UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

PART I. FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

Spok Holdings, Inc. (NASDAQ: SPOK) ("Spok"Spok," "we," "our" or the "Company") through its wholly-owned subsidiary Spok, Inc., is the global leader in healthcare communications. We deliver clinical information to care teams when and where it matters most to improve patient outcomes. Many hospitals rely on the Spok Care Connect platform to enhance workflows for clinicians, support administrative compliance, and provide a better experience for patients. Our customers send over 100 million messages each month through their Spok solutions.

We offer a focused suite of unified critical communication 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, mobile devices and personal computers. We also offer voice mail, personalized greeting, message storage and retrieval, and equipment loss and/or maintenance protection to both one-way and two-way messaging subscribers. These services are commonly referred to as wireless messaging and information services.

We also develop, sell and support enterprise-wide systems for hospitals and other organizations needing to automate, centralize and standardize mission critical 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 complement the market focus of our wireless services outlined above. These products and services are commonly referred to as software solutions and services.

Basis of Presentation

Amounts shown on the condensed consolidated statementsCondensed Consolidated Statement of incomeOperations within the operating expense categories of Cost of Revenue;revenue; Research and Development;development; Service, Rentalrental and Maintenance;maintenance; Selling and Marketing;marketing; and General and Administrativeadministrative are recorded exclusive of depreciation, amortization and accretion.

These items are shown separatelyCondensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and accompanying notes included in the Company's Annual Report on Form 10-K for the condensed consolidated statementsyear ended December 31, 2017 (the “2017 Annual Report”). The Condensed Consolidated Statement of income within operating expenses. Foreign currency translation adjustments were immaterial andOperations for the interim periods presented are not presented separately in our condensed consolidated financial statements and consequently no statementsnecessarily indicative of comprehensive income are presented.the results that may be expected for a full year.

Certain prior period amounts in the condensed consolidated financial statementsCondensed 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. In the fourthfirst quarter 2016,of 2018, the Company concluded that it was appropriatereclassified ($1.5) million from additional paid-in capital to separately state those operating expenses related to research and development. Previously those expenses had been classified under the Service, Rental and Maintenance operating category.accumulated other comprehensive income. Corresponding reclassifications of ($1.1) million were made to the Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2016. This change in classification has no effect on the previously reported Condensed Consolidated Statements of Income for any period.

Use of Estimates

The preparation of these condensed consolidated financial statementsCondensed Consolidated Financial Statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures. On an on-going basis, we evaluate estimates and assumptions, including, but not limited to, those related to the impairment of long-lived assets; intangible assets subject to amortization and goodwill; accounts receivable allowances; revenue recognition; determining standalone selling price ("SSP") of performance obligations; variable consideration; depreciation expense; asset retirement obligations; severance 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.

NOTE 2 - RISKS AND OTHER IMPORTANT FACTORS

See “Item 1A. Risk Factors” of Part II of this Quarterly Report on Form 10-Q (“Quarterly Report”) and "Item 1A. Risk Factors" of Part I of the 20162017 Annual Report, which describesdescribe key risks associated with our operations and industry. 

ASU No. 2016-02 will be effective for fiscal years beginning on January 1, 2019, including the related interim periods within that fiscal year, and while early adoption is permitted, we have elected not to early adopt. We have completed our review of the standard is permitted. Aacceptable transition methods and have selected the modified retrospective transition approach is required for capital and operating leases existing at, or entered into after, the beginningusing a cumulative-effect adjustment to our opening balance of the earliest comparative period presented in the financial statements, with certain practical expedients available.retained earnings as of January 1, 2019. While we are still evaluatingcontinue to evaluate the impact of the potential new standard on our consolidated financial statements,Financial Statements, we expect that upon adoption webelieve the modified retrospective approach will recognizehave a material impact on our ROU assets and lease liabilitiesliabilities. We do not anticipate a material change in how our lease expense is recognized in future Consolidated Statements of Operations as a result of the adoption of ASU No. 2016-02.

Our significant accounting policies are detailed in Note 1 “Organization and Significant Accounting Policies” of the 2017 Annual Report. Significant changes to our accounting policies as a result of adopting ASC 606 are discussed below.

Under the typical payment terms of our software contracts customers will normally pay a material amount of the contract price immediately upon execution of the contract. The remaining payments are required when product is delivered, when services begin and, to a lesser extent, when services are completed. Wireless services are generally billed as incurred on a monthly basis. Our contracts will generally result in billings in excess of revenue recognized, which we present as deferred revenues on the Condensed Consolidated Balance Sheets, primarily due to the receipt of payment in advance of product or services being provided. Amounts billed and due from our customers are classified as receivables on the Condensed 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 Condensed Consolidated Balance Sheets. 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.

More often than not, total consideration will equate to the stated value on the contract taking into consideration any period or term over which services are to be provided, if applicable. However, we could have contracts in which variable consideration is present. It is common for our contracts which include wireless services to contain customer penalties if rental pagers are not returned and fees for usage of services in excess of the contractually allotted amount for a given period. It is also common for our contracts that include professional services to include travel related costs. These are costs which we incur in the normal course of delivering professional services and are generally billable to the customer based on our incurred expenses. These elements of variable consideration are fully constrained when an agreement is initially executed and are generally not considered estimable until the penalties, fees or costs have been incurred or are otherwise known. We include estimated amounts could be material.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.

Our deferred commissions represent payments made to employees in advance of our performance on the related underlying contracts. These costs have been incurred directly in relation with obtaining a material impactcontract. As such, these costs are amortized over the estimated period of benefit. Changes in the balance of total deferred commissions during the nine months ended September 30, 2018 are as follows:

Deferred commissions are included within Prepaid Assets on our consolidated financial statements. the Condensed Consolidated Balance Sheets and commissions expense is included within Selling and marketing on the Condensed Consolidated Statement of Operations.

We have elected not yet determined whether we will early adopt ASU No. 2017-04.to disclose the value of unsatisfied performance obligations for contracts with an original expected length of one year or less and for variable consideration which is allocated entirely to a wholly unsatisfied performance obligation or to a wholly unsatisfied promise to transfer a distinct good or service that forms part of a single performance obligation. The remaining backlog is immaterial to our Condensed Consolidated Financial Statements.

NOTE 46 - CONSOLIDATED FINANCIAL STATEMENT COMPONENTS

Depreciation, Amortization and Accretion

Depreciation, amortization and accretion expenses consisted of the following for the periods stated:

NOTE 57 - INTANGIBLE ASSETS, NET

The net consolidated balance of intangible assets consisted of the following at September 30, 2017:2018:

NOTE 68 - ASSET RETIREMENT OBLIGATIONS

The components of the changes in the asset retirement obligation liabilities were:

Increases and reductions other than accretion, reclassification and amounts paid primarily relate to changes in estimate of the underlying liability, specifically as it relates to updates in estimated costs to remove a transmitter and the estimated timing of removal. The cost associated with the estimated removal costs and timing refinements due to ongoing network rationalization activities is expected to accrete to a total liability of $9.0 million. The total estimated liability is based on the transmitter locations remaining after we have consolidated the number of networks we operate and assume the underlying leases continue to be renewed to that future date.

Accretion expense was $0.4 million and $0.5 million for the nine months ended September 30, 20172018 and 2016, respectively.2017. Accretion expense related solely to asset retirement obligations and was recorded based on the interest method.

NOTE 79 - STOCKHOLDERS' EQUITY

General

At September 30, 20172018 and December 31, 2016,2017, we had no stock options outstanding.

At September 30, 20172018 and December 31, 2016,2017, there were 19,977,31819,449,319 and 20,525,61420,135,514 shares of common stock outstanding, respectively, and no shares of preferred stock outstanding.

The following table details our cash dividend payments madedividends declared in 2017.2018. Cash dividends paid as disclosed in the condensed consolidated statementsCondensed Consolidated Statement of cash flowsCash Flows for the nine months ended September 30, 20172018 and 20162017 include previously declared cash dividends on shares of vested restricted common stock ("restricted stock") issued to our non-executive directors and dividends related to vested restricted stock units ("RSUs") issued to eligible employees. Cash dividends on RSUs and restricted stock have been accrued and are paid when the applicable vesting conditions are met. Accrued cash dividends on forfeited restricted stock and RSUs are also forfeited.

(1) The total paymentdeclared reflects the cash dividends paiddeclared in relation to common stock and vested restricted stock.unvested RSUs.

Common Stock Repurchase Program

On April 26, 2017,In February 2018, the Company's Board of Directors authorized the repurchase of up to $10.0 million of the Company's common stock through 2017December 31, 2018 on the open market or in privately negotiated transactions. The Company usedAs of July 2018 the entirerepurchase authority had been exhausted. In August 2018 the Company's Board of Directors authorized the repurchase of up to an additional $10.0 million of repurchase authority by June 30, 2017.the Company's common stock through December 31, 2018 on the open market or in privately negotiated transactions. The following table presents information with respect to purchases made by the Company during the nine months ended September 30, 2017:2018:

Net (Loss) Income per Common Share

Basic net (loss) income per common share is computed on the basis of the weighted average common shares outstanding. Diluted net (loss) income 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 outstanding restricted stock and RSUs, which are treated as contingently issuable shares, using the “treasury stock” method.

The Company has determined, based on the provisions of the 2015 Long-Term Incentive Plan ("2015 LTIP"), that unvested RSUs do not currently meet, nor have they met since issuance, the criteria to be considered dilutive. Therefore, we have excluded them from the calculation of both diluted net income per common share as well as the diluted weighted average shares of common stock and common stock equivalents for the three and nine months ended September 30, 2017 and removed them from the comparative information for the three and nine months ended September 30, 2016. This correction is immaterial to our financial statements and corresponding disclosures.

On March 23, 2012, our Board of Directors adopted the Spok Holdings, Inc. 2012 Equity Incentive Award Plan (the “2012 Equity Plan”) that was subsequently approved by our stockholders on May 16, 2012. A total of 2,194,986 shares of common stock have been reserved for issuance under this plan. Awards under the 2012 Equity Plan may be in the form of stock options, common stock, restricted stock, RSUs, performance awards, dividend equivalents, deferred stock, deferred stock units, or stock appreciation rights. Restricted stock awards generally vest one year from the date of grant. Related dividends accumulate during the vesting period and are paid at the time of vesting. Contingent 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 equivalents rights generally accompany each RSU award and those rights accumulate and vest along with the underlying RSU.

The following table summarizes the activities under the 2012 Equity Incentive Award Plan ("2012 Equity Plan") from January 1, 20172018 through September 30, 2017:2018:

Of the 674,013 unvested RSUs with a grant date fair value of $2.2 million. An additional 10,039 shares were issued to eligible employees who were promoted or joined the Company during the nine months endedand restricted stock outstanding at September 30, 2017. Our Board2018, 354,974 RSUs include contingent performance requirements for vesting purposes. At September 30, 2018, there was $4.6 million of Directors also approved that future cash dividendsunrecognized net compensation cost related to the RSUs willand restricted stock, which is expected to be set aside and paid in cash to each eligible employee when the RSUs are converted into sharesrecognized over a weighted average period of common stock. These RSUs vest one third on December 31, 2017, December 31, 2018 and December 31, 2019. RSUs would be converted into shares of common stock on the earlier of a change in control of the Company (as defined in the 2012 Equity Plan) or on or after the first business day following the vesting date but in no event later than 60 days following the vesting date. Any unvested RSUs awarded under the 2017 time based grant and the related cash dividends are forfeited if the participant terminates employment with the Company. (For additional details regarding stock compensation refer to Note 9, "Stock Based Compensation".)

The Company's ESPP allows employees to be issued from timepurchase shares of common stock at a discounted rate, subject to time in connection with purchases under the Spok Holdings, Inc. 2016 Employee Stock Purchase Plan ("ESPP"). Shares were first offered for purchase under the ESPP during the third quarter of 2016.plan limitations. Under the ESPP, eligible participants can voluntarily elect to have contributions withheld from their pay for the duration of an offering period, subject to the ESPP limits. At the end of an offering period, contributions will be used to purchase the Company's common stock at a discount to the market price based on the first or last day of the offering period, whichever is lower. Participants are required to hold common stock for a minimum period of two years from the grant date. Participants will begin earning dividends on shares after the purchase date. Each offering period will generally last for no longer than six months. Once an offering period begins, participants cannot adjust their withholding amount. If a participant chooses to withdraw, any previously withheld funds will be returned to the participant, with no stock purchased, and that participant will be eligible to participate in the ESPP at the next offering period. If the participant terminates employment with the Company during the offering period, all contributions will be returned to the employee and no stock will be purchased at a discounted rate.

No shares wereThe Company uses the Black-Scholes model to calculate the fair value of the common stock to be purchased each offering period on their offer date. The Black-Scholes model requires the use of estimates for the expected term, the expected volatility of the underlying common stock over the expected term, the risk-free interest rate and the expected dividend payment.

The following table summarizes the activities under the ESPP from January 1, 20172018 through September 30, 2017:2018:

We record all stock-based awards, which consist of RSUs, restricted stock and the option to purchase common stock under the ESPP, at fair value as of the grant date. Stock based compensation expense is recognized based on a straight-line amortization basis over the respective service period. Forfeitures and withdrawals are accounted for on an as incurred basis.incurred.

The following table reflects the items for stock based compensation expense on the condensed consolidated statementsCondensed Consolidated Statement of incomeOperations for the periods stated:

In the fourth quarter of 2016 we determined that only 50% of the 2015 and 2016 performance grants made under the 2015 LTIP are expected to vest based on the related performance criteria and our assessment of the anticipated future performance applied to the performance criteria. As such, expenses listed in the table above reflect only the portion of grants and related expense that we anticipate will vest for those awards.

NOTE 1011 - COMMITMENTS AND CONTINGENCIES

There have been no material changes during the nine months ended September 30, 20172018 to the commitments and contingencies previously reported in the 20162017 Annual Report.Report and our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2018.

NOTE 1112 - RELATED PARTIES