Spok(SPOK) - 2021 Q4 - Annual Report

Part I Business Spok is a global leader in healthcare communications, focusing on established wireless and software solutions after discontinuing its Spok Go platform - Spok is a global leader in healthcare communications, delivering clinical information to care teams to improve patient outcomes, with a primary focus on hospitals[16] - In February 2022, the company announced a new strategic plan to discontinue the Spok Go platform and eliminate associated costs, shifting focus to its established business lines[18] - The company's business is heavily dependent on the U.S. healthcare industry, making it vulnerable to economic pressures, regulatory changes, and events like the COVID-19 pandemic[21][119] - Wireless services are regulated by the FCC, while certain software products connecting to medical devices are regulated by the FDA, and the company adheres to data privacy laws like HIPAA[74][81][82] Our Strategy The company's February 2022 strategic plan prioritizes generating free cash flow and returning capital to stockholders through established business lines - The overarching strategy is to prioritize free cash flow generation and return capital to stockholders by maximizing revenue from established business lines[35] - Strategic goals include acquiring new customers, expanding existing relationships, minimizing wireless revenue attrition, enhancing existing software applications with targeted investment, and managing expenses[36][38][40][41] - In February 2022, the Board authorized an increased quarterly dividend to $0.3125 per share and a new share repurchase program of up to $10.0 million[42] Products and Services Spok offers wireless messaging and the Spok Care Connect® Suite software, with professional services for implementation and support Revenue Source Breakdown (2021) | Revenue Source | % of Total Revenue (2021) | | :--- | :--- | | Wireless Products & Services | 55% | | Software Maintenance | 27% | | Professional Services | 12% | - Launched the new GenA pager in November 2021, a one-way alphanumeric pager with advanced features like a high-resolution ePaper display, HIPAA-compliant encryption, and over-the-air programming, expected to help slow wireless revenue attrition[47][48][49] - The Spok Care Connect® Suite is the core software offering, providing solutions for healthcare console operations, web-based directories, on-call scheduling, clinical alerting (e.Notify), and secure mobile communications (Spok Mobile®)[51][52][53][54] Competition Spok faces intense competition in wireless messaging and software, with potential threats from large EMR and technology firms entering the healthcare communication market - Direct competitors for wireless messaging include American Messaging Service, LLC, regional providers, and major mobile telephone companies like AT&T and Verizon[62] - Software competitors include companies such as Vocera Communications and NextGen Healthcare, though Spok believes its integrated product suite provides a competitive advantage[64][65][69] - The company faces a potential threat from larger EMR companies (e.g., Epic, Cerner) and major tech corporations (e.g., Microsoft, Oracle) that may enter the clinical communication market, highlighted by recent large-scale acquisitions[65][66] Human Capital Spok's workforce decreased to 563 FTEs by year-end 2021, with an additional 175 positions planned for elimination in 2022 due to restructuring Employee Metrics | Metric | Value | | :--- | :--- | | Full-Time Employees (FTEs) at Dec 31, 2021 | 563 | | Full-Time Employees (FTEs) at Dec 31, 2020 | 602 | | Planned Position Eliminations (2022) | ~175 | - The workforce reduction is part of the restructuring announced in February 2022 and will primarily affect R&D, professional services, sales & marketing, and back-office support[68] Risk Factors The company faces risks from its strategic plan, declining wireless revenue, U.S. healthcare industry dependence, asset impairment, cybersecurity threats, and complex regulations - The new strategic plan, including the discontinuation of Spok Go and associated restructuring, may fail to deliver expected results and could disrupt operations[93][94] - The business is highly dependent on the U.S. healthcare industry, making it vulnerable to economic pressures, regulatory changes, and events like the COVID-19 pandemic affecting hospital spending[106][111][119] - The company faces risks of asset impairment, having recorded a $15.7 million charge for capitalized software development in 2021 and a $25.0 million goodwill impairment in 2020[138] - Cybersecurity threats, system disruptions, and data breaches pose a significant risk, potentially leading to data loss, reputational damage, and legal liability, especially given the handling of sensitive health information[131][133][134] Unresolved Staff Comments As of February 17, 2022, the company reported no unresolved comments from the SEC staff - The company reports no unresolved SEC staff comments as of February 17, 2022[153] Properties Spok's corporate headquarters is a leased 26,000 sq ft facility in Alexandria, VA, with 2,836 leased transmitter sites and 3,468 active transmitters for its wireless network - The corporate headquarters is a leased 26,000 sq. ft. space in Alexandria, VA, with the lease expiring in September 2026[154] - As of December 31, 2021, the company leased approximately 2,836 transmitter sites and operated 3,468 active transmitters for its wireless network[156] Legal Proceedings The company is involved in various lawsuits in the normal course of business, none of which are expected to have a material adverse impact - The company is involved in various lawsuits arising from the normal course of business, which are not expected to have a material adverse impact[454] Mine Safety Disclosures This item is not applicable to the company's operations - Not applicable[159] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Spok's common stock trades on NASDAQ, with the company increasing its quarterly dividend and authorizing a $10 million share repurchase program in 2022, while maintaining transfer restrictions to protect deferred tax assets - The company's common stock is listed on the NASDAQ National Market under the trading symbol 'SPOK'[160] - In February 2022, the Board increased the quarterly dividend to $0.3125 per share and authorized a share repurchase program of up to $10 million[162][166] - The company's charter contains transfer restrictions for 5% stockholders to prevent an ownership change that could limit the use of its deferred income tax assets under IRC Section 382[167][168] Management's Discussion and Analysis of Financial Condition and Results of Operations In FY2021, total revenue declined to $142.2 million, resulting in operating and net losses, driven by a $15.7 million software impairment, with a new strategic plan anticipating $6.4 million to $10.2 million in 2022 restructuring charges - Announced a new strategic business plan in February 2022 to discontinue Spok Go, which is expected to result in one-time pre-tax restructuring charges of approximately $6.4 million to $10.2 million in 2022[173][174] Financial Highlights (in thousands) | (Dollars in thousands) | 2021 | 2020 | | :--- | :--- | :--- | | Total revenue | $142,153 | $148,180 | | Operating loss | $(27,718) | $(22,665) | | Net loss | $(22,180) | $(44,225) | | Impairment Charges | $15,663 | $25,007 | - Cash and cash equivalents plus short-term investments totaled $59.6 million at year-end 2021, with net cash provided by operating activities at $8.0 million[243][251] Results of Operations In FY2021, total revenue decreased by $6.0 million (4.1%), driven by declines in both wireless and software revenue, leading to a $27.7 million operating loss after a $15.7 million software impairment Revenue Performance (in thousands) | Revenue Stream (in thousands) | 2021 | 2020 | Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Wireless revenue | $78,826 | $83,593 | $(4,767) | (5.7)% | | Software revenue | $63,327 | $64,587 | $(1,260) | (2.0)% | | Total revenue | $142,153 | $148,180 | $(6,027) | (4.1)% | - The wireless revenue attrition rate was 5.7% in 2021, up from 5.2% in 2020, though the attrition rate for recurring paging revenue improved to 5.1% from 6.1%[183] - Operating expenses increased primarily due to the curtailment of 2020 cost mitigation measures (e.g., reduced work schedules) and costs related to the strategic alternatives review[184] - A capitalized software development impairment charge of $15.7 million was recognized in 2021, while a goodwill impairment charge of $25.0 million was recognized in 2020[233][234] Liquidity and Capital Resources As of December 31, 2021, Spok held $59.6 million in cash and investments, with net cash from operations at $8.0 million, anticipating a decrease in 2022 due to restructuring costs Cash and Investments (in thousands) | (Dollars in thousands) | Dec 31, 2021 | | :--- | :--- | | Cash and cash equivalents | $44,583 | | Short-term investments | $14,999 | | Total Cash & Investments | $59,582 | Cash Flow Summary (in thousands) | Cash Flow (in thousands) | 2021 | 2020 | | :--- | :--- | :--- | | Net cash provided by operating activities | $7,968 | $26,163 | | Net cash used in investing activities | $(225) | $(14,571) | | Net cash used in financing activities | $(11,753) | $(10,373) | - The company expects to use cash on hand to fund working capital, operations, investments, and capital returns, with cash expected to decrease in 2022 due to restructuring payments of $6.4 million to $10.2 million[245] Critical Accounting Estimates Critical accounting estimates involve significant judgment in revenue recognition, impairment testing for goodwill and long-lived assets, and assessing the realizability of deferred tax assets - Revenue recognition requires significant judgment in identifying performance obligations and estimating standalone selling prices (SSP) to allocate transaction prices, especially for complex software contracts[264][265] - Goodwill and long-lived asset impairment testing involves significant judgment in estimating fair value, which led to a $15.7 million impairment of capitalized software in Q4 2021 related to Spok Go[270][272][274] - Assessing the realizability of deferred tax assets requires significant judgment regarding future taxable income, with the company maintaining a valuation allowance of $24.2 million at year-end 2021 due to cumulative losses and economic uncertainty[269][240] Quantitative and Qualitative Disclosures About Market Risk The company reports no material exposure to market risks, including interest rate risk due to no outstanding debt, and immaterial foreign currency exchange rate risk due to limited international business - The company had no outstanding debt at December 31, 2021, and therefore has no material interest rate risk[278] - Exposure to foreign currency exchange rate fluctuations is considered immaterial as business outside the U.S. is limited[279] Financial Statements and Supplementary Data This section provides an index to the company's consolidated financial statements and supplementary data, beginning on page F-1 - This item contains the index to the Consolidated Financial Statements, which are included from page F-1 onwards[281][282] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants regarding accounting principles, practices, or financial statement disclosure - There are no reportable events under this item[283] Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2021, a conclusion concurred with by the independent auditor - Management concluded that disclosure controls and procedures were effective as of December 31, 2021[284] - Management concluded that internal control over financial reporting was effective as of December 31, 2021, an assessment audited and concurred with by Grant Thornton LLP[287] Other Information There is no other information to report for this item - None[289] Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This item is not applicable to the company - Not applicable[290] Part III Directors, Executive Officers and Corporate Governance Information regarding directors, executive officers, and corporate governance is incorporated by reference from the company's 2022 Proxy Statement - Information for this item is incorporated by reference from the company's 2022 Proxy Statement[292][293] Executive Compensation Information regarding executive compensation is incorporated by reference from the company's 2022 Proxy Statement - Information for this item is incorporated by reference from the company's 2022 Proxy Statement[292][294] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information regarding security ownership by major shareholders and management is incorporated by reference from the company's 2022 Proxy Statement - Information for this item is incorporated by reference from the company's 2022 Proxy Statement[292][294] Certain Relationships and Related Transactions, and Director Independence Information regarding related party transactions and director independence is incorporated by reference from the company's 2022 Proxy Statement - Information for this item is incorporated by reference from the company's 2022 Proxy Statement[292][295] Principal Accountant Fees and Services Information detailing fees paid to the independent registered public accounting firm is incorporated by reference from the company's 2022 Proxy Statement - Information for this item is incorporated by reference from the company's 2022 Proxy Statement[292][296] Part IV Exhibit and Financial Statement Schedules This section lists all financial statements, schedules, and exhibits filed as part of the Form 10-K - This item lists all financial statements, schedules, and exhibits filed with the Form 10-K[298] Form 10-K Summary No Form 10-K summary was provided for this report - None[300] Financial Statements and Notes Consolidated Financial Statements FY2021 consolidated financial statements show total assets of $248.2 million, a net loss of $22.2 million, and cash and short-term investments of $59.6 million Consolidated Balance Sheet Highlights (in thousands) | (Dollars in thousands) | Dec 31, 2021 | Dec 31, 2020 | | :--- | :--- | :--- | | Total Assets | $248,154 | $277,291 | | Goodwill | $99,175 | $99,175 | | Capitalized software development, net | $0 | $10,179 | | Total Liabilities | $74,463 | $76,678 | | Total Stockholders' Equity | $173,691 | $200,613 | Consolidated Income Statement Highlights (in thousands) | (Dollars in thousands, except per share) | 2021 | 2020 | | :--- | :--- | :--- | | Total Revenue | $142,153 | $148,180 | | Net Loss | $(22,180) | $(44,225) | | Diluted Net Loss Per Share | $(1.14) | $(2.32) | Notes to Consolidated Financial Statements The notes detail accounting policies, including the February 2022 restructuring, a $15.7 million software impairment, revenue disaggregation, lease obligations, equity plans, and a $24.2 million valuation allowance against deferred tax assets - Note 3 details the subsequent event of the February 2022 restructuring, including the discontinuation of Spok Go and expected charges of $6.4 million to $10.2 million[392][393] - Note 7 explains the $15.7 million impairment charge against capitalized software development costs in Q4 2021, which reduced the asset's carrying value to zero, triggered by unsatisfactory sales and reduced projections for Spok Go[408][410] - Note 10 discloses a valuation allowance of $24.2 million against deferred tax assets as of Dec 31, 2021, due to a three-year cumulative loss history limiting the ability to project future profitability[443][446] - Note 9 details the company's equity plans, including the authorization of a new $10.0 million share repurchase program in February 2022 and an increase in the quarterly dividend to $0.3125 per share[420][421]