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," the "Company," "we," "us" and "our") 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 products and services 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 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, with the exception of our adoption of ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments, often referred to as Current Expected Credit Losses ("CECL"). For additional details refer to Note 2, "Recent Accounting Standards."
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.
Certain immaterial prior period amounts in the consolidated financial statements have been reclassified to conform to the current period's presentation. These reclassifications had no effect on the reported results of operations or the statement of financial position.
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 ongoing 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.
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 the product is delivered, when services begin and, to a lesser extent, when services are completed. For Software as a Service ("SaaS") contracts, the subscription and premium support services are generally billed annually in advance while professional services are billed at various milestones which reflect work 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 the product or services we provide. 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 or 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 and subscriptions 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. Material performance obligations related to the sale of our SaaS platform include a SaaS subscription, professional services, and signature support services.
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 that 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 as 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.
Our wireless, professional, maintenance, and subscription 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 that include wireless, maintenance, or subscription 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. 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 $4.3 million, $5.0 million and $6.2 million for the years ended December 31, 2020, 2019 and 2018, 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, "Leases," to short-term leases. Those leases which have a term of less than 12 months will have lease payments recognized, in our Consolidated Statements 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 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 bond rates, 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.
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 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, assessment of the Company's future projected discounted cash flows and other relevant information if available.
Based on our assessment during the fourth quarter of 2020, 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, 2020, 2019 and 2018.
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 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 at 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 calculated 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 assess the recoverability of our deferred income tax assets, which represent the tax benefits of future tax deductions, based on available positive and negative evidence and 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" (meaning a probability of greater than 50%) that all or some portion of the deferred income tax assets will be realized in future periods. We provide a valuation allowance when we consider it "more likely than not" that a deferred income tax asset will not be fully recovered. The assessment of our deferred income tax assets requires significant judgment.
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. The assessment of an uncertain tax position requires significant judgment. We had no uncertain tax positions for the periods ended December 31, 2020 and 2019 (see Note 9, "Income Taxes," for additional details).
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 Software as a Service ("SaaS") arrangement. This includes certain development costs for Spok Go which qualified for capitalization beginning in the first quarter of 2020. All other costs incurred during the preliminary project stage or the post-implementation stage, are expensed as incurred. Significant judgment is required when assessing costs and determining whether they fall within the preliminary project, application development, or post-implementation stage that determines whether the associated costs are expensed as incurred or capitalized. Capitalized software development is amortized on a straight-line basis over the estimated useful life of the asset, typically three years, beginning when those development efforts have been placed into service (e.g., generally once made commercially available). Determining the estimated useful life requires significant judgment as we consider factors such as the rapid and continuous developments in software technology, obsolescence and anticipated life of the service offering before enhancements are necessary. In a SaaS environment, customer needs are rapidly evolving and a shorter useful life is generally expected.
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 $1.3 million, $1.7 million and $2.4 million for the years ended December 31, 2020, 2019, and 2018, 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, 2020, 2019, and 2018, our bad debt expenses were $1.1 million, $0.7 million, and $1.6 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, 2020, 2019, and 2018.
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.
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, 2020, and 2019 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 potentially 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 ACCOUNTING STANDARDS
In June 2016, the Financial Accounting Standards Board issued ASU No. 2016-13, or CECL. CECL 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. On January 1, 2020, we adopted ASU No. 2016-13 which resulted in an immaterial adjustment to the beginning balance of retained earnings and an increase to allowance for doubtful accounts.
NOTE 3 - REVENUE, DEFERRED REVENUE AND PREPAID COMMISSIONS
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 following table presents our revenues disaggregated by revenue type:
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For the Year Ended December 31,
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(Dollars in thousands)
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2020
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2019
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2018
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Revenue - wireless:
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Paging revenue
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$
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79,916
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$
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85,067
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$
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90,570
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Product and other revenue
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3,677
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3,100
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3,707
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Total wireless revenue
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$
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83,593
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$
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88,167
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$
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94,277
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Revenue - software:
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License
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$
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5,179
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$
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8,950
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$
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13,042
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Services
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17,910
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19,189
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18,091
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Equipment
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2,841
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3,618
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4,995
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Subscription
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66
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—
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—
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Operations revenue
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25,996
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31,757
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36,128
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Maintenance revenue
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38,591
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40,365
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39,069
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Total software revenue
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$
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64,587
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$
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72,122
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$
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75,197
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Total revenue
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$
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148,180
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$
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160,289
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$
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169,474
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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, 2020, 2019 and 2018. Revenue generated in the U.S. and internationally consisted of the following for the periods stated:
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|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
(Dollars in thousands)
|
2020
|
|
2019
|
|
2018
|
|
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
United States
|
$
|
145,349
|
|
|
$
|
154,766
|
|
|
$
|
164,558
|
|
|
International
|
2,831
|
|
|
5,523
|
|
|
4,916
|
|
|
Total revenue
|
$
|
148,180
|
|
|
$
|
160,289
|
|
|
$
|
169,474
|
|
Deferred Revenues
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, 2020, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
December 31, 2019
|
|
Additions
|
|
Revenue Recognized
|
|
December 31, 2020
|
|
|
|
|
|
|
|
|
|
|
Deferred Revenue
|
$
|
26,621
|
|
|
$
|
67,769
|
|
|
$
|
(64,594)
|
|
|
$
|
29,796
|
|
During the twelve months ended December 31, 2020, the Company recognized $24.7 million of revenue related to amounts deferred as of December 31, 2019.
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 year ended December 31, 2020, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
December 31, 2019
|
|
Additions
|
|
Commissions Recognized
|
|
December 31, 2020
|
|
|
|
|
|
|
|
|
|
|
Prepaid Commissions
|
$
|
2,431
|
|
|
$
|
4,160
|
|
|
(4,301)
|
|
|
$
|
2,290
|
|
Prepaid commissions are included within prepaid expenses in the Consolidated Balance Sheets and commissions expense is included within Selling and marketing on the Consolidated Statements of Operations.
Remaining Performance Obligations
The balance of remaining performance obligations at December 31, 2020, was $50.5 million. We expect to recognize approximately $37.0 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 Statements of Operations. The following table presents lease costs disaggregated by type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
(Dollars in thousands)
|
|
2020
|
|
2019
|
|
|
|
|
|
|
|
Operating lease cost
|
|
$
|
5,797
|
|
$
|
5,823
|
|
Short-term lease cost
|
|
7,991
|
|
8,281
|
|
Short-term lease cost - related party(1)
|
|
3,518
|
|
3,589
|
|
Total lease cost
|
|
$
|
17,306
|
|
$
|
17,693
|
|
|
|
|
|
|
|
Supplemental Disclosure:
|
|
|
|
|
|
Cash paid for amounts included in the measurement of lease liabilities - operating leases
|
|
$
|
5,685
|
|
$
|
5,678
|
|
Weighted-average remaining lease term - operating leases (in years)
|
|
5.06
|
|
5.60
|
|
Weighted-average discount rate - operating leases
|
|
5.17%
|
|
5.45%
|
(1) A former member of our Board of Directors, who departed our Board during the third quarter of 2020, also serves as a director for an entity that leases transmission tower sites to the Company. Refer to Note 12, "Related Parties" for additional details.
We intend to relocate our corporate headquarters during the first half of 2021 to office space located in Alexandria, Virginia, consisting of approximately 26,000 square feet of space under a lease that will expire on September 30, 2026. We expect to record approximately $4.4 million in a right-of-use asset and corresponding operating lease liability for this lease at such time that we obtain control of the property.
Maturities of lease liabilities as of December 31, 2020, were as follows:
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
For the Year Ended December 31,
|
|
|
|
|
|
2021
|
|
$
|
5,273
|
|
|
2022
|
|
3,539
|
|
|
2023
|
|
2,395
|
|
|
2024
|
|
1,672
|
|
|
2025
|
|
1,050
|
|
|
Thereafter
|
|
2,816
|
|
|
Total future lease payments
|
|
16,745
|
|
|
Imputed interest
|
|
(2,025)
|
|
|
Total
|
|
$
|
14,720
|
|
NOTE 5 - CONSOLIDATED FINANCIAL STATEMENTS' COMPONENTS
Depreciation, Amortization and Accretion
Depreciation, amortization and accretion consisted of the following for the periods stated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
(Dollars in thousands)
|
2020
|
|
2019
|
|
2018
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
|
|
|
|
Leasehold improvements
|
$
|
57
|
|
|
$
|
63
|
|
|
$
|
232
|
|
|
Asset retirement costs
|
(643)
|
|
|
(766)
|
|
|
(300)
|
|
|
Paging and computer equipment
|
5,291
|
|
|
6,526
|
|
|
7,397
|
|
|
Furniture, fixtures and vehicles
|
307
|
|
|
374
|
|
|
398
|
|
|
Total depreciation
|
5,012
|
|
|
6,197
|
|
|
7,727
|
|
|
Amortization
|
|
|
|
|
|
|
Intangible assets
|
2,500
|
|
|
2,500
|
|
|
2,500
|
|
|
Capitalized software development costs
|
1,073
|
|
|
—
|
|
|
—
|
|
|
Total amortization
|
3,573
|
|
|
2,500
|
|
|
2,500
|
|
|
Accretion
|
471
|
|
|
552
|
|
|
542
|
|
|
Total depreciation, amortization and accretion expense
|
$
|
9,056
|
|
|
$
|
9,249
|
|
|
$
|
10,769
|
|
Accounts Receivable, net
Accounts receivable was recorded net of an allowance of $1.7 million and $1.3 million for the years ended December 31, 2020, and 2019, respectively. Accounts receivable, net includes $7.0 million and $6.4 million of unbilled receivables for the years ended December 31, 2020, and 2019, 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.
Property and Equipment, net
Property and equipment, net consisted of the following for the periods stated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Useful Life
(In Years)
|
|
For the Year Ended December 31,
|
|
(Dollars in thousands)
|
|
2020
|
|
2019
|
|
|
|
|
|
|
|
|
Leasehold improvements
|
lease term
|
|
$
|
3,628
|
|
|
$
|
3,620
|
|
|
Asset retirement costs
|
1-5
|
|
3,717
|
|
|
1,922
|
|
|
Paging and computer equipment
|
1-5
|
|
92,608
|
|
|
96,562
|
|
|
Furniture, fixtures and vehicles
|
3-5
|
|
3,517
|
|
|
3,716
|
|
|
Total property and equipment
|
|
|
103,470
|
|
|
105,820
|
|
|
Accumulated depreciation
|
|
|
(95,655)
|
|
|
(97,820)
|
|
|
Total property and equipment, net
|
|
|
$
|
7,815
|
|
|
$
|
8,000
|
|
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 2020 (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 2024 to 2025. 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 2021. 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.
Capitalized Software Development
Capitalized software development is amortized on a straight-line basis over the estimated useful life of the asset, typically three years. Capitalized software development costs were $11.3 million for the year ended December 31, 2020, and no capitalized costs were recorded for the year ended December 31, 2019, respectively. Amortization expense with respect to software development costs was $1.1 million for the year ended December 31, 2020, and there was no amortization expense for the year ended December 31, 2019.
NOTE 6 - GOODWILL AND INTANGIBLE ASSETS, NET
Goodwill
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. There are a number of judgmental factors that are incorporated into our assessment to establish an estimated control premium, including the review of current and past market information published by a third-party resource, assessment of the Company's future projected discounted cash flows and other relevant information if available.
While a formal impairment assessment is performed annually, the Company monitors its business environment for potential triggering events on a quarterly basis. During the quarter ended March 31, 2020, we determined, based on a qualitative assessment, that COVID-19 created a triggering event that required further assessment. As such, we performed a quantitative assessment, using data as of March 31, 2020. Based on that assessment, the estimated fair value of the reporting unit exceeded the carrying value of the Company, which indicated an impairment did not exist as of the interim balance sheet date.
During the quarter ended December 31, 2020, we performed our annual assessment of goodwill. Based on our assessment, using data as of October 31, 2020, the carrying value of the reporting unit exceeded the estimated fair value of the Company, which indicated an impairment existed. There is potential for further impairment charges in future periods based on these ongoing assessments.
The change in goodwill for the year ended December 31, 2020, was as follows:
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
Change in Goodwill
|
|
|
|
|
Goodwill at January 1, 2019
|
$
|
133,031
|
|
|
Impairment
|
$
|
(8,849)
|
|
|
Goodwill at January 1, 2020
|
$
|
124,182
|
|
|
Impairment
|
(25,007)
|
|
|
Goodwill at December 31, 2020
|
$
|
99,175
|
|
Intangible Assets
Amortizable intangible assets at December 31, 2020 and 2019 related primarily to customer relationships. Such intangible assets are amortized over a period of ten years. We did not record an impairment of our intangible assets during the years ended December 31, 2020, 2019 and 2018. The remaining amortization of $0.4 million is expected to be incurred in 2021.
The net consolidated balance of intangible assets consisted of the following at December 31, 2020, and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
|
|
|
2020
|
|
2019
|
|
(Dollars in thousands)
|
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net Carrying Amount
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net Carrying Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
|
$
|
25,002
|
|
|
$
|
(24,585)
|
|
|
$
|
417
|
|
|
$
|
25,002
|
|
|
$
|
(22,085)
|
|
|
$
|
2,917
|
|
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)
|
Short-Term Portion
|
|
Long-Term Portion
|
|
Total
|
|
|
|
|
|
|
|
|
Balance at January 1, 2019
|
$
|
34
|
|
|
$
|
6,513
|
|
|
$
|
6,547
|
|
|
Accretion
|
39
|
|
|
513
|
|
|
552
|
|
|
Amounts paid
|
(177)
|
|
|
—
|
|
|
(177)
|
|
|
Additions
|
—
|
|
|
32
|
|
|
32
|
|
|
Reductions
|
14
|
|
|
(817)
|
|
|
(803)
|
|
|
Reclassifications
|
180
|
|
|
(180)
|
|
|
—
|
|
|
Balance at December 31, 2019
|
90
|
|
|
6,061
|
|
|
6,151
|
|
|
Accretion
|
(38)
|
|
|
509
|
|
|
471
|
|
|
Amounts paid
|
(352)
|
|
|
—
|
|
|
(352)
|
|
|
Additions
|
169
|
|
|
1,185
|
|
|
1,354
|
|
|
|
|
|
|
|
|
|
Reclassifications
|
466
|
|
|
(466)
|
|
|
—
|
|
|
Balance at December 31, 2020
|
$
|
335
|
|
|
$
|
7,289
|
|
|
$
|
7,624
|
|
Increases and reductions other than accretion, reclassification and amounts paid primarily relate to changes in estimates of the underlying liability, specifically related to updates in estimated costs to remove a transmitter and the estimated timing of removal. Estimated removal costs and timing refinements due to ongoing network rationalization activities are expected to accrete to a total liability of $9.3 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, 2020, and 2019, we had no stock options outstanding.
At December 31, 2020, and 2019, there were 19,384,192 and 19,071,614 shares of common stock outstanding, respectively, and no shares of preferred stock were outstanding.
Dividends
For each of the three years ending December 31, 2020, 2019 and 2018, 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 Consolidated Statements of Cash Flows for the years ended December 31, 2020, 2019 and 2018 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 17, 2021, the Board of Directors declared a regular quarterly cash dividend of $0.125 per share of common stock, with a record date of March 16, 2021, and a payment date of March 30, 2021. This cash dividend of approximately $2.4 million is expected to be paid from available cash on hand.
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, our Board of Directors authorized the repurchase of up to $10.0 million of our common stock through December 31, 2018, on the open market or in privately negotiated transactions. In November 2018, our Board of Directors extended the repurchase authority through December 31, 2019. The Company fully exhausted the repurchase authority in September 2019.
We used available cash on hand and net cash provided by operating activities to fund the common stock repurchase program. This 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.
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 were returned to the status of authorized, but unissued, shares of the Company.
The Company did not repurchase any of its common stock during 2020. Common stock repurchased in 2019 and 2018 (excluding commission and the purchase of common stock for tax withholdings) was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands, except for shares purchased)
|
|
|
|
2019
|
|
2018
|
|
For the Three Months Ended
|
|
|
|
|
|
Shares Purchased
|
|
Amount
|
|
Shares Purchased
|
|
Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
|
|
131,012
|
|
|
$
|
1,806
|
|
|
127,792
|
|
|
$
|
1,922
|
|
|
June 30,
|
|
|
|
|
|
—
|
|
|
—
|
|
|
501,782
|
|
|
7,520
|
|
|
September 30,
|
|
|
|
|
|
401,342
|
|
|
4,749
|
|
|
36,542
|
|
|
558
|
|
|
December 31,
|
|
|
|
|
|
—
|
|
|
—
|
|
|
263,000
|
|
|
3,446
|
|
|
Total
|
|
|
|
|
|
532,354
|
|
|
$
|
6,555
|
|
|
929,116
|
|
|
$
|
13,446
|
|
Net Loss per Common Share
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
(In thousands, except for share and per share amounts)
|
2020
|
|
2019
|
|
2018
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
Net loss
|
$
|
(44,225)
|
|
|
$
|
(10,765)
|
|
|
$
|
(1,479)
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
Basic and diluted weighted average outstanding shares of common stock
|
19,028,918
|
|
|
19,089,402
|
|
|
19,667,891
|
|
|
Basic and diluted net loss per common share
|
$
|
(2.32)
|
|
|
$
|
(0.56)
|
|
|
$
|
(0.08)
|
|
For the years ended December 31, 2020, 2019 and 2018, the following securities were not included in the calculation of diluted shares outstanding as the effect would have been anti-dilutive:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
2020
|
|
2019
|
|
2018
|
|
|
|
|
|
|
|
|
Restricted stock units
|
297,757
|
|
|
189,862
|
|
|
178,279
|
|
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 our stockholders subsequently approved on May 16, 2012. A total of 2,194,986 shares of common stock were reserved for issuance under this plan.
On April 29, 2020, our Board of Directors adopted the Spok Holdings, Inc. 2020 Equity Incentive Award Plan (the "2020 Equity Plan" and together with the 2012 Equity Plan, the "Equity Plans") that our stockholders subsequently approved on July 28, 2020. As of July 28, 2020, a total of 1,699,950 shares of common stock have been reserved for issuance under the 2020 Equity Plan, and no further grants will be made under the 2012 Equity Plan. However, the 2012 Equity Plan will continue to govern all outstanding awards thereunder.
Awards under the 2020 Equity Plan may be in the form of stock options, restricted common stock, RSUs, performance awards, dividend equivalents, stock payment awards, deferred stock, deferred stock units ("DSUs"), stock appreciation rights or other stock or cash-based awards.
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 RSUs generally vest over a three-year performance period upon successful completion of the performance objectives. Non-contingent RSUs generally vest in thirds, annually, over a three-year period. Dividend equivalent rights generally accompany each RSU award and those rights accumulate and vest along with the underlying RSU.
Dividend equivalent rights generally accompany each DSU award and are paid to participants in cash on the Company's applicable dividend payment date whether the DSU is vested or unvested. The dividend equivalent right associated with a DSU continues until delivery of the underlying shares of common stock is made.
Payment of the underlying shares of common stock occurs at the earliest of a participant's separation from service, disability, death, or a change in control. Any shares subject to an award under the 2012 Equity Plan that are forfeited or expire will be available for the future grant of awards under the 2020 Equity Plan. As of December 31, 2020, there was an aggregate of 605,606 unvested RSUs and restricted stock outstanding under the 2012 Equity Plan.
The following table summarizes the activities under the Equity Plans from January 1, 2018, through December 31, 2020:
|
|
|
|
|
|
|
|
|
Activity
|
|
|
|
|
Total equity securities available at January 1, 2018
|
1,140,658
|
|
|
Less: RSU and restricted stock awarded to eligible employees, net of forfeitures
|
(236,221)
|
|
|
Total equity securities available at December 31, 2018
|
904,437
|
|
|
Less: RSU and restricted stock awarded to eligible employees, net of forfeitures
|
(257,957)
|
|
|
Total equity securities available at December 31, 2019
|
646,480
|
|
|
Less: RSU, DSU and restricted stock awarded to eligible employees, net of forfeitures
|
(547,166)
|
|
|
Plus: Additional shares available for issuance under the 2020 Equity Plan
|
1,600,000
|
|
|
Total equity securities available at December 31, 2020
|
1,699,314
|
|
The following table details activities with respect to outstanding RSUs, DSUs, and restricted stock under the Equity Plans for the year ended December 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted-Average Grant Date Fair Value per Share
|
|
|
|
|
|
|
|
Unvested at January 1, 2020
|
|
419,426
|
|
|
$
|
14.00
|
|
|
Granted
|
|
603,171
|
|
|
11.94
|
|
|
Vested
|
|
(329,870)
|
|
|
14.05
|
|
|
Forfeited
|
|
(56,005)
|
|
|
12.49
|
|
|
Unvested at December 31, 2020
|
|
636,722
|
|
|
$
|
12.16
|
|
Of the 636,722 unvested RSUs and restricted stock outstanding at December 31, 2020, 354,125 RSUs include contingent performance requirements for vesting purposes. At December 31, 2020, there was $4.1 million of unrecognized net compensation cost related to RSUs and restricted stock, which is expected to be recognized over a weighted average period of 1.6 years.
During the years ended December 31, 2019 and 2018, the Company granted 388,321 and 343,102 RSUs, respectively, with a weighted-average grant date fair value of $13.27 and $15.65 per share, respectively. The fair value of RSUs that vested during the years ended December 31, 2019 and 2018 were $3.0 million and $2.7 million, respectively, based on the closing price of the Company's common stock of $12.23 and $13.26 at December 31, 2019 and December 31, 2018, respectively.
Employee Stock Purchase Plan
In 2016, our Board of Directors adopted the ESPP that our stockholders subsequently approved on July 25, 2016. A total of 250,000 shares of common stock were reserved for issuance under this plan.
The 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.
The Company uses the Black-Scholes model to calculate the fair value of each offering period on the 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, 2020, employees purchased 35,661 shares of common stock for a total price of $0.3 million. For the year ended December 31, 2019, employees purchased 23,299 shares of common stock for a total price of $0.3 million.
The following table summarizes the activities under the ESPP from January 1, 2018, through December 31, 2020:
|
|
|
|
|
|
|
|
|
Activity
|
|
|
|
|
Total ESPP equity securities available at January 1, 2018
|
228,279
|
|
|
Less: common stock purchased by eligible employees
|
(20,120)
|
|
|
Total ESPP equity securities available at January 1, 2019
|
208,159
|
|
|
Less: common stock purchased by eligible employees
|
(23,299)
|
|
|
Total ESPP equity securities available at January 1, 2020
|
184,860
|
|
|
Less: common stock purchased by eligible employees
|
(35,661)
|
|
|
Total ESPP equity securities available at December 31, 2020
|
149,199
|
|
Amounts withheld from participants will be classified as a liability on the Consolidated Balance Sheets 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
(Dollars in thousands)
|
2020
|
|
2019
|
|
2018
|
|
|
|
|
|
|
|
|
Performance-based RSUs
|
$
|
2,019
|
|
|
$
|
1,434
|
|
|
$
|
2,127
|
|
|
Time-based RSUs and restricted stock
|
3,389
|
|
|
2,119
|
|
|
2,756
|
|
|
ESPP
|
100
|
|
|
90
|
|
|
71
|
|
|
Total stock based compensation
|
$
|
5,508
|
|
|
$
|
3,643
|
|
|
$
|
4,954
|
|
NOTE 9 - INCOME TAXES
The significant components of our (provision for) benefit from income taxes attributable to current operations for the periods stated were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
(Dollars in thousands)
|
2020
|
|
2019
|
|
2018
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
$
|
(21,770)
|
|
|
$
|
(13,423)
|
|
|
$
|
(2,185)
|
|
|
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
Federal tax
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
State tax
|
58
|
|
|
582
|
|
|
838
|
|
|
Foreign tax
|
(150)
|
|
|
13
|
|
|
148
|
|
|
Total current
|
(92)
|
|
|
595
|
|
|
986
|
|
|
Deferred:
|
|
|
|
|
|
|
Federal tax
|
20,594
|
|
|
(2,121)
|
|
|
(1,467)
|
|
|
State tax
|
1,910
|
|
|
(1,239)
|
|
|
(532)
|
|
|
Foreign tax
|
43
|
|
|
107
|
|
|
307
|
|
|
Total deferred
|
22,547
|
|
|
(3,253)
|
|
|
(1,692)
|
|
|
(Provision for) benefit from income taxes
|
$
|
22,455
|
|
|
$
|
(2,658)
|
|
|
$
|
(706)
|
|
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 for the years ended December 31, 2020, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
2020
|
|
2019
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
$
|
(21,770)
|
|
|
|
|
$
|
(13,423)
|
|
|
|
|
$
|
(2,185)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes computed at the federal statutory rate
|
$
|
(4,572)
|
|
|
21.0
|
%
|
|
$
|
(2,819)
|
|
|
21.0
|
%
|
|
$
|
(459)
|
|
|
21.0
|
%
|
|
State income taxes, net of federal benefit
|
(703)
|
|
|
3.2
|
%
|
|
(567)
|
|
|
4.2
|
%
|
|
306
|
|
|
(14.0)
|
%
|
|
Goodwill impairment
|
6,341
|
|
|
(29.1)
|
%
|
|
2,243
|
|
|
(16.7)
|
%
|
|
—
|
|
|
—
|
%
|
|
Change in valuation allowance
|
22,108
|
|
|
(101.6)
|
%
|
|
—
|
|
|
—
|
%
|
|
—
|
|
|
—
|
%
|
|
Research and development and other tax credits
|
(1,316)
|
|
|
6.0
|
%
|
|
(1,790)
|
|
|
13.3
|
%
|
|
(1,144)
|
|
|
52.4
|
%
|
|
Excess executive compensation
|
266
|
|
|
(1.2)
|
%
|
|
322
|
|
|
(2.4)
|
%
|
|
281
|
|
|
(12.9)
|
%
|
|
Other
|
331
|
|
|
(1.5)
|
%
|
|
(47)
|
|
|
0.4
|
%
|
|
310
|
|
|
(14.2)
|
%
|
|
Provision for (benefit from) income taxes
|
$
|
22,455
|
|
|
(103.1)
|
%
|
|
$
|
(2,658)
|
|
|
19.8
|
%
|
|
$
|
(706)
|
|
|
32.3
|
%
|
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.
The components of deferred income tax assets at December 31, 2020, and 2019 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
(Dollars in thousands)
|
2020
|
|
2019
|
|
|
|
|
|
|
Capitalized research and development costs
|
$
|
13,367
|
|
|
$
|
18,605
|
|
|
Net operating loss carryforward
|
18,081
|
|
|
15,978
|
|
|
Property and equipment
|
5,353
|
|
|
6,092
|
|
|
Accrued liabilities, reserves and other expenses
|
5,063
|
|
|
3,718
|
|
|
Research and development credits
|
5,533
|
|
|
4,140
|
|
|
Tax credits
|
717
|
|
|
1,467
|
|
|
Stock based compensation
|
1,917
|
|
|
1,600
|
|
|
Other
|
132
|
|
|
121
|
|
|
Gross deferred income tax assets
|
50,163
|
|
|
51,721
|
|
|
Deferred income tax liabilities:
|
|
|
|
|
Intangible assets
|
(2,015)
|
|
|
(2,430)
|
|
|
Prepaid and other expenses
|
(214)
|
|
|
(308)
|
|
|
Gross deferred income tax liabilities
|
(2,229)
|
|
|
(2,738)
|
|
|
Net deferred income tax assets
|
47,934
|
|
|
48,983
|
|
|
Valuation allowance
|
(22,108)
|
|
|
—
|
|
|
Total deferred income tax assets
|
$
|
25,826
|
|
|
$
|
48,983
|
|
The Coronavirus Aid Relief and Economic Security ("CARES") Act was signed into law on March 27, 2020, to provide stimulus and relief in response to the COVID-19 pandemic and resulting economic collapse. While the CARES Act provides a number of potential benefits to companies, the Company has made use of the following provisions:
•Payroll Tax Deferral: Allows for the deferral of payment on the Company's share of the 6.2% Social Security tax on wages paid beginning on March 27, 2020, and ending on December 31, 2020. Deferred amounts are payable in two installments, with 50% of such taxes due on December 31, 2021, and the remainder due on December 31, 2022. This resulted in a total deferral of $2.1 million in payroll taxes for the year ended December 31, 2020.
•Employee Retention Credits: Allows for a refundable tax credit for the Company's share of the 6.2% Social Security tax on wages. This tax credit applies to the first $10,000 in qualified wages paid to each employee commencing on March 13, 2020. To be eligible, the Company must (i) have had operations fully or partially suspended because of a shutdown order from a governmental authority related to COVID-19, or (ii) have had gross receipts decline by more than 50% in a calendar quarter when compared to the same quarter in 2019. Qualified wages are limited to wages paid to employees who were not providing services due to the COVID-19 pandemic. This resulted in a tax credit of $1.3 million for the year ended December 31, 2020.
•Alternative Minimum Tax ("AMT") Credit: Allows for an immediate refund of all refundable AMT credits resulting from passage of the CARES Act of 2020. This resulted in accelerated collection of approximately $1.3 million of other current assets that was received during the third quarter of 2020.
Net Operating Losses
As of December 31, 2020, we had approximately $79.7 million of net operating losses available to offset future taxable income, of which approximately $70.6 million were Federal net operating losses with expiration dates that begin expiring in 2026 and will fully expire in 2029. We have an immaterial amount of foreign 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, based on available positive and negative evidence and 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" (meaning a probability of greater than 50%) that all or some portion of the deferred income tax assets will be realized in future periods.
The cumulative loss incurred by the Company over the three-year period ended December 31, 2020, constitutes a piece of objective negative evidence which limits our ability to consider other subjective evidence. In addition, the uncertainty created by COVID-19, has meaningfully limited our ability to consider our projections for future profitability and growth in our assessment of the recoverability of our deferred income tax assets. Based on this evaluation, which we completed utilizing our annual long-range planning and forecasting updates that are traditionally completed in the fourth quarter of each year, we recorded a valuation allowance of $22.1 million, as of December 31, 2020, to reduce net deferred income tax assets as their realization did not meet the more-likely-than-not criterion. COVID-19 has significantly limited our ability to consider projections for future profitability as objectively verifiable positive evidence to support the realizability of deferred tax assets, as the projections rely on subjective estimates and assumptions regarding the market launch of our SaaS product, Spok Go. As a result, a valuation allowance was established against deferred tax assets associated with net operating losses and credits with set expiration dates.
Those deferred income tax assets which are not currently covered by a valuation allowance are those that are indefinite-lived, or whose temporary differences would reverse in the future and may result in the creation of an indefinite-lived deferred income tax asset, which we consider to be realized through future taxable income despite near term uncertainties. The amount of deferred income tax assets considered realizable, however, could be adjusted in the future if objective negative evidence in the form of cumulative losses is no longer present, additional weight is given to subjective evidence such as our projections for future profitability and growth, or other relevant factors arise. We did not record a valuation allowance during 2019 or 2018.
Income Tax Audits
The 2018, 2019 and 2020 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 2017 through 2020, and for the four-year SOL states, the SOL is open for years ending from 2016 through 2020.
NOTE 10 - COMMITMENTS AND CONTINGENCIES
Contractual Obligations
We had no significant commitments and contractual obligations as of December 31, 2020.
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 the potential outcomes from these 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, 2020, were as follows:
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Operating Leases
|
|
For the Year Ended December 31,
|
|
|
|
|
|
|
2021
|
|
$
|
6,236
|
|
|
2022
|
|
4,541
|
|
|
2023
|
|
3,371
|
|
|
2024
|
|
1,879
|
|
|
2025
|
|
1,230
|
|
|
Thereafter
|
|
1,470
|
|
|
Total
|
|
$
|
18,727
|
|
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, 2020, 2019 and 2018, was approximately $17.3 million, $17.7 million and $17.5 million, respectively.
NOTE 11 - EMPLOYEE BENEFIT PLANS
The Company has a savings plan in the U.S., the Spok Holdings, Inc. Savings and Retirement Plan, which qualifies under Section 401(k) of the Internal Revenue Code. Participating U.S. employees may elect to contribute a percentage of their wages, subject to certain limitations. Matching contributions under the savings plan were approximately $1.6 million for the years ended December 31, 2020, 2019, and 2018.
NOTE 12 - RELATED PARTIES
A former member of our Board of Directors, who departed the Board during the third quarter of 2020, also serves as a director for an entity that leases transmission tower sites to the Company. We incurred $3.5 million for the year ended December 31, 2020, and $3.6 million for the years ended December 31, 2019, and 2018 for site rent expense from the entity on which the individual serves as a director for each of the years ended December 31, 2020, 2019 and 2018. These amounts are included in technology operations expenses.
A member of our Board of Directors who was appointed at the beginning of 2020 serves as Chief Information Officer for an entity that is also a customer of the Company. For the year ended December 31, 2020, we recognized revenues of $0.7 million related to contracts from the entity at which the individual is employed.
NOTE 13 - SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Quarterly financial information for the years ended December 31, 2020, and 2019 is summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2020
|
|
(Dollars in thousands except per share amounts)
|
First
Quarter
|
|
Second
Quarter
|
|
Third
Quarter
|
|
Fourth Quarter(3)
|
|
|
|
|
Revenues(1)
|
$
|
37,267
|
|
|
$
|
35,739
|
|
|
$
|
37,693
|
|
|
$
|
37,480
|
|
|
Operating (loss) income(1)
|
(4,108)
|
|
|
3,159
|
|
|
2,732
|
|
|
(24,449)
|
|
|
Net (loss) income(1)
|
(4,539)
|
|
|
3,759
|
|
|
3,165
|
|
|
(46,610)
|
|
|
Basic net (loss) income per common share(2)
|
(0.24)
|
|
|
0.20
|
|
|
0.17
|
|
|
(2.44)
|
|
|
Diluted net (loss) income per common share(2)
|
(0.24)
|
|
|
0.20
|
|
|
0.16
|
|
|
(2.44)
|
|
|
|
|
|
For the Year Ended December 31, 2019
|
|
(Dollars in thousands except per share amounts)
|
First
Quarter
|
|
Second
Quarter
|
|
Third
Quarter
|
|
Fourth Quarter(3)(4)
|
|
|
|
|
Revenues(1)
|
$
|
41,764
|
|
|
$
|
39,525
|
|
|
$
|
39,453
|
|
|
$
|
39,548
|
|
|
Operating income (loss)(1)
|
1,115
|
|
|
(1,992)
|
|
|
(2,692)
|
|
|
(12,239)
|
|
|
Net income (loss)(1)
|
742
|
|
|
(670)
|
|
|
(1,326)
|
|
|
(9,511)
|
|
|
Basic and diluted net income (loss) per common share(2)
|
0.04
|
|
|
(0.03)
|
|
|
(0.07)
|
|
|
(0.50)
|
|
(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, 2020, and 2019 may not equal the total computed for the year.
(3) The Company recorded a goodwill impairment of $25.0 million and $8.8 million during the fourth quarters of 2020 and 2019, respectively. See Note 6 "Goodwill and Intangible Assets, Net" for additional details.
(4) The Company recorded a valuation allowance of $22.1 million during the fourth quarter of 2020. See Note 9 "Income Taxes" for additional details.