Spok(US:SPOK)2023-02-23 21:04Part I Business Spok Holdings, Inc. is a global leader in healthcare communications, focusing on its core Spok Care Connect and wireless services after a strategic shift in February 2022 - In February 2022, the company announced a new strategic business plan to discontinue the Spok Go platform, rightsize the organization, and focus on generating cash flow from its core Spok Care Connect and Wireless business lines20 - The company's primary market is the U.S. healthcare industry, facing rising costs and a shift to value-based purchasing, increasing demand for efficient clinical communication tools192223 Revenue Contribution by Business Line (2020-2022) | Business Line | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Wireless Products & Services | 56% | 55% | 56% | | Professional Services | 9% | 12% | 12% | | Maintenance (Software Support) | 27% | 27% | 26% | - The company faces intense competition in its wireless segment from major mobile telephone companies and in software from specialized firms and large EMR companies687273 - As part of its 2022 restructuring, the company reduced FTE employees from 563 to 376, eliminating 176 positions primarily in R&D and support functions7577 Risk Factors The company faces risks from declining wireless revenue, healthcare industry reliance, cybersecurity threats, and data privacy regulations - The ongoing decline in wireless subscribers and revenue is a primary risk, with profitability dependent on reducing operating expenses in line with this erosion115118 - A significant portion of revenue (over 75%) comes from the U.S. healthcare industry, making the company vulnerable to economic pressures, regulatory changes, and events like the COVID-19 pandemic121113 - The company is subject to complex data privacy regulations, including HIPAA, HITECH, and GDPR, with non-compliance potentially leading to significant liability and harm to marketability142143146 - The ability to realize significant deferred income tax assets is dependent on achieving sufficient future taxable income, with failure materially affecting the company's financial condition138 - Cybersecurity threats, including unauthorized intrusions and data breaches, pose a material risk, potentially leading to reputational damage, litigation, and financial liabilities135137 Unresolved Staff Comments The company reported no unresolved comments from the SEC staff as of February 23, 2023 - As of February 23, 2023, Spok had no unresolved SEC staff comments158 Properties Spok's corporate headquarters is in Alexandria, Virginia, with numerous leased facilities and 2,738 wireless transmitter sites - The corporate headquarters is in Alexandria, Virginia, in a leased space of approximately 26,000 square feet with a lease expiring on September 30, 2026159 - As of December 31, 2022, the company leased 2,738 transmitter sites and operated 3,325 active transmitters for its wireless services161 Legal Proceedings Legal proceedings are disclosed in Note 11, with no expected material adverse impact from current lawsuits - The company refers to Note 11 for information on legal proceedings, stating that potential outcomes from current lawsuits are not expected to have a material adverse impact162437 Mine Safety Disclosures This item is not applicable to the company - Not applicable163 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 dividends, a share repurchase program, and transfer restrictions for deferred tax assets Dividends Declared per Share | Year | Dividend per Share | | :--- | :--- | | 2022 | $1.250 | | 2021 | $0.500 | | 2020 | $0.500 | - In February 2022, the Board of Directors authorized a share repurchase program for up to $10 million of the company's common stock, though no shares were repurchased under this program in 2022170169 - The company's Certificate of Incorporation includes transfer restrictions for 5% stockholders to prevent an ownership change that could limit the use of its deferred income tax assets under IRC Section 382171172 Management's Discussion and Analysis of Financial Condition and Results of Operations In 2022, revenue decreased, but significant operating expense reductions from restructuring led to net income and solid liquidity - The February 2022 strategic plan involved discontinuing Spok Go, eliminating associated costs, and restructuring the business, leading to the elimination of 176 positions and allowing for an increased quarterly dividend177 Key Financial Results (2022 vs. 2021) | Metric (in thousands) | 2022 | 2021 | Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Total Revenue | $134,534 | $142,153 | ($7,619) | (5.4)% | | Total Operating Expenses | $134,296 | $169,871 | ($35,575) | (20.9)% | | Operating Income (Loss) | $238 | ($27,718) | $27,956 | 100.9% | | Net Income (Loss) | $21,856 | ($22,180) | $44,036 | 198.5% | - The significant decrease in operating expenses was driven by business restructuring, including lower R&D costs, reduced personnel expenses, and the non-recurrence of a $15.7 million software impairment charge from 2021, partially offset by $7.3 million in one-time restructuring charges in 2022183226 - The company recorded a $20.9 million benefit from income taxes in 2022, primarily due to a $21.9 million reduction in the valuation allowance against its deferred tax assets, reflecting improved future profitability projections post-restructuring184232235 - Net cash provided by operating activities was $6.5 million in 2022, with $26.2 million used in financing activities, mainly for $25.0 million in cash dividends to stockholders243245248 Quantitative and Qualitative Disclosures About Market Risk The company reports minimal market risk due to no outstanding debt and immaterial foreign currency exposure - The company has no outstanding borrowings as of December 31, 2022, and therefore has no associated interest rate risk269 - Exposure to foreign currency exchange rate risk is immaterial as the company conducts limited business outside the U.S270 Financial Statements and Supplementary Data This section provides an index to the company's consolidated financial statements and supplementary data, starting on page F-1 - This item contains the index to the audited consolidated financial statements, which are included from page F-1 onwards272273 Controls and Procedures Management and auditors concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2022 - The principal executive officer and principal financial officer concluded that the company's disclosure controls and procedures were effective as of December 31, 2022275 - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2022, a conclusion audited and affirmed by Grant Thornton LLP278 Part III Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the 2023 Proxy Statement - Information regarding directors, executive officers, and corporate governance is incorporated by reference from the 2023 Proxy Statement283 Executive Compensation Information on executive compensation is incorporated by reference from the 2023 Proxy Statement - Information regarding executive compensation is incorporated by reference from the 2023 Proxy Statement284 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information on security ownership by beneficial owners and management is incorporated by reference from the 2023 Proxy Statement - Information regarding security ownership is incorporated by reference from the 2023 Proxy Statement284 Certain Relationships and Related Transactions, and Director Independence Information on related party transactions and director independence is incorporated by reference from the 2023 Proxy Statement - Information regarding related transactions and director independence is incorporated by reference from the 2023 Proxy Statement285 Principal Accountant Fees and Services Information on principal accountant fees and services is incorporated by reference from the 2023 Proxy Statement - Information regarding principal accountant fees and services is incorporated by reference from the 2023 Proxy Statement286 Part IV Exhibit and Financial Statement Schedules This section lists all financial statements and exhibits filed as part of the Form 10-K - This item lists all financial statements and exhibits filed with the Form 10-K288 Financial Statements and Notes Reports of Independent Registered Public Accounting Firm Grant Thornton LLP issued unqualified opinions on financial statements and internal controls, with deferred tax asset realizability as a critical audit matter - The auditor, Grant Thornton LLP, issued an unqualified (clean) opinion on the company's financial statements and its internal control over financial reporting as of December 31, 2022297310 - The audit identified the 'Realizability of Deferred Tax Assets and Valuation Allowance Assessment' as a critical audit matter, highlighting the complexity and significant judgment required by management in this area301302303 Consolidated Financial Statements The consolidated financial statements show a net income of $21.9 million in 2022, driven by reduced expenses and a tax benefit Consolidated Balance Sheet Highlights (As of Dec 31) | (in thousands) | 2022 | 2021 | | :--- | :--- | :--- | | Cash and cash equivalents | $35,754 | $44,583 | | Total Current Assets | $70,051 | $94,053 | | Goodwill | $99,175 | $99,175 | | Deferred income tax assets, net | $52,398 | $31,653 | | Total Assets | $244,477 | $248,154 | | Total Liabilities | $72,399 | $74,463 | | Total Stockholders' Equity | $172,078 | $173,691 | Consolidated Statement of Operations Highlights (Year Ended Dec 31) | (in thousands) | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Total Revenue | $134,534 | $142,153 | $148,180 | | Operating Income (Loss) | $238 | ($27,718) | ($22,665) | | Net Income (Loss) | $21,856 | ($22,180) | ($44,225) | | Diluted EPS | $1.09 | ($1.14) | ($2.32) | Notes to Consolidated Financial Statements The notes detail the February 2022 restructuring, revenue recognition, deferred tax asset valuation allowance reduction, goodwill, and dividends - The February 2022 restructuring resulted in $7.3 million in total costs, comprising $6.0 million in severance and $1.3 million in contractual terminations382 - As of December 31, 2022, the company had $44.0 million in remaining performance obligations, with $33.1 million expected to be recognized as revenue in the next 12 months388 - Based on improved profitability projections following its restructuring, the company reduced the valuation allowance on its deferred tax assets by $21.9 million as of December 31, 2022365431 - The company had goodwill of $99.2 million as of December 31, 2022, with no impairment recognized in 2022 or 2021, following a $25.0 million impairment in 2020398353 - The Board declared dividends of $1.25 per share in 2022, a significant increase from $0.50 per share in 2021 and 2020406