, compared to $7.39 in 2018.
•
In 2019, adjusted operating expenses (excluding depreciation, amortization, accretion and goodwill
impairment) totaled $158.0 million, compared to $161.9 million in 2018.
• For 2019, capital expenses totaled $4.8 million, compared to $5.9 million in 2018.
• The number of full-time equivalent employees at December 31, 2019, totaled 638, up from 596 at year-end
2018.
• Capital returned to stockholders in 2019 totaled $16.4 million. This came in the form of approximately $9.8
million from the regular quarterly dividend and approximately $6.6 million from share repurchases.
• The Company’s cash, cash equivalents, and short-term investments balance at December 31, 2019, was
$77.3 million, compared to $87.3 million at December 31, 2018.
On a final note, during the fourth quarter of 2019 we performed our annual assessment of goodwill. Based on that
assessment and given the recent decline in the market value of Spok common stock, it was determined that the
carrying value of the business exceeded the estimated fair value of the company, resulting in a non-cash impairment
charge of $8.8 million. While this charge impacted our full year net income and EBITDA (earnings before interest, taxes,
depreciation, and amortization) totals, let me point out that, in our belief, the impairment does not reflect management's
confidence in the future value of our business.
Research.“
Spok received recognition as the #1 secure communications
platform for hospitals and health systems by Black Book Market
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2019 Accomplishments
In 2019 Spok continued to build an industry-leading reputation in the marketplace. In addition to our financial performance,
progress was made in several other areas, including product development, sales strategy, and key strategic partnership
agreements. Here is a brief overview of some of our accomplishments in this area:
• First, for the full year 2019, we added more than 160 new accounts primarily in the healthcare and government sectors.
• Additionally, during the year we announced key strategic partnerships, most notably with Amazon Web Services, or
AWS, for a complete cloud services infrastructure, giving Spok enterprise customers excellence in security, agility, and
breadth and depth of services with a real-time cloud-based communication solution.
• Also, in 2019, our management were keynote speakers at numerous C-suite conferences.
• Next, Spok received recognition as the #1 secure communications platform for hospitals and health systems by Black
Book Market Research.
• We continue to provide solutions to all of the adult hospitals on the U.S. News & World Report Best Hospitals honor roll
and all but one of the Best Children’s Hospitals.
• Finally, during the year, we continued to add depth and experience to the Spok management team, with our new Chief
Medical Officer, Matt Mesnik, M.D., and Chief Information Officer, Tim Tindle.
Spok has many loyal, satisfied customers and strengths as an organization. This is evidenced by a customer list of over
2,200 hospitals, our extremely high maintenance renewal rates, and positive customer feedback.
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2020 Business Objectives
Approximately four years ago, Spok embarked on a transformation that was a tidal shift in our strategic direction for
healthcare, our largest customer segment. This strategy pivot is a five-year plan that signaled a very intentional move
from offering our customers “point” solutions, or single-product solutions, for call center software, alarm management,
and secure messaging, to offering them a cloud-based, single, integrated clinical communication and collaboration
platform called Spok Go.
Our decision to make this shift and focus on the Spok Go platform resulted from many reasons, including:
• Customer needs as our healthcare customers were telling us they needed a more unified approach to
communications across their enterprise.
• The large potential market opportunity as we further penetrate the multi-billion-dollar healthcare IT
communications market.
• Business simplification as we had been offering our customers too many different products in multiple
versions on several different platforms.
• Competitive positioning as we concluded that no one else offers a single, integrated cloud-native platform
for healthcare communications.
Our core foundation of clinical communication is strong. And we are proud of the work our employees have done in
support of this mission. We have accomplished so much together since we became Spok. We are laser focused on
making Spok Go the leading clinical communication and collaboration platform for the healthcare industry.
In 2020, we continue our commitment in investing to address near-term opportunities and to achieve long-term organic
growth. We believe these investments are critical in supporting our strategy to deliver our industry-leading clinical
communication and collaboration platform and drive long-term stockholder value. However, while we believe that we
need to continue investing in our future, we have completed the bulk of our investments as we begin selling the Spok Go
platform.
As a backdrop, in 2016, R&D expenses totaled approximately $13.5 million, an increase of nearly one-third from prior year
levels, in 2017 R&D expenses totaled $18.7 million, an increase of nearly 40% from 2016, in 2018 R&D expenses totaled
$24.5 million, a 31% increase from 2017, and in 2019 R&D expenses totaled $27.5 million, a 12.6% increase from the prior
year.
Increase in Product Research and Development Expense
2016
31%
2017
39%
2018
31%
2019
13%
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CASE STUDY
Yale New Haven Health
The challenge
The results
Yale New Haven Health, struggled to find a
In a test, Yale New Haven Health issued
reliable emergency notification system that
an emergency notification to all 20,000+
would allow them to send mass emergency
employees. The message reached everyone
notifications to all health system employees.
within eight minutes. With Spok e.Notify in
“Our biggest challenge is sending messages to
place, they reduced emergency notification
large, dynamic groups,” explains Steve Tortora,
by 22 minutes, a 73% decrease from previous
manager of call centers for Yale New Haven
notifications. What’s more, the notification
Health. “In the past, we tried sending messages
was sent to all employees, whereas previous
to a group of over 1,000 employees, which never
notifications could only be sent to groups of
worked as we hoped and took 30 minutes.”
no more than 1,000. “It really did work!” says
The call centers needed an easy-to-use, cost-
Tortora about the all-employee test.
effective solution that provided a way to send
mass emergency notifications.
The solution
Yale New Haven Health implemented Spok
emergency notifications (Spok® e.Notify) to
allow the call center team to send critical
information quickly and reliably on any type
of communication device. Instead of calling
trees and confusion, operators can focus their
efforts elsewhere—simplifying their emergency
notification workflow.
Reduced time
issuing emergency
notification alerts by
22 minutes
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We believe that R&D expense increases will continue to slow in 2020 and approach a more steady-state level.
We anticipate that R&D expenses will increase from 2019 levels, although at a much slower pace, and will be
primarily offset by expense reductions in other categories.
With respect to our capital allocation strategy in 2020, our goal has been to achieve sustainable business
growth while maximizing long-term stockholder value through our multi-faceted capital allocation strategy. That
has included:
• Dividends and share repurchases;
• Key strategic investments to improve our operating platform and infrastructure and
drive long-term organic growth; and
• Potential acquisitions that could provide additional revenue streams and are accretive
to earnings.
For 2020 we are committed to continue paying our 12.5 cents per share quarterly dividend. We will continue
to evaluate our capital allocation strategy on a quarterly basis and communicate our plans to you with respect
to dividends, share repurchases and other uses of capital each quarter when we report earnings.
With respect to our operating posture for
All of our executives fully support these
the balance of 2020, we intend to run the
furloughs, and we appreciate the sacrifice
business in a cash flow positive mode as
and hardship this may pose on our loyal
we enact cost savings measures, including
employees. We are all in this together. We
furloughs, to mitigate the impact of COVID-19
did not cause this pandemic, but it has
on our business. Furloughs will impact all
impacted us. Again, we intend to generate
levels of our organization from myself on
positive free cash flow from operations in
down. Because I intend to continue working,
2020, regardless of the pandemic’s impact
I will be taking another voluntary reduction
on sales. Since our operations will be cash
in pay via furlough in addition to the 25%
flow positive going forward, we will have
reduction I volunteered for last year and have
sufficient resources to continue paying our
continued into this year to help pay for our
recurring dividend.
investment in Spok Go.
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From a business configuration and strategy perspective, the Board of Directors believes we are optimally positioned
as a standalone company that has an organic growth engine in Spok Go and a source of strong cash flow in our paging
business. We run the largest and highest quality paging network in the world, have integrated paging operations deeply
with our software business, and continue to enhance our paging platform and user devices. While our Board is open to
considering all strategic alternatives presented to us, its view is that Spok is at an important inflection point. That is, we
have invested and are continuing to invest in R&D and development of Spok Go, but we have not yet realized significant
revenue and profit from that platform.
Further, we believe this is not the time to start a sale process for Spok and one would not be in the best interest of our
stockholders because:
1
2
3
4
5
This may be one of the worst possible times in American business history to start a process to sell a
company and expect to maximize value. M&A activity is severely depressed due to disruptions to the
debt and equity markets, strict restrictions on travel and the inability to conduct meaningful due diligence
on any proposed transaction, and the significant distractions affecting private equity and potential
strategic counterparties due to COVID-19;
We are currently unable to predict or quantify the impact of COVID-19 on our business, particularly the
impact of COVID-19 on the rollout of our Spok Go software business;
Our customers are large and mid-sized hospitals and health systems focused on patient care during this
challenging time, which will affect our near-term financial results;
Our Board of Directors continues to believe that, over the long term, our customers will further
appreciate the value that Spok brings to caregivers getting the right message to the right person on the
right device at the right time; and
We are focused on ensuring that our shareholders realize the appropriate net present value for the
investment in Spok Go, despite its rollout being affected by the COVID-19 pandemic.
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“The COVID-19 pandemic
has certainly created
an atmosphere of fear
and uncertainty and our
thoughts and prayers
go out to those who
have been both directly
and indirectly affected
by this tragedy. While
the situation is fluid,
and no one is able to
predict the duration
and severity of this
pandemic, let me assure
you that, as a company,
in the near term we are
positioned to deal with
the situation. “
Finally, earlier this year we announced that the Board of
Directors had appointed Bobbie Byrne, M.D., and Christine
Cournoyer to the Spok board, resulting in a total of nine
directors. Also, Samme Thompson, a Director of Spok since
2004, will be stepping down from the Board of Directors
at the Spok annual meeting later this year and will not
stand for re-election. While we are excited to have Bobbie
and Chris join our board, and look forward to the depth of
experience that these Software and Healthcare IT industry
veterans bring, I want to take this opportunity to say that it
has been an honor and privilege to have worked with and
learned from Samme over the years. I am grateful to have
worked alongside him to realize our mission to become a
global leader in healthcare communications.
In conclusion, we remain committed to our core values of
putting the customer first, providing solutions that matter,
innovation, and accountability. We believe our past results
and future plans reflect these values.
I want to take this opportunity to thank our talented team
of employees and our loyal customers and strategic
partners. Together, we made enormous progress in 2019.
We also want to thank our stockholders for your continued
support as we take this journey together.
Vincent D. Kelly
President and Chief Executive Officer
April 2020
This letter includes references to adjusted operating expenses, which is a non-GAAP
financial measure. For reconciliations between our non-GAAP measures and the nearest
GAAP measures, please refer to the page preceding the back cover of this Annual
Report. As non-GAAP financial measures are not intended to be considered in isolation
or as a substitute for GAAP financial measures, you should carefully read the Form 10-K
included in this Annual Report, which includes our consolidated financial statements
prepared in accordance with GAAP. Additionally, this letter includes statements that,
to the extent they are not recitations of historical fact, constitute for ward-looking
statements within the meaning of the federal securities laws, and are based on Spok’s
current expectations and assumptions. For a discussion identifying important factors
that could cause actual results to vary materially from those anticipated in the for ward-
looking statements, see the corporation’s filings with the SEC, including “Risk Factors”
in the Form 10-K portion of this Annual Report.
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Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2019
or
For the transition period from to
Commission file number 001-32358
SPOK HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of
incorporation or organization)
6850 Versar Center, Suite 420
Springfield, Virginia
(Address of principal executive offices)
16-1694797
(I.R.S. Employer
Identification No.)
22151-4148
(Zip Code)
(800) 611-8488
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol
Name of each exchange on which registered
Common Stock, par value $0.0001 per share
SPOK
NASDAQ National Market
®
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES
NO
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES
NO
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. YES
NO
Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted pursuant
to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
was required to submit such files). YES
NO
Table of Contents
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting
company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company,”
and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Non-accelerated filer
Accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition
period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the
Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). YES
NO
The aggregate market value of the common stock held by non-affiliates of the registrant was $289 million based on the closing price of
$15.04 per share on the NASDAQ National Market® on June 28, 2019.
The number of shares of registrant’s common stock outstanding on February 21, 2020 was 18,944,914.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s Definitive Proxy Statement for the 2020 Annual Meeting of Stockholders of the registrant, which will be filed
with the Securities and Exchange Commission pursuant to Regulation 14A no later than April 29, 2020, are incorporated by reference
into Part III of this Report.
Table of Contents
Item 1.
Business
Risk Factors
Item 1A.
Item 1B. Unresolved Staff Comments
Item 2.
Properties
Item 3.
Item 4.
Legal Proceedings
Mine Safety Disclosures
TABLE OF CONTENTS
Part I
Part II
Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Item 6.
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8
Financial Statements and Supplementary Data
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A.
Item 9B. Other Information
Controls and Procedures
Directors, Executive Officers and Corporate Governance
Executive Compensation
Part III
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions and Director Independence
Principal Accounting Fees and Services
Exhibits, Financial Statement Schedules
Form 10-K Summary
Part IV
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Item 15.
Item 16.
Signatures
3
5
14
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24
24
24
25
28
28
39
39
39
39
40
41
41
41
41
41
42
42
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Table of Contents
Forward-Looking Statements
This Annual Report on Form 10-K contains forward-looking statements and information relating to Spok Holdings, Inc. and its subsidiaries
(“Spok” 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 the following:
• Continuing decline in the number of paging units we have in service with customers, commensurate with a continuing decline
in our wireless revenue
• The sales cycle of our software solutions and services can run from six to eighteen months, making it difficult to plan for and
meet our sales objectives and bookings on a steady basis quarter-to-quarter and year-to-year
• Our ability to manage wireless network rationalization to lower our costs without causing disruption of service to our customers
• Our ability to design and develop an integrated clinical communications and collaboration platform to address mobile
communications, clinical alerting, nursing and workflow functions at state of the art hospitals that gains market acceptance and
wide-spread use by customers
• Our ability to address changing market conditions with new or revised software solutions
• Our ability to retain key management personnel and to attract and retain talent within the organization
• Our ability to manage change related to regulation, including laws and regulations affecting hospitals and the healthcare industry
generally
• Competition for our services and products from new technologies or those offered and/or developed from firms that are
substantially larger and have much greater financial and human capital resources
• The reliability of our networks and servers and our ability to prevent cyber-attacks and other security issues and disruptions
• We may experience litigation claiming intellectual property infringement by us, and we may not be able to protect our rights in
intellectual property that we own and develop
• Unauthorized breaches or failures in cybersecurity measures adopted by us and/or included in our products and services
• Declines in our stock price or other events or circumstances that result in future goodwill impairments
• Those matters are discussed in this Annual Report under Item 1A “Risk Factors.”
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 reports on Form 10-Q and Form 8-K that it will file with the United States Securities and Exchange
Commission (“SEC”). Also note that, in the risk factors section, 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 Annual Report.
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PART I
The terms "we," "us," "our," "Company" and "Spok" refer to Spok Holdings, Inc. and its direct and indirect wholly owned subsidiaries.
ITEM 1. BUSINESS
Overview
Spok, Inc., a wholly owned subsidiary of Spok Holdings, Inc. (NASDAQ: SPOK), is proud to be the global leader in healthcare
communications. We deliver clinical information to care teams when and where it matters most to improve patient outcomes. Top hospitals
rely on Spok Care Connect to enhance workflows for clinicians, support administrative compliance, and provide a better experience for
patients.
Our headquarters is located at 6850 Versar Center, Suite 420, Springfield, Virginia 22151, and our telephone number is 800-611-8488.
We maintain an Internet website at http://www.spok.com. (This website address is for information only and is not intended to be an active
link or to incorporate any website information into this 2019 Annual Report on Form 10-K ("2019 Form 10-K").)
We deliver smart, reliable clinical communication and collaboration solutions to help protect the health, well-being, and safety of people
in the United States and abroad, on a limited basis, in Europe, Canada, Australia, Asia and the Middle East. Our customers rely on Spok
for workflow improvement, secure texting, paging services, contact center optimization, and public safety response. We develop, sell,
and support enterprise-wide systems primarily for healthcare and other organizations needing to automate, centralize, and standardize
their approach to clinical communications. 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. We offer our services and
products to three major market segments: healthcare, government, and large enterprise, with a greater emphasis on the healthcare market
segment.
We have identified hospitals with 200 or more beds as the primary targets for our software solutions as well as our paging services. Within
this market, we have identified the following dynamics and have focused our efforts to address these dynamics:
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a heightened awareness of the ubiquitous, critical role of communications in healthcare;
an increased focus within hospitals on quality of care and patient safety initiatives;
the importance of confidentiality when sharing information;
increased regulations that may result in process changes, increased documentation and reporting and increased costs;
a continuing focus within hospitals to reduce labor and administrative costs while increasing productivity; and
a broader proliferation of information technology in healthcare as hospitals strive to apply technology to solve their business
problems.
Industry Overview
The United States healthcare market continues to experience significant change. Healthcare costs continue to rise, reimbursements from
Centers for Medicare and Medicaid Services are being reduced in certain areas, digitization of healthcare information continues and the
healthcare industry continues to shift towards a value-based purchasing model and away from the traditional fee-for-service model. The
value-based purchasing model places an emphasis on incentivizing value and quality at an individual patient level in order to provide
better patient outcomes and reduce 30-day readmissions.
In response, healthcare providers will require greater communication and collaboration between clinicians in order to create improvements
in patient care quality, safety, satisfaction and efficiency. Improvements in these areas are necessary for healthcare providers to successfully
navigate many of these issues. Many providers are seeking improvement through the adoption of technology, looking to take advantage
of automation, workflows, process improvement and in limited circumstances machine learning or artificial intelligence. Providers also
look to increase efficiencies through consolidation as larger health systems continue to acquire smaller hospitals for the primary purpose
of gaining regional market share amongst tough competition.
We believe these changes and continued pressures place greater emphasis on the need for better communication and collaboration tools
to meet the increasing requirements demanded by the healthcare industry in today’s marketplace. Our solutions help hospitals significantly
increase patient care quality, safety and satisfaction while simultaneously increasing employee productivity, reducing costs and reducing
clinician burnout. This is done through workflow enhancement, secure, reliable and integrated communication tools and mobile
accessibility.
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Sales and Marketing
Sales. We market and distribute our clinical communication and collaboration solutions through a direct sales force and an indirect sales
channel.
The direct sales force contracts or sells products, solutions, messaging services and other services directly to customers ranging from
small and medium-sized businesses to companies in the Fortune 1000, healthcare and related businesses, and Federal, state, and local
government agencies. We will continue to market primarily to commercial enterprises, with a focus on healthcare organizations, interested
in our communication solutions. We maintain a sales presence in key markets throughout the United States, and in limited markets
internationally including our Asia-Pacific sales team, in an effort to gain new customers and to retain and increase sales to existing
customers. The direct sales force targets leadership responsible for the procurement of clinical communication and collaboration solutions
such as chief information officers, chief technology officers, chief medical officers, chief nursing officers, information technology
directors, telecommunications directors, and contact center managers. The timing for a direct sale varies but may take from six to 18
months depending on the type and scope of software solution.
The indirect sales force complements our direct sales force. Through relationships with alliance partners we are able to sell our solutions
to a wider customer base. For paging services that we do not provide directly, we contract with and invoice an intermediary for airtime
services. For our software sales, our relationships with alliance partners assist us in broadening the distribution of our products and further
diversifying into markets outside healthcare.
Marketing. We have a centralized marketing function, which is focused on supporting our solutions and sales efforts by strengthening
our corporate brand, generating sales leads, and facilitating the sales process. Our principal marketing programs include:
• Content marketing (eBriefs, case studies, brochures, videos, infographics, and more) as an underlying foundation of all marketing
campaigns or initiatives;
• Website development and maintenance, which provides product and Company information, customer support options, paging
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capabilities, as well as thought leadership and engagement;
Participation at trade shows and industry events, such as Healthcare Information and Management Systems Society, College of
Healthcare Information Management Executives, Association of Medical Directors of Information Systems, American
Organization of Nurse Leaders, and other Healthcare Information technology related shows and conferences;
• Webinars about customer successes, current industry trends, and our solutions;
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• Newsletters and blog posts to provide information about industry trends and our solutions to customers, prospects, and alliances;
Social media involvement to provide information regarding upcoming educational events or new product offerings;
Industry analyst relationships;
and
• Annual customer conferences that solicit feedback on our solutions and services.
Licenses and Messaging Networks
In order to provide our wireless services, we hold licenses to operate on various frequencies in the 900 MHz narrowband. We are licensed
by the United States Federal Communications Commission (the “FCC”) to operate Commercial Mobile Radio Services (“CMRS”). These
licenses are required to provide one-way and two-way messaging services over our networks.
We operate local, regional and nationwide one-way networks, which enable subscribers to receive messages over a desired geographic
area. One-way networks operating in 900 MHz frequency bands utilize the FLEX™ protocol developed by Motorola Mobility, Inc.
(“Motorola”). The FLEX™ protocol has advantages of functioning at higher network speeds (which increases the volume of messages
that can be transmitted over the network) and of having more robust error correction (which facilitates message delivery to a device with
fewer transmission errors).
Our two-way networks utilize the ReFLEX 25™ protocol, also developed by Motorola. ReFLEX 25™ promotes spectrum efficiency
and high network capacity by dividing coverage areas into zones and sub-zones. Messages are directed to the zone or sub-zone where
the subscriber is located, allowing the same frequency to be reused to carry different traffic in other zones or sub-zones. As a result, the
ReFLEX 25™ protocol allows the two-way network to transmit substantially more messages than a one-way network using the FLEX™
protocols. The two-way network also provides for assured message delivery. The network stores, for a limited amount of time, messages
that could not be delivered to a device that is out of coverage for any reason, and when the unit returns to service, those messages are
delivered. The two-way paging network operates under a set of licenses called narrowband Personal Communications Service, which
uses 900 MHz frequencies. These licenses require certain minimum five and ten-year build-out commitments established by the FCC,
which have been satisfied.
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Although the capacities of our networks vary by geographic area, we have excess capacity at a consolidated level. We have implemented
a plan to manage network capacity and to improve overall network efficiency by consolidating subscribers onto fewer, higher capacity
networks with increased transmission speeds. This plan is referred to as network rationalization. Network rationalization will result in
fewer networks and therefore fewer transmitter locations, which we believe will result in lower operating expenses due primarily to lower
site rent expenses. As we continue to implement our network rationalization plan, we expect to have fewer transmitters that can be removed
efficiently from our networks and still maintain the level of service required for our customers, and thus the benefits of network
rationalization will decline. We expect related cost savings will begin to slow in 2019 as compared to historical cost savings. As we reach
certain minimum frequency commitments, as outlined by the FCC, we will be limited in our ability to continue our efforts to rationalize
and consolidate our networks. Our messaging networks and related infrastructure are located exclusively in the United States.
Generally, our software solutions do not require licenses or permits from Federal, state and/or local government agencies in order to be
sold to customers. However, certain of our software products are subject to regulation by the United States Food and Drug Administration
("FDA") and are subject to certification by the Joint Interoperability Test Command to be sold to the branches of the armed services of
the United States and the United States government. (see “Regulation” below).
Our Strategy
Our goal is to continue to execute on our vision of integrated communication and collaboration enterprise solutions. In doing so, we will
strengthen our core product offerings and offer new solutions as we continue to focus on serving the mission critical needs of our customers,
while operating an efficient and profitable business strategy.
Critical aspects of our strategy include:
Growth of our software revenue and bookings — We expect to continue to increase our investment in sales and marketing, product
implementation, product development and customer support to drive software, services and maintenance bookings and revenue growth.
We will continue to focus our sales and marketing efforts in the healthcare market in order to identify opportunities for sales and close
those opportunities in the form of bookings.
We have an ongoing initiative to further penetrate the hospital segment in the United States and while we believe there is a significant
opportunity to sell clinical communication and collaboration solutions to hospitals located outside the United States our focus is on the
domestic market. We intend to leverage the strength of our market presence and the breadth of our product offerings to further expand
our customer base in healthcare.
The introduction of Spok Go® is a key initiative that we are focused on in 2020. While we do not anticipate material revenues in 2020,
we believe Spok Go is the basis for future growth of our software revenue and bookings. Further details on Spok Go can be found under
"Spok Go platform".
Retention of our wireless subscribers and revenue stream — We will continue to focus on reducing the rate of subscriber disconnects
and minimize the rate of wireless revenue erosion. We continue to have a valuable wireless presence in the healthcare market, particularly
in larger hospitals. We offer a comprehensive suite of wireless messaging products and services focused on healthcare and “campus”
type environments and critical mission notification. We will continue to focus on network reliability and customer service to help minimize
the rate of subscriber disconnects.
We recognize that the number of wireless subscribers, units in service, and the related revenue will continue to decline. We intend to
continue reducing our underlying cost structure impacting this declining wireless revenue stream by reducing payroll and related expenses
as well as network related expenses where possible. We will integrate and consolidate operations as necessary to ensure the lowest cost
operational platform for our consolidated business.
Invest in our future solutions — The market for clinical communication and collaboration solutions is expected to grow as healthcare
continues to change. Focus on patient satisfaction, population health management, reimbursement changes and emphasis on quality
improvement and care coordination are all driving an evolution in communication and collaboration between previously disparate
departments and systems within and outside hospitals and across the healthcare ecosystem. Maintaining our position as a leader in
healthcare communication and collaboration requires us to continue development of the Spok Go platform and invest in key areas of
customer need including: 1) mobility, 2) integrated platform, 3) nursing and physician solutions and 4) alerting.
Investment in our future solutions is discussed in further detail under "Spok Go Platform."
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Return capital to our stockholders — We understand that our primary objective is to create long-term stockholder value. We will continue
to evaluate how best to deploy our capital resources to support sustainable business growth and maximize stockholder value. We expect
to continue to pay a quarterly dividend of $0.125 per share of common stock or $0.50 annually in 2020. We will continue to evaluate
both market and Company factors to determine whether a common stock repurchase program is an appropriate method to return capital
to our stockholders.
To ensure focus on our business strategy we establish specific performance objectives and develop short-term and long-term incentive
plans (“STIP” and "LTIP," respectively) for our management that include a combination of these operating objectives and priorities.
Our Products and Services
Wireless products and related services. We offer subscriptions to one-way or two-way messaging services for a periodic (monthly,
quarterly, semi-annual, or annual) service fee. The level of service fees is generally based upon the type of service provided, the geographic
area covered, the number of devices provided to the customer and the period of commitment. A subscriber to one-way messaging services
may select coverage on a local, regional, or nationwide basis to best meet their messaging needs. Two-way messaging is generally offered
on a nationwide basis. In addition, subscribers either contract for a messaging device from us for an additional fixed monthly fee or they
own a device, having purchased it either from us or from another vendor. We also sell devices to resellers who lease or resell them to
their subscribers and then sell messaging services utilizing our networks. We offer ancillary services, such as voicemail and equipment
loss or maintenance protection, which help increase the monthly recurring revenue we receive along with these traditional messaging
services. We offer exclusive one-way (T5) and two-way (T52) alphanumeric pagers which are configurable to support un-encrypted or
encrypted operation. When configured for encryption, they utilize AES-128 bit encryption, screen locking and remote wipe capabilities.
With encryption enabled these secure paging devices enhance our service offerings to the healthcare community by adding Health
Insurance Portability and Accountability Act ("HIPAA") security capabilities to the low cost, highly reliable and availability benefits of
paging.
The demand for one-way and two-way messaging services declined during the years ended December 31, 2019, 2018 and 2017, and we
believe demand will continue to decline for the foreseeable future. Wireless products and services revenue represented 55%, 56% and
59% of total consolidated revenue for the years ended December 31, 2019, 2018 and 2017, respectively. As demand for one-way and
two-way messaging has declined, we have developed or added service offerings in order to increase our revenue potential and mitigate
the decline in our wireless revenues. We will continue to evaluate opportunities to provide customers the highest value possible.
Software. Dependable clinical communications are paramount for individuals in healthcare and a host of other industries. We offer a
number of solutions, providing our customers with the ability to communicate anywhere, anytime across a number of situations. Our
solutions are used for contact centers, clinical alerting and notification, mobile communications and messaging, and for public safety
notifications.
Spok Go Platform
We continue to focus our product development activities on developing our clinical communication and collaboration platform, Spok
Go. Development of Spok Go has spanned several years, as we have worked to create an integrated cloud-native platform that is built
on a foundation of a single, best-in-class architecture. Spok Go is an enterprise solution that will include secure messaging, global directory,
on-call scheduling and workflow automation when first made available to customers in 2020. Building Spok Go from the ground-up has
allowed us to place an emphasis on mobile accessibility from the beginning. Mobile accessibility is a core component of the platform
and developing Spok Go with a focus on mobile application ensures that users will experience seamless transitions between mobile
technologies and integrated applications, whether they are in the hospital or "on the go”. Providing Software-as-a-Service (“SaaS”) will
allow for our customers to receive updates and enhancements seamlessly as they are released by the Company. Hosting and security will
be handled through our partnership with Amazon Web Services® (“AWS”). AWS will provide the core infrastructure for Spok Go through
AWS hosting, ensuring that customers will have access to the most current and secured technologies when it comes to a hosted environment
where security is critical to our customers.
Currently our Care Connect Suite ("CCS") implementations average seven to eight months from when a contract is signed through
completion. With the introduction of Spok Go, implementation times will be significantly reduced for customers so that they can begin
realizing the benefits of an installed solution much quicker than ever before. Building Spok Go as a cloud-native solution comprised of
a single architecture will allow for expedited implementations of the solution as the complexity of installation and configuration has been
significantly reduced.
We anticipate future development of new functionality and enhancements will be driven by specific market needs along with our desire
to expand into other service lines such as radiology, contact center and, emergency department. We expect our close and trusted relationships
with our customers will be sources for new use cases, features and solutions. Our product strategy team assesses these customer needs,
conducts industry-based research and helps to ensure new releases are designed to have immediate, broad applicability, a strong value
proposition and a high return on investment for both Spok and our customers.
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As previously mentioned, the shift to value-based healthcare, unsustainable growth in healthcare costs and the general move towards a
digital world has driven the healthcare industry towards technology in hopes of creating more efficiencies that will reduce pressure on
their bottom line and increase patient care quality, safety and satisfaction. Spok Go will provide a significant value proposition for potential
customers by delivering efficiencies in clinical communication and collaboration through improvements in secure messaging, workflow
and automation which will ultimately lead to improvements in clinical and quality outcomes.
While we anticipate initial sales from Spok Go in 2020, these sales will largely be with new customers as opposed to the transition of
existing customers. We also do not expect to recognize material revenues from Spok Go for the same period. Revenues recognized from
the sale of Spok Go will be recognized ratably over the terms of the contract and thus will generally lag behind actual sales (as opposed
to the immediate recognition of license revenues when a perpetual or term license is sold).
Care Connect Suite
Contact Center
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Spok® Healthcare Console: Provides operators with the information needed to process calls using their computers with just
a few keystrokes. This solution integrates with the customers’ existing phone systems and is used by the operator group to answer
incoming calls to the contact center. Operators can quickly and accurately perform directory searches and code calls, as well as
messaging and paging by individual, groups, and roles using the Spok Healthcare Console’s computer telephony integration and
directory capabilities.
Spok® Web-Based Directory: Makes employee contact information more accessible and enables staff to send messages quickly
right from the directory. Authenticated users can log on anywhere, anytime to perform a variety of important updates to contact
information and on-call schedules, search the directory, and send important messages.
Spok® Web-Based On-Call Scheduling: Keeps personnel, calendars and on-call scheduling information updated, even with
thousands of staff, using a secure web portal to maintain and allow password-protected access to the latest on-call schedules
and personnel information.
Spok® Speech: Enables the organization to process routine phone requests, including transfers, directory assistance, messaging
and paging without live operators and with more ease-of-use than touchtone menus.
Spok® Call Recording and Quality Management: Records, monitors, and scores operators’ conversations to allow for better
management of calls, helping improve customer service.
Clinical Alerting
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Spok® Messenger: Provides an intelligent, FDA, 510(k)-cleared solution that connects virtually all crucial alert systems,
including nurse call, fire, security, patient monitoring, and building management to mobile staff via their wireless communication
devices. This solution provides the ability to reach mobile team members within seconds of an alert, improving overall workflow,
staff productivity, and the comfort and safety of everyone in the facility.
Spok® e.Notify: Enables organizations to quickly and reliably notify and confirm team member availability during emergency
situations without relying on calling trees, thereby reducing confusion that may arise in an emergency situation. This solution
automatically delivers messages, collects responses, escalates issues to others, and logs all activities for reporting and analysis
purposes.
Spok® Critical Test Results Management: Automates and streamlines the process of delivering critical test results to the
appropriate clinicians to help ensure patient safety. This solution can send messages from the cardiology, laboratory and radiology
departments by means of encrypted smartphone communications, two-way paging, secure email, secure text, images, annotations,
and voice to a variety of endpoints such as workstations, laptops, tablets, smartphones, pagers, and other wireless devices.
Mobile Communications
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Spok Mobile®: Simplifies communications and strengthens care by using smartphones and tablets for secure code alerts, patient
updates, results, consult requests, and much more. Allows users to access the full directory of accurate contact information to
send messages/photos/videos to smartphones and other devices, and to ensure clinical communications are logged, all with
security, traceability, and reliability.
Spok® Device Preference Engine: Facilitates voice conversations among doctors and caregivers by enabling users to choose
the desired communication method based on factors such as message priority.
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Public Safety
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Spok® pc/psap: Speeds emergency dispatch by giving Public Safety Answering Point call-takers an easy-to-use, standards-
based, graphical interface that integrates the underlying phone system, mapping systems, and other resources for critical
information availability. 9-1-1 call-takers are able to instantly involve police, fire, EMT, and hazardous material personnel with
a single click of the mouse or touch of the screen.
Spok® Enterprise Alert: Directs emergency personnel to a 9-1-1 caller’s exact location (building, floor, room), helping to
ensure speed, accuracy, and reliability of response. The E9-1-1 software provides real-time, onsite notification when 9-1-1 is
dialed, and works to decrease emergency response time.
We plan to continue investing in our development of Spok Go, however, we believe costs will continue to normalize through 2020. We
expect growth in development costs related to Spok Go will continue to decline relative to growth rates we have seen over the past several
years. As revenues from Spok Go begin to materialize over the next several years we anticipate improvement in our development costs
relative to total software revenues.
Services. We offer a variety of professional services to assist our customers in the successful implementation of, and to maximize the
benefits obtained from the use of, our software solutions. We also offer support services to enhance and refine the customer's experience
throughout their relationship with Spok.
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• Professional Services: We offer a full suite of professional services which are provided by a dedicated group of professional
service employees. Our professional services include consultation, implementation, and training services. For on-premise
software solution implementations, our professional services staff uses a branded, consistent methodology that provides a
comprehensive phased work plan for both new software installations and/or upgrades. In support of our implementation
methodology, we manage the various aspects of the process through a professional services automation tool. We may also use
third-party professional services firms as supplemental resources to implement our solutions for customers as needed. Professional
services revenue represented 12% of total consolidated revenue for the year ended December 31, 2019, 11% for the year ended
December 31, 2018 and 10% for the year ended December 31, 2017.
Software License Updates and Product Support (Maintenance): Software license updates and product support, which is
generally referred to as maintenance when sold to customers, is an important offering to customers who utilize our on-premise
software solutions. In order to support our products that provide clinical communication and collaboration solutions to our
customer’s organizations, we have a dedicated customer support organization. The customer support organization provides
support 24 hours a day, 7 days a week, 365 days a year and the service can be accessed via telephone, email or the Internet via
the Spok webpage. The Spok support service is augmented by third party services where needed. Software license updates and
product support are generally priced together as a percentage of the software licenses for which these services will be provided.
Largely all of our customers purchase maintenance when they purchase new software licenses after which renewals generally
occur on an annual basis and are paid in advance. Software license updates provide customers with rights to unspecified product
upgrades as well as maintenance and patch releases that are released during the term of the support period. Software license
updates and product support revenue (i.e. Maintenance revenue) represented 25% of total consolidated revenue for the year
ended December 31, 2019 and, 23% for both the years ended December 31, 2018 and 2017.
Future sales of Spok Go are expected to generate less implementation revenue relative to legacy CCS solution sales. We anticipate that
the initial implementation time for a new installation of Spok Go will be significantly less as compared to our on-premise legacy CCS
solutions. Additionally, what has historically been referred to as license and maintenance revenues for our on-premise CCS solutions will
be bundled together within the SaaS revenue stream, specifically Spok Go. The SaaS revenue stream is inclusive of hosting, access to
the Company's software platform and update and support services. Similar to historical maintenance practices, a customer's subscription
to Spok Go is renewed on a recurring basis according to the service terms and is generally expected to be from one to five years.
Sources of Equipment
We do not manufacture the messaging devices our customers need to make use of our wireless services or the network equipment we use
to provide wireless messaging services. We have relationships with several vendors to purchase new messaging devices. Used messaging
devices are available in the secondary market from various sources. We believe existing inventory, returns of devices from customers
that canceled wireless services, and purchases from other available sources of new and reconditioned devices will be sufficient to meet
expected messaging device requirements for the foreseeable future. We negotiate contractual terms with our vendors that do not directly
relate to the manufacturing of the network equipment or messaging devices. The network equipment and messaging devices on which
we may place our logo or label are generic.
We sell third party equipment for use with our software solutions. The third-party equipment that we sell is generally available and does
not require any specialty manufacturing to accommodate our software solutions.
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We currently have inventory and network equipment on hand that we believe will be sufficient to meet our wireless and software equipment
requirements for the foreseeable future.
Intellectual Property
As of December 31, 2019, we held 85 trademarks and 12 patents, as well as pending trademarks, which we believe are important to
protect our intellectual property. We believe our intellectual property distinguishes our business from our competition and are integral to
our continued success in the area of clinical communication and collaboration solutions. The expiration dates of these trademarks range
from 2020 to 2032 and can be extended for 10 year periods upon renewals.
Customers
Our customers include businesses and employees who need to be accessible to their offices or customers, first responders who need to
be accessible in emergencies, and third parties, such as other telecommunication carriers and resellers that pay our Company to use our
networks. Customers include businesses, professionals, management personnel, medical personnel, field sales personnel and service
forces, members of the construction industry and construction trades, real estate brokers and developers, sales and services organizations,
specialty trade organizations, manufacturing organizations and government agencies.
Our wide ranging customer base allows for low customer revenue concentration and as a result, no single customer accounted for more
than 10% of our total revenues in 2019, 2018 or 2017.
We pursue close, long-term relationships with our customers because we believe strong customer relationships enable us to retain our
current customer base and expand our services and revenue to that customer base.
Backlog
Our software backlog of undelivered or in-progress orders was $50.6 million and $40.4 million at December 31, 2019 and 2018,
respectively. Of the current backlog, we expect to deliver and complete all but $14.1 million in 2020.
Competition
The competitors and degree of competition vary among our various product categories. Competition is particularly strong for our wireless
messaging services. Within the wireless industry, companies compete on the basis of price, coverage area, services offered, transmission
quality, network reliability and customer service. We compete by maintaining competitive pricing for our products and services, by
providing broad coverage options through high-quality, reliable messaging networks and by providing quality customer service. Direct
competitors for wireless messaging services include American Messaging Service, LLC and a variety of other regional and local providers.
We also compete with a broad array of wireless messaging services provided by mobile telephone companies, including AT&T Mobility
LLC, Sprint Nextel Corporation, T-Mobile USA, Inc., and Verizon Wireless, Inc. This competition has intensified as prices for the services
of mobile telephone companies have declined and as those companies have incorporated messaging capabilities into their mobile phone
devices. Many of these companies possess far greater financial, technical and other resources than we do.
Most personal communications service and other mobile phone devices currently sold in the United States are capable of sending and
receiving one-way and two-way messages. Most subscribers that purchase these services no longer need to subscribe to a separate
messaging service. As a result, many one-way and two-way messaging subscribers can readily switch to cellular, personal communications
service and other mobile telephone services. The decrease in prices and increase in capacity and functionality for cellular, personal
communications service, WiFi, and other mobile telephone services have led many subscribers to select combined voice and messaging
services from mobile telephone companies as an alternative to our stand-alone messaging services.
We also have a number of competitors whose software products compete with one or more modules of our clinical communication and
collaboration solutions. These competitors are a mix of privately held and public companies that offer a number of call center, alerting
and mobile communication products. Our primary competitive advantages include having:
• An integrated product suite;
• A communication-driven workflow;
• Certifications, such as those through the Joint Interoperability Test Command (see "Joint Interoperability Test Command" below)
and the FDA; and
• A complete directory of contacts throughout the customer enterprise.
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Although there are no competitors that offer a similar comprehensive set of software modules that match our product offerings, there are
several competitors who offer software similar to many of our solutions. As we continue our transition to a software company the
Company's competitive landscape will continue to evolve. Selected competitors for portions of our product portfolio include:
Five9, Inc. - Cloud-based solutions;
• Alaska Communications Systems Group, Inc. - Mobile communications solutions;
• Appfolio, Inc. - Cloud-based software solutions;
• Boingo Wireless, Inc. - Mobile communications solutions;
• Castlight Health, Inc. - Software as a service health benefits platform;
• Computer Programs and Systems, Inc. - Healthcare IT solutions;
• Everbridge, Inc. - Clinical alerting solutions;
• Evolent Health, Inc. - Healthcare delivery and payment solutions;
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• Globalstar, Inc. - Mobile communications solutions;
• HealthStream, Inc. - healthcare development solutions;
• LivePerson,Inc. - Mobile and online messaging solutions;
• MobileIron, Inc. - Mobile communications solutions;
• Model N, Inc. - Revenue management cloud solutions;
• NextGen Healthcare, Inc. - Medical and Dental software, services, and analytic solutions;
• ORBCOMM Inc. - Network connectivity and device management solutions; and
• Vocera Communications, Inc. - Mobile communications solutions.
In addition, substantially larger companies in the electronic medical records space such as Epic Systems Corporation, Cerner Corporation,
Athenahealth, Inc. and Allscripts Healthcare Solutions, Inc. may choose to offer software related solutions similar to our clinical
communication and collaboration solutions or may acquire one of our competitors.
Research and Development
We maintain a product development group, a substantial portion of which is focused on developing new software products, especially
with respect to developing the Spok Go platform and additional enhancements. Within our research and development group is a separate
task force focused on ongoing maintenance and enhancement of existing point-solution products. Our product development group uses
a methodology that balances enhancement requests from a number of sources including customers, regulatory requirements, the
professional services staff, customer support incidents, known defects, market and technology trends, and competitive requirements.
These requests are reviewed and prioritized based on criteria that include the potential for increased revenue, customer/employee
satisfaction, possible cost savings, and development time and expense.
Employees
At December 31, 2019 and 2018 we had 638 and 596 full time equivalent (“FTE”) employees, respectively. Our employees are not
represented by labor unions or covered by a collective bargaining agreement.
Regulation
Federal Regulation
The FCC issues licenses to use radio frequencies necessary to conduct our business and regulate many aspects of the operations that
support our wireless revenue. Licenses granted to us by the FCC have varying terms, generally of up to ten years, at which time the FCC
must approve renewal applications. In the past, FCC renewal applications generally have been granted upon showing compliance with
FCC regulations and adequate service to the public. Other than those still pending, the FCC has thus far granted each license renewal
that we have requested.
The Communications Act of 1934, as amended (the “Communications Act”), requires radio licensees, including us, to obtain prior approval
from the FCC for the assignment or transfer of control of any construction permit or station license or authorization of any rights thereunder.
The FCC has thus far granted each assignment or transfer request we have made in connection with a change of control.
The Communications Act also places limitations on foreign ownership of CMRS licenses, which constitute the majority of our licenses.
These foreign ownership restrictions limit the percentage of stockholders’ equity that may be owned or voted, directly or indirectly, by
non-United States citizens or their representatives, foreign governments or their representatives, or foreign corporations. Our Amended
and Restated Certificate of Incorporation permits the redemption of our equity from stockholders where necessary to ensure compliance
with these requirements.
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The FCC’s rules and regulations require us to pay a variety of fees that otherwise increase our costs of doing business. For example, the
FCC requires licensees, including Spok, to pay levies and fees, such as universal service fees, to cover the costs of certain regulatory
programs and to promote various other societal goals. These requirements increase the cost of the services provided. By law, we are
permitted to bill our customers for these regulatory costs and we typically do so.
Additionally, the Communications Assistance to Law Enforcement Act of 1994, (“CALEA”) and certain rules implementing CALEA
require some telecommunication companies, including Spok, to design and/or modify their equipment in order to allow law enforcement
personnel to “wiretap” or otherwise intercept messages. Other regulatory requirements restrict how we may use customer information
and prohibit certain commercial electronic messages, even to our own customers.
In addition, the FCC’s rules require us to pay other carriers for the transport and termination of some telecommunication traffic. As a
result of various FCC decisions over the last few years, we no longer pay fees for the termination of traffic originating on the networks
of local exchange carriers providing wireline services interconnected with our services. In some instances, we received refunds for prior
payments to certain local exchange carriers. We have entered into a number of interconnection agreements with local exchange carriers
in order to resolve various issues regarding charges imposed by local exchange carriers for interconnection.
Failure to follow the FCC’s rules and regulations can result in a variety of penalties, ranging from monetary fines to the loss of licenses.
Additionally, the FCC has the authority to modify licenses, or impose additional requirements through changes to its rules.
The FDA has determined software systems that connect to medical devices are subject to regulation as medical devices as defined by the
federal Food, Drug and Cosmetic Act (“the FDC Act”). Since our middleware software products connect to medical devices, we are
required to comply with the FDC Act’s requirements, including but not limited to: registration and listing, labeling, medical device
reporting (reporting of medical device-related adverse events), removal and correction, and good manufacturing practice requirements.
We have complied with the regulatory requirements of the FDC Act, and registered and received the necessary clearances for our products.
As we modify and/or enhance our software products (including our middleware product), we may be required to request FDA clearance
before we are permitted to market these products.
In addition, our software solutions may handle or have access to personal health information subject in the United States to the HIPAA,
the Health Information Technology for Economic and Clinical Health Act (“HITECH”), and related regulations. These statutes and related
regulations impose numerous requirements regarding the use and disclosure of personal health information with which we help our
customers comply. Our failure to accurately anticipate or interpret these complex and technical laws could subject us to civil and/or
criminal liability. We believe that we are in compliance with these laws and their related regulations.
Although these and other regulatory requirements have not, to date, had a material adverse effect on our operating results, such requirements
could have a material impact on our operating results in the future. We monitor discussions at the FCC and FDA on pending changes in
regulatory policy or regulations; however, we are unable to predict what changes, if any, may occur in 2020 to regulatory policy or
regulations.
State Regulation
As a result of the enactment by the United States Congress of the Omnibus Budget Reconciliation Act of 1993 (“OBRA”) in August
1993, states are now generally preempted from exercising rate or entry regulation over any of our operations. States are not preempted,
however, from regulating “other terms and conditions” of our operations, including consumer protection and similar rules of general
applicability. Zoning requirements are also generally permissible, however, provisions of the OBRA prohibit local zoning authorities
from unreasonably restricting wireless services. States that regulate our services also may require us to obtain prior approval of (1) the
acquisition of controlling interests in other paging companies and (2) a change of control.
At this time, we are not aware of any proposed state legislation or regulations that would have a material adverse impact on our business.
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Joint Interoperability Test Command ("JITC") Certification
JITC is a military organization that tests technology for use by the branches of the armed services of the United States and the United
States federal government. JITC certification is required of all systems with joint interfaces or joint information exchanges with other
systems used by these organizations and is done to ensure all systems operate effectively together. All information technology and national
security systems that exchange and use information to enable units or forces to operate effectively in joint, combined, coalition and
interagency operations and simulations must be certified. Once a system has been certified under this program, the certification must be
renewed every four years or after any changes that may affect interoperability. The interoperability certification process consists of four
basic steps, which are:
•
Identify (interoperability) requirements;
• Develop certification approach (planning);
•
• Report certifications and statuses.
Perform interoperability test and evaluation; and
We submit and receive JITC certification for certain of our products through the Defense Information Systems Agency, which allows us
to sell and implement our solutions at federal government agencies. We currently certify a console, web, speech, mass notification, public
safety answering point, call recording and campus 911 product with JITC. We have a roadmap to renew the existing certifications with
new releases of existing products and to bring additional products to JITC to increase the products that can be sold into Federal agencies.
Available Information
We make available on our website at http://www.spok.com, free of charge, our annual reports on Form 10-K, quarterly reports on Form
10-Q, current reports on Form 8-K and all amendments to those reports as soon as reasonably practicable after such reports are electronically
filed with, or furnished to, the SEC. The SEC also maintains an Internet site that contains reports, proxy and information statements, and
other information regarding issuers that file electronically with the SEC at http://www.sec.gov. We also make available on our website,
and in print, if any stockholder or other person so requests, our code of business conduct and ethics entitled “Code of Ethics” which is
applicable to all employees and directors, our “Corporate Governance Guidelines” and the charters for all committees of our Board of
Directors, including Audit, Compensation and Nominating and Governance. Any changes to our Code of Ethics or waiver, if any, of our
Code of Ethics for executive officers or directors will be posted on that website.
ITEM 1A. RISK FACTORS
The following important factors, among others, could cause our actual operating results to differ materially from those indicated or
suggested by forward-looking statements made in this 2019 Form 10-K or presented elsewhere by management from time to time.
Our estimates of market opportunity for our software solutions are subject to significant uncertainty and, even if the markets in which
we compete meet or exceed our size estimates, we could fail to increase our revenue or market share.
Market opportunity estimates are based on assumptions and estimates, and our internal analysis and industry experience. However,
assessing the market for clinical communication and collaboration solutions, particularly cloud-based, SaaS solutions, is difficult due to
several factors, such as limited available information and rapid evolution of the market. Our estimates of market opportunity depend on
the assumptions we made, and the estimated market opportunity could be materially different with different assumptions. Even if the
markets in which we compete meet or exceed our size estimates, our software solutions may fail to gain market acceptance and our
business may not grow in line with our forecasts,
In addition, an increase in the prevalence of cloud-based offerings by us and our competitors could also unfavorably impact the pricing
of our on-premise offerings and have a dampening impact on overall demand for our on-premise offerings, which could have a material
adverse impact on our business, financial condition and operating results.
The rate of wireless subscriber and revenue erosion could exceed our ability to reduce wireless operating expenses in order to
maintain overall positive operating cash flow.
Our wireless revenue is dependent on the number of subscribers that use our paging devices. Our customers may not renew their
subscriptions after the expiration of their subscription agreements. In addition, our customers may opt for a lower-priced edition of our
offerings or for fewer subscriptions. Our customers’ renewal rates may decline or fluctuate as a result of a number of factors, including
their level of satisfaction with our offerings and their ability to continue their operations and spending levels. Increasing awareness and
concern over HIPAA/HITECH compliance is causing healthcare organizations, our largest customer segment, to re-evaluate paging
subscriptions for clinical use cases when users are not equipped with our encrypted pager offerings.
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We face intense competition for subscribers from other paging service providers and alternate wireless communications providers such
as mobile phone and mobile data service providers. There is a risk that our competitors’ products may provide better performance or
include additional features when compared to our offerings. Competitive pressures could also affect the prices we may charge or the
demand for our offerings, resulting in reduced profit margins and loss of market share. Our efforts to compete effectively may not be
sufficient, which may adversely affect our business, financial condition, operating results and cash flows.
In addition to competition, our customer base may be impacted by the introduction of new technologies. As mobile communications
technology evolves, competitors that provide wireless broadband data services may lower their prices to customers that approach, meet
or undercut our prices for paging services. We are unable to predict how customer perceptions of the value of our wireless services will
be impacted by the development of new wireless technologies. Our continued success will depend on our ability to adapt to rapidly
changing technologies and user preferences, to adapt our offerings to evolving industry standards, to predict user preferences and industry
changes in order to continue to provide value to our customers and to improve the performance and reliability of our offerings. Our failure
to adapt to such changes could harm our business, and our efforts to adapt to such changes could require substantial expenditures on our
part to modify our offerings or infrastructure. Delays in developing, completing or delivering new or enhanced offerings and technologies
could result in delayed or reduced revenue for those offerings and could also adversely affect customer acceptance of those offerings and
technologies. Even if we are able to enhance our existing offerings or introduce new offerings that are well perceived by the market, if
our marketing or sales efforts do not generate interest in or sales for these offerings, they may be unsuccessful.
We expect our wireless subscriber results, units in service and revenue will continue to decline for the foreseeable future. As this revenue
erosion continues, maintaining positive cash flow is dependent on substantial and timely reductions in selected wireless operating expenses.
Reductions in wireless operating expenses require both the reduction of internal costs and negotiation of lower costs from outside vendors.
As we require fewer services and products from our vendors, our negotiating leverage to lower our costs is diminished. There can be no
assurance that we will be able to reduce our wireless operating expenses commensurate with the level of revenue erosion. The inability
to reduce wireless operating expenses would have a material adverse impact on our business, financial condition and operating results
including our continued ability to remain profitable, produce positive operating cash flow, continue our research and development
investment in Spok Go, pay cash dividends to stockholders, and repurchase shares of our common stock.
If we are unable to enhance and deploy our cloud-based offerings while continuing to effectively support our on-premise offerings,
our business and operating results could be adversely affected.
Historically, our revenue has been driven predominately by our on-premise offerings. However, we have responded to the increasing
market shift toward cloud-based offerings by developing cloud-based solutions that we expect to offer to our customers in the upcoming
year. Despite the launch of our cloud-based offerings, we expect our customers to continue to require substantial on-premise offerings
through a transition period while gradually adopting our cloud-based offerings. To support deployment of both our on-premise and cloud-
based offerings, our developers and support team must learn multiple environments in which our platform is deployed, which is more
expensive than training such individuals on a single environment. Furthermore, we cannot ensure that the market for cloud-based offerings
will develop at a rate or in the manner we expect, or that our cloud-based offerings will be competitive with those of more established
cloud-based providers or other new market entrants. Customers may require features and capabilities that our current solutions do not
have and that we may be unable to develop. If we are unable to develop and deploy cloud-based offerings alongside on-premise offerings
that satisfy customer preferences in a timely and cost-effective manner, it may harm our ability to retain existing customers and to attract
new customers, which could have a material adverse impact on our business, financial condition and operating results.
Our transition to a SaaS based business model may negatively impact our revenue, and if we fail to successfully manage
the transition, our business, financial condition and operating results may be adversely affected.
We are currently transitioning to a SaaS based business model and may undergo additional business model changes in the future in order
to adapt to changing market demands. Such business model changes entail significant known and unknown risks and uncertainties, and
we cannot provide assurance that we will be able to complete the transition or manage the transition successfully and in a timely manner.
If we do not successfully complete the transition, or fail to do so in a timely manner, our revenues, business and operating results may
be adversely affected. The transition to a SaaS business model also means that our historical results, especially those achieved before we
began the transition, may not be indicative of our future results.
Regardless of how we manage the transition, our total billings and revenue may be adversely impacted by the transition, particularly
when compared to historical periods. If we are unable to increase the volume of our SaaS sales in any given period to make up for the
lower selling price of certain subscription-based offerings compared to the selling price of on-premise offerings, our total billings and
revenue for such period will be negatively impacted. Additionally, the revenue associated with certain SaaS subscription purchases will
be recognized ratably over the term of the subscription, resulting in less upfront revenue as compared to our perpetual and term-based
licenses. This may result in increased volatility in our reported revenues and operating results if demand for our subscription-based
offerings increases in the future. These factors may also make it difficult to increase our revenue in a given period even with additional
sales in the same period. In addition, maintaining our historically high customer renewal rates will become increasingly important. Our
SaaS customers have no obligation to renew their subscriptions for our solutions after the expiration of the subscription term, and may
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decide not to renew, renew only for a portion of our solutions, or renew with pricing terms that are less favorable to us. Customer renewal
rates may decline or fluctuate due to a number of factors, including their level of satisfaction with our solutions, their ability to continue
their operations and spending levels, the pricing of our solutions and the availability of competing solutions. If our renewal rates decline,
our total billings and revenue will fluctuate or decline, and our business and financial results will be negatively affected.
Additional risks associated with our transition to a SaaS business model include, but are not limited to:
•
•
If current or prospective end customers prefer our on-premise licenses, adoption of our subscription-based model may not meet
our expectations, or may take longer than anticipated to achieve;
Potential confusion or concerns among current or prospective end customers and channel partners, including concerns regarding
changes to our pricing models;
• We may be unsuccessful in implementing or maintaining subscription-based pricing models, which could negatively affect
•
•
adoption, renewal rates and our business results;
If we are unsuccessful in implementing our go-to-market cost structure in a timely or cost-effective manner, we may incur sales
compensation costs at a higher than forecasted rate, particularly if the pace of our subscription transition is faster than anticipated;
Investors, industry and financial analysts may have difficulty understanding the shift in our business model, resulting in changes
in financial estimates or perceived failure to meet investor expectations.
Finally, as we transition to a SaaS business model, there are many risks or uncertainties that may remain unknown to us until we have
gathered more information as part of the transition. If we fail to anticipate these unknowns, whether due to a lack of information, precedent,
or otherwise, or if we fail to properly manage expected risks and/or execute our transition to a subscription-based business model, our
business and operating results, and our ability to accurately forecast our future operating results, may be adversely affected.
We may be unable to effectively develop, introduce and deploy our integrated communications platform and collaboration
platform, Spok Go, which is the basis for our future growth.
Our future revenue growth depends on our ability to develop, introduce and effectively deploy our Spok Go platform. This multi-year
effort will require the coordination of multiple development teams dedicated to this task. Simultaneously with this new development
effort, we must continue to improve and support our existing suite of products to transition them to Spok Go. We foresee the following
risks inherent in this process:
• Requirements Definition - Our plans for Spok Go may not meet the market's needs or customer expectations and could result
•
•
in low market demand and/or acceptance.
Product Scope and Schedule - Our product scope may be subject to development from market-led requirements, new technologies
or competitors expanding product capabilities or entering into adjacent markets. We may fail to manage the scope of our software
development activities effectively, resulting in delays in meeting key milestones, achieving network solutions on a fully integrated
basis, or solving coding problems in a timely and efficient manner. In addition, the continuing software development efforts on
our existing products could distract management time and focus from developing Spok Go.
Staffing and Organization - The development of Spok Go requires the hiring of new personnel. We may be unable to attract, in
a timely manner, the qualified staff to meet our requirements. In addition the organizational changes and new hires necessary
to address our development requirements could create attrition risk for our current staff.
• Operational Readiness - Even if the development of Spok Go occurs as we have planned, we may not be prepared or ready to
sell, deliver and support the new platform technology.
Technical problems and higher costs may affect our product development initiatives.
Our future software revenue growth depends on our ability to develop, introduce and effectively deploy new solutions and features to
our existing software solutions. These new features and functionalities are designed to address both existing and new customer
requirements. We may experience technical problems and additional costs as these new features are tested and deployed. Failure to
effectively develop new or improved software solutions could adversely impact software revenue growth and could have a material
adverse effect on our operations, financial condition and statement of operations including our continued ability to remain profitable,
produce positive operating cash flow, pay cash dividends to stockholders, and repurchase shares of our common stock.
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We are dependent on the U.S. healthcare provider market segment for most of our revenue.
Over 75% of our revenue for wireless services and software products comes from sales to hospitals and other healthcare provider
organizations in the United States. These customers, both non-profit and for-profit, are greatly affected by healthcare reform and the
reimbursement policies of the federal and state governments and health insurance companies, and any decline in revenue received by our
customers due to adverse economic conditions or legislative or regulatory changes could significantly affect the type and amount of
services and products they order from us. We do not anticipate any flexibility in increasing prices for our wireless services notwithstanding
general inflation due to an unrelenting focus by our customers on their cost structures, and our customers could be slow to invest in our
software products and professional services due to budgetary pressures.
If we are unable to retain key management personnel, we might not be able to find suitable replacements in a timely manner, or at
all, and our business could be disrupted.
Our success is largely dependent upon the continued service, availability and performance of key personnel, including our Chief Executive
Officer, senior management team and other highly skilled personnel, particularly in product development, product strategy and sales. We
believe that there is, and will continue to be, intense competition for qualified personnel in the telecommunication and software industries,
and there is no assurance that we will be able to attract, motivate and retain the personnel necessary for the management and development
of our business. Turnover, particularly among senior management, can also create distractions as we search for replacement personnel,
which could result in significant recruiting, relocation, training and other costs, and could cause operational inefficiencies as replacement
personnel become familiar with our business and operations. In addition, manpower in certain areas may be constrained, which could
lead to disruptions over time. The elimination or reconfiguration of employee responsibilities could impact retention decisions by key
executives and personnel. Also, to the extent we hire personnel from competitors, we may be subject to allegations that they have been
improperly solicited, that they have divulged proprietary or other confidential information, or that their former employers own their
inventions or other work product. Moreover, the loss of these key employees, particularly to a competitor, some of which may be in a
position to offer greater compensation, and any resulting loss of customers could reduce our market share and diminish our brands.
We depend on highly skilled personnel and, if we are unable to retain or hire additional qualified personnel, we may not be able to
achieve our strategic objectives.
To execute our growth plan and achieve our strategic objectives, we must continue to attract and retain highly qualified and motivated
personnel across our organization. In particular, to continue to enhance our software solutions, add new and innovative core functionality
and services, as well as develop new products, it will be critical for us to increase the size of our research and product development
organization, including hiring highly skilled software engineers. Competition for software engineers is intense within our industry and
there continues to be upward pressure on the compensation paid to these professionals. In addition, for us to achieve broader market
acceptance of our software solutions, grow our customer base, and pursue adjacent markets, we will need to continue to increase the size
of our sales and marketing and customer support organizations. Identifying and recruiting qualified personnel, training them in the use
of our software solutions and ensuring they are well-equipped to serve our customers requires a significant investment of time and
resources, and it can be particularly difficult to retain these individuals.
Many of the companies with which we compete for experienced personnel have greater name recognition and financial resources than
we have. If we hire employees from competitors or other companies, their former employers may attempt to assert that we or these
employees have breached their legal obligations to the former employer, resulting in a diversion of our time and resources. In addition,
the job market in the Minneapolis-St. Paul area, where the majority of our software developers are located, has historically been very
competitive, and existing employees often consider the value of the equity awards they receive in connection with their employment. If
the perceived value of our equity awards declines, or if the price of our common stock experiences significant volatility, this may adversely
affect our ability to recruit and retain highly skilled employees. As a result, we have greater difficulty hiring and retaining skilled personnel
than some of our competitors. If we are unable to attract and retain the personnel necessary to execute our growth plan, we may be unable
to achieve our strategic objectives and our business, financial condition and operating results may be adversely affected.
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Growth in our software revenue and bookings, and maintenance of our wireless revenue and subscriber base is dependent on the
productivity of our sales organization.
Our ability to achieve revenue growth will depend, in large part, on our success in recruiting, training and retaining sufficient numbers
of sales personnel to support our growth. New hires require significant training and may take significant time before they achieve full
productivity. Based on past experience, we expect new sales team members to reach full productivity after nine months of employment.
However, our recent hires and planned hires may not become productive as quickly as we expect, or at all, and we may be unable to hire
or retain a sufficient number of qualified individuals in the markets where we do business or plan to do business. Moreover, as we
commence our transition to a subscription-based business model, we are also re-training our experienced sales employees, who have
historically focused on wireless and on-premise sales.
From time to time it may be necessary to reorient our sales representatives to focus on specific market segments, product lines or new
software solutions or to remove underperforming individuals, which may require additional resources to maintain productivity. The impact
of these changes could adversely impact our ability to achieve our sales productivity goals. We have also identified the following risks
that could impact our sales productivity:
• Customer Dissatisfaction and Reputational Harm - We may experience customer dissatisfaction with our solutions that could
result in lost opportunities for sales. Potential low ratings of our solutions may result in us being excluded from consideration
by current and prospective customers with respect to future opportunities. In addition, fewer customer references for our solutions
could impact our ability to prospect new sales.
• Training - Training of our marketing and sales personnel as to the clinical requirements of our healthcare customers and the
complexity of our service offerings, takes time and requires a substantial, continuing investment in new hires as well as long
term employees.
• Competitive Speed - Sales productivity can be impacted by the capabilities of our competitors. There is a risk that competitors
may innovate, or partner faster than we do to deliver a unified communications platform.
• Employee Retention - The impact of the elements noted above may challenge the ability of employees to make sales, which
may affect morale and employee retention.
If we are unable to deliver effective customer support, it could harm our relationships with our existing customers and adversely affect
our ability to attract new customers.
Our revenue growth depends, in part, on our ability to satisfy our customers, including by providing continued customer support, which
may contribute to increased customer retention and adoption and utilization of our wireless services and software solutions. Once our
wireless services and software solutions are deployed, our customers depend on our customer support group to resolve technical issues
relating to their use of our solutions. We may be unable to respond quickly to accommodate short-term increases in customer demand
for support services or may otherwise encounter a customer issue that is difficult to resolve. If a customer is not satisfied with the quality
of our customer support, we may need to incur additional costs to remedy the situation or a customer may choose to terminate, or not to
renew, their relationship with us.
Our sales process is highly dependent on the ease of use of our wireless services and software solutions, our reputation and positive
recommendations from our existing customers. Any failure to maintain high-quality or responsive customer support, or a market perception
that we do not maintain high-quality or responsive customer support, could harm our reputation, cause us to lose customers and adversely
impact our ability to sell our wireless services and software solutions to prospective customers.
We may experience a long sales cycle for our software products.
Our software revenue growth results from a long sales cycle that from initial contact to final sales order may take six to 18 months,
depending on the type of software solution. Our software sales and marketing efforts involve educating our customers on the technical
capabilities of our software solutions and the potential benefits from the deployment of our software, as well as educating ourselves as
to the clinical needs of our customers. The inherent unpredictability of decision making in our target market segment of healthcare resulting
from customer budget constraints, multiple approvals and administrative issues may result in fluctuating bookings and revenue from
month to month, quarter to quarter and year to year. Our bookings and corresponding revenue are dependent on actions that have occurred
in the past. Each month we need to spend substantial time, effort, and expense on our marketing and sales efforts that may not result in
future revenue.
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Undetected defects, bugs, or security vulnerabilities in our products could adversely affect the market acceptance of new products,
damage our reputation with current or prospective customers, and materially and adversely affect our operating costs.
Software products, such as those we offer, may contain defects and bugs when they are first introduced or as new versions are released,
or their release may be delayed due to unforeseen difficulties during product development. If any of our products, including products of
companies we have acquired, or third-party components used in our products, contain defects or bugs, or have reliability, quality or
compatibility problems, we may not be able to successfully design workarounds. Any defects we do not detect and fix in pre-release
testing could cause reduced sales and revenue, damage to our reputation, repair or remediation costs, delays in the release of new products
or versions, or legal liability. There can be no assurance that provisions in our license agreements that limit our exposure to liability will
be sufficient or withstand legal challenge. Computer programmers and hackers also may be able to develop and deploy viruses, worms,
and other malicious software programs that attack our products or otherwise exploit any security vulnerabilities of our products.
Wireless service to our customers could be adversely impacted by network rationalization.
We have an active program to consolidate the number of networks and related transmitter locations, which is referred to as network
rationalization. Network rationalization is necessary to match our technical infrastructure to our smaller subscriber base and to reduce
both site rent and telecommunication costs. The implementation of the network rationalization program could adversely impact service
to our existing subscribers, and there can be no assurance that any efforts to minimize that impact would be successful. This adverse
impact could increase the rate of gross subscriber cancellations and/or the level of wireless revenue erosion. Adverse changes in gross
subscriber cancellations and/or revenue erosion could have a material adverse effect on our business, financial condition and operating
results.
We may be unable to find vendors able to supply us with wireless paging equipment based on future demands.
We purchase paging equipment from third party vendors. This equipment is sold or leased to customers in order to provide wireless
messaging services. The reduction in industry demand for paging equipment has caused various suppliers to cease manufacturing this
equipment or increase prices for devices. There can be no assurance that we will continue to find vendors to supply paging equipment,
or that the vendors will supply equipment at costs that allow us to remain a competitive alternative in the wireless messaging industry.
A lack of paging equipment could impact our ability to provide certain wireless messaging services and could have a material adverse
effect on our business, leading to further wireless revenue erosion.
We may be unable to maintain successful relationships with our channel partners.
We use channel partners such as resellers, consulting firms, original equipment manufacturers, and technology partners to license and
support our products. We rely, to a significant degree, on each of our channel partners to select, screen and maintain relationships with
its distribution network and to distribute our offerings in a manner that is consistent with applicable law and regulatory requirements and
our quality standards. Contract defaults by any of these channel partners or the loss of our relationships with them may materially adversely
affect our ability to develop, market, sell, or support our communication solution offerings. If our indirect distribution channel is disrupted,
we may be required to devote more resources to distribute our offerings directly and support our customers, which may not be as effective
and could lead to higher costs, reduced revenue and growth that is slower than expected.
Recruiting and retaining qualified channel partners and training them in the use of our enterprise technologies requires significant time
and resources. If we fail to devote sufficient resources to support and expand our network of channel partners, our business may be
adversely affected. In addition, because we rely on channel partners for the indirect distribution of our enterprise technologies, we may
have little or no contact with the ultimate end-users of our technologies, thereby making it more difficult for us to establish brand awareness,
ensure proper delivery and installation of our software, support ongoing customer requirements, estimate end-user demand, respond to
evolving customer needs and obtain subscription renewals from end-users.
We may be unable to realize the benefits associated with our deferred income tax assets.
We have significant deferred income tax assets that are available to offset future taxable income and increase cash flows from operations.
The use of these deferred income tax assets is dependent on the availability of taxable income in future periods. The availability of future
taxable income is dependent on our ability to profitably manage our operations to support a growing base of software revenue offset by
declining wireless subscribers and revenue. To the extent that anticipated reductions in wireless operating expenses do not occur or
sufficient revenue is not generated, we may not achieve sufficient taxable income to allow for use of our deferred income tax assets. The
accounting for deferred income tax assets is based upon an estimate of future results, and any valuation allowance we may apply to our
deferred tax assets may be increased or decreased as conditions change or if we are unable to implement certain tax planning strategies.
If we are unable to use these deferred income tax assets, our financial condition and statement of operations may be materially affected.
In addition, a significant portion of our deferred income tax assets relate to net operating losses. If our ability to utilize these losses is
limited, due to Internal Revenue Code (“IRC”) Section 382, our financial condition and statement of operations may be materially affected.
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Our wireless products are regulated by the FCC and, to a lesser extent, state and local regulatory authorities. Changes in
regulation could result in increased costs to us and our customers.
We are subject to regulation by the FCC and, to a lesser extent, by state and local authorities. Changes in regulatory policy could increase
the fees we must pay to the government or to third parties, and could subject us to more stringent requirements that could cause us to
incur additional capital and/or operating costs. To the extent additional regulatory costs are passed along to customers, those increased
costs could adversely impact subscriber cancellations.
For example, the FCC issued an order in October 2007 that mandated paging carriers (including the Company) along with all other CMRS
providers serving a defined minimum number of subscribers to maintain an emergency back-up power supply at all cell sites to enable
operation for a minimum of eight hours in the event of a loss of commercial power (the “Back-up Power Order”). Ultimately, after a
hearing by the DC Circuit Court and disapproval by the Office of Management and Budget (the “OMB”) of the information collection
requirements of the Back-Up Power Order, the FCC indicated that it would not seek to override the OMB’s disapproval. Rather the FCC
indicated that it would issue a Notice of Proposed Rulemaking with the goal of adopting revised back-up power rules. To date, there has
been no Notice of Proposed Rulemaking by the FCC and we are unable to predict what impact, if any, a revised back-up power rule could
have on our operations, cash flows, ability to continue payment of cash dividends to stockholders, and ability to repurchase shares of our
common stock.
As a further example, the FCC continues to consider changes to the rules governing the collection of universal service fees. The FCC is
evaluating a flat monthly charge per assigned telephone number as opposed to assessing universal service contributions based on
telecommunication carriers’ interstate revenue. There is no timetable for any rulemaking to implement this numbers-based methodology.
If the FCC adopts a numbers-based methodology, our attempt to recover the increased contribution costs from our customers could
significantly diminish demand for our services, and our failure to recover such increased contribution costs could have a material adverse
impact on our business, financial condition and results of operations.
Certain of our software products are regulated by the FDA. The application of or changes in regulations could impact our ability
to market new or revised software products to our customers.
Certain of our software products are regulated by the FDA as medical devices. The classification of our software products as medical
devices means that we are required to comply with certain registration and listing, labeling, medical device reporting, removal and
correction, and good manufacturing practice requirements. Updates to these products or the development of new products could require
us to seek clearance from the FDA before we are permitted to market or sell these software products. In addition, changes to FDA
regulations could impact existing software products or require updates to existing products. The impact of delays in FDA clearance or
changes to FDA regulations could impact our ability to market or sell our software products and could have a material adverse effect on
our software sales, financial condition and results of operations, including our continued ability to remain profitable, produce positive
operating cash flow, pay cash dividends to stockholders and repurchase shares of our common stock.
We may experience litigation claiming intellectual property infringement by us, and we may not be able to protect our rights in
intellectual property that we own and develop.
Intellectual property infringement litigation has become commonplace, particularly in the wireless and software industries in which we
operate. Litigations can be protracted, expensive, and time consuming. There is no assurance that we will remain immune to this litigation.
Any such claims, whether meritorious or not, could be time consuming and costly in terms of both resources and management time.
We may receive claims that we have infringed the intellectual property rights of others, including claims regarding patents, copyrights,
and trademarks. The number and types of these claims may grow as a result of constant technological change in the segments in which
our wireless services and software products compete, the extensive patent coverage of existing technologies, and the rapid rate of issuance
of new patents.
Our patents, trademarks, copyrights and trade secrets relating to our wireless services and networks, and our software solutions, are
important assets. The efforts we undertake to protect our proprietary rights may not be sufficient or effective. Any significant impairment
to our intellectual property rights could harm our business and our ability to compete effectively. Protecting our intellectual property
rights can be costly and time consuming.
We seek to maintain certain of our intellectual property rights as trade secrets, including the source code for many of our software solutions
and innovations. Our source code and system architecture may be reverse engineered by our competitors, or the secrecy of our solutions
and designs could be compromised through a security breach or otherwise, or by our employees or former employees, intentionally or
accidentally. Any compromise of our trade secrets could cause us to lose any competitive advantage our software solutions have and the
investment we have made in developing our products and services.
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Our portfolio of issued patents and copyrights may be insufficient to defend ourselves against intellectual property infringement claims,
and the validity and scope of our patents could be challenged by third parties were we to seek to enforce them.
Our use of open source software, third-party software and other intellectual property may expose us to risks.
We license and integrate certain software components from third parties into our software, and we expect to continue to use third party
software in the future. Some open source software licenses require users who distribute or make available as a service open source software
as part of their own software product to publicly disclose all or part of the source code of the users’ developed software or to make
available any derivative works of the open source code on unfavorable terms or at no cost. Our efforts to use the open source software
in a manner consistent with the relevant license terms that would not require us to disclose our proprietary code or license our proprietary
software at no cost may not be successful. We may face claims by third parties seeking to enforce the license terms applicable to such
open source software, including by demanding the release of the open source software, derivative works or our proprietary source code
that was developed using such software. In addition, if the license terms for the open source code change, we may be forced to re-engineer
our software or incur additional costs.
Some of our products and services include other software or intellectual property licensed from third parties, and we also use software
and other intellectual property licensed from third parties in our business. This exposes us to risks over which we may have little or no
control. For example, a licensor may have difficulties keeping up with technological changes or may stop supporting the software or
other intellectual property that it licenses to us. There can be no assurance that the licenses we use will be available on acceptable terms,
if at all. In addition, a third party may assert that we or our customers are in breach of the terms of a license, which could, among other
things, give such third party the right to terminate a license or seek damages from us, or both. Our inability to obtain or maintain certain
licenses or other rights or to obtain or maintain such licenses or rights on favorable terms, or the need to engage in litigation regarding
these matters, could result in delays in releases of new products, and could otherwise disrupt our business, until equivalent technology
can be identified, licensed or developed. In addition, sophisticated hardware and operating system software and applications that we
procure from third parties may contain defects in design or manufacture, including ‘‘bugs,” security vulnerabilities, and other problems
that could unexpectedly interfere with the expected operation of our products and services.
We may encounter issues with privacy and security of personal information.
A substantial portion of our revenue comes from healthcare customers. As part of our business, we (or third parties with whom we contract)
may receive, store and process our data, as well as our customers’ and partners’ private data and personal information. As such, our
business is subject to a variety of federal, state and international laws and regulations that apply to the collection, use, retention, protection,
disclosure, transfer and processing of personal data.
Our software solutions may handle or have access to personal health information subject in the United States to HIPAA, HITECH and
related regulations as well as legislation and regulations in foreign countries. These statutes and related regulations impose numerous
requirements regarding the use and disclosure of personal health information with which we and our software solutions must comply.
Our failure to accurately anticipate or interpret these complex and technical laws and regulations could subject us to civil and/or criminal
liability. Such failure could adversely impact our ability to market and sell our software solutions to healthcare customers, and have a
material adverse impact on our software sales. In addition to personal health information, the Company may handle or have access to
personal information subject in the European Union to General Data Protection Regulations (GDPR). The GDPR imposes several stringent
requirements for controllers and processors of personal data and increases our obligations, including, for example, by requiring more
robust disclosures to individuals, strengthening the individual data rights regime, shortening timelines for data breach notifications,
limiting retention periods and secondary use of information, and imposing additional obligations when we contract third party processors
in connection with the processing of personal data. The GDPR could limit our ability to use and share personal data or could cause our
costs to increase and harm our business, financial condition, operating results and cash flows. Failure to comply with the requirements
of the GDPR and the applicable European Union member states may result in fines of up to €20,000,000 or up to 4% of the total worldwide
annual turnover of the preceding financial year, whichever is higher, and other administrative penalties. To comply with the new data
protection rules imposed by the GDPR we may be required to put in place additional mechanisms which could be onerous and adversely
affect our business, financial condition, results of operations and prospects. Existing privacy-related laws and regulations in the United
States and other countries are evolving and are subject to potentially differing interpretations, and various U.S. federal and state or other
international legislative and regulatory bodies may expand or enact laws regarding privacy and data security-related matters. In the U.S.,
the state of California enacted the California Consumer Privacy Act, which came into effect on January 1, 2020, and which also imposes
heightened transparency obligations and requirements to make available data collected about California residents and to provide them
the ability to object to the sale, or request deletion of, their personal data in certain instances. If other states in the U.S. adopt similar laws
or if a comprehensive federal data privacy law is enacted, we may expend considerable resources to meet these requirements.
In addition, customers may use our wireless services to transmit patient health information subject to HIPAA and other regulatory
requirements. While we offer encrypted pagers to our customers, many customers use pager devices provided by us that do not encrypt
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text messages. While we disclaim liability for customer non-compliance with HIPAA and other privacy requirements, there remains
some risk we could be held responsible for privacy violations by our customers.
There can be no assurance that the security and testing measures we take relating to our offerings and operations will prevent all security
breaches and data loss that could harm our business or the businesses of our customers and partners. These risks may increase as we
continue to grow our services and offerings and as we receive, store and process more of our customers’ data. Actual or perceived
vulnerabilities may lead to regulatory investigations, claims against us by customers, partners or other third parties, or costs, such as
those related to providing customer notifications and fraud monitoring. There can be no assurance that any provisions in our customer
agreements limiting our liability will be enforceable or effective under applicable law. In addition, the cost and operational consequences
of implementing further data protection measures could be significant.
The data privacy and protection-related laws and regulations to which we are subject are evolving, with new or modified laws and
regulations proposed and implemented frequently, and existing laws and regulations subject to new or different interpretations. Any
failure by us to comply with data privacy- and protection-related laws and regulations could result in enforcement actions, significant
penalties or other legal actions against us or our customers or suppliers. An actual or alleged failure to comply, which could result in
negative publicity, reduce demand for our offerings, increase the cost of compliance, require changes in business practices that result in
reduced revenue, restrict our ability to provide our offerings in certain locations, result in our customers’ inability to use our offerings
and prohibit data transfers or result in other claims, liabilities or sanctions, including fines, and could have an adverse effect on our
business, financial condition, operating results and cash flows.
System disruptions and security threats to our computer networks, satellite control or telecommunications systems could have a
material adverse effect on our business.
The performance and reliability of our computer network and telecommunications systems infrastructure, as well as the technology
infrastructure of third parties, is critical to our operations. This technology infrastructure may be vulnerable to damage or interruption
from natural disasters, power loss, telecommunication failures, terrorist attacks, software errors and other events. Any computer system
or satellite network error or failure, regardless of cause, could result in a substantial outage that materially disrupts our operations. In
addition, we face the threat to our computer systems of unauthorized access, computer hackers, computer viruses, malicious code,
organized cyber-attacks and other security problems and system disruptions. Our satellite network connections for our wireless services
depend upon very small aperture terminals, many of which are based on decades-old technology or equipment that could fail and result
in a loss of service to our customers. With respect to our Enterprise Reporting and Management systems and data storage, we rely on
third party data centers and services for maintaining accessibility, reliability and uninterrupted connectivity.
A significant number of the systems making up this infrastructure are not redundant, and our disaster recovery planning may not be
sufficient for every eventuality. We may not carry business interruption insurance sufficient to protect us from all losses that may result
from interruptions in our services as a result of technology infrastructure failures or to cover all contingencies. We may be required to
expend significant resources to protect against the threat of these system disruptions or to alleviate problems caused by these disruptions.
Any interruption in the availability of our websites and on-line interactions with customers or partners may cause a reduction in customer
or partner satisfaction levels, which in turn could cause additional claims, reduced revenue or loss of customers or partners. There can
be no assurance that any precautions we take will prove successful, and such problems could result in, among other consequences, a loss
of data, loss of confidence in the stability and reliability of our offerings, damage to our reputation, and legal liability, all of which may
adversely affect our business, financial condition, operating results and cash flows.
Unauthorized breaches or failures in cybersecurity measures adopted by us and/or included in our products and services could have
a material adverse effect on our business.
Our security systems are designed to maintain the physical security of our facilities and protect our customers’, suppliers’ and employees’
confidential information, as well as our own proprietary information. However, we are also dependent on a number of third-party providers
of critical corporate infrastructure services relating to, among other things, human resources, electronic communication services and
certain finance functions, and we are, of necessity, dependent on the security systems of these providers. Accidental or willful security
breaches or other unauthorized access by third parties or our employees or contractors to our facilities, our information systems or the
systems of our third party providers, or the existence of computer viruses or malware in our or their data or software could expose us to
risks of information loss and misappropriation of proprietary and confidential information, including information relating to our products
or customers and the personal information of our employees. We utilize a costly, multilayered security framework including detailed
security policies and procedures, security appliances and software, third party vulnerability testing and detailed business continuity plans
that could be disrupted at any time.
In addition, we have, from time to time, also been subject to unauthorized network intrusions and malware on our own IT networks. Any
theft or misuse of confidential, personal or proprietary information as a result of such activities could result in, among other things,
unfavorable publicity, damage to our reputation, loss of our trade secrets and other competitive information, difficulty in marketing our
products, allegations by our customers that we have not performed our contractual obligations, litigation by affected parties and possible
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financial obligations for liabilities and damages related to the theft or misuse of such information, as well as fines and other sanctions
resulting from any related breaches of data privacy regulations, any of which could have a material adverse effect on our reputation,
business, profitability and financial condition. Furthermore, the techniques used to obtain unauthorized access or to sabotage systems
change frequently and are often not recognized until launched against a target, and we may be unable to anticipate these techniques or
to implement adequate preventative measures.
General economic conditions that are largely out of our control may adversely affect our financial condition and statement of
operations.
Our business is sensitive to changes in general economic conditions, both in the United States and foreign markets. Recessionary economic
cycles, higher interest rates, inflation, higher levels of unemployment, higher tax rates and other changes in tax laws, or other economic
factors that may affect business spending or buying habits could adversely affect the demand for our services. This adverse impact could
increase the rate of gross subscriber cancellations and/or the level of revenue erosion.
A significant portion of our revenue is derived from healthcare customers and we are impacted by changes in the healthcare economic
environment. The healthcare industry is highly regulated and is subject to changing political, legislative, regulatory, and other economic
developments. These developments can have a dramatic effect on the decision-making and spending by our customers for information
technology and software. This economic uncertainty can add to the unpredictability of decision-making and lengthen our sales cycle.
Further, the consequences of the implementation of changes to healthcare reform legislation continue to impact both the economy in
general and the healthcare market in particular. The uncertainty created by the possibility of changes to the legislation is impacting
customer decision making and information technology plans in our key healthcare market. We are unable to predict the full consequences
of this uncertainty on our operations. Adverse changes in the economic environment could adversely impact our ability to market and
sell our wireless and software solutions to healthcare customers.
If our long-lived assets, intangible assets subject to amortization or goodwill become impaired, we may be required to record a
significant charge to earnings.
We are required to evaluate the carrying value of our long-lived assets, amortizable intangible assets and goodwill. For long-lived and
amortizable intangible assets, we assess quarterly whether circumstances exist which suggest that the carrying value of long-lived and
amortizable intangible assets may not be recoverable. We evaluate goodwill for impairment at least annually, or when events or
circumstances suggest a potential impairment has occurred. We generally perform this annual goodwill impairment test in the fourth
quarter of the fiscal year.
If our long-lived assets, intangible assets subject to amortization or goodwill are deemed to be impaired, an impairment loss equal to
the amount by which the carrying amount exceeds the fair value of the assets would be recognized. We may be required to record a
significant charge in our financial statements during the period in which any impairment of our long-lived assets, intangible assets
subject to amortization or goodwill is determined, which would negatively affect our results of operations. For example, in the fourth
quarter of 2019 we recognized non-cash pre-tax goodwill impairment charges of $8.8 million.
We have investigated potential acquisitions and may not be able to identify an opportunity at favorable terms or have the ability to
close on the financing necessary to consummate the transaction.
We cannot provide any assurances that we will be successful in finding such acquisitions or consummating future acquisitions on favorable
terms. We anticipate that our acquisitions will be financed through a combination of methods, including but not limited to the use of
available cash on hand, and, if necessary, borrowings from third party financial institutions. Disruptions in credit markets and an
unwillingness to lend may limit our ability to finance acquisitions.
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We have investigated potential acquisitions and may be unable to successfully integrate such acquisitions into our business and
may not achieve all or any of the operating synergies or anticipated benefits of those acquisitions.
We continue to evaluate acquisitions of other businesses where we believe such acquisitions will yield increased cash flows, improved
market penetration and/or identified operating efficiencies and synergies. We may face various challenges with our integration efforts,
including the combination and simplification of product and service offerings, sales and marketing approaches and establishment of
combined operations.
We may have limited or no history of owning and operating any business that we acquire. If we were to acquire these businesses, there
can be no assurance that:
•
•
•
•
such businesses will perform as expected;
such businesses will not incur unforeseen obligations or liabilities;
such businesses will generate sufficient cash flow to support the indebtedness, if incurred, to acquire them or the expenditures
needed to develop them; and/or
the rate of return from such businesses will justify the decision to invest the capital to acquire them.
There can be no assurance that we will manage these challenges and risks successfully. Moreover, if we are not successful in completing
transactions that we have pursued or may pursue, our business may be adversely affected, and we may incur substantial expenses and
divert significant management time and resources. In addition, in pursuing and completing such transactions, we could use substantial
portions of our available cash to pay for all or a portion of the purchase price for these transactions or retention incentives to employees
of the acquired business, or we may incur substantial debt. We could also issue additional securities to finance all or a portion of the
purchase price for these transactions or as retention incentives to employees of the acquired business, which could cause our stockholders
to suffer significant dilution. Any of such transactions may not generate additional revenue or profit for us, or may take longer to do so
than expected, which may adversely affect our business, financial condition, operating results and cash flows.
ITEM 1B. UNRESOLVED STAFF COMMENTS
We had no unresolved SEC staff comments as of February 27, 2020.
ITEM 2. PROPERTIES
Our corporate headquarters is located in Springfield, Virginia, and consists of approximately 18,000 square feet of space under a lease
that expires on March 31, 2021. At December 31, 2019, we leased facility space, including our executive headquarters, sales offices,
technical facilities, warehouse and storage facilities in 60 locations in 28 states in the United States, one facility in Australia and one
facility in the Middle East. The total leased space is approximately 165,000 square feet. At December 31, 2019, we owned four small
parcels of land in three states in the United States.
At December 31, 2019, we leased transmitter sites on commercial broadcast towers, buildings and other fixed structures, some of which
are free of charge, in approximately 3,078 locations throughout the United States. These leases are for our active transmitters and are for
various terms and provide for periodic lease payments at various rates.
At December 31, 2019, we had 3,840 active transmitters on leased sites which provide service to our customers.
ITEM 3. LEGAL PROCEEDINGS
Refer to Note 10, "Commitments and Contingencies" in the Notes to Consolidated Financial Statements for information regarding legal
proceedings in which we are involved.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
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PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
Market Information
Our sole class of common equity is our $0.0001 par value common stock, which is listed on the NASDAQ National Market® and is traded
under the symbol “SPOK.”
Holders of Common Stock
As of February 21, 2020, there were 2,983 holders of record of our common stock.
Dividends
The Company declared dividends totaling $9.9 million and $10.1 million during 2019 and 2018, respectively, and expects to pay dividends
of $0.125 per common share each quarter, subject to declaration by the Board of Directors, in 2020. Cash dividends declared for the years
ended December 31, 2019 and 2018, respectively, include dividends related to unvested restricted stock units (“RSUs”) and shares of
unvested restricted common stock (“restricted stock”) granted under the Spok Holdings, Inc. Equity Incentive Plan (“Equity Plan”) to
executives and non-executive members of our Board of Directors. Cash distributions on RSUs and restricted stock are accrued and paid
when the applicable vesting conditions are met. Accrued cash distributions on forfeited RSUs and restricted stock are also forfeited.
The following table details information on our dividends declared and cash distributions since the formation of the Company in 2005
through the year ended December 31, 2019:
Year
Prior to 2015
2015(2)
2016(3)
2017
2018
2019
Dividends Declared
Per Share
Amount
Total
Payment
(1)
(Dollars in
thousands)
16.900
0.625
0.750
0.500
0.500
0.500
19.775
$
$
428,413
13,333
10,287
15,234
10,064
9,819
487,150
$
$
Total
(1) The total payment reflects the cash distributions paid in relation to common stock, vested RSUs and vested shares of restricted stock.
(2) The cash distribution includes an additional special one-time cash distribution to stockholders of $0.125 per share of common stock.
(3) The per share amount includes a special one-time dividend of $0.25 per share of common stock declared in 2016 but payable to stockholders
in 2017.
On February 26, 2020, our Board of Directors declared a regular quarterly cash dividend of $0.125 per share of common stock, with a
record date of March 16, 2020, and a payment date of March 30, 2020. This cash dividend of approximately $2.4 million is expected to
be paid from available cash on hand.
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Performance Graph
We began trading on the NASDAQ National Market® on November 17, 2004. The chart below compares the relative changes in the
cumulative total return of our common stock for the period December 31, 2014 to December 31, 2019, against the cumulative total return
of the NASDAQ Composite Index®, the NASDAQ Telecommunications Index® and the S&P Health Care Technology Index for the same
period.
The chart below assumes that on December 31, 2014, $100 was invested in our common stock and in each of the indices. The comparisons
assume that all cash distributions were reinvested. The chart indicates the dollar value of each hypothetical $100 investment based on
the closing price as of the last trading day of each fiscal year from December 31, 2014 to December 31, 2019.
Spok Holdings, Inc.
NASDAQ Composite
NASDAQ Telecommunications
S&P Health Care Technology
2014
2015
2016
2017
2018
$
100.00
$
109.38
$
129.19
$
100.33
$
87.90
$
December 31,
100.00
100.00
100.00
106.96
97.52
93.06
26
116.45
102.36
73.26
150.96
127.62
104.22
146.67
127.16
81.10
2019
84.23
200.49
142.60
114.37
Table of Contents
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
No common stock was repurchased by the Company (excluding the purchase of common stock for tax withholdings) during the three
months ended December 31, 2019.
Repurchased shares of our common stock are accounted for as a reduction to common stock and additional paid-in-capital in the period
in which the repurchase occurs. In August 2018, the Company's Board of Directors reset the repurchase authority under the share repurchase
program to $10.0 million which was set to expire on December 31, 2018. In November 2018, the Company's Board of Directors extended
the repurchase authority through December 31, 2019. The Company fully exhausted the repurchase authority in September 2019.
Transfer Restrictions on Common Stock
In order to reduce the possibility that certain changes in ownership could impose limitations on the use of our deferred income tax assets,
our Amended and Restated Certificate of Incorporation contains provisions that generally restrict transfers by or to any 5% stockholder
of our common stock or any transfer that would cause a person or group of persons to become a 5% stockholder of our common stock.
After a cumulative indirect shift in ownership of more than 45% since our emergence from bankruptcy proceedings in May 2002 through
a transfer of our common stock, any transfer of our common stock by or to a 5% stockholder of our common stock or any transfer that
would cause a person or group of persons to become a 5% stockholder of such common stock, will be prohibited unless the transferee
or transferor provides notice of the transfer to us and our Board of Directors determines in good faith that the transfer would not result
in a cumulative indirect shift in ownership of more than 47%.
Prior to a cumulative indirect ownership change of more than 45%, transfers of our common stock will not be prohibited, except to the
extent that they result in a cumulative indirect shift in ownership of more than 47%, but any transfer by or to a 5% stockholder of our
common stock or any transfer that would cause a person or group of persons to become a 5% stockholder of our common stock requires
notice to us. Similar restrictions apply to the issuance or transfer of an option to purchase our common stock, if the exercise of the option
would result in a transfer that would be prohibited pursuant to the restrictions described above. These restrictions will remain in effect
until the earliest of (1) the repeal of IRC Section 382 (or any comparable successor provision) and (2) the date on which the limitation
amount imposed by IRC Section 382 in the event of an ownership change would not be less than the tax attributes subject to these
limitations. Transfers by or to us and any transfer pursuant to a merger approved by our Board of Directors or any tender offer to acquire
all of our outstanding stock where a majority of the shares have been tendered will be exempt from these restrictions.
Based on publicly available information and after considering any direct knowledge we may have, our combined cumulative change in
ownership was an insignificant amount as of December 31, 2019 and 2018.
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ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data should be read in conjunction with “Item 7. Management’s Discussion and Analysis
of Financial Condition and Statement of Operations,”, the consolidated financial statements and notes thereto, and other financial
information appearing elsewhere in this 2019 Form 10-K. The Company adopted Accounting Standards Codification ("ASC") 606,
"Revenue from Contracts with Customers" ("ASC 606") on January 1, 2018. Periods prior to January 1, 2018 reflect accounting under
ASC 605, "Revenue Recognition" and have not been adjusted for the adoption of ASC 606.
Statements of Operations Data:
Revenues
Operating expenses
Operating (loss) income
Net (loss) income
Basic and diluted net (loss) income per common share
Cash dividends declared per common share
Balance Sheets Data:
Current assets
Total assets
Long-term liabilities, excluding deferred revenue
Stockholders’ equity
For the Year Ended December 31,
2019
2018
2017
2016
2015
(Dollars in thousands, except per share amounts)
$
160,289
$
169,474
$
171,175
176,098
(15,809)
(10,765)
(0.56)
0.50
172,647
(3,173)
(1,479)
(0.08)
0.50
160,469
10,706
(15,306)
(0.76)
0.50
179,561
157,408
22,153
13,979
0.68
0.75
189,628
164,528
25,100
80,246
3.74
0.625
December 31,
2019
2018
2017
2016
2015
(Dollars in thousands)
$
117,665
$
130,978
$
144,303
$
155,862
$
141,613
319,872
17,918
250,094
327,712
348,004
388,087
386,433
7,734
8,075
8,921
8,972
274,554
290,529
322,087
329,564
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTSOF OPERATIONS
The following discussion and analysis should be read in conjunction with our consolidated financial statements and related notes and the
discussion under “Organization and Significant Accounting Policies” (refer to Note 1), which describes key estimates and assumptions
we make in the preparation of our consolidated financial statements; the cautionary language that appears under the title "Forward Looking
Statements" immediately following the Table of Contents; “Item 1. Business,” which describes our operations; and “Item 1A. Risk
Factors,” which describes key risks associated with our operations and markets in which we operate. A reference to a “Note” in this
section refers to the accompanying Notes to Consolidated Financial Statements.
Overview and Highlights
We are a comprehensive provider of clinical communication and collaboration solutions for enterprises. We offer a suite of unified clinical
communication and collaboration solutions that include call center operations, clinical alerting and notifications, one-way and advanced
two-way wireless messaging services, mobile communications and public safety response. Our customers rely on Spok for workflow
improvement, secure texting, paging services, contact center optimization and public safety response. Our product offerings are capable
of addressing a customer’s mission clinical communications needs. We develop, sell and support enterprise-wide systems for healthcare
and other organizations needing to automate, centralize and standardize their approach to clinical communications. 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 has been the healthcare industry, particularly hospitals. We have identified
hospitals with 200 or more beds as the primary targets for our software and wireless solutions.
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Revenue generated by wireless messaging services (including voice mail, personalized greetings, message storage and retrieval) and
equipment loss and/or maintenance protection to both one-way and two-way messaging subscribers is presented as wireless revenue in
our statements of operations. Revenue generated by the sale of our software solutions, which includes software license, professional
services (installation, consulting and training), equipment procured by us from third parties (to be used in conjunction with our software)
and post-contract support (on-going maintenance), is presented as software revenue in our statements of operations. Our software is
licensed to end users under an industry standard software license agreement.
2019 Highlights
Total revenue declined by 5.4% or $9.2 million during 2019 compared to 2018, primarily as a result of the continued and expected decline
in wireless revenue along with a decrease in license revenues. The rate of decline in wireless revenues continues to trend favorably over
the last several years as we saw the lowest level of erosion in the last five years, declining at a rate of only 6.5%.
In the fourth quarter of 2019, we recognized non-cash pre-tax goodwill impairment charges of $8.8 million. Excluding the goodwill
impairment, our operating expenses decreased by 3.1% or $5.4 million during 2019 compared to 2018, driven primarily by savings in
cost of revenue and general and administrative.
While we continued investment in our development of Spok Go, we anticipate costs will begin to normalize in 2020. We saw growth in
development costs decline from 30.8% between 2017 and 2018 to 12.6% from 2018 to 2019. We anticipate the rate of growth will continue
to decline through 2020 as we balance the mix of staffing and outside service resources with internal development needs. We made
significant progress in our development efforts related to Spok Go and expect to have a product ready for public release in 2020.
We returned approximately $16.4 million of capital to stockholders in the form of cash dividends and share repurchases.
2018 Highlights
Total revenue declined by 1.0% or $1.7 million during 2018 compared to 2017, primarily as a result of moderate growth in software
revenue, offset by the continued and expected decline in wireless revenue. This represents a $6.7 million improvement in the decrease
of consolidated revenues period over period as compared to the year ended December 31, 2017 and brings us closer to consolidated
revenue growth as we continue our transition into a software company. The anticipated rate of decline in wireless revenues has trended
favorably over the last several years continuing in 2018 as we saw the lowest level of erosion in the last five years, declining at a rate of
only 6.8%.
Our operating expenses increased by 7.6% or $12.2 million during 2018 compared to 2017, driven primarily by our continued investment
in the development of Spok Go and the related research and development costs.
We returned approximately $23.6 million of capital to stockholders in the form of cash dividends and share repurchases.
Wireless Revenue
Wireless revenue consists of two primary components: Paging revenue and product and other revenue. Paging revenue consists primarily
of recurring fees associated with the provision of messaging services and fees for paging devices and is net of a provision for service
credits. Product and other revenue reflects system sales, the sale of devices and charges for paging devices that are not returned and are
net of anticipated credits. Our core offering includes subscriptions to one-way or two-way messaging services for a periodic (monthly,
quarterly, semiannual, or annual) service fee. This is generally based upon the type of service provided, the geographic area covered, the
number of devices provided to the customer and the period of commitment. A subscriber to one-way messaging services may select
coverage on a local, regional or nationwide basis to best meet their messaging needs. Two-way messaging is generally offered on a
nationwide basis. In addition, subscribers either contract for a messaging device from us for an additional fixed monthly fee or they own
a device, having purchased it either from us or from another vendor. We also sell devices to resellers who lease or resell devices to their
subscribers and then sell messaging services utilizing our networks. We offer ancillary services, such as voicemail and equipment loss
or maintenance protection, which help increase the monthly recurring revenue we receive along with these traditional messaging services.
We offer exclusive one-way (T5) and two-way (T52) alphanumeric pagers, which are configurable to support un-encrypted or encrypted
operation. When configured for encryption, they utilize AES-128 bit encryption, screen locking and remote wipe capabilities. With
encryption enabled, these new secure paging devices enhance our service offerings to the healthcare community by adding HIPAA security
capabilities to the low cost, highly reliable and availability benefits of paging (see Item 1. “Business” for more details).
29
Table of Contents
Software Revenue
Software revenue consists of two primary 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 facilitate the use of
our software solutions, and professional services revenue related to the implementation of our solutions. Maintenance revenue is for
ongoing support of our software solutions or related equipment (typically for one year).
The Company adopted ASC 606 on January 1, 2018. Periods prior to January 1, 2018 reflect accounting under ASC 605, "Revenue
Recognition" and have not been adjusted for the adoption of ASC 606.
As of 2018, with the adoption of ASC 606, our software licenses and hardware are generally recognized at a point in time when we have
transferred control to the customer. For software licenses, revenue is not recognized until the related license(s) has been made available
to the customer and the customer can begin to benefit from its right to use the license(s). Our software licenses represent a right to use
Spok’s intellectual property ("IP") as it exists at the point in time at which the license is granted. Many of our software licenses have
significant standalone functionality due to their ability to process a transaction or perform a function or task, and we do not need to
maintain those products, once provided to the customer, for value to exist. While the functionality of IP that we license may substantively
change during the license period, customers are not contractually or practically required to update their license as a result of those changes.
Our wireless, professional and maintenance services are generally recognized over time due to a customer's simultaneous receipt and
consumption of the benefit as we perform the work. As we transfer control over time, we recognize revenue based on the extent of progress
towards completion of the performance obligation. The selection of the method to measure progress towards completion requires significant
judgment and is based on the nature of the products or services to be provided. Generally, we use the time-elapsed measure of progress
for performance obligations which include wireless or maintenance services. We believe this method best depicts the simultaneous transfer
and consumption of the benefit based on our performance as these services are generally considered standby services. For professional
services, we leverage an input methodology based on the number of hours worked on a project versus the total expected hours necessary
to complete the project. Revenues are recognized proportionally as hours are incurred.
Operating Expenses
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 primarily for hardware, third-party software, outside service 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.
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 our networks continue to be consolidated.
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 have
a centralized marketing function, which 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 which
includes finance and accounting, human resources and executive management. This classification consists primarily of payroll
and related expenses, outside service expenses, taxes, licenses and permit expenses, and facility rent expenses.
30
Table of Contents
Results of Operations
The following table is a summary of our Consolidated Statements of Operations for the years ended December 31, 2019, 2018 and
2017:
(Dollars in thousands)
Revenues:
Wireless
Software
Total revenue
Operating expenses:
Cost of revenue
Research and development
Technology operations
Selling and marketing
General and administrative
Goodwill impairment
Depreciation, amortization and accretion
Total operating expenses
Operating (loss) income
Interest income
Other income (expense)
(Loss) income before income tax benefit
(expense)
Benefit from (provision for) income taxes
Net loss
Supplemental information
FTEs
Active transmitters
2019
Change
2018
Change
2017
$ 88,167
72,122
160,289
(6,110)
(3,075)
(9,185)
(6.5)% $ 94,277
(4.1)%
75,197
(5.4)% 169,474
$ (6,911)
5,210
(1,701)
(6.8)% $ 101,188
7.4 %
69,987
(1.0)% 171,175
30,072
27,543
31,428
23,170
45,787
8,849
9,249
176,098
(15,809)
1,651
735
(2,336)
3,079
72
(1,383)
(3,310)
8,849
(1,520)
3,451
(12,636)
13
1,385
(7.2)%
12.6 %
0.2 %
(5.6)%
(6.7)%
100.0 %
32,408
24,464
31,356
24,553
49,097
—
(14.1)%
10,769
398.2 %
2.0 % 172,647
(3,173)
1,638
(650)
0.8 %
(213.1)%
3,990
5,762
(146)
1,730
1,697
—
(855)
12,178
(13,879)
919
(784)
(13,423)
(11,238)
1,952
$ (10,765) $ (9,286)
2,658
514.3 %
(13,744)
276.5 %
27,571
627.9 % $ (1,479) $ 13,827
(2,185)
706
14.0 %
30.8 %
(0.5)%
7.6 %
3.6 %
— %
28,418
18,702
31,502
22,823
47,400
—
(7.4)%
11,624
7.6 % 160,469
(129.6)%
10,706
127.8 %
(585.1)%
719
134
(118.9)%
11,559
(102.6)% (26,865)
(90.3)% $ (15,306)
638
3,840
42
(94)
7.0 %
(2.4)%
596
3,934
—
(96)
— %
(2.4)%
596
4,030
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Table of Contents
Revenue
The table below details total revenue for the periods stated:
(Dollars in thousands)
Revenue - wireless
Paging revenue
Product and other revenue
Total wireless revenue
Revenue - software
License
Services
Equipment
Operations revenue
Maintenance revenue
Total software revenue
Total revenue
2019
Change
2018
Change
2017
$ 85,067
3,100
88,167
$ (5,503)
(607)
(6,110)
(6.1)% $ 90,570
(16.4)%
3,707
94,277
(6.5)%
$ (6,726)
(185)
(6,911)
(6.9)% $ 97,296
(4.8)%
3,892
(6.8)% 101,188
8,950
19,189
3,618
31,757
40,365
72,122
$ 160,289
(4,092)
1,098
(1,377)
(4,371)
1,296
(3,075)
$ (9,185)
13,042
(31.4)%
18,091
6.1 %
4,995
(27.6)%
36,128
(12.1)%
39,069
3.3 %
(4.1)%
75,197
(5.4)% $ 169,474
3,501
461
848
4,810
400
5,210
$ (1,701)
9,541
36.7 %
17,630
2.6 %
4,147
20.4 %
31,318
15.4 %
38,669
1.0 %
69,987
7.4 %
(1.0)% $ 171,175
The decrease in wireless revenue during 2019 compared to both 2018 and 2017, respectively, reflects the decrease in demand for our
wireless services. Wireless revenue is generally based upon the number of units in service and the monthly 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. ARPU for the years ended December 31, 2019, 2018 and 2017 was $7.34, $7.39 and $7.51,
respectively, while total units in service were 0.9 million for the year ended December 31, 2019, 1.0 million for the year ended December
31, 2018 and 1.0 million for the year ended December 31, 2017. While demand for wireless services continues to decline, it has done so
at a slower rate for each of the periods presented. While we are encouraged that this trend will continue in future periods, 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 narrow band wireless service offerings to broad band technology
services, our wireless revenue will continue to decrease.
The following reflects the impact of subscribers and ARPU on the change in wireless revenue:
Units in Service as of December 31,
Revenue for the Year Ended December 31,
Change Due To:
2019
2018
Change
2019
2018
Change
ARPU
Units
Total
938
992
(54) $
85,067
$
(Units in thousands)
(Dollars in thousands)
(5,503) $
$
90,570
(583) $
(4,920)
Units in Service as of December 31,
Revenue for the Year Ended December 31,
Change Due To:
2018
2017
Change
2018
2017
Change
ARPU
Units
Total
992
1,049
(57) $
90,570
$
(Units in thousands)
(Dollars in thousands)
(6,726) $
$
97,296
(1,395) $
(5,331)
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 in order 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.
The decrease in software operations revenue during 2019 when compared to 2018 primarily resulted from the delivery of fewer software
licenses and hardware products partially offset by an increase in services revenue stemming from stronger utilization rates and more
efficient projects. The mix of sales in 2019 reflected a greater trend towards upgrade projects, which primarily consist of professional
services, as we look to position our customer base for successful transition to Spok Go when available. Upgrade sales are generally
weighted more heavily towards professional service revenues whereas new customer sales generally have a greater mix of license and
equipment revenues. The increase in software operations revenue during 2018 when compared to 2017 primarily reflects an increase in
the size and value of projects being worked during 2018 as compared to the same period in 2017 as well as the acceleration of license
revenue due to a change in revenue rules resulting from the adoption of ASC 606.
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Table of Contents
The continued increase in maintenance revenue for each of the periods stated reflects our continuing success in renewals of our maintenance
support for existing software solutions and in maintenance support for sales of new solutions. The renewal rates for maintenance revenue,
including the annual uplifts, for the years ended December 31, 2019, 2018 and 2017 were in excess of 99%.
Operating Expenses
Certain immaterial prior period amounts, within individual operating expense categories, have been reclassified to conform to the current
period's presentation. These reclassifications had no effect on the reported results of operations nor did they have any effect on the total
operating expense amounts they are a part of.
Cost of revenue. Cost of revenue consisted primarily of the following items:
Cost of revenue
(Dollars in thousands)
Payroll and related
Cost of sales
Stock based compensation
Other
Total cost of revenue
FTEs
2019
Change
2018
Change
2017
$ 20,001
7,825
267
1,979
$ 30,072
202
$
466
(2,746)
18
(74)
$ (2,336)
24
2.4 % $ 19,535
$
1,729
9.7 % $ 17,806
(26.0)%
10,571
7.2 %
(3.6)%
249
2,053
(7.2)% $ 32,408
178
13.5 %
$
2,453
70
(262)
3,990
(7)
30.2 %
39.1 %
(11.3)%
8,118
179
2,315
14.0 % $ 28,418
185
(3.8)%
Cost of revenue expense decreased for the year ended December 31, 2019 compared to December 31, 2018 primarily due to the decrease
in cost of sales partially offset by an increase in payroll and related expenses. The decrease in cost of sales is primarily related to lower
hardware revenues with a corresponding decrease in related costs as well as lower use of third-party resources for professional services.
The increase in payroll and related expenses is primarily related to an increase in headcount and general pay increases partially offset by
lower benefit costs.
Cost of revenue expense increased for the year ended December 31, 2018 compared to December 31, 2017 primarily due to the increase
in cost of sales and payroll and benefits. The increase in cost of sales is primarily due to an increase in the usage of third party implementation
resources and an increase in equipment revenue which caused a corresponding increase in cost of sales.
Research and development. Research and development consisted primarily of the following items:
Research and development
(Dollars in thousands)
Payroll and related
Outside services
Stock based compensation
Other
Total research and development
FTEs
2019
Change
2018
Change
2017
$ 19,040
$
1,473
8.4% $ 17,567
$
2,830
19.2% $ 14,737
7,426
310
767
$ 27,543
$
132
1,277
74
255
3,079
11
20.8%
31.4%
6,149
236
512
49.8%
12.6% $ 24,464
$
9.1%
121
2,763
144
25
5,762
10
81.6%
156.5%
3,386
92
487
5.1%
30.8% $ 18,702
9.0%
111
Research and development expense increased for the year ended December 31, 2019 compared to the same periods in 2018 and 2017
primarily as a result of our anticipated increases in payroll and benefits and outside service related costs as we continue to focus on the
development efforts of our software solutions. We intend to continue these efforts based on their importance to our continued success
and do not anticipate a return to historically low costs. However, increases in staffing and the use of outside services have grown at a
slower pace in 2019 when compared to prior years. These costs will continue to substantially impact margins and our cash flow from
operations as the benefits from our development efforts will not be realized for at least one to three years. We anticipate that certain of
these costs will begin to qualify for capitalization under accounting principles generally accepted in the United States ("GAAP") beginning
in early 2020 as it relates to the development of the Spok Go and these amounts will likely be material. Refer to "Item 1. Business," which
describes our development efforts in further detail.
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Table of Contents
Technology operations. Technology operations consisted primarily of the following items:
Technology Operations
(Dollars in thousands)
Payroll and related
Site rent
Telecommunications
Stock based compensation
Other
Total technology operations
FTEs
2019
Change
2018
Change
2017
$ 10,788
$
13,715
4,058
123
2,744
$ 31,428
$
92
(4)
(233)
253
28
28
72
—
— % $ 10,792
$
(1.7)%
6.6 %
29.5 %
1.0 %
13,948
3,805
95
2,716
0.2 % $ 31,356
$
— %
92
525
(281)
(318)
16
(88)
(146)
—
5.1 % $ 10,267
(2.0)%
(7.7)%
20.3 %
(3.1)%
14,229
4,123
79
2,804
(0.5)% $ 31,502
— %
92
Technology operations expense was relatively flat for the year ended December 31, 2019 compared to December 31, 2018 primarily due
to an increase in telecommunications and other minor expenses partially offset by the reductions in site rent. For the year end December
31, 2018 compared to December 31, 2017 technology operation decreased primarily due to reductions in site rent and telecommunications
partially offset by increase in payroll due to an increase in benefit expenses. The number of active transmitters declined 2.4% from
December 31, 2018 to December 31, 2019 and 2.4% from December 31, 2017 to December 31, 2018. The number of active transmitters
directly relates to the amount of site rent expenses we generally incur on a recurring basis. As we reach certain minimum frequency
commitments, as outlined by the FCC, we will be unable to continue our efforts to rationalize and consolidate our networks.
Selling and marketing. Selling and marketing consisted primarily of the following items:
Selling and marketing
(Dollars in thousands)
Payroll and related
Commissions
Stock based compensation
Advertising and events
Other
Total selling and marketing
FTEs
2019
Change
2018
Change
2017
$ 13,508
4,994
590
3,326
752
$ 23,170
105
$
456
(1,158)
87
(921)
153
$ (1,383)
8
3.5 % $ 13,052
$
1,256
10.6 % $ 11,796
(18.8)%
17.3 %
(21.7)%
25.5 %
6,152
503
4,247
599
(5.6)% $ 24,553
$
961
126
(306)
(307)
1,730
18.5 %
33.4 %
(6.7)%
(33.9)%
5,191
377
4,553
906
7.6 % $ 22,823
8.2 %
97
4
4.3 %
93
Selling and marketing expense decreased for the year ended December 31, 2019 compared to December 31, 2018 primarily due to a
decrease in commissions and advertising and events expense partially offset by an increase in payroll and related expenses. The decrease
in commissions expense primarily relates to the mix of revenue and the related commissions associated with those revenues. Commissions
were paid at a lower rate on revenues that were recognized for the year ended December 31, 2019 as compared to the same period in
2018. The increase in payroll and related expenses is primarily related to an increase in head count. The decrease in advertising and events
expenses is largely due to management's focused efforts to reduce marketing costs to augment research and development initiatives.
Selling and marketing expense increased for the year ended December 31, 2018 compared to December 31, 2017 primarily due to an
increase in benefits expenses due to higher medical benefit costs incurred across our employee base. The increase in commissions expense
for the year ended December 31, 2018 primarily relates to the increase in operations revenue and the adoption of ASC 606.
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Table of Contents
General and administrative. General and administrative consisted primarily of the following items:
General and administrative
(Dollars in thousands)
Payroll and related
Stock based compensation
Facility rent and office costs
Outside services
Taxes, licenses and permits
Bad debt
Other
Total general and administrative
FTEs
2019
Change
2018
Change
2017
$ 16,372
2,353
9,099
8,437
3,672
669
5,185
$ 45,787
107
$ (1,305)
(1,518)
(862)
646
377
(955)
307
$ (3,310)
(1)
(7.4)% $ 17,677
$
599
3.5 % $ 17,078
(39.2)%
(8.7)%
8.3 %
11.4 %
(58.8)%
6.3 %
3,871
9,961
7,791
3,295
1,624
4,878
(6.7)% $ 49,097
$
(0.9)%
108
910
(11)
(359)
(926)
1,096
388
1,697
(7)
30.7 %
(0.1)%
(4.4)%
(21.9)%
207.6 %
8.6 %
2,961
9,972
8,150
4,221
528
4,490
3.6 % $ 47,400
(6.1)%
115
For the years ended December 31, 2018 and 2017, we reclassified $3.6 million and $2.3 million from outside services to facility rent and
office costs, respectively, to conform to current period presentation. These costs primarily related to software and other technology costs.
General and administrative expense decreased for the year ended December 31, 2019 compared to December 31, 2018 primarily due to
a decrease in payroll and related, stock-based compensation, and bad debt expense. The decrease in payroll and related expenses is
primarily due to a decrease in headcount, benefit related costs, and expenses related to the resignation of a named executive officer
("NEO"). The decrease in stock-based compensation is largely due to forfeitures related to the previously mentioned NEO resignation
for the year ended December 31, 2019 when compared to the same period in 2018. The decrease in facility rent and office costs is related
to the decrease in telephone and computer hardware and software costs. The decrease in bad debt expense is primarily related to a return
to normal operating expectations as compared to 2018 and to a lesser extent, improvements in our collections. In 2018 a change in
methodology was implemented, meant to provide additional coverage for our exposure to potentially uncollectible accounts receivable,
which resulted in an increase in bad debt expense for the year ended December 31, 2018 which was not incurred during the year ended
December 31, 2019.
General and administrative expense increased for the year ended December 31, 2018 compared to December 31, 2017 primarily due to
an increase in benefits expenses due to higher medical benefit costs incurred across our employee base, stock compensation, outside
services and bad debt. The increase in stock based compensation is largely related to additional grants made during the year ended
December 31, 2018 which replace awards that vested on December 31, 2017 but were amortized at 50% of the original award due to
anticipated forfeitures related to unmet performance obligations. The increase in bad debt is related to providing for our estimated exposure
to potentially uncollectible accounts receivable.
Depreciation, amortization and accretion. For the year ended December 31, 2019 compared to the same period in 2018 depreciation,
amortization and accretion expenses decreased by $1.5 million primarily due to certain paging assets becoming fully depreciated in 2018
and continued efforts to reduce capital expenditures. The decrease of $0.9 million in depreciation, amortization and accretion expenses
for the year ended December 31, 2018 compared to the same period in 2017 was due primarily to various assets becoming fully depreciated
during 2018.
Goodwill impairment. In the fourth quarter of 2019, we recognized non-cash pre-tax goodwill impairment charges of $8.8 million. The
goodwill impairment relates to impairment charges recognized in the fourth quarter of 2019 as a result of the Company's annual goodwill
impairment testing and, in our belief, does not reflect management's confidence in the future value of our business. Despite the impairment
of goodwill, our outlook for the business continues to remain strong. We believe the launch of Spok Go is set to meet a significant need
in the healthcare marketplace and will create significant value for shareholders in the coming years. Refer to Note 1, "Organization and
Significant Accounting Policies", and Note 6, "Goodwill and Intangible Assets, Net", for further discussion.
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Table of Contents
Interest income, Other income (expense), and Income tax (benefit) expense
Interest income. Interest income increased slightly for the year ended December 31, 2019, compared to the same periods in 2018 and
2017, respectively, primarily due to interest earned on the Company's cash balances and short term investments due to increased investments
in short-term treasury bonds.
Other income (expense). For the year ended December 31, 2019 compared to the same period in 2018, other income (expense) increased
by $1.4 million primarily as a result of various immaterial expenses incurred in 2018 that were not subsequently incurred during 2019
and an increase in gains on foreign currency. The decrease of $0.8 million in other income (expense) for the year ended December 31,
2018 compared to the same period in 2017 was primarily a result of legal and other expenses related to the lawsuit previously reported
in the 2017 Annual Report and our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2018.
Benefit from (provision for) income taxes. The effects of foreign taxes are immaterial for all periods presented. The following is the
effective tax rate reconciliation for the years ended December 31, 2019, 2018 and 2017, respectively (See Note 9, "Income Taxes", for
further discussion on our income taxes):
Effective tax rate reconciliation
2019
2018
2017
(Dollars in thousands)
(Loss) income before income tax (benefit) expense
Income taxes computed at the Federal statutory rate
State income taxes, net of Federal benefit
Goodwill impairment
Impact of 2017 Tax Act
Research and development and other tax credits
Excess executive compensation
Other
(Benefit from) provision for income taxes
$ (13,423)
$ (2,819)
(567)
2,243
—
(1,790)
322
(47)
$ (2,658)
$ (2,185)
(459)
306
—
—
(1,144)
281
310
(706)
21.0 % $
4.2 %
(16.7)%
— %
13.3 %
(2.4)%
0.4 %
19.8 % $
$ 11,559
4,046
21.0 % $
472
(14.0)%
—
— %
24,235
— %
(1,775)
52.4 %
—
(12.9)%
(113)
(14.2)%
32.3 % $ 26,865
35.0 %
4.1 %
— %
209.7 %
(15.4)%
— %
(1.0)%
232.4 %
Benefit from income taxes increased by $2.0 million for the year ended December 31, 2019 compared to the same period in 2018 due
primarily to an overall increase in pretax book loss partially offset by the add back of goodwill that was impaired and an increase in
research and development and other tax credits. Our investment in research and development qualifies for the research and development
income tax credit under Section 41 of the Internal Revenue Code. Unused research and development tax credits have a 20-year carryover
and will provide future tax benefits once Spok’s net operating losses are fully utilized.
Liquidity and Capital Resources
Cash and Cash Equivalents
At December 31, 2019, we had cash and cash equivalents of $47.4 million. The available cash and cash equivalents are held in accounts
managed by third-party financial institutions and consist of invested cash and cash in our operating accounts. The invested cash is invested
in interest bearing funds managed by third-party financial institutions. These funds invest in direct obligations of the government of the
United States. 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.
We maintain a level of liquidity sufficient to allow us to meet our cash needs in both the short-term and long-term. At any point in time,
we have approximately $7.0 to $12.0 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.
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 possible 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. Because we intend to increase substantially our investment in developing the Spok Go platform over the next two
or three years, commensurate with declining revenues from our wireless business, we anticipate that our cash on hand will decrease
significantly during that period and possibly longer until revenues from Spok Go begins to be realized.
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Table of Contents
Cash Flows Overview
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 resume our common stock
repurchase program, and/or 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 additional financing would be
available on acceptable terms.
Based on current and anticipated levels of operations, we anticipate net cash provided by operating activities, together with the available
cash on hand at December 31, 2019, should be adequate to meet anticipated cash requirements for the foreseeable future.
The following table sets forth information on our net cash flows from operating, investing, and financing activities for the periods stated:
Cash provided by operating activities
$
Cash used in investing activities
Cash used in financing activities
For the Year Ended December 31,
2019
2018
2017
(Dollars in thousands)
$
11,693
(30,222)
(17,153)
$
10,315
(5,826)
(24,276)
15,515
(9,171)
(25,001)
Cash Provided by 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.
Cash provided by operating activities in 2019 was $11.7 million, due primarily to non-cash items such as goodwill impairment of $8.8
million, depreciation, amortization and accretion of $9.2 million, stock-based compensation of $3.6 million, and other non-cash items
of $0.7 million, partially offset by the 2019 net loss of $10.8 million and deferred income benefit of $3.2 million. Cash provided by
operating activities also increased resulting from changes in prepaids and other assets of $2.9 million and accounts receivable of $1.0
million and deferred revenue of $0.1 million, partially offset by a change in accounts payable, accrued liabilities and other of $0.6 million.
Cash provided by operating activities in 2018 was $10.3 million, due primarily to non-cash items such as depreciation, amortization and
accretion of $10.8 million, stock-based compensation of $4.9 million and other non-cash items of $1.9 million, partially offset by the
2018 net loss of $1.5 million and deferred income benefit of $1.7 million. Cash provided by operating activities was partially offset
resulting from changes in accounts receivable of $0.9 million, prepaids and other assets of $0.6 million, accounts payable, accrued
liabilities and other of $1.7 million and deferred revenue of $0.9 million.
Cash provided by operating activities in 2017 was $15.5 million, due primarily to non-cash items such as depreciation, amortization and
accretion of $11.6 million, stock-based compensation of $3.7 million, deferred income tax of $25.4 million and other non-cash items of
$0.2 million, partially offset by the 2019 net loss of $15.3 million. Cash provided by operating activities was partially offset resulting
from changes in accounts receivable of $9.6 million and accounts payable, accrued liabilities and other of $3.3 million, partially offset
by a change in prepaids and other assets of $0.2 million and deferred revenue of $2.6 million.
Cash Used in Investing Activities. Cash used in investing activities in 2019, 2018, and 2017 was $30.2 million, $5.8 million, and $9.2
million, respectively, due primarily to the purchase and maturity of U.S. treasury securities, as well as purchases of property and equipment.
Cash Used in Financing Activities. Cash used in financing activities was $17.2 million, $24.3 million, and $25.0 million for the years
ended December 31, 2019, 2018, and 2017, respectively, primarily due to cash distributions to stockholders and the purchase of common
stock.
Cash Dividends to Stockholders. For the year ended December 31, 2019, we paid a total of $9.8 million in cash dividends compared to
$10.1 million and $15.2 million in cash dividends for 2018 and 2017, respectively. In 2016, a special dividend of $0.25 per common
stock was declared and paid in 2017.
Future Cash Dividends to Stockholders. On February 26, 2020, our Board of Directors declared a regular quarterly cash dividend of
$0.125 per share of common stock, with a record date of March 16, 2020, and a payment date of March 30, 2020. This cash dividend of
approximately $2.4 million is expected to be paid from available cash on hand.
Common Stock Repurchase Program. For the year ended December 31, 2019, we purchased 532,354 shares of our common stock under
the repurchase program for $6.6 million excluding commissions. The repurchase authority allowed us, at management’s discretion, to
selectively repurchase shares of our common stock from time to time in the open market depending upon market price and other factors.
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Table of Contents
In August 2018, the Company's Board of Directors reset the repurchase authority under the share repurchase program to $10.0 million
which was set to expire on December 31, 2018. In November 2018, the Company's Board of Directors extended the repurchase authority
through December 31, 2019. The Company fully exhausted the repurchase authority in September 2019 (See Note 8, "Stockholders'
Equity", for further discussion on our common stock repurchase program).
Other. For 2020, the Board of Directors currently expects to pay dividends of $0.125 per common share each quarter, subject to declaration
by the Board of Directors.
Commitments and Contingencies
Contractual Obligations. The following table provides the Company's significant commitments and contractual obligations as of
December 31, 2019.
(Dollars in thousands)
Operating lease obligations
Unconditional purchase obligations
Total contractual obligations
Total
Less than 1 Year
1 to 3 years
3 to 5 years
More than 5 years
$
$
$
17,570
2,188
19,758
$
$
$
6,792
$
— $
6,792
$
8,095
2,188
10,283
$
$
$
2,466
$
— $
2,466
$
217
—
217
Payments Due by Period
As of December 31, 2019, our contractual payment obligations under our operating leases for office and transmitter locations are indicated
in the table above. For purposes of the table above, purchase obligations are defined as agreements to purchase goods or services that
are enforceable, legally binding, noncancelable, 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 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. Refer to Note 10, "Commitments and Contingencies," for
further discussion on commitments and contingencies.
Off-Balance Sheet Arrangements. 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.
Related Parties
Refer to Note 12, "Related Parties," for further discussion on our related party transactions.
Inflation
Inflation has not had a material effect on our operations to date. System equipment and operating costs have not significantly increased
in price, and the price of wireless messaging devices has tended to decline in recent years. Our general operating expenses, such as
salaries, site rent for transmitter locations, employee benefits and occupancy costs, are subject to normal inflationary pressures.
Critical Accounting Policies and Estimates
Refer to Note 1, "Organization and Significant Accounting Policies," for a summary of significant accounting policies and estimates.
Refer to Note 2, "Recent and Pending Accounting Standards," for a summary of recent and pending accounting standards.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
At December 31, 2019, we had no outstanding borrowings or associated debt service requirements.
Foreign Currency Exchange Rate Risk
We conduct a limited amount of business outside the United States. The financial impact of transactions billed in foreign currencies is
immaterial to our financial results and, consequently, we do not have any material exposure to the risk of foreign currency exchange
rate fluctuations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements are included in this Report beginning on Page F-1.
Index to Consolidated Financial Statements
Reports of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2019 and 2018
Consolidated Statements of Operations for the Years Ended December 31, 2019, 2018 and 2017
Consolidated Statements of Comprehensive Loss for the Years Ended December 31, 2019, 2018 and 2017
Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 2019, 2018 and 2017
Consolidated Statements of Cash Flows for the Years Ended December 31, 2019, 2018 and 2017
Notes to Consolidated Financial Statements
Selected Quarterly Financial Information (Unaudited)
Schedule II - Valuation and Qualifying Accounts
Page
F- 2
F- 4
F- 5
F- 6
F- 7
F- 8
F- 9
F- 28
F- 29
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
There are no reportable events.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management carried out an evaluation, as required by Rule 13a-15(b) of the Securities Exchange Act of 1934, as amended (the
“Exchange Act”), with the participation of our principal executive officer and our principal financial officer, of the effectiveness of our
disclosure controls and procedures, as of the end of our last fiscal year. Disclosure controls and procedures are defined under Rule
13a-15(e) under the Exchange Act as controls and other procedures of an issuer that are designed to ensure that the information required
to be disclosed by the issuer in the reports that it files or submits under the Exchange Act (i) is recorded, processed, summarized and
reported within the time periods specified in SEC rules and forms, and (ii) is accumulated and communicated to the issuer’s management,
including its principal executive officer and principal financial officer, or persons performing similar functions, as appropriate to allow
timely decisions regarding required disclosure. Based upon this evaluation, our principal executive officer and our principal financial
officer have concluded that our disclosure controls and procedures were effective as of December 31, 2019.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in the
Exchange Act Rule 13a-15(f) and 15d-15(f). Management conducted an evaluation of the effectiveness of our internal control over
financial reporting based on the 2013 Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (“COSO”).
39
Table of Contents
Such internal controls include those policies and procedures that:
•
•
•
pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of
the assets of the Company;
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in
accordance with GAAP, and that receipts and expenditures are being made only in accordance with authorizations of management
and members of the Board of Directors of the Company; and
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any
evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions,
or that the degree of compliance with the policies or procedures may deteriorate.
Based on our evaluation under the 2013 Internal Control — Integrated Framework, our management concluded that our internal control
over financial reporting was effective as of December 31, 2019.
The effectiveness of our internal control over financial reporting as of December 31, 2019 has been audited by Grant Thornton LLP, an
independent registered public accounting firm, as stated in their report which appears in this 2019 Form 10-K.
Changes in Internal Control Over Financial Reporting
There were no changes made in the Company’s internal control over financial reporting during the quarter ended December 31, 2019
that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
40
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PART III
Certain information called for by Items 10 through 14 is incorporated by reference from Spok’s definitive Proxy Statement for our 2020
Annual Meeting of Stockholders, which will be filed with the SEC no later than April 29, 2020.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The following information required by this item is incorporated by reference from Spok’s definitive Proxy Statement for our 2020 Annual
Meeting of Stockholders:
•
•
•
•
information regarding directors is set forth under the caption “Election of Directors”;
information regarding executive officers is set forth under the caption “Executive Officers”;
information regarding our audit committee and designated “audit committee financial expert” is set forth under the caption
“Committees of the Board of Directors”; and
if applicable, information regarding compliance with Section 16(a) of the Exchange Act is set forth under the caption “Delinquent
Section 16(a) Reports."
We also make available on our website, and in print, if any stockholder or other person so requests, our code of business conduct and
ethics entitled “Code of Ethics” which is applicable to all employees and directors, our “Corporate Governance Guidelines,” and the
charters for all committees of our Board of Directors, including Audit, Compensation and Nominating and Governance. Any changes to
our Code of Ethics or waiver, if any, of our Code of Ethics for executive officers or directors will be posted on that website.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from the section of Spok’s definitive Proxy Statement for our 2020
Annual Meeting of Stockholders entitled “Compensation Discussion and Analysis.”
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
The information required by this item is incorporated by reference from the section of Spok’s definitive Proxy Statement for our 2020
Annual Meeting of Stockholders entitled “Security Ownership of Certain Beneficial Owners and Management.”
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this item with respect to certain relationships and related transactions is incorporated by reference from the
section of Spok’s definitive Proxy Statement for our 2020 Annual Meeting of Stockholders entitled “Related Person Transactions and
Code of Conduct.” The information required by this item with respect to director independence is incorporated by reference from the
section of Spok’s definitive Proxy Statement for our 2020 Annual Meeting of Stockholders entitled “Board of Directors and Governance
Matters.”
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this item is incorporated by reference from the section of Spok’s definitive Proxy Statement for our 2020
Annual Meeting of Stockholders entitled “Independent Registered Public Accounting Firm Fees.”
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PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
The following documents are filed as part of this Form 10-K:
(a) 1. Financial Statements
Index to Consolidated Financial Statements
Reports of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2019 and 2018
Consolidated Statements of Operations for the Years Ended December 31, 2019, 2018 and 2017
Consolidated Statements of Comprehensive Loss for the Years Ended December 31, 2019, 2018 and 2017
Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 2019, 2018 and 2017
Consolidated Statements of Cash Flows for the Years Ended December 31, 2019, 2018 and 2017
Notes to Consolidated Financial Statements
Selected Quarterly Financial Information (Unaudited)
2. Financial Statement Schedules
Index to Consolidated Financial Statements
Schedule II - Valuation and Qualifying Accounts
(b) Exhibits
The exhibits listed in the accompanying index to exhibits, that follows the Signatures page, are filed as part of this Form 10-K.
ITEM 16. FORM 10-K SUMMARY
None.
Page
F- 2
F- 4
F- 5
F- 6
F- 7
F- 8
F- 9
F- 28
Page
F- 29
42
Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on our behalf by the undersigned, thereunto duly authorized.
Spok Holdings, Inc.
By:
/s/ Vincent D. Kelly
Vincent D. Kelly
President and Chief Executive Officer
February 27, 2020
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf
of the registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ Vincent D. Kelly
Vincent D. Kelly
/s/ Michael W. Wallace
Michael W. Wallace
/s/ Royce Yudkoff
Royce Yudkoff
/s/ N. Blair Butterfield
N. Blair Butterfield
/s/ Stacia A. Hylton
Stacia A. Hylton
/s/ Brian O’Reilly
Brian O’Reilly
/s/ Matthew Oristano
Matthew Oristano
/s/ Todd Stein
Todd Stein
/s/ Samme L. Thompson
Samme L. Thompson
/s/ Dr. Bobbie Byrne
Dr. Bobbie Byrne
Director, President and Chief Executive
Officer (principal executive officer)
February 27, 2020
Chief Financial Officer (principal
financial officer and principal
accounting officer)
February 27, 2020
Chairman of the Board
February 27, 2020
Director
Director
Director
Director
Director
Director
Director
43
February 27, 2020
February 27, 2020
February 27, 2020
February 27, 2020
February 27, 2020
February 27, 2020
February 27, 2020
Table of Contents
Index to Consolidated Financial Statements
Reports of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2019 and 2018
Consolidated Statements of Operations for the Years Ended December 31, 2019, 2018 and 2017
Consolidated Statements of Comprehensive Loss for the Years Ended December 31, 2019, 2018 and 2017
Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 2019, 2018 and 2017
Consolidated Statements of Cash Flows for the Years Ended December 31, 2019, 2018 and 2017
Notes to Consolidated Financial Statements
Selected Quarterly Financial Information (Unaudited)
Schedule II - Valuation and Qualifying Accounts
Page
F- 2
F- 4
F- 5
F- 6
F- 7
F- 8
F- 9
F- 28
F- 29
F- 1
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Spok Holdings, Inc.
Opinion on the financial statements
We have audited the accompanying consolidated balance sheets of Spok Holdings, Inc. (a Delaware corporation) and subsidiaries (the
“Company”) as of December 31, 2019 and 2018, the related consolidated statements of comprehensive operations, comprehensive loss,
changes in stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2019, and the related notes
and financial statement schedule included under Item 15(a) (collectively referred to as the “financial statements”). In our opinion, the
financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and
the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019, in conformity with
accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”),
the Company’s internal control over financial reporting as of December 31, 2019, based on criteria established in the 2013 Internal
Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our
report dated February 27, 2020 expressed an unqualified opinion.
Change in accounting principle
As discussed in Note 2 to the consolidated financial statements, the Company has changed its method of accounting for leases in 2019
due to the adoption of Accounting Standards Update 2016-02, Leases (Topic 842).
Basis for opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the
Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be
independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of
the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error
or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant
estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits
provide a reasonable basis for our opinion.
/s/ GRANT THORNTON LLP
We have served as the Company's auditor since 2006.
Arlington, Virginia
February 27, 2020
F- 2
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Spok Holdings, Inc.
Opinion on internal control over financial reporting
We have audited the internal control over financial reporting of Spok Holdings, Inc. (a Delaware corporation) and subsidiaries (the
“Company”) as of December 31, 2019, based on criteria established in the 2013 Internal Control-Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as of December 31, 2019, based on criteria established in the 2013 Internal
Control Integrated Framework issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”),
the consolidated financial statements of the Company as of and for the year ended December 31, 2019, and our report dated February
27, 2020 expressed an unqualified opinion on those financial statements.
Basis for opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of
the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control
Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based
on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company
in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission
and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our
audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists,
testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other
procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and limitations of internal control over financial reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations
of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections
of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ GRANT THORNTON LLP
Arlington, Virginia
February 27, 2020
F- 3
Table of Contents
SPOK HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share and per share amounts)
ASSETS
Current assets:
Cash and cash equivalents
Short-term investments
Accounts receivable, net
Prepaid expenses
Other current assets
Inventory, net
Total current assets
Non-current assets:
Property and equipment, net
Operating lease right-of-use assets
Goodwill
Intangible assets, net
Deferred income tax assets, net
Other non-current assets
Total non-current assets
TOTAL ASSETS
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable
Accrued compensation and benefits
Accrued taxes
Deferred revenue
Operating lease liabilities
Other current liabilities
Total current liabilities
Non-current liabilities:
Asset retirement obligations
Operating lease liabilities
Other non-current liabilities
Total non-current liabilities
TOTAL LIABILITIES
COMMITMENTS AND CONTINGENCIES (Note 10)
STOCKHOLDERS’ EQUITY:
Preferred stock—$0.0001 par value; 25,000,000 shares authorized; no shares issued or outstanding
Common stock—$0.0001 par value; 75,000,000 shares authorized; 19,071,614 and 19,389,066 shares issued and
outstanding as of December 31, 2019 and December 31, 2018, respectively
Additional paid-in capital
Accumulated other comprehensive loss
Retained earnings
TOTAL STOCKHOLDERS’ EQUITY
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
December 31,
2019
2018
$
47,361
$
29,899
30,174
7,517
1,710
1,004
117,665
8,000
16,317
124,182
2,917
48,983
1,808
202,207
319,872
$
3,615
$
11,680
1,529
25,944
5,437
2,978
51,183
6,061
11,575
959
18,595
69,778
— $
2
86,874
(1,601)
164,819
250,094
319,872
$
$
$
$
$
83,343
3,963
32,386
6,906
2,672
1,708
130,978
10,354
—
133,031
5,417
46,484
1,448
196,734
327,712
2,010
11,348
1,822
26,106
—
3,662
44,948
6,513
—
1,697
8,210
53,158
—
2
90,559
(1,301)
185,294
274,554
327,712
The accompanying notes are an integral part of these consolidated financial statements.
F- 4
Table of Contents
SPOK HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except share and per share amounts)
Revenue:
Wireless
Software
Total revenue
Operating expenses:
Cost of revenue
Research and development
Technology operations
Selling and marketing
General and administrative
Depreciation, amortization and accretion
Goodwill impairment
Total operating expenses
Operating (loss) income
Interest income
Other income (expense)
(Loss) income before income tax benefit (expense)
Benefit from (provision for) income taxes
Net loss
Basic and diluted net (loss) income per common share
Basic and diluted weighted average common shares outstanding
Cash dividends declared per common share
For the Year Ended December 31,
2019
2018
2017
$
$
$
$
$
88,167
72,122
160,289
30,072
27,543
31,428
23,170
45,787
9,249
8,849
176,098
(15,809)
1,651
735
(13,423)
2,658
(10,765) $
(0.56) $
$
94,277
75,197
169,474
32,408
24,464
31,356
24,553
49,097
10,769
—
172,647
(3,173)
1,638
(650)
(2,185)
706
(1,479) $
(0.08) $
19,089,402
0.50
$
19,667,891
0.50
$
101,188
69,987
171,175
28,418
18,702
31,502
22,823
47,400
11,624
—
160,469
10,706
719
134
11,559
(26,865)
(15,306)
(0.76)
20,210,260
0.50
The accompanying notes are an integral part of these consolidated financial statements.
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SPOK HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Dollars in thousands)
Net loss
Other comprehensive (loss) income, net of tax:
Foreign currency translation adjustments
Other comprehensive (loss) income
Comprehensive loss
For the Year Ended December 31,
2019
2018
2017
$
$
(10,765) $
(1,479) $
(15,306)
(300)
(300)
(11,065) $
(49)
(49)
(1,528) $
11
11
(15,295)
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SPOK HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Dollars in thousands, except share amounts)
Balance, January 1, 2017
Net income
Issuance of common stock under the Employee
Stock Purchase Plan
Issuance of common stock for vested restricted
stock units under the 2012 Equity Plan
Amortization of stock based compensation
Cash dividends declared
Common stock repurchase program
Issuance of restricted stock under the Equity Plan
and other
Cumulative translation adjustment
Balance, December 31, 2017
Net loss
Adjustment to beginning balance due to adoption
of ASC 606 and related tax impact
Issuance of common stock under the Employee
Stock Purchase Plan
Issuance of common stock for vested restricted
stock units under the 2012 Equity Plan
Purchase of common stock for tax withholding
Amortization of stock based compensation
Cash dividends declared
Common stock repurchase program including
commissions
Issuance of restricted stock under the Equity Plan
Cumulative translation adjustment
Balance, December 31, 2018
Net loss
Issuance of common stock under the Employee
Stock Purchase Plan
Issuance of common stock for vested restricted
stock units under the 2012 Equity Plan
Purchase of common stock for tax withholding
Amortization of stock based compensation
Cash dividends declared
Common stock repurchase program including
commissions
Issuance of restricted stock under the Equity Plan
and other
Cumulative translation adjustment
Additional
Paid-In
Capital &
Accumulated
Other
Comprehensive
Loss
$
104,810
$
Outstanding
Common
Shares
20,525,614
$
—
17,760
143,394
—
—
(572,550)
21,296
Common
Stock
2
—
—
—
—
—
—
—
— $
— $
—
256
—
3,688
—
(10,023)
(11)
11
20,135,514
$
—
—
20,120
199,991
(62,432)
—
—
(929,116)
24,989
—
19,389,066
—
$
23,299
233,507
(74,049)
—
—
(532,354)
32,145
—
2
—
—
—
—
—
—
—
—
—
—
2
—
—
—
—
—
—
—
—
—
2
$
98,731
—
(166)
247
—
(976)
4,954
—
(13,483)
—
(49)
89,258
—
264
—
(1,017)
3,643
—
(6,575)
$
(300)
85,273
$
Retained
Earnings
217,275
(15,306)
Total
Stockholders’
Equity
$
322,087
(15,306)
—
—
—
(10,332)
—
256
—
3,688
(10,332)
(10,023)
$
$
159
— $
148
11
191,796
(1,479)
$
290,529
(1,479)
5,110
4,944
—
—
—
—
(10,133)
—
—
—
247
—
(976)
4,954
(10,133)
(13,483)
—
(49)
$
$
185,294
(10,765)
274,554
(10,765)
—
—
—
—
(9,864)
—
154
—
264
—
(1,017)
3,643
(9,864)
(6,575)
154
(300)
$
164,819
$
250,094
Balance, December 31, 2019
19,071,614
$
The accompanying notes are an integral part of these consolidated financial statements.
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SPOK HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Cash flows from operating activities:
Net loss
Adjustments to reconcile net (loss) income to net cash provided by
operating activities:
Depreciation, amortization and accretion
Goodwill impairment
Deferred income tax (benefit) expense
Stock based compensation
Provisions for doubtful accounts, service credits, adjustments of
non-cash transaction taxes and other
Changes in assets and liabilities:
Accounts receivable
Prepaid expenses and other assets
Accounts payable, accrued liabilities and other
Deferred revenue
Net cash provided by operating activities
Cash flows from investing activities:
Purchases of property and equipment
Purchase of short-term investments
Maturity of short-term investments
Net cash used in investing activities
Cash flows from financing activities:
Cash distributions to stockholders
Purchase of common stock (including commissions)
Proceeds from issuance of common stock under the Employee Stock
Purchase Plan
Purchase of common stock for tax withholding on vested equity
awards
Net cash used in financing activities
Effect of exchange rate on cash
Net decrease in cash and cash equivalents
Cash and cash equivalents, beginning of period
Cash and cash equivalents, end of period
Supplemental disclosure:
Income taxes paid
$
$
For the Year Ended December 31,
2019
2018
2017
$
(10,765) $
(1,479) $
(15,306)
9,249
8,849
(3,253)
3,643
694
964
2,913
(643)
42
11,693
(4,837)
(59,385)
34,000
(30,222)
(9,819)
(6,575)
258
(1,017)
(17,153)
(300)
(35,982)
83,343
47,361
901
$
$
10,769
—
(1,692)
4,954
1,922
(915)
(646)
(1,732)
(866)
10,315
(5,915)
(3,911)
4,000
(5,826)
(10,064)
(13,483)
247
(976)
(24,276)
(49)
(19,836)
103,179
83,343
1,061
$
$
11,624
—
25,390
3,688
222
(9,648)
244
(3,278)
2,579
15,515
(9,214)
(3,957)
4,000
(9,171)
(15,234)
(10,023)
256
—
(25,001)
11
(18,646)
121,825
103,179
2,620
The accompanying notes are an integral part of these consolidated financial statements.
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SPOK HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Spok, Inc., a wholly owned subsidiary of Spok Holdings, Inc. (NASDAQ: SPOK) ("Spok" or the "Company"), is proud to be the global
leader in healthcare communications. We deliver clinical information to care teams when and where it matters most to improve patient
outcomes. Top hospitals rely on the Spok Care Connect platform to enhance workflows for clinicians, support administrative compliance,
and provide a better experience for patients.
We offer a focused suite of unified clinical communication and collaboration solutions that include call center operations, clinical alerting
and notifications, one-way and advanced two-way wireless messaging services, mobile communications and public safety solutions.
We provide one-way and advanced two-way wireless messaging services, including information services, throughout the United States.
These services are offered on a local, regional and nationwide basis, employing digital networks. One-way messaging consists of numeric
and alphanumeric messaging services. Numeric messaging services enable subscribers to receive messages that are composed entirely
of numbers, such as a phone number, while alphanumeric messages may include numbers and letters, which enable subscribers to receive
text messages. Two-way messaging services enable subscribers to send and receive messages to and from other wireless messaging
devices, including pagers, personal digital assistants and personal computers. We also offer voice mail, personalized greetings, message
storage and retrieval, and equipment loss and/or maintenance protection to both one-way and two-way messaging subscribers. These
services are commonly referred to as wireless messaging and information services.
We also develop, sell and support enterprise-wide systems for hospitals and other organizations needing to automate, centralize and
standardize mission clinical communications. These solutions are used for contact centers, clinical alerting and notification, mobile
communications and messaging and for public safety notifications. These areas of market focus compliment the market focus of our
wireless services outlined above.
Basis of Presentation
The accompanying Consolidated Financial Statements include our accounts and the accounts of our wholly owned direct and indirect
subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. Our Consolidated Financial
Statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and the rules
and regulations of the United States Securities and Exchange Commission (the “SEC”). In management's opinion, the Consolidated
Financial Statements include all adjustments and accruals that are necessary for the presentation of the results of all periods reported
herein and all such adjustments are of a normal, recurring nature. As a result of the adoption of Accounting Standards Codification
(“ASC”) 842, Leases, and our application of the modified retrospective approach using a cumulative effect adjustment to our opening
balance of retained earnings as of January 1, 2019, prior period amounts have not been restated under ASC 842. For additional details
refer to Note 2, "Recent and Pending Accounting Standards" and Note 4, "Leases."
Amounts shown on the consolidated statements of operations within the operating expense categories of cost of revenue; research and
development; technology operations; selling and marketing; and general and administrative are recorded exclusive of depreciation,
amortization and accretion. These items are shown separately on the consolidated statements of operations within operating expenses
to the extent that they are considered material for the periods presented.
The Company adopted ASC 606 on January 1, 2018. Periods prior to January 1, 2018 reflect accounting under ASC 605, "Revenue
Recognition" and have not been adjusted for the adoption of ASC 606.
Use of Estimates
The preparation of these consolidated financial statements requires management to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues, expenses and related disclosures. On an on-going basis, we evaluate estimates and assumptions,
including but not limited to those related to the impairment of long-lived assets, intangible assets subject to amortization and goodwill,
accounts receivable allowances, revenue recognition, depreciation expense, 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.
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Revenue Recognition
The majority of our revenues are derived from short-term contracts related to the sale of wireless paging services and software solutions.
Our arrangements exist primarily with customers in the healthcare market and to a lesser extent State and Federal governments, as well
as large enterprise businesses.
Under the typical payment terms of our software contracts customers will normally pay a material amount of the contract price immediately
upon execution of the contract. The remaining payments are required when product is delivered, when services begin and, to a lesser
extent, when services are completed. Wireless services are generally billed as incurred on a monthly basis. Our contracts will generally
result in billings in excess of revenue recognized, which we present as deferred revenues on the Consolidated Balance Sheets, primarily
due to the receipt of payment in advance of product or services being provided. Amounts billed and due from our customers are classified
as accounts receivable on the Consolidated Balance Sheets. At times, we may have contracts which require us to perform work or provide
products prior to billing which will generally result in revenue recognized in excess of billings. This excess is presented as unbilled
receivables in the Notes to the Consolidated Financial Statements. We generally do not have transactions that include a significant financing
component (whether payments are made in advance or in arrears) as our contracts typically take less than 12 months to complete once
started. We would not adjust the total consideration for the effects of a significant financing component if we anticipate, at contract
inception, that the period between when we transfer a promised good or service to a customer and when the customer pays for that good
or service will be one year or less.
We account for a contract when: (1) both parties have approved the contract through mutually signed agreements but at times may be
done through other methods such as purchase orders or master agreements; (2) the rights of the parties have been identified; (3) payment
terms have been identified; (4) the contract has commercial substance; and (5) collectability of consideration is probable. We also evaluate
whether two or more contracts should be combined and accounted for as a single contract. In our evaluation, we consider criteria such
as, but not limited to, whether: (1) the contracts are negotiated as a package with a single commercial objective; (2) the amount of
consideration to be paid in one contract is dependent on the price or performance of another contract; and (3) some or all of the goods
or services promised in the contracts are a single performance obligation. Should we consider contracts related, we would account for
those contracts as if they were a single contract. Evaluating whether two or more contracts should be combined and accounted for as a
single contract requires significant judgment. In the aggregate, a decision to combine a group of contracts could significantly impact the
amount of revenue and profit recorded in a given period.
We review each contract to determine whether to account for the various promises as one or more performance obligations. The assessment
and determination of performance obligations for a given contract requires significant judgment. Wireless service contracts are generally
considered to be a single promise and therefore accounted for as a single performance obligation. Contracts which include goods or
services related to our software solutions are generally sold with multiple promises and therefore will often include multiple performance
obligations. Material performance obligations related to the sale of our software solutions include software licenses, professional services,
hardware and maintenance, of which professional services and maintenance are generally considered a series of performance obligations.
More often than not, total consideration will equate to the stated value on the contract taking into consideration any period or term over
which services are to be provided, if applicable. However, we could have contracts in which variable consideration is present. It is common
for our contracts which include wireless services to contain customer penalties if rental pagers are not returned and fees for usage of
services in excess of the contractually allotted amount for a given period. It is also common for our contracts that include professional
services to include travel related costs. These are costs which we incur in the normal course of delivering professional services and are
generally billable to the customer based on our incurred expenses. These elements of variable consideration are fully constrained when
an agreement is initially executed and are generally not considered estimable until the penalties, fees or costs have been incurred or are
otherwise known. We include estimated amounts in the transaction price to the extent it is probable that a significant reversal of cumulative
revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. Estimating variable
consideration requires significant judgment and our assessment includes all relevant information that is reasonably available to us including
historical, current and forecasted information. We have elected to exclude from revenue, all amounts collected on behalf of third parties,
and therefore, items such as sales and use tax are excluded from our calculation of the total transaction price.
If a contract is separated into more than one performance obligation we allocate the total transaction price to each performance obligation
proportionately based on the estimated relative standalone selling price ("SSP") of the promised goods or services underlying each
performance obligation. We rarely sell goods or services with readily observable standalone sales, however, if we do, the observable
standalone sales are used to determine the SSP. In most cases, we must estimate the relative SSP which requires significant judgment
and estimates. In instances where SSP is not directly observable we determine the SSP using information that may include contractually
stated prices, market conditions, costs, renewal contracts, list prices and other observable inputs. A discount is present if the total transaction
price is less than the sum of the estimated SSPs of the goods or services promised in the contract. Discounts are generally allocated
proportionately based on the relative SSP of the identified performance obligations for a given contract.
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Our wireless, professional and maintenance services are generally recognized over time due to a customer's simultaneous receipt and
consumption of the benefit as we perform the work. As we transfer control over time, we recognize revenue based on the extent of progress
towards completion of the performance obligation. The selection of the method to measure progress towards completion requires significant
judgment and is based on the nature of the products or services to be provided. Generally, we use the time-elapsed measure of progress
for performance obligations which include wireless or maintenance services. We believe this method best depicts the simultaneous transfer
and consumption of the benefit based on our performance as these services are generally considered standby services. For professional
services, we leverage an input methodology based on the number of hours worked on a project versus the total expected hours necessary
to complete the project. Revenues are recognized proportionally as hours are incurred. This is a significant area of judgment as it requires
an estimate at completion (“EAC”) for each contract. Our initial EAC is primarily based on prior experience also taking into consideration
any specific facts and circumstances for a given contract. As projects progress, the EAC is periodically updated and reviewed to ensure
the timing of revenue recognition is appropriate. The creation, maintenance and review of a project's EAC requires significant judgment
to determine an appropriate number of hours over which the remaining project is expected to be completed.
Our software licenses and hardware are generally recognized at a point in time when we have transferred control to the customer. For
software licenses, revenue is not recognized until the related license(s) has been made available to the customer and the customer can
begin to benefit from its right to use the license(s). Our software licenses represent a right to use Spok’s Intellectual Property (“IP”) as
it exists at a point in time at which the license is granted. Many of our software licenses have significant standalone functionality due to
their ability to process a transaction or perform a function or task, and we do not need to maintain those products, once provided to the
customer, for value to exist. While the functionality of IP that we license may substantively change during the license period, customers
are not contractually or practically required to update their license as a result of those changes. Assessing when transfer of control has
occurred requires significant judgment. In most contracts transfer of control for software licenses occurs in a short period of time after
a contract has been executed and licenses are made electronically available.
Contracts may be modified to account for changes in a project's scope or other customer requirements. Most of our contract modifications
are for goods or services that are distinct from the existing contract. In these instances, the contract modification would either be recognized
as an entirely new and separate contract or the modification would be treated as if it were a termination of the existing contract and the
creation of a new contract including all undelivered goods and services under the previous contract. Revenue would be recognized on a
prospective basis and a cumulative catch-up would not be recognized.
Incremental Costs of Obtaining a Contract and Costs to Fulfill a Contract
Our incremental costs primarily relate to sales commissions. We capitalize commissions and proportionally recognize the related expense
to revenue as it is recognized on the underlying performance obligations. Some of these costs may relate to specific future anticipated
contracts, specifically future maintenance renewals, which we do not pay commensurate sales commissions on. We amortize commission
costs proportionally with revenue, thus it is necessary for us to estimate future revenues when there are future anticipated contracts. We
estimate future revenues based on anticipated renewal amounts over an expected useful life (e.g. the period over which we believe the
initial sales commissions relate to future anticipated contracts). The expected useful life is based on a review of our product life cycles,
customer upgrade patterns and the rate at which customers renew maintenance. Commission expense was $5.0 million, $6.2 million and
$5.2 million for the years ended December 31, 2019, 2018 and 2017, respectively. Commission expense is classified within the selling
and marketing operating expenses category.
Leases
Operating lease right-of-use (“ROU”) assets and liabilities are recognized at the commencement date based on the present value of lease
payments over the lease term. We have made an accounting policy election not to apply the recognition requirements of ASC 842 to
short-term leases. Those leases which have a term of less than 12 months will have lease payments recognized, in our Condensed
Consolidated Statement of Operations, on a straight-line basis over the lease term. An optional renewal or termination is not recognized
as part of the lease term unless we determine that it is reasonably certain that we will exercise that option. The term reasonably certain
is a high threshold for which pervasive evidence generally does not exist, and therefore, optional renewal periods are generally excluded
from our ROU assets and lease liabilities until they have been exercised. Lease expense is recognized on a straight-line basis over the
lease term.
As most of our leases do not provide an implicit rate, we use an estimated incremental borrowing rate in determining the present value
of lease payments. The Company uses a portfolio approach when determining the discount rate to be applied to its leases. Significant
judgment is necessary when determining a discount rate because we must estimate the discount rate based on a number of factors and
observable inputs including current market conditions, market yields, government bonds, credit risk, and other factors as necessary. The
Company must also exercise significant judgment when determining whether an option to renew or terminate a lease should be included
in the lease term. This judgment includes an assessment of all relevant economic factors such as costs relating to the termination or
extension of a lease, importance of the underlying asset to the Company’s operations, and the terms and conditions of the optional periods
in relation to current market rates.
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Where we have lease agreements which contain lease and non-lease components, we have elected to make use of the practical expedient
to account for each separate lease component and associated non-lease component as a single lease component.
Impairment of Long-Lived Assets, Intangible Assets Subject to Amortization and Goodwill
We are required to evaluate the carrying value of our long-lived assets, amortizable intangible assets and goodwill. Amortizable intangible
assets include customer-related intangibles that resulted from previous acquisitions. Such intangibles are amortized over periods up to
ten years. Quarterly, we assess whether circumstances exist which suggest that the carrying value of long-lived and amortizable intangible
assets may not be recoverable. When applicable, we assess the recoverability of the carrying value of our long-lived assets and certain
amortizable intangible assets based on estimated undiscounted cash flows to be generated from such assets. In assessing the recoverability
of these assets, we forecast estimated enterprise-level cash flows based on various operating assumptions such as revenue forecasted by
product line and in-process research and development cost. If the forecast of undiscounted cash flows does not exceed the carrying value
of the long-lived and amortizable intangible assets, we record an impairment charge to the extent the carrying value exceeded the fair
value of such assets.
Goodwill is not amortized but is evaluated for impairment at least annually, or when events or circumstances suggest a potential impairment
has occurred. We generally perform this annual impairment test in the fourth quarter of the fiscal year. We evaluate goodwill for impairment
between annual tests if indicators of impairment exist. The impairment test involves comparing the fair value of the reporting unit with
its carrying value. An impairment charge is recognized for the amount that the carrying value exceeds the reporting unit's fair value. For
purposes of the goodwill impairment evaluation, the Company as a whole is considered the reporting unit. The fair value of the reporting
unit is estimated under a market based approach using the fair value of the Company's common stock. The estimated fair value requires
significant judgments, including timing and appropriateness of the price of common stock used (e.g. point-in-time application, simple
moving average, exponential moving average), as well as application of an estimated control premium. The estimated control premium
is based on a review of current and past market information published by a third-party resource.
Based on our assessment during the fourth quarter of 2019, the estimated fair value exceeded the carrying value of the reporting unit and,
therefore, an impairment existed. For additional details refer to Note 6, "Goodwill and Intangible Assets, Net."
We did not record any impairment of long-lived assets or definite-lived intangible assets for the years ended December 31, 2019, 2018
and 2017.
Accounts Receivable Allowances
Our two most significant allowance accounts are: an allowance for doubtful accounts and an allowance for service credits. Provisions
for these allowances are recorded on a monthly basis and are included as a component of general and administrative expenses, respectively.
Estimates are used in determining the allowance for doubtful accounts and are based on historical collection experience and current and
forecasted trends, as well as known specific collection risks. In determining these estimates, we review historical write-offs, including
comparisons of write-offs to provisions for doubtful accounts. We compare the ratio of the allowance to gross receivables to historical
levels, and monitor amounts collected and related statistics. We write off receivables when they are deemed uncollectible. While write-
offs of customer accounts have historically been within our expectations and the provisions established, we cannot guarantee that the
future write-off experience will be consistent with historical experience, which could result in material differences when compared to
the allowance for doubtful accounts and related provisions.
From time to time, we grant service credits for customer retention purposes or when there is an adjustment in the scope of work. The
allowance for service credits related provisions are based on historical credit percentages, current credit and aging trends, historical actual
payment trends and actual credit experience. We analyze our past credit experience over several time frames. Using this analysis along
with current operational data, including existing experience of credits issued and the time frames in which credits are issued, we establish
an appropriate allowance for service credits. This allowance also reduces accounts receivable for lost and non-returned pagers to the
expected realizable amounts and for free wireless services. While credits issued have been within our expectations and the provisions
established, we cannot guarantee that future credit experience will be consistent with historical experience, which could result in material
differences when compared to the allowance for service credits and maintenance related provisions.
Inventory
Inventories are stated at the lower of cost or net realizable value. Cost is computed using a weighted average cost approach which averages
the prices at which goods are purchased from vendors. We evaluate our ending inventories for shrinkage and estimated obsolescence.
Any shrinkage identified is written off to cost of goods sold in the period in which the shrinkage is identified. Further, we assess the
impact of changing technology on our inventories and we write off inventories that are considered obsolete in the period in which the
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analysis takes place. Inventory consists primarily of finished goods. We do not account for inventory as work-in-process or raw materials
as any such inventory would be immaterial to the consolidated financial statements.
Property and Equipment
Property and equipment are reported at cost and are depreciated using the straight-line method based on estimated useful lives which
range from one to five years.
Transmitter assets are grouped into tranches based on our transmitter decommissioning forecast and are depreciated using the group life
method on a straight-line basis. Depreciation expense is determined by the expected useful life of each tranche of the underlying transmitter
assets. The expected useful life is based on our forecasted usage of those assets and their retirement over time and aligns the useful lives
of these transmitter assets with their planned removal from service. Disposals are charged against accumulated depreciation with no gain
or loss recognized. This rational and systematic method matches the underlying usage of these assets to the underlying revenue that is
generated from these assets. Depreciation expense for these assets is subject to change based upon revisions in the timing of transmitter
deconstruction resulting from our long-range planning and network rationalization process.
Asset Retirement Obligations
We recognize liabilities and corresponding assets for future obligations associated with the retirement of assets. We have paging equipment
assets, principally transmitters, which are located on leased locations. The underlying leases generally require the removal of equipment
at the end of the lease term; therefore, a future obligation exists. Asset retirement costs are reflected in paging equipment assets with
depreciation expense recognized over the estimated lives, which range between one and five years. The asset retirement costs and the
corresponding liabilities that have been recorded to date generally relate to either current plans to consolidate networks or to the removal
of assets at a future terminal date. When an asset retirement obligation arises, the liabilities and corresponding assets are recorded at their
present value using a discounted cash flow approach and the liabilities are accreted using the interest method.
The recognition of an asset retirement obligation requires that management make numerous assumptions regarding such factors as the
cost and timing of deconstruction; the credit-adjusted risk-free rate to be used; inflation rates; and future advances in technology. The
fair value estimate of contractor fees to remove each asset is assumed to escalate by 2% each year through the terminal date. The total
estimated liability is based on the estimated future value of those costs and the timing of deconstruction.
We believe these estimates are reasonable at the present time, but we can give no assurance that changes in technology, our financial
condition, the economy or other factors would not result in higher or lower asset retirement obligations. Any variations from our estimates
would generally result in a change in the assets and liabilities in equal amounts, and operating results would differ in the future by any
difference in depreciation expense and accretion expense (see Note 5, "Consolidated Financial Statement Components", and Note 7,
"Asset Retirement Obligations", for additional details).
Income Taxes
We file a consolidated U.S. Federal income tax return and income tax returns in state, local and foreign jurisdictions as required. The
provision for current income taxes is calculated and accrued on income and expenses expected to be included in current year U.S. and
foreign income tax returns. The provision for current income taxes may also include interest, penalties and an estimated amount reflecting
uncertain tax positions.
Deferred income tax assets and liabilities are computed based on temporary differences between the financial statement values and the
tax bases of assets and liabilities including net operating loss and tax credit carryforwards at the enacted tax rates expected to apply to
taxable income when taxes are actually paid or recovered. Changes in deferred income tax assets and liabilities are included as a component
of deferred income tax expense. Deferred income tax assets represent amounts available to reduce future income taxes payable. We
provide a valuation allowance when we consider it “more likely than not” (greater than a 50% probability) that a deferred income tax
asset will not be fully recovered. Our valuation allowance assessment includes an evaluation of our history of generating taxable income
and estimates of future taxable income, including when applicable the use of appropriate tax planning strategies.
Assets and liabilities are established for uncertain tax positions taken or positions expected to be taken in income tax returns when such
positions fail to meet the “more likely than not” threshold based on the technical merits of the positions. We assess whether previously
unrecognized tax benefits may be recognized when the tax position is (1) more likely than not of being sustained based on its technical
merits, (2) effectively settled through examination, negotiation or litigation, or (3) settled through actual expiration of the relevant tax
statutes We had no uncertain tax positions for the periods ended December 31, 2019 and 2018. (see Note 9, "Income Taxes," for additional
details).
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Research and Development
In accordance with ASC 985-20, Software to be Sold, Leased, or Marketed, certain software development costs are charged to operations
and expensed as incurred until technological feasibility has been established. Material costs incurred after technological feasibility is
established and before the product is ready for general release are capitalized and amortized on a straight-line basis over the estimated
remaining economic life of the product or the ratio of current revenues to total projected product revenues, whichever is greater. To date,
the time between technological feasibility and general release to the public has been extremely short and consequently expenses available
for capitalization have been immaterial. Accordingly, all research and developments costs incurred to date, accounted for in accordance
with ASC 985-20, have been expensed as incurred.
In accordance with ASC 350-40, Internal-use Software, certain software development costs are capitalized while in the application
development stage related to software developed for internal use or software sold in a SaaS arrangement. This includes certain development
costs for Spok Go. All other costs incurred during the preliminary project stage or the post implementation stage, are expensed as incurred.
To date, we have not incurred material costs that would qualify for capitalization. We anticipate certain costs will begin to qualify for
capitalization beginning in early 2020 and these costs are likely to be material.
Shipping and Handling Costs
We incur shipping and handling costs to send and receive messaging devices and other equipment to/from our customers. Amounts billed
to customers related to shipping and handling are classified as revenue and the Company's shipping and handling costs are classified as
cost of revenue. These costs are expensed as incurred.
Advertising Expenses
Advertising costs are charged to operations when incurred. Advertising costs are classified as selling and marketing expenses. Advertising
expenses were $1.7 million, $2.4 million and $2.3 million for the years ended December 31, 2019, 2018, and 2017, respectively.
Stock Based Compensation
We account for share-based payments to employees, including restricted stock units ("RSUs"), restricted common stock ("restricted
stock") and the option to purchase common stock under the Employee Stock Purchase Plan ("ESPP") based on their fair value and the
estimated number of shares we expect will vest based on the performance metrics associated with the award, if applicable. Fair value is
measured based on the closing fair market value of the Company's common stock on the date of grant. Compensation expense is recognized
on a straight-line basis over the requisite service period. Forfeitures and withdrawals are accounted for on an as incurred basis.
Changes in our estimates of the expected attainment of performance targets are reflected in the amount of compensation expense that we
recognize for the related instruments during the interim reporting period when the change in estimate is determined and may cause the
amount of compensation expense that we record for each period to vary. Further information regarding stock based compensation can
be found in Note 8, "Stockholders' Equity."
Concentration of Credit Risk
Our financial instruments that are potentially subject to concentrations of credit risk consist primarily of cash, cash equivalents, short-
term receivables and accounts receivable. While our cash and cash equivalents are managed by reputable financial institutions, deposits
at these institutions and funds may, at times, exceed federally insured limits. Management believes that these financial institutions and
funds are financially sound and, accordingly, that minimal credit risk exists.
Accounts receivable are typically unsecured and are derived from revenue earned from customers across different geographic locations,
primarily within the U.S. We perform ongoing credit evaluations of our customers, and generally do not require collateral. We maintain
an allowance for estimated credit losses. During the years ended December 31, 2019, 2018, and 2017, our bad debt expenses were $0.7
million, $1.6 million, and $0.5 million, respectively. In the event that accounts receivable collection cycles deteriorate, our operating
results and financial position could be adversely affected. No customer represented 10% or more of total revenue or accounts receivable
during the years ended December 31, 2019, 2018, and 2017.
Sales and Use Taxes
Sales and use taxes imposed on the ultimate consumer are excluded from revenue where we are required by law or regulation to act as
collection agent for the taxing jurisdiction.
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Fair Value Measurements and Financial Instruments
We account for certain assets and liabilities at fair value. We categorize each of our fair value measurements in one of the following three
levels based on the lowest level input that is significant to the fair value measurement in its entirety. These levels are:
Level 1 - Inputs are based upon unadjusted quoted prices for identical instruments in active markets.
Level 2 - Inputs are based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments
in markets that are not active, inputs other than quoted prices that are observable for the asset or liability and inputs that are corroborated
by other observable market data.
Level 3 - Unobservable inputs that cannot be corroborated by observable market data and typically reflect management's estimates of
assumptions that market participants would use in pricing the asset or liability.
We consider all highly liquid interest-earning investments with a maturity of three months or less at the date of purchase to be cash
equivalents. Those investments with an original maturity of greater than three months and less than one year are classified as short-term
investments. Cash and cash equivalents consist primarily of cash on deposit with banks and investments in money market funds.
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 Consolidated Balance Sheets. These investments are classified as Level 1 and mature within 12 months. The
differences between carrying value and fair value are not material to the Consolidated Financial Statements.
Financial instruments including cash and cash equivalents, accounts receivable and accounts payable all have fair values that approximate
their carrying values at December 31, 2019 and 2018 due to their short maturities.
Earnings Per Common Share
The calculation of earnings per common share is based on the weighted-average number of common shares outstanding during the
applicable period. The calculation for diluted earnings per common share recognizes the effect of all potential dilutive common shares
that were outstanding during the respective periods, unless the impact would be anti-dilutive. Further information regarding earnings per
common share can be found in Note 8, "Stockholders' Equity."
NOTE 2 - RECENT AND PENDING ACCOUNTING STANDARDS
Recently Adopted
Leases - ASC 842 "Leases"
On January 1, 2019, we adopted ASC 842 using the modified retrospective approach that resulted in a material adjustment to our balance
sheet as of January 1, 2019. During the quarter ended June 30, 2019, we adjusted our opening balance to record the effect of adopting
ASC 842 by approximately $0.4 million. As a result, the impact of the adoption of ASC 842 was an increase to assets and liabilities of
approximately $17.8 million. Results for reporting periods beginning after January 1, 2019 are presented under ASC 842, while prior
period amounts are not adjusted and continue to be reported in accordance with our historic accounting under ASC 840. In the adoption
of ASC 842, we elected to use the package of available practical expedients with the exception of hindsight. For additional details refer
to Note 1, "Significant Accounting Policies Update" and Note 4 "Leases."
Pending Adoption
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses on Financial Instruments ("CECL") that requires
early recognition of credit losses on financial assets held at the reporting date based on historical experience, current conditions, and
reasonable and supportable forecasts. This guidance is effective for fiscal years beginning after December 15, 2019. While our assessment
is on-going, we do not believe the impact will have a material effect on our consolidated financial statements.
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NOTE 3 - REVENUE, DEFERRED REVENUE AND PREPAID COMMISSIONS
Wireless Revenue
Wireless revenue consists of two primary components: paging revenue and product and other revenue. Paging revenue consists primarily
of recurring fees associated with the provision of messaging services and fees for paging devices and is net of a provision for service
credits. Product and other revenue reflects system sales, the sale of devices and charges for paging devices that are not returned and are
net of anticipated credits. Our core offering includes subscriptions to one-way or two-way messaging services for a periodic (monthly,
quarterly, semiannual, or annual) service fee. This is generally based upon the type of service provided, the geographic area covered, the
number of devices provided to the customer and the period of commitment. A subscriber to one-way messaging services may select
coverage on a local, regional or nationwide basis to best meet their messaging needs. Two-way messaging is generally offered on a
nationwide basis. In addition, subscribers either contract for a messaging device from us for an additional fixed monthly fee or they own
a device, having purchased it either from us or from another vendor. We also sell devices to resellers who lease or resell devices to their
subscribers and then sell messaging services utilizing our networks. We offer ancillary services, such as voicemail and equipment loss
or maintenance protection, which help increase the monthly recurring revenue we receive along with these traditional messaging services.
We offer exclusive one-way (T5) and two-way (T52) alphanumeric pagers, which are configurable to support un-encrypted or encrypted
operation. When configured for encryption, they utilize AES-128 bit encryption, screen locking and remote wipe capabilities. With
encryption enabled these new secure paging devices enhance our service offerings to the healthcare community by adding Health Insurance
Portability and Accountability Act ("HIPAA") security capabilities to the low cost, highly reliable and availability benefits of paging.
(see Item 1. “Business,” for more details).
Software Revenue
Software revenue consists of two primary components: operations revenue and maintenance revenue. Operations revenue consists
primarily of license revenues for our healthcare communications solutions, equipment revenues that facilitate the use of our software
solutions, and professional services revenue related to the implementation of our solutions. Maintenance revenue is for ongoing support
of our software solutions or related equipment (typically for one year) and access to when-and-if available software updates. Our software
licenses and hardware are generally recognized at a point in time when we have transferred control to the customer. For software licenses,
revenue is not recognized until the related license(s) has been made available to the customer and the customer can begin to benefit from
its right to use the license(s). Our software licenses represent a right to use Spok’s IP as it exists at a point in time at which the license is
granted. Many of our software licenses have significant standalone functionality due to their ability to process a transaction or perform
a function or task, and we do not need to maintain those products, once provided to the customer, for value to exist. While the functionality
of IP that we license may substantively change during the license period, customers are not contractually or practically required to update
their license as a result of those changes. Our paging, professional and maintenance services are generally recognized over time due to
a customer's simultaneous receipt and consumption of the benefit as we perform the work. As we transfer control over time, we recognize
revenue based on the extent of progress towards completion of the performance obligation. The selection of the method to measure
progress towards completion requires significant judgment and is based on the nature of the products or services to be provided. Generally,
we use the time-elapsed measure of progress for performance obligations which include wireless or maintenance services. We believe
this method best depicts the simultaneous transfer and consumption of the benefit based on our performance as these services are generally
considered standby services. For professional services, we leverage an input methodology based on the number of hours worked on a
project versus the total expected hours necessary to complete the project. Revenues are recognized proportionally as hours are incurred.
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Revenue Recognition
Revenues are recognized when control of the promised goods or services is transferred to our customers, in an amount that reflects the
consideration we expect to be entitled to in exchange for those goods or services. The Company adopted ASC 606 on January 1, 2018.
Periods prior to January 1, 2018 reflect accounting under ASC 605, "Revenue Recognition" and have not been adjusted for the adoption
of ASC 606.
The following table presents our revenues disaggregated by revenue type:
(Dollars in thousands)
Revenue - wireless
Paging revenue
Product and other revenue
Total wireless revenue
Revenue - software
License
Services
Equipment
Operations revenue
Maintenance revenue
Total software revenue
Total revenue
For the Twelve Months Ended December 31,
2019
2018
2017
85,067
3,100
88,167
90,570
3,707
94,277
8,950
19,189
3,618
31,757
40,365
72,122
160,289
$
$
$
$
13,042
18,091
4,995
36,128
39,069
75,197
169,474
$
$
$
$
$
$
$
$
97,296
3,892
101,188
9,541
17,630
4,147
31,318
38,669
69,987
171,175
The Company is currently structured as a single operating (and reportable) segment, a clinical communication and collaboration business.
The U.S. was the only country that accounted for more than 10% of the Company’s total revenue for the years ended December 31, 2019,
2018 and 2017. Revenue generated in the U.S. and internationally consisted of the following for the periods stated:
(Dollars in thousands)
Revenue
United States
International
Total revenue
Deferred Revenues
For the Twelve Months Ended December 31,
2019
2018
2017
$
$
154,766
5,523
160,289
$
$
164,558
4,916
169,474
$
$
166,790
4,385
171,175
Our deferred revenues represent payments made to, or due from, customers in advance of our performance. Changes in the balance of
total deferred revenue during the twelve months ended December 31, 2019 are as follows:
(Dollars in thousands)
Deferred Revenue
December 31, 2018
26,582
$
$
Additions
70,684
$
Revenue
Recognized
(70,645) $
December 31, 2019
26,621
During the twelve months ended December 31, 2019, the Company recognized $25.3 million of revenue related to amounts deferred as
of December 31, 2018.
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Prepaid Commissions
Our prepaid commissions represent payments made to employees in advance of our performance on the related underlying contracts.
These costs have been incurred directly in relation to obtaining a contract. As such, these costs are amortized over the estimated period
of benefit. Changes in the balance of total prepaid commissions during the twelve months ended December 31, 2019 are as follows:
(Dollars in thousands)
Prepaid Commissions
December 31, 2018
2,394
$
$
Additions
5,031
$
Commissions
Recognized
(4,994) $
December 31, 2019
2,431
Prepaid commissions are included within prepaid expenses on the Consolidated Balance Sheets and commissions expense is included
within Selling and marketing on the Consolidated Statement of Operations.
Remaining Performance Obligations
The balance of remaining performance obligations at December 31, 2019 was $50.6 million. We expect to recognize approximately $36.5
million of these remaining performance obligations over the next 12 months, with the remaining balance recognized thereafter.
NOTE 4 - Leases
We have operating lease arrangements for corporate offices, cellular towers, storage units and small building spaces. The building space
is used to house infrastructure, such as transmitters, antennae and other various equipment for the Company’s wireless paging services.
For leases with a term of 12 months or less, renewal terms are generally of an evergreen nature (either month-to-month or year-to-year).
For leases with a term greater than 12 months, renewal terms are generally explicit and provide for one to five optional renewals consistent
with the initial term. Many of our leases, with the exception of those for our corporate offices, include options to terminate the lease
within one year. Variable lease payments, residual value guarantees or purchase options are not generally present in these leases.
Lease costs are included in Technology Operations and General and Administrative expenses on the Consolidated Statement of Operations.
The following table presents lease costs disaggregated by type:
(Dollars in thousands)
Operating lease cost
Short-term lease cost
Short-term lease cost - related party(1)
Total lease cost
Supplemental Disclosure:
Cash paid for amounts included in the measurement of lease liabilities - operating leases
Weighted-average remaining lease term - operating leases
Weighted-average discount rate - operating leases
For the Year Ended
December 31,
2019
$
$
$
5,823
8,281
3,589
17,693
1,421
5.60 years
5.45%
A member of our Board of Directors also serves as a director for an entity that leases transmission tower sites to the Company. Refer to Note 12, "Related Parties"
(1)
for additional details.
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Maturities of lease liabilities as of December 31, 2019 were as follows:
For the Year Ended December 31,
2020
2021
2022
2023
2024
Thereafter
Total future lease payments
Imputed interest
Total
(Dollars in thousands)
5,447
4,398
2,765
1,860
1,409
3,824
19,703
(2,691)
17,012
$
NOTE 5 - CONSOLIDATED FINANCIAL STATEMENTS' COMPONENTS
Depreciation, Amortization and Accretion
Depreciation, amortization and accretion consisted of the following for the periods stated:
(Dollars in thousands)
Depreciation
Leasehold improvements
Asset retirement costs
Paging and computer equipment
Furniture, fixtures and vehicles
Total depreciation
Amortization
Accretion
Total depreciation, amortization and accretion expense
Accounts Receivable, net
For the Year Ended December 31,
2019
2018
2017
$
$
63
(766)
6,526
374
6,197
2,500
552
9,249
$
$
232
(300)
7,397
398
7,727
2,500
542
10,769
$
$
234
(388)
8,024
306
8,176
2,886
562
11,624
Accounts receivable was recorded net of an allowance of $1.3 million and $1.7 million for the years ended December 31, 2019 and 2018,
respectively. Accounts receivable, net includes $6.4 million and $8.7 million of unbilled receivables for the years ended December 31,
2019 and 2018, respectively. Unbilled receivables are defined as the Company's right to consideration in exchange for goods or services
that we have transferred to the customer but have not yet billed for, generally as a result of contractual billing terms. The decrease in
unbilled receivables was primarily due to an increase in billings for the year ended December 31, 2019.
Property and Equipment, net
Property and equipment, net consisted of the following for the periods stated:
(Dollars in thousands)
Leasehold improvements
Asset retirement costs
Paging and computer equipment
Furniture, fixtures and vehicles
Total property and equipment
Accumulated depreciation
Total property and equipment, net
Useful Life
(In Years)
lease term
1-5
1-5
3-5
For the Year Ended December 31,
2019
2018
$
$
3,620
1,922
96,562
3,716
105,820
(97,820)
8,000
$
$
4,139
2,021
98,401
4,353
108,914
(98,560)
10,354
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Table of Contents
For purposes of assessing our asset retirement costs, we completed a review of the estimated useful life of our transmitter assets during
the fourth quarter of 2019 (that are part of paging and computer equipment). This review was based on the results of our long-range
planning and network rationalization process and indicated that the expected useful life of the last tranche of the transmitter assets was
no longer appropriate. As a result of that review, the expected useful life of the final tranche of transmitter assets was extended from 2023
to 2024. This change resulted in a revision of the expected future depreciation expense for the transmitter assets and an immaterial impact
to the consolidated financial statements beginning in 2020. We believe these estimates remain reasonable at the present time, but we can
give no assurance that changes in technology, customer usage patterns, our financial condition, the economy or other factors would not
result in changes to our transmitter decommissioning plans. Any further variations from our estimates could result in a change in the
expected useful lives of the underlying transmitter assets and operating results could differ in the future by any difference in depreciation
expense. The extension of the depreciable life was accounted for as a change in accounting estimate.
NOTE 6 - GOODWILL AND INTANGIBLE ASSETS, NET
Goodwill
During the quarter ended December 31, 2019, we performed our annual assessment of goodwill. Based on our assessment, using data as
of October 31, 2019, the carrying value of the reporting unit exceeded the estimated fair value of the Company which indicated an
impairment existed. For purposes of the goodwill impairment assessment, the Company as a whole is considered the reporting unit. The
fair value of the reporting unit is estimated under a market based approach using the fair value of the Company's common stock. The
estimated fair value requires significant judgments, including timing and appropriateness of the price of common stock used (e.g., point-
in-time application, simple moving average, exponential moving average), as well as application of an estimated control premium. The
estimated control premium is based on a review of current and past market information published by a third-party resource. While a
formal impairment assessment is performed annually, the Company monitors its business environment for potential triggering events on
a quarterly basis. There is potential for further impairment charges being recognized in future periods based on these ongoing assessments.
The change in goodwill for the year ended December 31, 2019 was as follows:
(Dollars in thousands)
Goodwill at January 1, 2019
Impairment
Goodwill at December 31, 2019
Intangible Assets
(Dollars in
thousands)
$
$
133,031
(8,849)
124,182
Amortizable intangible assets at December 31, 2019 and 2018 related primarily to customer relationships. Such intangible assets are
being amortized over a period of ten years. We have not recorded an impairment of our intangible assets during the years ended
December 31, 2019, 2018 and 2017.
The net consolidated balance of intangible assets consisted of the following at December 31, 2019 and 2018:
As of December 31,
2019
2018
(Dollars in thousands)
Customer relationships
Useful Life
(In Years)
10
Gross Carrying
Amount
$
25,002
Accumulated
Amortization
$
(22,085) $
Net Carrying
Amount
Gross Carrying
Amount
2,917
$
25,002
Accumulated
Amortization
$
(19,585) $
Net Carrying
Amount
5,417
Estimated amortization of intangible assets for future periods was as follows:
For the year ending December 31,
2020
2021
Total
(Dollars in
thousands)
2,500
417
2,917
$
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NOTE 7 - ASSET RETIREMENT OBLIGATIONS
The components of the changes in the asset retirement obligation liabilities for the periods stated were as follows:
(Dollars in thousands)
Balance at January 1, 2018
Accretion
Amounts paid
Additions
Reductions
Reclassifications
Balance at December 31, 2018
Accretion
Amounts paid
Additions
Reductions
Reclassifications
Balance at December 31, 2019
Short-Term Portion
Long-Term Portion
Total
$
$
234
(91)
(154)
—
(185)
230
34
39
(177)
—
14
180
90
$
7,174
$
633
—
55
(1,119)
(230)
6,513
513
—
32
(817)
(180)
6,061
$
$
7,408
542
(154)
55
(1,304)
—
6,547
552
(177)
32
(803)
—
6,151
Increases and reductions other than accretion, reclassification and amounts paid primarily relate to changes in estimates of the underlying
liability, specifically as it relates to updates in estimated costs to remove a transmitter and the estimated timing of removal. The cost
associated with the estimated removal costs and timing refinements due to ongoing network rationalization activities is expected to accrete
to a total liability of $7.6 million.
Additional information regarding asset retirement costs and accretion expense can be found in Note 5, "Consolidated Financial
Statements' Components."
NOTE 8 - STOCKHOLDERS' EQUITY
General
Our authorized capital stock consists of 75 million shares of common stock, par value $0.0001 per share, and 25 million shares of preferred
stock, par value $0.0001 per share.
At December 31, 2019 and 2018, we had no stock options outstanding.
At December 31, 2019 and 2018, there were 19,071,614 and 19,389,066 shares of common stock outstanding, respectively, and no shares
of preferred stock outstanding.
Dividends
For each of the three years ending December 31, 2019, 2018 and 2017 our Board of Directors declared cash dividends of $0.50 per share
of our outstanding common stock. An immaterial amount of dividends declared were related to unvested RSUs and unvested shares of
restricted stock, which are accrued for and paid when the applicable vesting conditions are met. Accrued cash dividends on forfeited
RSUs and restricted stock are also forfeited. Cash dividends paid as disclosed in the statements of cash flows for the years ended
December 31, 2019, 2018 and 2017 included previously declared cash dividends on vested RSUs and on shares of vested restricted stock
issued to non-executive members of our Board of Directors.
On February 26, 2020, our Board of Directors declared a regular quarterly cash dividend of $0.125 per share of common stock, with a
record date of March 16, 2020, and a payment date of March 30, 2020. This cash dividend of approximately $2.4 million is expected to
be paid from available cash on hand.
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Common Stock Repurchase Program
On July 31, 2008, our Board of Directors approved a program to repurchase our common stock in the open market. This program has
been extended at various times. In August 2018, the Company's Board of Directors authorized the repurchase of up to $10.0 million of
the Company's common stock through December 31, 2018 on the open market or in privately negotiated transactions. In November 2018,
the Company's Board of Directors extended the repurchase authority through December 31, 2019. The Company fully exhausted the
repurchase authority in September 2019.
We use available cash on hand and net cash provided by operating activities to fund the common stock repurchase program. This
repurchase authority allows us, at management’s discretion, to selectively repurchase shares of our common stock from time to time in
the open market depending upon market price and other factors.
Repurchased shares of our common stock were accounted for as a reduction to common stock and additional paid-in-capital in the period
in which the repurchase occurred. All repurchased shares of common stock are returned to the status of authorized, but unissued, shares
of the Company.
Common stock purchased in 2019, 2018 and 2017 (excluding commission and the purchase of common stock for tax withholdings) was
as follows:
For the Three Months Ended
(dollars in thousands, except for shares
purchased)
March 31,
June 30,
September 30,
December 31,
Total
Net Loss per Common Share
Shares
Purchased
Amount
Shares
Purchased
Amount
Shares
Purchased
Amount
2019
131,012 $
—
401,342
—
532,354 $
1,806
—
4,749
—
6,555
2018
127,792 $
501,782
36,542
263,000
929,116 $
1,922
7,520
558
3,446
13,446
2017
— $
572,550
—
—
—
10,000
—
—
572,550 $
10,000
Basic net loss per common share is computed on the basis of the weighted average common shares outstanding. Diluted net loss per
common share is computed on the basis of the weighted average common shares outstanding plus the effect of all potentially dilutive
common shares, including unvested and outstanding equity awards. The components of basic and diluted net loss per common share were
as follows for the periods stated:
(in thousands, except for share and per share amounts)
Numerator:
Net loss
Denominator:
Basic and diluted weighted average outstanding shares of common stock
Basic and diluted net loss per common share
For the Year Ended December 31,
2019
2018
2017
(10,765) $
(1,479) $
(15,306)
19,089,402
19,667,891
(0.56) $
(0.08) $
20,210,260
(0.76)
$
$
For the years ended December 31, 2019, 2018 and 2017, the following securities were not included in the calculation of diluted shares
outstanding as the effect would have been anti-dilutive:
Restricted stock units
For the Year Ended December 31,
2019
189,862
2018
178,279
2017
90,665
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Share-based Compensation Plans
On March 23, 2012, our Board of Directors adopted the Spok Holdings, Inc. 2012 Equity Incentive Award Plan (the “2012 Equity Plan”)
that was subsequently approved by our stockholders on May 16, 2012. A total of 2,194,986 shares of common stock have been reserved
for issuance under this plan.
Awards under the 2012 Equity Plan may be in the form of stock options, common stock, restricted stock, RSUs, performance awards,
dividend equivalents, deferred stock, deferred stock units, or stock appreciation rights.
Restricted stock awards generally vest one year from the date of grant. Related dividends accumulate during the vesting period and are
paid at the time of vesting.
Contingent RSU's generally vest over a three-year performance period upon successful completion of the performance objectives. Non-
contingent RSU's generally vest in thirds, annually, over a three-year period. Dividend equivalents rights generally accompany each RSU
award and those rights accumulate and vest along with the underlying RSU.
The following table summarizes the activities under the 2012 Equity Plan from January 1, 2017 through December 31, 2019:
Total equity securities available at January 1, 2017
Less: RSU and restricted stock awarded to eligible employees, net of forfeitures
Total equity securities available at December 31, 2017
Less: RSU and restricted stock awarded to eligible employees, net of forfeitures
Total equity securities available at December 31, 2018
Less: RSU and restricted stock awarded to eligible employees, net of forfeitures
Total equity securities available at December 31, 2019
Activity
1,246,939
(106,281)
1,140,658
(236,221)
904,437
(257,957)
646,480
The following table details activities with respect to outstanding RSUs and restricted stock for the year ended December 31, 2019:
Unvested at January 1, 2019
Granted
Vested
Forfeited
Unvested at December 31, 2019
Shares
Weighted-
Average Grant
Date Fair Value
404,325
$
388,321
(242,856)
(130,364)
419,426
$
17.27
13.27
17.48
15.49
14.00
Of the 419,426 unvested RSUs and restricted stock outstanding at December 31, 2019, 273,788 RSUs include contingent performance
requirements for vesting purposes. At December 31, 2019, there was $3.1 million of unrecognized net compensation cost related to RSUs
and restricted stock, which is expected to be recognized over a weighted average period of 1.60 years.
F- 23
Table of Contents
Employee Stock Purchase Plan
In 2016, our Board of Directors adopted the ESPP that was subsequently approved by our stockholders on July 25, 2016. A total of
250,000 shares of common stock have been reserved for issuance under this plan.
The Company's ESPP allows employees to purchase shares of common stock at a discounted rate, subject to plan limitations. Under the
ESPP, eligible participants can voluntarily elect to have contributions withheld from their pay for the duration of an offering period,
subject to the ESPP limits. At the end of an offering period, contributions will be used to purchase the Company's common stock at a
discount to the market price based on the first or last day of the offering period, whichever is lower. Participants are required to hold
common stock for a minimum period of two years from the grant date. Participants will begin earning dividends on shares after the
purchase date. Each offering period will generally last for no longer than six months. Once an offering period begins, participants cannot
adjust their withholding amount. If a participant chooses to withdraw, any previously withheld funds will be returned to the participant,
with no stock purchased, and that participant will be eligible to participate in the ESPP at the next offering period. If the participant
terminates employment with the Company during the offering period, all contributions will be returned to the employee and no stock
will be purchased at a discounted rate.
The Company uses the Black-Scholes model to calculate the fair value of each offering period on their offer date. The Black-Scholes
model requires the use of estimates for the expected term, the expected volatility of the underlying common stock over the expected term,
the risk-free interest rate and the expected dividend payment.
For the year ended December 31, 2019, employees purchased 23,299 shares of common stock for a total price of $0.3 million. For the
year ended December 31, 2018, employees purchased 20,120 shares of common stock for a total price of $0.2 million.
The following table summarizes the activities under the ESPP from January 1, 2017 through December 31, 2019:
Total ESPP equity securities available at January 1, 2017
Less: common stock purchased by eligible employees
Total ESPP equity securities available at January 1, 2018
Less: common stock purchased by eligible employees
Total ESPP equity securities available at January 1, 2019
Less: common stock purchased by eligible employees
Total ESPP equity securities available at December 31, 2019
Activity
246,039
(17,760)
228,279
(20,120)
208,159
(23,299)
184,860
Amounts withheld from participants will be classified as a liability on the balance sheet until funds are used to purchase shares. This
liability amount is immaterial to the consolidated financial statements.
Stock-Based Compensation Expense
Compensation expense associated with common stock, RSUs and restricted stock was recognized based on the grant date fair value of
the instruments, over the instruments’ vesting period.
The following table reflects stock based compensation expense for the periods stated:
(Dollars in thousands)
Performance-based RSUs
Time-based RSUs and restricted stock
ESPP
Total stock based compensation
For the Year Ended December 31,
2019
2018
2017
$
$
1,434
2,119
90
3,643
$
$
2,127
2,756
71
4,954
$
$
1,762
1,862
64
3,688
F- 24
Table of Contents
NOTE 9 - INCOME TAXES
The Tax Cuts and Jobs Act of 2017 ("2017 Tax Act") was signed into law on December 22, 2017. The 2017 Tax Act significantly revised
the U.S. corporate income tax by, among other things, lowering the statutory corporate tax rate from 35% to 21%, eliminating certain
deductions, imposing a mandatory one-time tax on accumulated earnings of foreign subsidiaries, introducing new tax regimes, and
changing how foreign earnings are subject to U.S. tax. The 2017 Tax Act also enhanced and extended through 2026 the option to claim
accelerated depreciation deductions on qualified property. We have completed our determination of the accounting implications of the
2017 Tax Act on our tax accruals.
The significant components of our income tax (benefit) expense attributable to current operations for the periods stated were as
follows:
(Dollars in thousands)
(Loss) income before income tax (benefit) expense
Current:
Federal tax
State tax
Foreign tax
Total current
Deferred:
Federal tax
State tax
Foreign tax
Total deferred
Total income tax (benefit) expense
For the Year Ended December 31,
2019
2018
2017
(13,423) $
(2,185) $
11,559
— $
582
13
595
(2,121)
(1,239)
107
(3,253)
(2,658) $
— $
838
148
986
(1,467)
(532)
307
(1,692)
(706) $
199
1,006
270
1,475
26,348
(787)
(171)
25,390
26,865
$
$
$
Foreign income before income tax (benefit) expense is immaterial to consolidated income before income tax (benefit) expense.
The following table summarizes the principal elements of the difference between the United States Federal statutory rate of 21% and
our effective tax rate:
Effective tax rate reconciliation
2019
2018
2017
(Dollars in thousands)
(Loss) income before income tax (benefit) expense
Income taxes computed at the Federal statutory rate
State income taxes, net of Federal benefit
Goodwill impairment
Impact of 2017 Tax Act
Research and development and other tax credits
Excess executive compensation
Other
(Benefit from) provision for income taxes
$ (13,423)
$ (2,819)
(567)
2,243
—
(1,790)
322
(47)
$ (2,658)
$ (2,185)
(459)
306
—
—
(1,144)
281
310
(706)
21.0 % $
4.2 %
(16.7)%
— %
13.3 %
(2.4)%
0.4 %
19.8 % $
$ 11,559
4,046
21.0 % $
472
(14.0)%
—
— %
24,235
— %
(1,775)
52.4 %
—
(12.9)%
(113)
(14.2)%
32.3 % $ 26,865
35.0 %
4.1 %
— %
209.7 %
(15.4)%
— %
(1.0)%
232.4 %
The anticipated effective income tax rate is expected to continue to differ from the Federal statutory rate primarily due to the effect of
state income taxes, the benefit of the research and development tax credit, permanent differences between book and taxable income and
certain discrete items. The earnings of non-U.S. subsidiaries are deemed to be indefinitely reinvested in non-U.S. operations.
F- 25
Table of Contents
The components of deferred income tax assets at December 31, 2019 and 2018 were as follows:
(Dollars in thousands)
Capitalized research and development costs
Net operating loss carryforward
Property and equipment
Accrued liabilities, reserves and other expenses
Research and development credits
Tax credits
Stock based compensation
Other
Gross deferred income tax assets
Deferred income tax liabilities:
Intangible assets
Prepaid and other expenses
Gross deferred income tax liabilities
Net deferred income tax assets
Net Operating Losses
December 31,
2019
2018
$
$
$
18,605
$
15,978
6,092
3,718
4,140
1,467
1,600
121
51,721
(2,430)
(308)
(2,738) $
$
48,983
14,219
18,851
5,969
3,837
2,360
2,141
1,739
200
49,316
(2,711)
(121)
(2,832)
46,484
As of December 31, 2019, we had approximately $71.2 million of NOLs available to offset future taxable income. The Federal NOLs
begin expiring in 2026 and will fully expire in 2029. We have an immaterial amount of foreign NOLs and tax credits available for future
use.
Valuation Allowance
We assess the recoverability of our deferred income tax assets, which represent the tax benefits of future tax deductions, NOLs and tax
credits, by considering the adequacy of future taxable income from all sources, including prudent and feasible tax planning strategies.
This assessment is required to determine whether based on all available evidence, it is “more likely than not” (which means a probability
of greater than 50%) that all or some portion of the DTAs will be realized in future periods. As of December 31, 2019 and 2018, we
believe it is more likely than not that our DTAs will be realized in future periods and thus did not have a valuation allowance.
Income Tax Audits
The 2017, 2018 and 2019 Federal and state income tax returns are within the statute of limitations (“SOL”) and are currently not under
examination by any Federal or state tax authority.
We operate in all states and the District of Columbia and are subject to various state income and franchise tax audits. The states’ SOL
varies from three to four years from the later of the due date of the return or the date filed. We usually file our Federal and all state and
local income tax returns on or before September 15 of the following year; therefore, the SOL for those states with a three-year SOL is
open for calendar years ending 2016 through 2019, and for the four-year SOL states, the SOL is open for years ending from 2015 through
2019.
F- 26
Table of Contents
NOTE 10 - COMMITMENTS AND CONTINGENCIES
Contractual Obligations
We had no significant commitments and contractual obligations as of December 31, 2019.
Other Commitments
We have various LOCs outstanding with multiple state agencies which are considered to be immaterial to the consolidated financial
statements. The LOCs typically have one to three-year contract requirements and contain automatic renewal terms.
Legal Contingencies
We are involved, from time to time, in lawsuits arising in the normal course of business. We believe these pending lawsuits will not have
a material adverse impact on our financial position or statement of operations.
Operating Leases
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.
Future minimum lease payments under non-cancelable operating leases at December 31, 2019 were as follows:
For the Year Ended December 31,
2020
2021
2022
2023
2024
Thereafter
Total
(Dollars in thousands)
$
$
6,792
5,056
3,039
1,968
498
217
17,570
These leases typically include renewal options and escalation clauses. Where material, we recognize rent expense on a straight-line basis
over the lease period.
Total rent expense under operating leases for the years ended December 31, 2019, 2018 and 2017, was approximately $17.7 million,
$17.5 million and $17.7 million, respectively.
NOTE 11 - EMPLOYEE BENEFIT PLANS
Spok Holdings, Inc. Savings and Retirement Plan
The Company has a savings plan in the U.S. that qualifies under Section 401(k) of the Internal Revenue Code ("IRC"). Participating U.S.
employees may elect to contribute a percentage of their salary, subject to certain limitations. Matching contributions under the savings
plan were approximately $1.6 million for the years ended December 31, 2019 and 2018 and $1.1 million for the year ended December
31, 2017.
NOTE 12 - RELATED PARTIES
A member of our Board of Directors also serves as a director for an entity that leases transmission tower sites to the Company. We incurred
$3.6 million for the years ended December 31, 2019 and 2018 and $3.8 million for the same period in 2017 of site rent expense from
the entity on which the individual serves as a director. These amounts are included in technology operations expenses.
F- 27
Table of Contents
NOTE 13 - SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Quarterly financial information for the years ended December 31, 2019 and 2018 is summarized below:
For the Year Ended December 31, 2019
First
Quarter
Second
Quarter
Third
Quarter
Fourth Quarter(3)
(Dollars in thousands except per share amounts)
Revenues(1)
Operating income (loss)(1)
Net income (loss)(1)
Basic and diluted net income (loss) per common share(2)
$
41,764
$
1,115
742
0.04
$
39,525
(1,992)
(670)
(0.03)
$
39,453
(2,692)
(1,326)
(0.07)
39,548
(12,239)
(9,511)
(0.50)
For the Year Ended December 31, 2018
First
Quarter
Second
Quarter
Third
Quarter
Fourth Quarter
Revenues(1)
Operating income (loss)(1)
Net income (loss)(1)
Basic and diluted net income (loss) per common share(2)
$
43,114
584
345
0.02
(Dollars in thousands except per share amounts)
$
$
$
40,628
(2,346)
(1,172)
(0.06)
42,476
(1,560)
(840)
(0.04)
43,256
149
189
0.01
(1) Slight variations in totals are due to rounding.
(2) Basic and diluted net income (loss) per common share is computed independently for each period presented. As a result, the sum of the quarterly
basic and diluted net income (loss) per common share for the years ended December 31, 2019 and 2018 may not equal the total computed for
the year.
(3) During the fourth quarter of 2019, the Company recorded a goodwill impairment of $8.8 million. See Note 6 "Goodwill and Intangible Assets,
Net" for additional details.
F- 28
Table of Contents
SPOK HOLDINGS, INC.
VALUATION AND QUALIFYING ACCOUNTS
SCHEDULE II
Allowance for Doubtful Accounts,
Service Credits and Other
Year ended December 31, 2019
Year ended December 31, 2018
Year ended December 31, 2017
Balance at the
Beginning of
the Period
Charged to
Operations
Write-offs
(Dollars in thousands)
Balance at the
End of the
Period
$
$
$
1,705
1,065
1,056
$
$
$
1,248
2,125
1,035
$
$
$
(1,660) $
(1,485) $
(1,026) $
1,293
1,705
1,065
F- 29
Table of Contents
EXHIBIT INDEX
Incorporated by Reference
Exhibit Description
Amended and Restated Certificate of Incorporation
Second Amended and Restated Bylaws
Specimen of common stock certificate, par value
$0.0001 per share
Form
8-K
8-K
File No.
001-32358
001-32358
S-4/A
333-115769
Exhibit
Filing Date
3.1
3.1
4.1
7/8/2014
12/20/2016
10/6/2004
Filed/
Furnished
Herewith
10-Q
001-32358
10.1
10/25/2018
001-32358
10-Q
10-Q
001-32358
DEF 14A 001-32358
10.18
10.24
A
11/1/2007
10/30/2008
3/28/2012
8-K
10-K
10-K
10-K
10-K
10-K
10-K
10-K
10-K
10-K
001-32358
10.1
1/4/2019
001-32358
10.16
3/2/2017
001-32358
10.17
3/2/2017
001-32358
001-32358
001-32358
001-32358
001-32358
001-32358
001-32358
10.18
10.10
10.10
10.13
10.15
10.16
10.16
3/2/2017
3/1/2018
2/28/2019
3/1/2018
2/28/2019
3/1/2018
2/28/2019
DEF 14A 001-32358
001-32358
10-Q
001-32358
10-K
A
10.2
21
4/27/2017
4/27/2017
3/1/2018
Form of Indemnification Agreement for executive officers of
Spok, Holding Inc.
USA Mobility, Inc. Equity Incentive Plan Restricted Stock
Agreement (For Board of Directors) (amended)
Form of Director’s Indemnification Agreement
USA Mobility, Inc. 2012 Equity Incentive Award Plan
Employment Agreement, between Spok Holdings, Inc. and
Vince D. Kelly, dated as of January 1, 2019
Restricted Stock Unit Grant Notice for the USA Mobility,
Inc. 2012 Equity Incentive Award Plan
Restricted Stock Unit Grant Notice for the Spok Holdings,
Inc. 2015 Long-Term Incentive Plan
Spok Holdings, Inc. Severance Pay Plan and Summary Plan
Description (For certain C-Level, not including CEO)
(amended and restated)
Spok Holdings, Inc. 2015 Long-Term Incentive Plan
Exhibits to Spok Holdings, Inc., 2015 Long-Term Incentive
Plan for the 2016 - 2018 performance period
Spok Holdings, Inc. 2017 Short-Term Incentive Plan
Exhibits to Spok Holdings, Inc., 2015 Long-Term Incentive
Plan for the 2017 - 2019 performance period
Spok Holdings, Inc. 2018 Short-Term Incentive Plan
Spok Holdings, Inc. 2018 Long-Term Incentive Plan(1)
Spok Holdings, Inc. 2019 Short-Term Incentive Plan
Spok Holdings, Inc. 2020 Short-Term Incentive Plan
Amendment to the USA Mobility, Inc. 2012 Equity
Incentive Award Plan
NEO Severance and Change in Control Document
Subsidiaries of the Company
Consent of Grant Thornton LLP
Certification of President and Chief Executive Officer
pursuant to Rule 13a-14(a)/Rule 15d-14(a) of the Securities
Exchange Act of 1934, as amended
Certification of Chief Financial Officer pursuant to
Rule 13a-14(a)/Rule 15d-14(a) of the Securities Exchange
Act of 1934, as amended
Certification of President and Chief Executive Officer
pursuant to 18 U.S.C. Section 1350
Certification of Chief Financial Officer pursuant to 18
U.S.C. Section 1350
XBRL Instance Document**
XBRL Taxonomy Extension Schema**
XBRL Taxonomy Extension Calculation**
XBRL Taxonomy Extension Definition**
XBRL Taxonomy Extension Labels**
XBRL Taxonomy Extension Presentation**
Filed
Filed
Filed
Filed
Filed
Furnished
Furnished
Furnished
Furnished
Furnished
Furnished
Furnished
Furnished
Exhibit
Number
3.1
3.2
4.1*
10.1
10.2*
10.3*
10.4*
10.5†
10.6*
10.7
10.8*†
10.9†
10.10†
10.11†
10.12†
10.13†
10.14†
10.15†
10.16†
10.17*
10.18†
21
23
31.1
31.2
32.1
32.2
101.INS
101.SCH
101.CAL
101.DEF
101.LAB
101.PRE
* On July 8, 2014, the Company changed its name from USA Mobility, Inc. to Spok Holdings, Inc.
**
†
The financial information contained in these XBRL documents is unaudited.
Denotes a management contract or compensatory plan or arrangement.
Table of Contents
(1)
Portions of this document have been omitted and filed separately with the Securities and Exchange Commission
pursuant to requests for confidential treatment pursuant to Rule 24b-2.
Exhibit E
Performance Goals
Exhibit 10.12
2017-2019 Performance Period
Spok 2017 Long Term Incentive Plan (LTIP) Payout Scale
1
Exhibit F
List of Spok Holdings, Inc., Participants (as of January 1, 2017)
2017-2019 Performance Period
1
Spok Holdings, Inc.
2020 Short-Term Incentive Plan
(Effective January 1, 2020)
Exhibit 10.16
I. Effective Date. The 2020 Short-Term Incentive Plan (the “Plan”) for Spok Holdings, Inc., was adopted by the
Compensation Committee of the Board of Directors (the “Compensation Committee”) of Spok Holdings, Inc.,
(the “Parent” or the “Company”), a Delaware corporation for the employees of Spok, Inc., a Delaware
corporation and an indirect wholly-owned subsidiary of the Parent (“Spok”) on December 17, 2020. The Plan
is effective as of January 1, 2020 and supersedes and replaces all former management short-term incentive
plans, including the Spok Holdings, Inc., 2019 Short-Term Incentive Plan.
II. Purpose. The Plan is designed to attract, motivate, retain and reward key employees for their performance
during the calendar year, from January 1 through December 31, 2020 (the “Performance Period”). The Plan
rewards key employees by allowing them to receive cash bonuses based on how well the Company performs
against the performance objectives as set forth by the Compensation Committee and, as may be adjusted
by the Compensation Committee in the event of a Change of Control or other corporate reorganization,
merger, similar transaction, to take into account extraordinary events or as the Compensation Committee
determines is in the best interests of the Company. In order for bonuses to be earned, the Company must
meet the quantitative Performance Objectives and the Management by Objective (MBO) criteria as by
December 31, 2020. Performance Objectives are based solely on the consolidated performance of the
Company. For clarity, Performance Objectives and the attainment thereof does not include revenue or
expenses related to acquisitions or due diligence expenses occurring after the Effective Date of this Plan
except as directed by the Compensation Committee.
III. Eligibility. Participation in the Plan is limited to those key employees who are selected for participation in
the Plan by the Compensation Committee, in its sole discretion (each such individual, a “Participant”).
Individuals selected by the Compensation Committee to participate as of January 1, 2020 are listed on Exhibit
A. Newly hired or promoted employees, or employees who otherwise become eligible to participate, who
are selected to participate in the Plan after January 1, 2020 but before October 1, 2020 will participate in the
Plan on a prorated basis based on the number of days worked during the performance period after becoming
bonus eligible. Employees who are newly hired or promoted on or after October 1, 2020 will not be eligible
to participate in the Plan.
IV. Target Bonus. The target bonus for each Participant is based on a percentage of the Participant’s annual (or
prorated, if applicable) salary as of January 1, 2020 (or date of hire or promotion to an eligible position, if
later). The applicable percentage is determined by the Compensation Committee with respect to executives
earning $250,000 or more and by the CEO for other management and need not be identical among
Participants. The earned bonus may be greater than or less than the target bonus depending on the level at
which the Performance Objectives are attained.
V. Payment of Earned Bonus.
a. Except as provided herein, each earned bonus under the Plan will be calculated based on the
attainment of the Performance Objectives and will be paid in a lump sum (subject to any required
withholding for income and employment taxes) after the 2020 annual audit of the Parent’s
consolidated financial statement has been completed and the Parent’s 2020 Annual Report on Form
10-K has been filed with the Securities and Exchange Commission but in no event later than December
31, 2021.
If the Participant involuntarily Separates from Service without Cause or due to disability or dies prior
to December 31, 2020, he or she will be eligible to receive a prorated bonus provided that the
Company is on track to attain the Performance Objectives as reasonably determined by the
Compensation Committee and provided further that, in the event Participant involuntarily Separates
b.
from Service without Cause, he or she has executed a release, any waiting period in connection with
such release has expired, he or she has not exercised any rights to revoke the release and he or she
has followed any other applicable and customary termination procedures, as determined by the
Parent in its sole discretion. The bonus will be prorated to the date of Participant’s Separation from
Service or death, calculated as follows: one-hundred percent (100%) of a Participant’s target bonus
will be multiplied by a fraction, the numerator of which is the number of days the Participant was
continuously providing services to the Company from January 1, 2020 through the date immediately
prior to the Participant’s Separation from Service or death, and the denominator of which is 365
days. Prorated bonuses will be paid to the Participant, or in the event of Participant’s death, the
Participant’s estate, on the sixty-fifth (65th) day following the date of Participant’s Separation from
Service or death.
i. For purposes of the Plan, “Separation from Service” shall have the meaning provided in the
Treasury Regulations under section 409A of the Internal Revenue Code of 1986, as amended
(the “Code”), and “Separates from Service” shall have a consistent meaning. Unless
otherwise defined in an employment agreement between the Participant and the Parent or
the Company, for purposes of the Plan, “Cause” means (i) dishonesty of a material nature
that relates to the performance of services for the Company by Participants; (ii) criminal
conduct (other than minor infractions and traffic violations) that relates to the performance
of services for the Company by Participant; (iii) the Participant’s willfully breaching or failing
to perform his or her duties as an employee of the Company (other than any such failure
resulting from the Participant having a disability (as defined herein)), within a reasonable
period of time after a written demand for substantial performance is delivered to the
Participant by the Compensation Committee, which demand specifically identifies the
manner in which the Compensation Committee believes that the Participant has not
substantially performed his duties; or (iv) the willful engaging by the Participant in conduct
that is demonstrably and materially injurious to the Parent, Company or an Affiliate,
monetarily or otherwise. No act or failure to act on the Participant’s part shall be deemed
“willful” unless done, or omitted to be done; by the Participant not in good faith and without
reasonable belief that such action or omission was in the reasonable best interests of the
Parent, Company and Affiliates. For this purpose, “disability” means a condition or
circumstance such that the Participant has become totally and permanently disabled as
defined or described in the Parent’s long term disability benefit plan applicable to executive
officers as in effect at the time the Participant incurs a disability.
c. Notwithstanding anything to the contrary in this Plan, no payments contemplated by this Plan will
be paid during the six-month period following a Participant’s Separation from Service unless the
Company determines, in its good faith judgment, that paying such amounts at the time indicated in
paragraph b above would not cause the Participant to incur an additional tax under Code section
409A (a)(2)(B)(i), in which case the bonus payment shall be paid in a lump sum on the first day of the
seventh month following the Participant’s Separation from Service.
VI. Forfeiture. Any Participant whose employment is terminated for Cause or who voluntarily Separates from
Service prior to the date bonuses are paid shall forfeit any right to receive a bonus award.
VII. Clawback. The Compensation Committee of the Board may require forfeiture or a clawback of any incentive
compensation awarded or paid under this Plan in excess of the compensation actually earned based on a
restatement of the Company’s financial statements as filed with the Securities and Exchange Commission for
the period covered by this Plan.
VIII.
Administrator. The Compensation Committee shall administer the Plan in accordance with its terms,
and shall have full discretionary power and authority to construe and interpret the Plan; to prescribe, amend
and rescind rules and regulations, terms, and notices hereunder; and to make all other determinations
necessary or advisable in its discretion for the administration of the Plan. Any actions of the Compensation
Committee with respect to the Plan shall be conclusive and binding upon all persons interested in the Plan.
The Compensation Committee, in its sole discretion and on such terms and conditions as it may provide, may
delegate all or part of its authority and powers under the Plan to one or more directors and/or officers of
the Parent or the Company.
IX. Amendment; Termination. The Compensation Committee, in its sole discretion, without prior notice to
Participants, may amend or terminate the Plan, or any part thereof, including the Performance Objectives as
described in Section II, at any time and for any reason, to the extent such action will not cause adverse tax
consequences to a participant under Code section 409A. Any amendment or termination must be in writing
and shall be communicated to all Participants. No award may be granted during any period of suspension
or after termination of the Plan.
X. Miscellaneous.
a. No Rights as Employee. Nothing contained in this Plan or any documents relating to this Plan shall
(a) confer on a Participant any right to continue in the employ of the Company; (b) constitute any
contract or agreement of employment; or (c) interfere in any way with the Company’s right to
terminate the Participant’s employment at any time, with or without Cause.
b. Tax Withholding. To the extent required by applicable federal, state, local or foreign law, the Company
shall withhold all applicable taxes (including, but not limited to, the Participant’s FICA and Social
Security obligations) from any bonus payment.
c. Transferability. A Participant may not sell, assign, transfer or encumber any of his or her rights under
the Plan.
d. Unsecured General Creditor. Participants (or their beneficiary) may seek to enforce any rights or
claims for payment under the Plan solely as an unsecured general creditor of the Parent or Spok.
e. Successors. This Plan shall be binding upon and inure to the benefit of the Parent, Company and any
successor to the Company and the Participant’s heirs, executors, administrators and legal
representatives.
f. Code Section 409A. The Plan is intended to be a nonqualified deferred compensation plan within
the meaning of Code section 409A and shall be interpreted to meet the requirements of Code section
409A. To the extent that any provision of the Plan would cause a conflict with the requirements of
Code section 409A, or would cause the administration of the Plan to fail to satisfy Code section 409A,
such provision shall be deemed null and void to the extent permitted by applicable law. Nothing
herein shall be construed as a guarantee of any particular tax treatment to a Participant.
h.
g. Governing Law. All questions pertaining to the validity, construction and administration of the Plan
shall be determined in accordance with the laws of the State of Delaware, without regard to conflicts
of law provisions.
Integration. This document and each exhibit hereto represent the entire agreement and
understanding between the Company and the Participants and supersede any and all prior
agreements or understandings, whether oral or written, with the Company relating to the subject
matter covered by this Plan.
Severability. In case any provision of this Plan shall be held illegal or invalid, such illegality or invalidity
shall be construed and enforced as if said illegal or invalid provision had never been inserted herein
and shall not affect the remaining provisions of this Plan, but shall be fully severable, and the Plan
shall be construed and enforced as if any such illegal or invalid provision were not a part hereof.
i.
[Execution page follows]
IN WITNESS WHEREOF, Spok Holdings, Inc., by its duly authorized officer acting in accordance with
a resolution duly adopted by the Compensation Committee of the Board of Directors of Spok Holdings, Inc., has
executed this Plan for the benefit of employees of Spok Holdings, Inc. and subsidiaries, effective as of January 1,
2020.
SPOK HOLDINGS, INC.
/s/ Vincent D. Kelly
Vincent D. Kelly, President & CEO
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Exhibit 23
We have issued our reports dated February 27, 2020, with respect to the consolidated financial statements and internal control
over financial reporting included in the Annual Report of Spok Holdings, Inc. on Form 10-K for the year ended December 31,
2019. We consent to the incorporation by reference of said reports in the Registration Statements of Spok Holdings, Inc. on
Forms S-8 (File No. 333-182444 and File No. 333-212724).
/s/ GRANT THORNTON LLP
Arlington, Virginia
February 27, 2020
Exhibit 31.1
I, Vincent D. Kelly, certify that:
1.
I have reviewed this Annual Report on Form 10-K of Sp k Holdings, Inc.;
CERTIFICATIONS
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present
in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the
periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a.
b.
c.
d.
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in
which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting
to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles;
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred
during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control
over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or
persons performing the equivalent functions):
a.
b.
All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize
and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role
in the registrant’s internal control over financial reporting.
Dated: February 27, 2020
/s/ Vincent D. Kelly
Vincent D. Kelly
President and Chief Executive Officer
I, Michael W. Wallace, certify that:
1.
I have reviewed this Annual Report on Form 10-K of Sp k Holdings, Inc.;
CERTIFICATIONS
Exhibit 31.2
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present
in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the
periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a.
b.
c.
d.
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in
which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting
to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles;
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred
during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control
over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or
persons performing the equivalent functions):
a.
b.
All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize
and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role
in the registrant’s internal control over financial reporting.
Dated: February 27, 2020
/s/ Michael W. Wallace
Michael W. Wallace
Chief Financial Officer
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.1
Pursuant to 18 U.S.C. § 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned officer of Sp k
Holdings, Inc. (the “Company”) hereby certifies, to such officer’s knowledge, that:
(i)
the accompanying Annual Report on Form 10-K of the Company for the year ended December 31, 2019 (the “Report”)
fully complies with the requirements of Section 13(a) or Section 15(d), as applicable, of the Securities Exchange Act of
1934, as amended; and
(ii)
the information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of the Company.
Dated: February 27, 2020
/s/ Vincent D. Kelly
Vincent D. Kelly
President and Chief Executive Officer
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.2
Pursuant to 18 U.S.C. § 1350, as created by Section 906 of the Sarbanes-Oxley Act of 2002, the undersigned officer of Sp k
Holdings, Inc. (the “Company”) hereby certifies, to such officer’s knowledge, that:
(i)
the accompanying Annual Report on Form 10-K of the Company for the year ended December 31, 2019 (the “Report”)
fully complies with the requirements of Section 13(a) or Section 15(d), as applicable, of the Securities Exchange Act of
1934, as amended; and
(ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of the Company.
Dated: February 27, 2020
/s/ Michael W. Wallace
Michael W. Wallace
Chief Financial Officer
Reconciliation from Operating Expenses to
Adjusted Operating Expenses (a)
(Dollars in thousands)
For the twelve months ended
12/31/2019
12/31/2018
Operating expenses
$176,098
$172,647
Less: depreciation,
amortization and accretion
Less: Goodwill impairment
Adjusted operating
expenses
$10,768
$9,249
$8,849
$158,000
$161,879
(a) Adjusted operating expenses is a non-GAAP measure and is presented for analytical purposes only. Management and the
Board of Directors rely on adjusted operating expenses for purposes of assessing our core operating results based on expenses
incurred within a period that directly drive operating income in that period. Management adjusts for certain items because we
do not regard these costs as reflective of normal costs related to the ongoing operation of the business in the ordinary course.
In general, these items possess one or more of the following characteristics; non-cash expenses, factors outside of our control,
items that are non-operational in nature, and unusual items not expected to occur in the normal course of business
spok.co m
4
Board of Directors
(as of 6/1/2020)
Royce Yudkoff
Chairman of the Board, Spok
Holdings, Inc. and Co-Founder of ABRY
Partners, LLC
Vincent D. Kelly
President and Chief Executive Officer
N. Blair Butterfield
Chairman of Wind River Advisory Group,
LLC
Stacia A. Hylton
Principal of LS Advisory
Brian O’Reilly
Former Managing Director, Toronto
Dominion Bank
Matthew Oristano
Chairman and Chief Executive Officer of
Reaction Biology Corporation
Samme L. Thompson
President of Telit Associates, Inc.
Todd Stein
Co-Investment Manager of Braeside
Investments, LLC
Christine M. Cournoyer
Former Chairperson and Chief Executive
Officer of N-of-One, Inc.
Dr. Bobbie Byrne
Chief Information Officer, Advocate
Aurora Health
Corporate Officers
Vincent D. Kelly
President and Chief Executive Officer
Michael W. Wallace
Chief Operating Officer, Chief Financial Officer
Bonnie K. Culp
Executive Vice President, Human
Resources and Administration and
Chief Compliance Officer, Spok, Inc.
Sharon Woods Keisling
Corporate Secretary and Treasurer
spok .c om
5
Annual Meeting
A formal notice of the meeting is being mailed to
each stockholder. The proxy statement, proxy card
and 2019 Annual Report on Form 10-K are available
at www.proxyvote.com.
This annual report contains the 2019 Annual
Report on Form 10-K filed with the Securities and
Exchange Commission. Spok Holdings, Inc. will
provide without charge to each stockholder of
record additional copies of the Company’s 2019
Annual Report on Form 10-K. Please send your
request to:
Investor Relations
Spok Holdings, Inc.
6850 Versar Center, Suite 420
Springfield, VA 22151
Investor and Media Information
Inquiries from investors, the financial community,
and news organizations should be directed to
Investor Relations and Corporate Communications
at the address noted above, by calling (800) 611-
8488, or by visiting our website at www.spok.com.
Securities Listing
The common stock of Spok Holdings, Inc., trading
symbol “SPOK,” trades on the NASDAQ National
Market®.
Transfer Agent and Registrar
Computershare
P.O. Box 505000
Louisville, KY 40233
Direct: (781) 575-2725
Toll Free: (877) 498-8865
Hearing Impaired: TDD (800) 952-9245
www.computershare.com/investor
Independent Public Accountants
Grant Thornton LLP
1000 Wilson Boulevard, Suite 1400
Arlington, VA 22209
Corporate Counsel
Latham & Watkins LLP
555 Eleventh Street, NW, Suite 1000
Washington, DC 20004-1304
SM
Spok, Inc.
6850 Versar Center, Suite 420
Springfield, VA 22151
Telephone (800) 611-8488
Fax (866) 382-1662
www.spok.com
ABOUT SPOK, INC.
Spok, Inc., a wholly owned subsidiary of Spok Holdings, Inc. (NASDAQ: SPOK), headquartered in Springfield, Virginia, is
proud to be a global leader in healthcare communications. We deliver clinical information to care teams when and where
it matters most to improve patient outcomes. Top hospitals rely on the Spok Care Connect® and Spok Go® platforms to
enhance workflows for clinicians, support administrative compliance, and provide a better experience for patients. Our
customers send over 100 million messages each month through their Spok® solutions. Spok is making care collaboration
easier.
spok.com
© 2020 Spok, Inc. Spok is a trademark of Spok Holdings, Inc. Spok Care Connect and Spok Go are trademarks of Spok, Inc.
Other names and trademarks may be the property of their respective owners.
Rev: 5/20