UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)



x	Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended ~~September 30, 2019~~March 31, 2020



¨	Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from to

Commission File Number: 001-32358

SPOK HOLDINGS, INC.

(Exact name of registrant as specified in its charter)



DELAWARE		16-1694797
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)



6850 Versar Center, Suite 420
Springfield, Virginia		22151-4148
(Address of principal executive offices)		(Zip Code)

(800) 611-8488

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:



Title of each class	Trading Symbol	Name of each exchange on which registered
Common Stock, par value $0.0001 per share	SPOK	NASDAQ National Market®

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.



Large accelerated filer	¨	Accelerated filer	x

Non-accelerated filer	¨	Smaller reporting company	¨

		Emerging growth company	¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.			¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

~~18,854,381~~19,005,209 shares of the registrant’s common stock (par value $0.0001 per share) were outstanding as of ~~October 18, 2019.~~April 24, 2020.

SPOK HOLDINGS, INC.

QUARTERLY REPORT ON FORM 10-Q

INDEX



			Page
PART I.	FINANCIAL INFORMATION
	Item 1.	Condensed Consolidated Financial Statements
		Condensed Consolidated Balance Sheets as of ~~September 30, 2019~~March 31, 2020 (Unaudited) and December 31, ~~2018~~2019	2
		Condensed Consolidated Statements of Operations for the Three ~~and Nine~~ Months Ended ~~September 30,~~March 31, 2020 and 2019 ~~and 2018~~ (Unaudited)	3
		Condensed Consolidated Statements of Comprehensive ~~Loss~~(Loss) Income for the Three ~~and Nine~~ Months Ended ~~September 30,~~March 31, 2020 and 2019 ~~and 2018~~ (Unaudited)	4
		Condensed Consolidated Statements of Stockholders' Equity for the Three ~~and Nine~~ Months Ended ~~September 30,~~March 31, 2020 and 2019 ~~and 2018~~ (Unaudited)	5
		Condensed Consolidated Statements of Cash Flows for the ~~Nine~~Three Months Ended ~~September 30,~~March 31, 2020 and 2019 ~~and 2018~~ (Unaudited)	76
		Unaudited Notes to Condensed Consolidated Financial Statements	87
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	2017
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	2926
	Item 4.	Controls and Procedures	2926
PART II.	OTHER INFORMATION
	Item 1.	Legal Proceedings	3027
	Item 1A.	Risk Factors	3027
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	3127
	Item 6.	Exhibits	3128
Signatures

PART I. FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SPOK HOLDINGS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS


(in thousands)	September 30, 2019			December 31, 2018			March 31, 2020			December 31, 2019
ASSETS	(Unaudited)						(Unaudited)
Current assets:
Cash and cash equivalents	$	49,319		$	83,343		$	42,284		$	47,361
Short-term investments	29,870			3,963			29,906			29,899
Accounts receivable, net	31,071			32,386			27,216			30,174
Prepaid expenses and other	9,975			9,578
Inventory	995			1,708
Prepaid expenses							8,411			7,517
Other current assets							2,433			2,714
Total current assets	121,230			130,978			110,250			117,665
Non-current assets:
Property and equipment, net	9,603			10,354			7,655			8,000
Operating lease right-of-use assets	16,345			—			15,591			16,317
Capitalized software development							1,705			—
Goodwill	133,031			133,031			124,182			124,182
Intangible assets, net	3,542			5,417			2,292			2,917
Deferred income tax assets	46,961			46,484			47,486			48,983
Other non-current assets	1,319			1,448			1,641			1,808
Total non-current assets	210,801			196,734			200,552			202,207
Total assets	$	332,031		$	327,712		$	310,802		$	319,872
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	3,605		$	2,010		$	4,003		$	3,615
Accrued compensation and benefits	11,465			11,348			10,403			11,680
Accrued taxes	1,605			1,822			1,419			1,529
Deferred revenue	27,668			26,106			25,265			25,944
Operating lease liabilities	5,303			—			5,236			5,437
Other current liabilities	2,531			3,662			3,629			2,978
Total current liabilities	52,177			44,948			49,955			51,183
Non-current liabilities:
Asset retirement obligations	6,756			6,513			6,109			6,061
Operating lease liabilities	11,658			—			10,972			11,575
Other non-current liabilities	643			1,697			986			959
Total non-current liabilities	19,057			8,210			18,067			18,595
Total liabilities	71,234			53,158			68,022			69,778
Commitments and contingencies (Note 12)
Stockholders' equity:
Preferred stock	$	—		$	—		$	—		$	—
Common stock	2			2			2			2
Additional paid-in capital	85,614			90,559			87,153			86,874
Accumulated other comprehensive loss	(1,499		)	(1,301		)	(1,821		)	(1,601		)
Retained earnings	176,680			185,294			157,446			164,819
Total stockholders’ equity	260,797			274,554			242,780			250,094
Total liabilities and stockholders' equity	$	332,031		$	327,712		$	310,802		$	319,872

The accompanying notes are an integral part of these ~~unaudited~~ Condensed Consolidated Financial Statements.

SPOK HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS


	For the Three Months Ended September 30,						For the Nine Months Ended September 30,						For the Three Months Ended March 31,
(Unaudited and in thousands except share and per share amounts)	2019			2018			2019			2018			2020			2019
Revenue:
Wireless	$	21,814		$	23,259		$	66,552		$	71,186		$	21,386		$	22,610
Software	17,639			19,217			54,189			55,032			15,881			19,154
Total revenue	39,453			42,476			120,741			126,218			37,267			41,764
Operating expenses:
Cost of revenue	7,190			8,141			22,021			23,635			8,264			7,592
Research and development	7,437			5,934			20,411			17,845			5,449			6,167
Technology operations	7,805			7,787			23,345			23,235			7,904			7,674
Selling and marketing	5,595			5,716			17,279			18,279			6,361			6,110
General and administrative	11,813			13,673			34,255			38,377			11,251			10,747
Depreciation, amortization and accretion	2,305			2,785			6,999			8,168			2,146			2,359
Total operating expenses	42,145			44,036			124,310			129,539			41,375			40,649
Operating loss	(2,692		)	(1,560		)	(3,569		)	(3,321		)
Operating (loss) income													(4,108		)	1,115
Interest income	399			384			1,300			1,009			363			449
Other income (expense)	163			(110		)	528			(56		)
Loss before income taxes	(2,130		)	(1,286		)	(1,741		)	(2,368		)
Benefit from income taxes	804			446			486			701
Net loss	$	(1,326	)	$	(840	)	$	(1,255	)	$	(1,667	)
Basic and diluted net loss per common share	$	(0.07	)	$	(0.04	)	$	(0.07	)	$	(0.09	)
Basic and diluted weighted average common shares outstanding	19,086,811			19,456,149			19,166,812			19,742,869
Other expense													(137		)	(236		)
(Loss) income before income taxes													(3,882		)	1,328
Provision for income taxes													(657		)	(586		)
Net (loss) income													$	(4,539	)	$	742
Basic and diluted net (loss) income per common share													$	(0.24	)	$	0.04
Basic weighted average common shares outstanding													18,958,716			19,196,970
Diluted weighted average common shares outstanding													18,958,716			19,356,712
Cash dividends declared per common share	$	0.125		$	0.125		$	0.375		$	0.375		$	0.125		$	0.125

The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.

SPOK HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS


	For the Three Months Ended September 30,						For the Nine Months Ended September 30,						For the Three Months Ended March 31,
	2019			2018			2019			2018			2020			2019
(Unaudited and in thousands)
Net loss	$	(1,326	)	$	(840	)	$	(1,255	)	$	(1,667	)
Net (loss) income													$	(4,539	)	$	742
Other comprehensive loss, net of tax:
Foreign currency translation adjustments	(105		)	(367		)	(198		)	(965		)	(220		)	(60		)
Other comprehensive loss	(105		)	(367		)	(198		)	(965		)	(220		)	(60		)
Comprehensive loss	$	(1,431	)	$	(1,207	)	$	(1,453	)	$	(2,632	)
Comprehensive (loss) income													$	(4,759	)	$	682

The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.

SPOK HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY


(Unaudited and in thousands except share amounts)	Outstanding Common Shares		Common Stock		Additional Paid-In Capital & Accumulated Other Comprehensive Loss			Retained Earnings			Total Stockholders’ Equity			Outstanding Common Shares		Common Stock		Additional Paid-In Capital & Accumulated Other Comprehensive Loss			Retained Earnings			Total Stockholders’ Equity
Balance, January 1, 2018	20,135,514		$	2	$	98,731		$	191,796		$	290,529
Balance, January 1, 2019														19,389,066		$	2	$	89,258		$	185,294		$	274,554
Net income	—		—		—			345			345			—		—		—			742			742
Adjustment to beginning balance resulting from adoption of ASC 606 and tax impact	—		—		—			4,644			4,644
Purchase of common stock for tax withholding	(56,269	)	—		(892		)	—			(892		)	(67,648	)	—		(1,011		)	—			(1,011		)
Amortization of stock-based compensation	—		—		1,234			—			1,234			—		—		528			—			528
Cash dividends declared	—		—		—			(2,589		)	(2,589		)	—		—		—			(2,479		)	(2,479		)
Common stock repurchase program including commissions	(127,792	)	—		(1,927		)	—			(1,927		)	(131,012	)	—		(1,810		)	—			(1,810		)
Issuance of restricted stock under the Equity Plan and other	4,812		—		—			—			—			13,650		—		—			70			70
Cumulative translation adjustment	—		—		(256		)	—			(256		)	—		—		(60		)	—			(60		)
Balance, March 31, 2018	19,956,265		$	2	$	96,890		$	194,196		$	291,088
Net loss	—		—		—			(1,172		)	(1,172		)
Amortization of stock-based compensation	—		—		1,267			—			1,267
Cash dividends declared	—		—		—			(2,539		)	(2,539		)
Common stock repurchase program including commissions	(501,782	)	—		(7,540		)	—			(7,540		)
Issuance of restricted stock under the Equity Plan and other	17,766		—		143			—			143
Cumulative translation adjustment	—		—		(342		)	—			(342		)
Balance, June 30, 2018	19,472,249		$	2	$	90,418		$	190,485		$	280,905
Net income	—		—		—			(840		)	(840		)
Prior period adjustments	—		—		—			412			412
Purchase of common stock for tax withholding	—		—		(86		)	—			(86		)
Amortization of stock-based compensation	—		—		1,423			—			1,423
Cash dividends declared	—		—		—			(2,500		)	(2,500		)
Common stock repurchase program including commissions	(36,542	)	—		(559		)	—			(559		)
Issuance of restricted stock under the Equity Plan and other	13,611		—					—			—
Cumulative translation adjustment	—		—		(367		)	—			(367		)
Balance, September 30, 2018	19,449,318		$	2	$	90,829		$	187,557		$	278,388
Balance, March 31, 2019														19,204,056		$	2	$	86,905		$	183,627		$	270,534


(Unaudited and in thousands except share amounts)	Outstanding Common Shares		Common Stock		Additional Paid-In Capital & Accumulated Other Comprehensive Loss			Retained Earnings			Total Stockholders’ Equity
Balance, January 1, 2019	19,389,066		$	2	$	89,258		$	185,294		$	274,554
Net income	—		—		—			742			742
Balance, January 1, 2020														19,071,614		$	2	$	85,273		$	164,819		$	250,094
Net loss														—		—		—			(4,539		)	(4,539		)
Adoption of current expected credit loss ("CECL")														—		—		—			(365		)	(365		)
Purchase of common stock for tax withholding	(67,648	)	—		(1,011		)	—			(1,011		)	(79,981	)	—		(903		)	—			(903		)
Amortization of stock-based compensation	—		—		528			—			528
Cash dividends declared	—		—		—			(2,479		)	(2,479		)
Common stock repurchase program including commissions	(131,012	)	—		(1,810		)	—			(1,810		)
Issuance of restricted stock under the Equity Plan and other	13,650		—		—			70			70
Cumulative translation adjustment	—		—		(60		)	—			(60		)
Balance, March 31, 2019	19,204,056		$	2	$	86,905		$	183,627		$	270,534
Net loss	—		—		—			(670		)	(670		)
Amortization of stock-based compensation	—		—		1,029			—			1,029			—		—		1,182			—			1,182
Cash dividends declared	—		—		—			(2,480		)	(2,480		)	—		—		—			(2,488		)	(2,488		)
Issuance of restricted stock under the Equity Plan and other	17,910		—		120			$	—		120			1,918		—		—			19			19
Cumulative translation adjustment	—		—		(33		)	—			(33		)	—		—		(220		)	—			(220		)
Balance, June 30, 2019	19,221,966		$	2	$	88,021		$	180,477		$	268,500
Net loss	—		—		—			(1,326		)	(1,326		)
Amortization of stock-based compensation	—		—		964			—			964
Cash dividends declared	—		—		—			(2,471		)	(2,471		)
Common stock repurchase program including commissions	(401,342	)	—		(4,765		)	—			(4,765		)
Issuance of restricted stock under the Equity Plan	7,146		—		—			—			—
Cumulative translation adjustment	—		—		(105		)	—			(105		)
Balance, September 30, 2019	18,827,770		$	2	$	84,115		$	176,680		$	260,797
Balance, March 31, 2020														18,993,551		$	2	$	85,332		$	157,446		$	242,780

The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.

SPOK HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


	For the Nine Months Ended September 30,						For the Three Months Ended March 31,
(Unaudited and in thousands)	2019			2018			2020			2019
Cash flows provided by operating activities:
Net loss	(1,255		)	$	(1,667	)
Operating activities:
Net (loss) income							(4,539		)	$	742
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation, amortization and accretion	6,999			8,168			2,146			2,359
Deferred income tax expense	(569		)	(1,000		)	790			517
Stock-based compensation	2,521			3,922			1,182			528
Provision for doubtful accounts, service credits and other	652			1,631			18			374
Adjustment of non-cash transaction taxes	—			(156		)
Changes in assets and liabilities:
Accounts receivable	252			(2,534		)	2,441			(4,791		)
Prepaid expenses, inventory, and other assets	2,131			(1,160		)	964			2,216
Accounts payable, accrued liabilities and other	(1,366		)	(346		)	(1,143		)	(2,525		)
Deferred revenue	1,383			4,998			(542		)	1,803
Net cash provided by operating activities	10,748			11,856			1,317			1,223
Cash flows used in investing activities:
Investing activities:
Purchase of property and equipment	(4,162		)	(5,094		)	(1,049		)	(1,287		)
Capitalized software development							(1,705		)	—
Purchase of short-term investments	(44,499		)	(3,911		)	(14,888		)	(14,824		)
Maturity of short-term investments	19,000			4,000			15,000			—
Net cash used in investing activities	(29,661		)	(5,005		)	(2,642		)	(16,111		)
Cash flows used in financing activities:
Financing activities:
Cash distributions to stockholders	(7,440		)	(7,631		)	(2,629		)	(2,647		)
Purchase of common stock (including commissions)	(6,575		)	(10,026		)	—			(1,810		)
Proceeds from issuance of common stock under the Employee Stock Purchase Plan	119			143
Purchase of common stock for tax withholding on vested equity awards	(1,017		)	(978		)	(903		)	(1,011		)
Net cash used in financing activities	(14,913		)	(18,492		)	(3,532		)	(5,468		)
Effect of exchange rate on cash	(198		)	(965		)	(220		)	(60		)
Net decrease in cash and cash equivalents	(34,024		)	(12,606		)	(5,077		)	(20,416		)
Cash and cash equivalents, beginning of period	83,343			103,179			47,361			83,343
Cash and cash equivalents, end of period	$	49,319		$	90,573		$	42,284		$	62,927
Supplemental disclosure:
Income taxes paid	$	927		$	726		$	—		$	80

The accompanying notes are an integral part of these unaudited Condensed Consolidated Financial Statements.

SPOK HOLDINGS, INC.

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES

Spok Holdings, Inc. (NASDAQ: SPOK) ("Spok," "we," "our" or the "Company") through its ~~wholly-owned~~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. Top 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 clinical ~~communications~~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, mobile devices and personal computers. We also offer voice mail, personalized ~~greeting,~~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 and collaboration. These solutions are used for contact centers, clinical alerting and notification, mobile communications and messaging and for public safety notifications. We offer a variety of solutions in both on-premise and Software as a Service ("SaaS") delivery models. The Spok Go platform was made commercially available in early 2020. Spok Go features an integrated cloud-native platform that is built on a foundation of a single, best-in-class architecture with hosting and security handled through our partnership with AMazon Web Services®. 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

The accompanying Condensed Consolidated Financial Statements include our accounts and the accounts of our ~~wholly-owned~~wholly owned direct and indirect subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. Our Condensed 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 unaudited Condensed Consolidated Financial Statements include all adjustments and accruals that are necessary for the presentation of the results of all interim periods reported herein and all such adjustments are of a normal, recurring ~~nature. As a result~~nature with the exception of ~~the~~our adoption of Accounting Standards ~~Codification (“ASC”~~Update ("ASU") ~~842,~~No. 2016-13, Financial Instruments - Credit Losses ~~Leases~~(Topic 326), Measurement of Credit Losses on Financial Instruments, ~~and our application of the modified retrospective approach using a cumulative-effect adjustment~~often referred to ~~our opening balance of retained earnings~~ as ~~of January 1, 2019, prior period amounts have not been restated under ASC 842.~~Current Expected Credit Losses ("CECL"). For additional details refer to Note 4,3, "Significant Accounting Policies Update" ~~and Note 6, "Leases."~~.

Amounts shown on the Condensed Consolidated ~~Statement~~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.

The financial information included herein, other than the Condensed Consolidated Balance Sheet as of December 31, ~~2018,~~2019, is unaudited. The Condensed Consolidated Balance Sheet at December 31, ~~2018~~2019 has been derived from, but does not include all, the disclosures contained in the audited Consolidated Financial Statements as of and for the year ended December 31, ~~2018.~~2019.

These Condensed 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 year ended December 31, ~~2018~~2019 (the ~~“2018~~“2019 Annual Report”). The Condensed Consolidated Statement of Operations for the interim periods presented are not necessarily indicative of the results that may be expected for a full year.

Certain prior period amounts in the Condensed Consolidated Financial Statements have been reclassified to conform to the current period's presentation. For additional information refer to the 2018 Annual Report.

~~SPOK HOLDINGS, INC.~~

~~UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~

Use of Estimates

The preparation of these Condensed 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

SPOK HOLDINGS, INC.

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

obligations; variable consideration; depreciation expense; asset retirement obligations; income taxes; and ~~income taxes.~~capitalization of software costs. 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 ~~2018~~2019 Annual Report, which describe key risks associated with our operations and industry.

NOTE 3 - RECENT ACCOUNTING STANDARDS

Recently Adopted

~~Leases~~Credit Losses -In ~~February~~June 2016, the ~~FASB issued~~Financial Accounting Standards ~~Update~~Board ("~~ASU"~~FASB") issued ASU No. ~~2016-02,~~ ~~Leases. The new standard establishes a right-of-use (“ROU”) model that~~2016-13, or CECL. CECL requires ~~a lessee to record a ROU asset~~early recognition of credit losses on financial assets held at the reporting date based on historical experience, current conditions, and ~~a lease liability on the balance sheet~~reasonable and supportable forecasts. This guidance is effective for all leases with terms longer than twelve months. Leases will be classified as either financing or operating with the classification affecting the pattern of expense recognition in the Condensed Consolidated Statement of Operations.fiscal years beginning after December 15, 2019.

On January 1, ~~2019,~~2020 we adopted ~~ASC 842 using the modified retrospective approach that~~ASU No. 2016-13 which resulted in ~~a material~~an immaterial adjustment to ~~our~~the beginning balance ~~sheet as~~ of January 1, 2019. During the quarter ended June 30, 2019 we adjusted our opening balance to record the effect of adopting ASC 842 by approximately $0.4 million. As a result, the impact of the adoption of ASC 842 wasretained earnings and an increase to ~~assets and liabilities of approximately $17.8 million. Results~~allowance for reporting periods beginning after January 1, 2019 are presented under ASC 842, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting under ASC 840. In the adoption of ASC 842, we elected to use the package of available practical expedients with the exception of hindsight. For additional details refer to Note 4, "Significant Accounting Policies Update" and Note 6, "Leases."doubtful accounts.

NOTE 4 - SIGNIFICANT ACCOUNTING POLICIES UPDATE

Our significant accounting policies are detailed in Note 1, “Organization and Significant Accounting Policies” of the ~~2018~~2019 Annual Report. Significant changes to our accounting policies ~~as a result of adopting ASC 842~~that occurred during the three months ended March 31, 2020 are discussed below:

Research and Development

Certain costs related to the development of Spok Go qualified for capitalization beginning in the first quarter of 2020.

~~Leases -~~In accordance with ASC ~~842 “Leases”~~985-20,

~~Operating lease ROU assets~~Software to be Sold, Leased, or Marketed, certain software development costs are charged to operations and ~~liabilities~~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 recognized at the commencement date based on the present value of lease payments over the lease term. We have made an accounting policy election not to apply the recognition requirements of ASC 842 to short-term leases. Those leases which have a term of less than 12 months will have lease payments recognized, in our Condensed Consolidated Statement of Operations,capitalized and amortized on a straight-line basis over the ~~lease term. An optional renewal or termination is not recognized as part~~estimated remaining economic life of the ~~lease term unless we determine that it~~product or the ratio of current revenues to total projected product revenues, whichever is ~~reasonably certain that we will exercise that option. The term reasonably certain is a high threshold~~greater. To date, the time between technological feasibility and general release to the public has been extremely short and consequently expenses available 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~~capitalization have been ~~exercised. Lease expense~~immaterial. Accordingly, all research and developments costs incurred to date, accounted for in accordance with ASC 985-20, have been expensed as incurred.

In accordance with ASC 350-40, Internal-use Software, certain software development costs are capitalized while in the application development stage related to software developed for internal use or software sold in a SaaS arrangement. This includes certain development costs for Spok Go. All other costs incurred during the preliminary project stage or the post implementation stage, are expensed as incurred. Capitalized software development is ~~recognized~~amortized on a straight-line basis over the ~~lease term.~~

~~As most~~estimated useful life of ~~our leases do not provide an implicit rate, we use an~~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 incremental borrowing rate in determining the present value of lease payments. The Company uses a portfolio approach when determining the discount rate to be applied to its leases. Significant judgment is necessary when determining a discount rate because we must estimate the discount rate based on a number of factors and observable inputs including current market conditions, market yields, government bonds or currency LIBOR rates, credit risk, and other factors as necessary. The Company must also exerciseuseful life requires 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~~as we consider factors such as ~~costs relating to~~ the ~~termination or extension of a lease, importance~~rapid and continuous developments in software technology, obsolescence and anticipated life of the ~~underlying asset to the Company’s operations,~~service offering before enhancements are necessary. In a SaaS environment, customer needs are rapidly evolving and ~~the terms and conditions of the optional periods in relation to current market rates.~~a shorter useful life is generally expected.

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.

~~SPOK HOLDINGS, INC.~~

~~UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~

NOTE 5 - REVENUE, DEFERRED REVENUE AND PREPAID COMMISSIONS

Wireless Revenue

Wireless revenue consists of two primary components: Paging revenue and product and other revenue. Paging revenue consists primarily of recurring fees associated with the provision of messaging services and fees for paging devices and is net of a provision for service credits. Product and other revenue reflects system sales, the sale of devices and charges for paging devices that are not returned and are net of anticipated credits. Our core offering includes subscriptions to one-way or two-way messaging services for a periodic (monthly, quarterly, semiannual, or annual) service fee. This is generally based upon the type of service provided, the geographic area covered, the number of devices provided to the customer and the period of commitment. A subscriber to one-way messaging services may select coverage on a local, regional or nationwide basis to best meet their messaging needs. Two-way messaging is generally offered on a

SPOK HOLDINGS, INC.

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

nationwide basis. In addition, subscribers either contract for a messaging device from us for an additional fixed monthly fee or they own a device, having purchased it either from us or from another vendor. We also sell devices to resellers who lease or resell devices to their subscribers and then sell messaging services utilizing our networks. We offer ancillary services, such as voicemail and equipment loss or maintenance protection, which increase the monthly recurring revenue we receive along with these traditional messaging services. We ~~also~~ offer ~~encryption for~~exclusive one-way (T5) and two-way (T52) alphanumeric pagers, ~~that~~which are configurable to support un-encrypted or encrypted operation. When configured for encryption, they utilize AES-128 bit encryption, screen locking and remote wipe capabilities. With encryption enabled these ~~pagers can add~~secure paging devices enhance our service offerings to the healthcare community by adding Health Insurance Portability and Accountability Act ("HIPAA") security capabilities to the low cost, highly reliable and availability benefits of paging. (See Item 1. “Business,” in the ~~2018~~2019 Annual Report for more details.)

Software Revenue

Software revenue consists of two primary components: operations revenue and maintenance revenue. Operations revenue consists primarily of license revenues for our healthcare communications solutions, equipment revenues that facilitate the use of our software solutions, and professional services revenue related to the implementation of our solutions. Maintenance revenue is for ongoing support of our software solutions or related equipment ~~(typically for one year).~~and access to when-and-if available software updates. Maintenance is generally purchased and renewed on an annual basis.

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. 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 IPIntellectual 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 the IP that we license may substantively change during the license period, customers are not contractually or practically required to update their license as a result of those changes. Our wireless, professional and maintenance services are generally recognized over time due to a customer's simultaneous receipt and consumption of the benefit as we perform the work. As we transfer control over time, we recognize revenue based on the extent of progress towards completion of the performance obligation. The selection of the method to measure progress towards completion requires significant judgment and is based on the nature of the products or services to be provided. Generally, we use the time-elapsed measure of progress for performance obligations which include wireless or maintenance services. We believe this method best depicts the simultaneous transfer and consumption of the benefit based on our performance as these services are generally considered standby services. For professional services, we leverage an input methodology based on the number of hours worked on a project versus the total expected hours necessary to complete the project. Revenues are recognized proportionally as hours are incurred.

The following table presents our revenues disaggregated by revenue type:

For the Three Months Ended September 30, For the Nine Months Ended September 30,
(Dollars in thousands) 2019 2018 2019 2018
Wireless products and services $ 21,814
$ 23,259
$ 66,552
$ 71,186
License 2,723
3,175
7,239
9,544
Services 4,202
4,555
14,242
12,988
Hardware 689
1,296
2,493
3,428
Maintenance 10,025
10,191
30,215
29,072
Total revenue $ 39,453
$ 42,476
$ 120,741
$ 126,218

~~SPOK HOLDINGS, INC.~~

~~UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~



	For the Three Months Ended March 31,
(Dollars in thousands)	2020		2019
Wireless products and services	$	21,386	$	22,610
License	955		2,840
Services	4,549		5,206
Hardware	725		963
Maintenance	9,652		10,145
Total revenue	$	37,267	$	41,764

The U.S. was the only country that accounted for more than 10% of the Company’s total revenue for the three ~~and nine~~ months ended ~~September 30, 2019~~March 31, 2020 and ~~2018.~~2019. Revenue ~~by geographic region~~generated in the U.S. and internationally consisted of the following for the periods stated:


	For the Three Months Ended September 30,				For the Nine Months Ended September 30,				For the Three Months Ended March 31,
(Dollars in thousands)	2019		2018		2019		2018		2020		2019
Revenue
United States	$	38,312	$	41,198	$	116,525	$	122,243	$	36,503	$	39,766
International	1,141		1,278		4,216		3,975		764		1,998
Total revenue	$	39,453	$	42,476	$	120,741	$	126,218	$	37,267	$	41,764

SPOK HOLDINGS, INC.

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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 ~~nine~~three months ended ~~September 30, 2019~~March 31, 2020 are as follows:


(Dollars in thousands)	December 31, 2018		Additions		Revenue Recognized			September 30, 2019		December 31, 2019		Additions		Revenue Recognized			March 31, 2020
Deferred Revenue	$	26,582	$	59,759	$	(58,376	)	$	27,965	$	26,621	$	15,100	$	(15,642	)	$	26,079

During the ~~nine~~three months ended ~~September 30, 2019,~~March 31, 2020, the Company recognized ~~$28.5~~$11.8 million related to amounts deferred as of December 31, ~~2018.~~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 ~~with~~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 ~~nine~~three months ended ~~September 30, 2019~~March 31, 2020 are as follows:


(Dollars in thousands)	December 31, 2018		Additions		Commissions Recognized			September 30, 2019		December 31, 2019		Additions		Commissions Recognized			March 31, 2020
Prepaid Commissions	$	2,394	$	3,607	$	(3,836	)	$	2,165	$	2,431	$	1,110	$	(1,212	)	$	2,329

Prepaid commissions are included within prepaid expenses and other on the Condensed Consolidated Balance Sheets and commissions expense is included within Selling and marketing on the Condensed Consolidated ~~Statement~~Statements of Operations.

Remaining Performance Obligations

~~We have elected not to disclose the value~~The balance of ~~unsatisfied~~remaining performance obligations ~~for contracts~~at March 31, 2020 was $49.0 million. We expect to recognize approximately $37.7 million of our remaining performance obligations over the next 12 months, 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. Thethe remaining ~~backlog is immaterial to our Condensed Consolidated Financial Statements.~~balance recognized thereafter.

~~SPOK HOLDINGS, INC.~~

~~UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~

NOTE 6 - Leases

We have operating lease arrangements for corporate offices, cellular towers, storage units and small building space. 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 Condensed Consolidated ~~Statement~~Statements of Operations. The following table presents lease costs disaggregated by type:


	For the Three Months Ended September 30,			For the Nine Months Ended September 30,		For the Three Months Ended March 31,
(Dollars in thousands)	2019			2019		2020			2019
Operating lease cost	$	1,285		$	4,008	$	1,382		$	1,381
Short-term lease cost	2,255			6,427		1,977			1,935
Short-term lease cost - related party⁽¹⁾	895			2,718		890			902
Total lease cost	$	4,435		$	13,153	$	4,249		$	4,218

Supplemental Disclosure:
Cash paid for amounts included in the measurement of lease liabilities - operating leases	$	1,419				$	1,349
Weighted-average remaining lease term - operating leases	5.84 years					5.55 years
Weighted-average discount rate - operating leases	5.5		%			5.39		%

⁽¹⁾A member of our Board of Directors also serves as a director for an entity that leases transmission tower sites to the Company. Refer to Note 13, "Related Parties" for additional details.

~~Maturities of lease liabilities as of September 30, 2019 were as follows:~~

For the Year Ended December 31, (Dollars in thousands)
For the remaining three months ending December 31, 2019 $ 1,416
2020 5,095
2021 4,049
2022 2,475
2023 1,725
Thereafter 4,968
Total future lease payments 19,728
Imputed interest (2,767 )
Total $ 16,961

SPOK HOLDINGS, INC.

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Maturities of lease liabilities as of March 31, 2020 were as follows:



For the Year Ended December 31,	(Dollars in thousands)
For the remaining nine months ending December 31, 2020	$	4,425
2021	4,404
2022	2,829
2023	1,883
2024	1,416
Thereafter	3,763
Total future lease payments	18,720
Imputed interest	(2,512		)
Total	$	16,208

NOTE 7 - CONSOLIDATED FINANCIAL STATEMENT COMPONENTS

Depreciation, Amortization and Accretion

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


	For the Three Months Ended September 30,						For the Nine Months Ended September 30,						For the Three Months Ended March 31,
(Dollars in thousands)	2019			2018			2019			2018			2020			2019
Depreciation
Leasehold improvements	$	14		$	60		$	50		$	195		$	16		$	24
Asset retirement costs	(191		)	(74		)	(575		)	(226		)	(161		)	(192		)
Paging and computer equipment	1,627			1,938			4,950			5,608			1,478			1,666
Furniture, fixtures and vehicles	92			100			285			310			70			98
Total depreciation	1,542			2,024			4,710			5,887			1,403			1,596
Amortization	625			625			1,875			1,875			625			625
Accretion	138			136			414			406			118			138
Total depreciation, amortization and accretion expense	$	2,305		$	2,785		$	6,999		$	8,168		$	2,146		$	2,359

Accounts Receivable, Net

Accounts receivable was recorded net of an allowance of ~~$1.5~~$1.6 million and ~~$1.7~~$1.3 million at ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, respectively. Accounts receivable, net includes ~~$5.8~~$6.5 million and ~~$8.7~~$6.4 million of unbilled receivables at ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018,~~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. ~~The decrease in unbilled receivables was primarily due to an increase in billings for the nine months ended September 30, 2019.~~

Property and Equipment, Net

Property and equipment, net consisted of the following as of the dates stated:


(Dollars in thousands)	Useful Life (In Years)	September 30, 2019			December 31, 2018			Useful Life (In Years)	March 31, 2020			December 31, 2019
Leasehold improvements	shorter of useful life or lease term	$	3,624		$	4,139		shorter of useful life or lease term	$	3,620		$	3,620
Asset retirement costs	1-5	2,041			2,021			1-5	1,922			1,922
Paging and computer equipment	1-5	98,403			98,401			1-5	95,542			96,562
Furniture, fixtures and vehicles	3-5	3,639			4,353			3-5	3,585			3,716
Total property and equipment		107,707			108,914				104,669			105,820
Accumulated depreciation		(98,104		)	(98,560		)		(97,014		)	(97,820		)
Total property and equipment, net		$	9,603		$	10,354			$	7,655		$	8,000

SPOK HOLDINGS, INC.

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

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 $1.7 million for the three months ended March 31, 2020 and no capitalized costs were recorded for the three months ended March 31, 2019. There was no amortization expense with respect to software development costs for the three months ended March 31, 2020 and 2019.

NOTE 8 - GOODWILL AND INTANGIBLE ASSETS, NET

Goodwill

~~We evaluated goodwill for impairment during~~During the ~~three months~~quarter ended ~~September 30,~~March 31, 2020, we determined, based on qualitative assessment, that the Coronavirus Disease 2019 ~~due to the decline in stock price during the third quarter which indicated to the Company~~("COVID-19") pandemic created a triggering event that ~~impairment could exist.~~required further assessment. As such, we performed a quantitative assessment, using data as of March 31, 2020. Based on ~~our~~this assessment, ~~at September 30, 2019, the carrying value exceeded~~ the estimated fair value of the reporting unit ~~and thus we did not record an impairment of goodwill during the three months ended September 30, 2019. The carrying value~~ exceeded the ~~estimated fair~~carrying value of the ~~reporting unit by less than five percent.~~Company, which indicated an impairment did not exist as of the interim balance sheet date. For purposes of the goodwill impairment assessment, the Company as a whole is considered to be 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, etc.), as well as application of an estimated control premium. The estimated control premium is based on ~~review~~a number of factors including current and past market information published by third-party resources and detailed analysis that considers appropriate industry, market and other pertinent factors. While a ~~third-party resource. In accordance with historical practice,~~formal impairment assessment is performed annually, the Company ~~anticipates performing~~monitors its ~~annual assessment of goodwill during the fourth quarter of 2019. We can provide no assurance that the Company's carrying value will continue to exceed the estimated fair value~~business environment for ~~any~~potential triggering events on a quarterly basis. There is potential for further impairment charges being recognized in future ~~period. A continued declining trend in the price of the Company's common stock will likely result in some impairment to goodwill.~~periods based on these ongoing assessments.

Intangible Assets

Amortizable intangible assets at ~~September 30, 2019~~March 31, 2020 related primarily to customer relationships that resulted from our acquisition of Amcom Software, Inc. in 2011. Such intangibles are being amortized over a period of ten years. For the years ending December 31, 2020 and 2021 there is an estimated remaining amortization of $1.9 million and $0.4 million, respectively.

The net consolidated balance of intangible assets consisted of the following at ~~September 30, 2019:~~March 31, 2020:


(Dollars in thousands)	Useful Life (In Years)	Gross Carrying Amount		Accumulated Amortization			Net Balance		Useful Life (In Years)	Gross Carrying Amount		Accumulated Amortization			Net Balance
Customer relationships	10	$	25,002	$	(21,460	)	$	3,542	10	$	25,002	$	(22,710	)	$	2,292

~~Estimated amortization of intangible assets for future periods was as follows:~~

SPOK HOLDINGS, INC.

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

(Dollars in thousands)
For the remaining three months ending December 31, 2019 $ 625
For the year ending December 31:
2020 2,500
2021 417
Total amortizable intangible assets $ 3,542

NOTE 9 - ASSET RETIREMENT OBLIGATIONS

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


(Dollars in thousands)	Short-Term Portion			Long-Term Portion			Total			Short-Term Portion			Long-Term Portion			Total
Balance at January 1, 2019	$	34		$	6,513		$	6,547
Balance at January 1, 2020										$	90		$	6,061		$	6,151
Accretion	29			385			414			(9		)	127			118
Amounts paid	(125		)	—			(125		)	(27		)	—			(27		)
Increases	—			20			20			—			—			—
Reclassifications	162			(162		)	—			79			(79		)	—
Balance at September 30, 2019	$	100		$	6,756		$	6,856
Balance at March 31, 2020										$	133		$	6,109		$	6,242

The short-term portion balance above is included within other current liabilities on the Condensed Consolidated Balance Sheet at ~~September 30, 2019~~March 31, 2020. and December 31, 2019.

~~SPOK HOLDINGS, INC.~~

~~UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~

Increases 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 ~~$8.1~~$7.6 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~~$0.1 million for the ~~nine~~three months ended ~~September 30, 2019~~March 31, 2020 and ~~2018.~~2019. Accretion expense related solely to asset retirement obligations and was recorded based on the interest method.

NOTE 10 - 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 ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, we had no stock options outstanding.

At ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, there were ~~18,827,770~~18,993,551 and ~~19,389,066~~19,071,614 shares of common stock outstanding, respectively, and no shares of preferred stock outstanding.

Dividends

The following table details our cash dividends declared in ~~2019.~~2020. Cash dividends paid as disclosed in the Condensed Consolidated ~~Statement~~Statements of Cash Flows for the ~~nine~~three months ended ~~September 30,~~March 31, 2020 and 2019 ~~and 2018~~ 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.

Declaration Date Record Date Payment Date Per Share Amount
Total Declared⁽¹⁾
(Dollars in thousands)
February 27, 2019 March 15, 2019 March 29, 2019 $ 0.125
$ 2,479
April 24, 2019 May 24, 2019 June 24, 2019 0.125
2,480
July 31, 2019 August 16, 2019 September 10, 2019 0.125
2,471
Total $ 0.375
$ 7,430



Declaration Date	Record Date	Payment Date	Per Share Amount		Total Declared⁽¹⁾
					(Dollars in thousands)
February 26, 2020	March 16, 2020	March 30, 2020	$	0.125	$	2,488
	Total		$	0.125	$	2,488

(1) The total declared reflects the cash dividends declared in relation to common stock and unvested RSUs.

On ~~October 23, 2019,~~April 29, 2020, our Board of Directors declared a regular quarterly cash dividend of $0.125 per share of common stock with a record date of ~~November 15, 2019,~~May 25, 2020, and a payment date of ~~December 10, 2019.~~June 24, 2020. This cash dividend of approximately $2.4 million will be paid from available cash on hand.

SPOK HOLDINGS, INC.

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

~~Common Stock Repurchase Program~~

In August 2018, the Company's Board of Directors authorized the repurchase of up to $10.0 million of the Company's common stock through December 31, 2018 on the open market or in privately negotiated transactions. In November 2018, the Company's Board of Directors extended the repurchase authority through December 31, 2019. The Company fully exhausted the repurchase authority as of September 30, 2019. The following table presents information with respect to purchases made by the Company during the nine months ended September 30, 2019:

Period Total Number of Shares Purchased
Average Price Paid Per Share⁽¹⁾
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs
(Dollars in thousands)
Balance at January 1, 2019 $ 6,555
Three Months Ended March 31, 2019 131,012
$ 13.77
131,012
$ 4,749
Three Months Ended June 30, 2019 —
—
—
$ 4,749
Three Months Ended September 30, 2019 401,342
$ 11.83
401,342
—
Total 532,354
$ 12.31
532,354

⁽¹⁾ ~~Average price paid per share excludes commissions of approximately $21,294.~~

~~The above table excludes shares repurchased to settle employee tax withholdings related to the vesting of equity awards.~~

Net ~~Loss~~(Loss) Income per Common Share

Basic net ~~loss~~(loss) income 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 outstanding restricted stock and RSUs, which are treated as contingently issuable shares, using the “treasury stock” method.

The components of basic and diluted net loss per common share were as follows for the periods stated:


	For the Three Months Ended September 30,						For the Nine Months Ended September 30,						For the Three Months Ended March 31,
(in thousands, except for share and per share amounts)	2019			2018			2019			2018			2020			2019
Numerator:
Net loss	$	(1,326	)	$	(840	)	$	(1,255	)	$	(1,667	)
Net (loss) income													$	(4,539	)	$	742

Denominator:
Basic and diluted weighted average outstanding shares of common stock	19,086,811			19,456,149			19,166,812			19,742,869			18,958,716			19,196,970
Basic and diluted net loss per common share	$	(0.07	)	$	(0.04	)	$	(0.07	)	$	(0.09	)
Diluted weighted average outstanding shares of common stock													18,958,716			19,356,712
Basic and diluted net (loss) income per common share													$	(0.24	)	$	0.04

For the three ~~and nine~~ months ended ~~September 30,~~March 31, 2020 and 2019 ~~and 2018~~ the following securities were excluded from the calculation of diluted shares outstanding as the effect would have been anti-dilutive:

For the Three Months Ended September 30, For the Nine Months Ended September 30,
2019 2018 2019 2018
Restricted stock units $ 129,973
$ 107,139
$ 179,576
$ 162,648

~~SPOK HOLDINGS, INC.~~

~~UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~

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~~“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 Plan from January 1, ~~2019~~2020 through ~~September 30, 2019:~~March 31, 2020:



	Activity
Total equity securities available at January 1, ~~2019~~2020	~~904,437~~646,480
RSU and restricted stock awarded to eligible employees, net of forfeitures	(~~248,955~~497,082	)
Total equity securities available at ~~September 30, 2019~~March 31, 2020	~~655,482~~149,398

SPOK HOLDINGS, INC.

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The following table details activities with respect to outstanding RSUs and restricted stock for the ~~nine~~three months ended ~~September 30, 2019:~~March 31, 2020:


	Shares		Weighted- Average Grant Date Fair Value		Shares		Weighted- Average Grant Date Fair Value
Unvested at January 1, 2019	404,325		$	17.27
Unvested at January 1, 2020					419,426		$	14.00
Granted	356,176		13.26		531,170		12.20
Vested	(14,057	)	15.65		(8,106	)	13.26
Forfeited	(130,364	)	15.49		(34,088	)	11.97
Unvested at September 30, 2019	616,080		$	15.37
Unvested at March 31, 2020					908,402		$	13.03

Of the ~~616,080~~908,402 unvested RSUs and restricted stock outstanding at ~~September 30, 2019, 358,218~~March 31, 2020, 471,002 RSUs include contingent performance requirements for vesting purposes. At ~~September 30, 2019,~~March 31, 2020, there was ~~$4.0~~$7.9 million of unrecognized net compensation cost related to RSUs and restricted stock, which is expected to be recognized over a weighted average period of ~~1.7~~2.1 years.

Employee Stock Purchase Plan. In 2016, our Board of Directors adopted the Spok Holdings, Inc. Employee Stock Purchase Plan ("ESPP") that was subsequently approved by our stockholders on July 25, 2016. A total of 250,000 shares of common stock have been reserved for issuance under this plan.

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

The Company uses the Black-Scholes model to calculate the fair value of 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.

~~SPOK HOLDINGS, INC.~~

~~UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)~~

For the three ~~and nine~~ months ended ~~September 30,~~March 31, 2020 and 2019, ~~and 2018, 9,876 and 11,581~~no shares of the Company's common stock were ~~purchased, respectively, for a total cost of $0.1 million for each period.~~purchased.

The following table summarizes the activities under the ESPP from January 1, ~~2019~~2020 through ~~September 30, 2019:~~March 31, 2020:



	Activity
Total ESPP equity securities available at January 1, ~~2019~~2020	~~208,159~~184,860
ESPP common stock purchased by eligible employees	~~(9,876~~—	)
Total ESPP securities available at ~~September 30, 2019~~March 31, 2020	~~198,283~~184,860

Amounts withheld from participants will be classified an accrued compensation and benefit on the Condensed Consolidated Balance Sheets until funds are used to purchase shares. This liability amount is immaterial to the Condensed Consolidated Financial Statements.

SPOK HOLDINGS, INC.

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Stock-Based Compensation Expense

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 as incurred.

The following table reflects the items for stock-based compensation expense on the Condensed Consolidated ~~Statement~~Statements of Operations for the periods stated:


	For the Three Months Ended September 30,				For the Nine Months Ended September 30,				For the Three Months Ended March 31,
(Dollars in thousands)	2019		2018		2019		2018		2020		2019
Performance-based RSUs	$	397	$	655	$	939	$	1,677	$	346	$	107
Time-based RSUs and restricted stock	546		750		1,520		2,194		812		404
ESPP	21		18		62		51		24		17
Total stock-based compensation	$	964	$	1,423	$	2,521	$	3,922	$	1,182	$	528

NOTE 11 - INCOME TAXES

The Coronavirus Aid, Relief, and Economic Security ("CARES") Act was signed into law on March 27, 2020. The CARES Act was initiated 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, we believe the following items may provide certain relief for our Company:

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 being due on December 31, 2021, and the remainder due on December 31, 2022. While we continue to assess the impact of the CARES Act, we believe this is likely to result in a deferral of between $1.5 million and $3.0 million in payroll taxes.

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 is for the first $10,000 in qualified wages paid to each employee commencing on March 13, 2020. To be eligible, our Company must (i) have had operations fully or partially suspended because of a shut-down 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 crisis. While we continue to assess the impact of the CARES Act, we believe this is likely to result in a tax credit of between $0.5 million and $1.5 million.

Alternative Minimum Tax ("AMT") Credit - Allows for an immediate refund of all refundable AMT credits resulting from passage of the Tax Cuts and Jobs Act of 2017. This will result in accelerated collection of approximately $1.3 million of other current assets.

Spok files a consolidated U.S. Federal income tax return and income tax returns in various state, local and foreign jurisdictions as required.

Our quarterly tax provision, and our quarterly estimate of our annual effective tax rate, is subject to significant variation due to several factors, including variability in accurately predicting our pre-tax and taxable income and loss and the mix of jurisdictions to which they relate, changes in how we do business, changes in our stock price, foreign currency gains (losses), tax law developments (including changes in statutes, regulations, case law, and administrative practices), and relative changes of expenses or losses for which tax benefits are not recognized. Additionally, our effective tax rate can be more or less volatile based on the amount of pre-tax income or loss. For example, the impact of discrete items and non-deductible expenses on our effective tax rate is greater when our pre-tax income is lower.

For ~~2019,~~2020, the anticipated effective income tax rate is expected to continue to differ from the Federal statutory rate of 21% primarily due to the effect of state income taxes, research and development credits, permanent differences between book and taxable income and certain discrete items.

At ~~September 30, 2019,~~March 31, 2020, we had total deferred income tax assets ("DTAs") of ~~$47.0~~$47.5 million and no valuation allowance. This reflects ~~an increase~~a decrease of ~~$0.5~~$1.5 million from the December 31, ~~2018~~2019 DTAs of ~~$46.5~~$49.0 million and no valuation allowance.

We consider both positive and negative evidence when evaluating the recoverability of our DTAs. The assessment is required to determine whether, based on all available evidence, it is more likely than not (i.e., greater than a 50% probability) that all or some portion of the DTAs will be realized in the future. During the fourth quarter of each year, we update our multi-year forecast of taxable income for our operations, which assists in analyzing the recoverability of our DTAs.

SPOK HOLDINGS, INC.

UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

NOTE 12 - COMMITMENTS AND CONTINGENCIES

There have been no material changes during the ~~nine~~three months ended ~~September 30, 2019~~March 31, 2020 to the commitments and contingencies previously reported in the ~~2018~~2019 Annual Report.

NOTE 13 - RELATED PARTIES

A member of our Board of Directors also serves as a director for an entity that leases transmission tower sites to the Company. For both the three months ended ~~September 30,~~March 31, 2020 and 2019, ~~and 2018,~~ we incurred site rent expenses of $0.9 ~~million and for the nine months ended September 30, 2019 and 2018, we incurred site rent expenses of $2.7~~ million from the entity on which the individual serves as a director. Site rent expenses are included in Technology operations expenses on the Condensed Consolidated ~~Statement~~Statements of Operations.

A member of our Board of Directors, who was appointed at the beginning 2020, also serves as Chief Information Officer for an entity that is also a customer of the Company. For both the three months ended March 31, 2020 and 2019, we recognized revenues of $0.2 million related to contracts from the entity at which the individual is employed.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

This Quarterly Report contains forward-looking statements and information relating to Spok Holdings, Inc. and its subsidiaries (collectively, “we,” “Spok,” ~~"our"~~“our” or the “Company”) that set forth anticipated results based on management’s current plans, known trends and assumptions. These statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Statements that are predictive in nature, that depend upon or refer to future events or conditions, or that include words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “will,” “target,” “forecast” and similar expressions, as they relate to Spok are forward-looking statements.

Although these statements are based upon current plans, known trends and assumptions that management considers reasonable, they are subject to certain risks, uncertainties and assumptions, including, but not limited to, those discussed in this section and “Risk Factors” below and under the captions “Business,” “Management’s Discussion and Analysis of Financial Condition and Statement of Operations (“MD&A”),” and “Risk Factors” in our ~~2018~~2019 Annual Report. Should known or unknown risks or uncertainties materialize, known trends change, or underlying assumptions prove inaccurate, actual results or outcomes may differ materially from past results and those described herein as anticipated, believed, estimated, expected, intended, targeted or forecasted. Investors are cautioned not to place undue reliance on these forward-looking statements.

The Company undertakes no obligation to update forward-looking statements. Investors are advised to consult all further disclosures the Company makes in its subsequent ~~reports~~Quarterly Reports on Form 10-Q and Current Reports on Form 8-K that it will file with the SEC. Also note that, in the risk factors disclosed below in “Risk Factors” and in the Company’s ~~2018~~2019 Annual Report, the Company provides a cautionary discussion of risks, uncertainties and possibly inaccurate assumptions relevant to its business. These are factors that, individually or in the aggregate, could cause the Company’s actual results to differ materially from past results as well as those results that may be anticipated, believed, estimated, expected, intended, targeted or forecasted. It is not possible to predict or identify all such risk factors. Consequently, investors should not consider the risk factor discussion to be a complete discussion of all of the potential risks or uncertainties that could affect Spok's business, statement of operations or financial condition, subsequent to the filing of this Quarterly Report.

Overview

The following MD&A is intended to help the reader understand the ~~Statement~~results of ~~Operations~~operations and ~~Financial Position~~financial condition of Spok. This MD&A is provided as a supplement to, and should be read in conjunction with, our ~~2018~~2019 Annual Report and our unaudited Condensed Consolidated Financial Statements and accompanying notes. A reference to a “Note” in this section refers to the accompanying Unaudited Notes to Condensed Consolidated Financial Statements.

Spok, acting through its indirect ~~wholly-owned~~wholly owned operating subsidiary, Spok, Inc., delivers smart, reliable solutions to help protect the health, well-being and safety of people primarily in the United States. Organizations rely on Spok for workflow improvement, secure texting, paging services, contact center optimization and public safety response.

Business

See Note 1, "Organization and Significant Accounting Policies" in Item 1 of Part I of this Quarterly Report on Form 10-Q ("Quarterly Report") and "Item 1. Business" of Part I of the ~~2018~~2019 Annual Report, which ~~describes~~describe our business in further detail.

COVID-19

The virus known as COVID-19 has significantly impacted the global economy. While the United States first began experiencing an impact in late February of this year, federal and state restrictions were not widely adopted until late in the first quarter. Given the significant uncertainties that exist regarding COVID-19 it is difficult for us to predict the short and long-term implications that this pandemic will have on our business. There is a high level of uncertainty around COVID-19 including, but not limited to: the length of time in which government restrictions will remain in place; the ability to contain the spread of the virus; the time it will take for the general economy to recover; and the time it will take hospitals to return to a more normal operating state. As a result, we are unable to quantify the potential impact that COVID-19 may have on our business. In the short period of time that governmental restrictions have been in place, we have seen delays in our sales cycle impacting software bookings, which directly impacts license and equipment revenues, as well as delays in our ability to deliver on-site implementation services. While this impact was not material to our results for the three months ended March 31, 2020, it is likely to have a greater impact on our results in future quarters depending on how long these restrictions remain in place. We believe there will likely be a significant impact on our software revenues for the full year ending December 31, 2020 given the disruptions to our business we anticipate in the second quarter and beyond. However, with regards to implementation services these impacts are primarily a delay in timing. The revenue still resides in our backlog of performance obligations ready to deliver at some point in the future. As facts and circumstances continue to evolve over the coming months, we will continue to assess and communicate the anticipated impact on our business. While we believe revenue is likely to be impacted for the full year ending December 31, 2020, we are diligently pursuing counter measures to prudently manage operating expenses during this time, with a goal of neutralizing the impact of COVID-19 on our cash flows for the remaining nine months ending December 31, 2020. More specifically, the Company has enacted a Company wide plan that will reduce work schedules with a related temporary reduction in salary during the second quarter of 2020. While the Company has the ability to continue this plan for the foreseeable future, we anticipate re-evaluating our position on a quarterly basis based on the progression of COVID-19, impacts on our business, and other facts and circumstances as deemed relevant by management. Additionally, we believe the Company is likely to see some benefits from the Coronavirus Aid Relief, and Economic Security ("CARES") Act discussed in further detail below.

The 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, we believe the following items may provide certain relief for our Company:

As previously mentioned, we believe these cost mitigation efforts, in addition to relief provided by the CARES Act and natural cost savings that will materialize as a result of COVID-19 (e.g. travel and events), will allow us to offset any negative cash flow impact resulting from COVID-19 for the remainder of the year.

As a result of COVID-19 it was determined that a triggering event had occurred during the three months ended March 31, 2020, requiring us to perform a quantitative goodwill assessment. However, the assessment determined that our goodwill was not impaired. Refer to Note 8, "Goodwill and Intangible Assets, Net," for further discussion.

Revenue

We offer a focused suite of unified clinical communications 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 develop, sell and support enterprise-wide systems for healthcare, government, large enterprise and other organizations needing to automate, centralize and standardize their approach to clinical communications and collaboration. Our solutions can be found in prominent hospitals, large government agencies, leading public safety institutions, colleges and universities, large hotels, resorts and casinos, and well-known manufacturers. Our primary market has been the healthcare industry, particularly hospitals. We have identified hospitals with 200 or more beds as the primary targets for our software and wireless solutions.

Revenue generated by wireless messaging services (including voice mail, personalized greeting, message storage and retrieval) and equipment loss and/or maintenance protection for both one-way and two-way messaging subscribers is presented as wireless revenue in our Statement of Operations. Revenue generated by the sale of our software solutions, which includes software subscription, software license, professional services (installation, consulting and training), equipment (to be used in conjunction with the software) and post-contract support (on-going maintenance), is presented as software revenue in our Statement of Operations. Our software is licensed to end users under an industry standard software license agreement. For the ~~nine~~three months ended ~~September 30, 2019~~March 31, 2020 wireless revenue represented approximately ~~55.1%~~57.4% and software revenue represented approximately ~~44.9%~~42.6% of our consolidated revenue.

Refer to Note 5, "Revenue, Deferred Revenue and Prepaid Commissions" for additional information on our wireless and software revenue streams.

Operating Expenses

Our operating expenses are presented in functional categories. Certain of our functional categories are especially important to overall expense control and management. These operating expenses are categorized as follows:

Cost of revenue. These are expenses primarily for hardware, third-party software, outside services expenses and payroll and related expenses for our professional services, logistics, customer support and maintenance staff.

Research and Development. These expenses relate primarily to the development of new software products and the ongoing maintenance and enhancement of existing products. This classification consists primarily of employee payroll and related expenses, outside services related to the design, development, testing and enhancement of our solutions and to a lesser extent hardware equipment.

Technology operations. These are expenses associated with the operation of our paging networks. Expenses consist largely of site rent expenses for transmitter locations, telecommunication expenses to deliver messages over our paging networks, and payroll and related expenses for our engineering and pager repair functions. We actively pursue opportunities to consolidate

transmitters and other technology operations expenses in order to maintain an efficient network while simultaneously ensuring adequate service for our customers. We believe continued reductions in these expenses will occur as our networks continue to be consolidated for the foreseeable future.

Selling and marketing. The sales and marketing staff are involved in selling our communication solutions primarily in the United States. These expenses support our efforts to maintain gross placements of units in service, which mitigated the impact of disconnects on our wireless revenue base, and to identify business opportunities for additional or future software sales. We have a centralized marketing function, which is focused on supporting our products and vertical sales efforts by strengthening our brand, generating sales leads and facilitating the sales process. These marketing functions are accomplished through targeted email campaigns, webinars, regional and national user conferences, monthly newsletters and participation at industry trade shows. Expenses consist largely of payroll and related expenses, commissions and other costs such as travel and advertising costs.

General and administrative. These are expenses associated with information technology and administrative functions, which include finance and accounting, human resources and executive management. This classification consists primarily of payroll and related expenses, outside services expenses, taxes, licenses and permit expenses, and facility rent expenses.

Results of Operations

The following table is a summary of our Consolidated Statement of Operations for the Three ~~and Nine~~ Months Ended ~~September 30, 2019~~March 31, 2020 and ~~2018~~2019


	For the Three Months Ended September 30,						Change					For the Nine Months Ended September 30,						Change					For the Three Months Ended March 31,						Change
(Dollars in thousands)	2019			2018			Total			%		2019			2018			Total			%		2020			2019			Total			%
Revenue:
Wireless	$	21,814		$	23,259		$	(1,445	)	(6.2	)%	$	66,552		$	71,186		$	(4,634	)	(6.5	)%	$	21,386		$	22,610		$	(1,224	)	(5.4	)%
Software	17,639			19,217			(1,578		)	(8.2	)%	54,189			55,032			(843		)	(1.5	)%	15,881			19,154			(3,273		)	(17.1	)%
Total revenue	39,453			42,476			(3,023		)	(7.1	)%	120,741			126,218			(5,477		)	(4.3	)%	37,267			41,764			(4,497		)	(10.8	)%
Operating expenses:
Cost of revenue	7,190			8,141			(951		)	(11.7	)%	22,021			23,635			(1,614		)	(6.8	)%	8,264			7,592			672			8.9	%
Research and development	7,437			5,934			1,503			25.3	%	20,411			17,845			2,566			14.4	%	5,449			6,167			(718		)	(11.6	)%
Technology operations	7,805			7,787			18			0.2	%	23,345			23,235			110			0.5	%	7,904			7,674			230			3.0	%
Selling and marketing	5,595			5,716			(121		)	(2.1	)%	17,279			18,279			(1,000		)	(5.5	)%	6,361			6,110			251			4.1	%
General and administrative	11,813			13,673			(1,860		)	(13.6	)%	34,255			38,377			(4,122		)	(10.7	)%	11,251			10,747			504			4.7	%
Depreciation, amortization and accretion	2,305			2,785			(480		)	(17.2	)%	6,999			8,168			(1,169		)	(14.3	)%	2,146			2,359			(213		)	(9.0	)%
Total operating expenses	42,145			44,036			(1,891		)	(4.3	)%	124,310			129,539			(5,229		)	(4.0	)%	41,375			40,649			726			1.8	%
Operating loss	(2,692		)	(1,560		)	(1,132		)	72.6	%	(3,569		)	(3,321		)	(248		)	7.5	%
Operating (loss) income																							(4,108		)	1,115			(5,223		)	(468.4	)%
Interest income	399			384			15			3.9	%	1,300			1,009			291			28.8	%	363			449			(86		)	(19.2	)%
Other income (expense)	163			(110		)	273			(248.2	)%	528			(56		)	584			(1,043	)%
Loss before income taxes	(2,130		)	(1,286		)	(844		)	65.6	%	(1,741		)	(2,368		)	627			(26.5	)%
Benefit from income taxes	804			446			358			80.3	%	486			701			(215		)	(30.7	)%
Net loss	$	(1,326	)	$	(840	)	$	(486	)	57.9	%	$	(1,255	)	$	(1,667	)	$	412		(24.7	)%
Other expense																							(137		)	(236		)	99			(41.9	)%
(Loss) income before income taxes																							(3,882		)	1,328			(5,210		)	(392.3	)%
Provision for income taxes																							(657		)	(586		)	(71		)	12.1	%
Net (loss) income																							$	(4,539	)	$	742		$	(5,281	)	(711.7	)%

Supplemental Information
Full-Time Equivalent ("FTE") Employees	617			603			14			2.3	%												620			591			29			4.9	%
Active transmitters	3,846			3,942			(96		)	(2.4	)%												3,811			3,909			(98		)	(2.5	)%

Revenue

The table below details total revenue for the periods stated:


	For the Three Months Ended September 30,				Change					For the Nine Months Ended September 30,				Change					For the Three Months Ended March 31,				Change
(Dollars in thousands)	2019		2018		Total			%		2019		2018		Total			%		2020		2019		Total			%
Revenue - wireless:
Paging revenue	$	21,212	$	22,442	$	(1,230	)	(5.5	)%	$	64,241	$	68,574	$	(4,333	)	(6.3	)%	$	20,451	$	21,687	$	(1,236	)	(5.7	)%
Product and other revenue	602		817		(215		)	(26.3	)%	2,311		2,612		(301		)	(11.5	)%	935		923		12			1.3	%
Total wireless revenue	21,814		23,259		(1,445		)	(6.2	)%	66,552		71,186		(4,634		)	(6.5	)%	21,386		22,610		(1,224		)	(5.4	)%

Revenue - software:
License	2,723		3,175		(452		)	(14.2	)%	7,239		9,544		(2,305		)	(24.2	)%	955		2,840		(1,885		)	(66.4	)%
Services	4,202		4,555		(353		)	(7.7	)%	14,242		12,988		1,254			9.7	%	4,549		5,206		(657		)	(12.6	)%
Equipment	689		1,296		(607		)	(46.8	)%	2,493		3,429		(936		)	(27.3	)%	725		963		(238		)	(24.7	)%
Operations revenue	7,614		9,026		(1,412		)	(15.6	)%	23,974		25,961		(1,987		)	(7.7	)%	6,229		9,009		(2,780		)	(30.9	)%
Maintenance revenue	10,025		10,191		(166		)	(1.6	)%	30,215		29,071		1,144			3.9	%	9,652		10,145		(493		)	(4.9	)%
Total software revenue	17,639		19,217		(1,578		)	(8.2	)%	54,189		55,032		(843		)	(1.5	)%	15,881		19,154		(3,273		)	(17.1	)%
Total revenue	$	39,453	$	42,476	$	(3,023	)	(7.1	)%	$	120,741	$	126,218	$	(5,477	)	(4.3	)%	$	37,267	$	41,764	$	(4,497	)	(10.8	)%

The decrease in wireless revenue for the three ~~and nine~~ months ended ~~September 30, 2019~~March 31, 2020 compared to the same ~~periods~~period in ~~2018~~2019 reflects the decrease in demand for our wireless services. Wireless revenue is generally based upon the number of units in service and the monthly Average Revenue Per User ("ARPU"). On a consolidated basis, ARPU is affected by several factors, including the mix of units in service and the pricing of the various components of our services. The number of units in service changes based on subscribers added, referred to as gross placements, less subscriber cancellations, or disconnects. ARPU for the three months ended ~~September 30,~~March 31, 2020 and 2019 was $7.31 and ~~2018 was~~ $7.32, ~~and $7.40, respectively, while total~~respectively. Total units in service were 0.9 million and 1.0 million for ~~both periods.~~the three months ended March 31, 2020 and 2019, respectively. While demand for wireless services continues to decline, it has done so at a slower rate than historically experienced. While we are encouraged that this trend will continue in future periods, we believe that demand will continue to decline for the foreseeable future in line with recent and historical trends. As our wireless products and services are replaced with other competing technologies, such as the shift from narrow band wireless service offerings to broad band technology services, our wireless revenue will continue to decrease.

The following reflects the impact of subscribers and ARPU on the change in wireless revenue:


	Units in Service as of September 30,				Revenue for the Three Months Ended September 30,							Change Due To:						Units in Service as of March 31,				Revenue for the Three Months Ended March 31,							Change Due To:
(in thousands)	2019	2018	Change		2019		2018		Change			ARPU			Units			2020	2019	Change		2020		2019		Change			ARPU			Units
Total	955	999	(44	)	$	21,212	$	22,442	$	(1,230	)	$	(278	)	$	(952	)	926	982	(56	)	$	20,451	$	21,687	$	(1,236	)	$	(35	)	$	(1,201	)

	Units in Service as of September 30,				Revenue for the Nine Months Ended September 30,							Change Due To:
(in thousands)	2019	2018	Change		2019		2018		Change			ARPU			Units
Total	955	999	(44	)	$	64,241	$	68,574	$	(4,333	)	$	(1,126	)	$	(3,207	)

As demand for one-way and two-way messaging has declined, we have developed or added service offerings such as encrypted paging and Spok Mobile with a pager number in order to increase our revenue potential and mitigate the decline in our wireless revenue. We will continue to explore ways to innovate and provide customers the highest value possible.

For the three months ended ~~September 30, 2019,~~March 31, 2020, as compared to the same period in ~~2018,~~2019, the decrease in software operations revenue primarily resulted from lower license revenue. The three months ended March 31, 2019 included a benefit from software licenses delivered to the customer which were contracted in a prior period. During the three months ended March 31, 2019, the Company began delivering software licenses to customers in the same month they were contracted for, thus a similar benefit was not seen during the three months ended March 31, 2020. Additionally, the delay in our sales cycle due to COVID-19 resulted in delivery of fewer software licenses and ~~hardware~~equipment products. ~~The decline~~Service revenue was lower primarily as a result of less efficient projects as well as initial impacts from COVID-19. Governmental travel restrictions and our customers focus on COVID-19 mitigation efforts led to delays in implementation projects contributing to lower services revenue ~~was primarily attributable~~beginning in March. Given the nature of our projects (e.g. fixed bid), the time taken to complete projects in comparison to the original expectation can vary significantly resulting from a ~~decrease~~number of factors including complexity, customer focus, accuracy of the original scope, etc. Additionally, we significantly increased capacity in ~~reimbursable expense revenues which also resulted~~the fourth quarter of 2019. Some of this inefficiency seen in ~~a corresponding decline~~the first quarter can be attributed to ~~cost~~the significant training and other efforts undertaken by the services team as these new hires were

assimilated into the professional service organization. Our current expectation is that these individuals will be fully utilized beginning in the second quarter of ~~sales for the same periods. Our project-based professional services revenues were largely in-line for~~2020, excluding any effects from COVID-19.

For the three months ended ~~September 30, 2019 and 2018. For the nine months ended September 30, 2019,~~March 31, 2020 as compared to the same period in ~~2018,~~2019, the decrease in ~~operations~~maintenance revenue primarily ~~resulted from~~relates to certain one-time revenue reflected in the delivery of fewer software licenses and hardware products partially offset by an increase in services revenue stemming from stronger utilization rates and more efficient projects. The decrease in maintenance revenue,results for the three months ended ~~September 30,~~March 31, 2019 as

~~compared to the same periods in 2018, primarily relates to the timing of revenue in 2018 and to a lesser extent a limited number of contracts which were up for renewal~~that did not occur during the ~~three months ended September 30, 2019 but we are continuing~~first quarter of 2020. These one-time items generally relate to ~~negotiate. While many of our~~specific renewal contracts that do not have auto-renewal terms ~~there are a subset~~and for which we must negotiate for at the end of ~~contracts which require renegotiation for~~ each ~~renewal period.~~term. We are generally precluded from recognizing revenue on these contracts until new terms have been agreed ~~to.~~to even though we generally will continue to provide maintenance service for these customers while negotiations are on-going. While certain of our commercial customers require this type of contract renewal, these contracts are generally limited to government organizations including ~~Federal, State~~federal, state and ~~Local~~local entities. ~~The increase~~When a renewal of this nature has been contracted, it is often accompanied by several months of "catch-up" revenue from services performed in ~~maintenance~~past periods resulting in a one-time value that is greater than the normal monthly revenue ~~for~~expected over the ~~nine months ended September 30, 2019 compared to the same period in 2018, is a result~~life of the continued success of revenue renewal rates. The maintenance revenue renewal rates for the three and nine months ended September 30, 2019 and 2018 were in excess of 99% and reflect our continuing success in renewals of our maintenance support for existing software solutions and in maintenance support for sales of new solutions.remaining term.

Operating Expenses

The following is a review of our operating expense categories for the three ~~and nine~~ months ended ~~September 30, 2019~~March 31, 2020 and ~~2018.~~2019. Certain prior period amounts have been reclassified to conform to the current period's presentation.

Cost of revenue. Cost of revenue consisted primarily of the following items:


	For the Three Months Ended September 30,				Change					For the Nine Months Ended September 30,				Change					For the Three Months Ended March 31,				Change
(Dollars in thousands)	2019		2018		Total			%		2019		2018		Total			%		2020		2019		Total			%
Payroll and related	$	5,099	$	4,923	$	176		3.6	%	$	14,779	$	14,667	$	112		0.8	%	$	5,785	$	4,931	$	854		17.3	%
Cost of sales	1,567		2,623		(1,056		)	(40.3	)%	5,547		7,221		(1,674		)	(23.2	)%	1,940		2,080		(140		)	(6.7	)%
Stock-based compensation	21		75		(54		)	(72.0	)%	224		205		19			9.3	%	119		107		12			11.2	%
Other	503		520		(17		)	(3.3	)%	1,471		1,542		(71		)	(4.6	)%	420		474		(54		)	(11.4	)%
Total cost of revenue	$	7,190	$	8,141	$	(951	)	(11.7	)%	$	22,021	$	23,635	$	(1,614	)	(6.8	)%	$	8,264	$	7,592	$	672		8.9	%
FTEs	182		185		(3		)	(1.6	)%	182		185		(3		)	(1.6	)%
FTE Employees																			203		177		26			14.7	%

Cost of revenue expense ~~decreased~~increased for the three ~~and nine~~ months ended ~~September 30, 2019~~March 31, 2020 compared to the same ~~periods~~period in ~~2018~~2019 primarily due to ~~a decrease in cost of sales partially offset by~~ an increase in payroll and related ~~expenses.~~expenses, partially offset by a decrease in cost of sales. The increase in payroll and related ~~expenses~~ is ~~primarily related~~due to an increase in headcount for added professional services resources to ~~general pay increases partially offset by lower benefit costs.~~drive corresponding revenue. The decrease in cost of sales is primarily related to lower hardware revenues with a corresponding decrease in related costs as well as lower ~~use~~costs related to professional services as the result of ~~third-party resources for professional services.~~travel restrictions related to COVID-19.

Research and Development. Research and development expenses consisted of the following items:


	For the Three Months Ended September 30,				Change				For the Nine Months Ended September 30,				Change					For the Three Months Ended March 31,					Change
(Dollars in thousands)	2019		2018		Total		%		2019		2018		Total			%		2020			2019		Total			%
Payroll and related	$	5,083	$	4,709	$	374	7.9	%	$	13,985	$	13,217	$	768		5.8	%	$	4,761		$	4,263	$	498		11.7	%
Outside services	2,027		1,040		987		94.9	%	5,684		4,035		1,649			40.9	%	1,584			1,745		(161		)	(9.2	)%
Capitalized software development																		(1,705		)	—		(1,705		)	100.0	%
Stock-based compensation	102		71		31		43.7	%	196		231		(35		)	(15.2	)%	236			11		225			2,045.5	%
Other	225		114		111		97.4	%	546		362		184			50.8	%	573			148		425			287.2	%
Total research and development	$	7,437	$	5,934	$	1,503	25.3	%	$	20,411	$	17,845	$	2,566		14.4	%	$	5,449		$	6,167	$	(718	)	(11.6	)%
FTEs	136		117		19		16.2	%	136		117		19			16.2	%
FTE Employees																		123			121		2			1.7	%

Research and development expenses ~~increased~~decreased for the three ~~and nine~~ months ended ~~September 30, 2019~~March 31, 2020 compared to the same period in ~~2018~~2019 primarily due to the capitalization of certain development costs related to Spok Go, as ~~a result~~development efforts reached project phases where certain costs qualified for capitalization. Refer to Note 4 "Significant Accounting Policies Update" and Note 7 "Consolidated Financial Statement Components" for further detail. The capitalization of ~~our~~development costs partially offset anticipated increases in payroll and related ~~and outside services~~compensation expenses, as we continue to focus on the development efforts of our software solutions. We intend to ~~continue~~maintain these efforts based on their importance to our continued success and do not anticipate a return to historically ~~lower~~low costs. However, increases in ~~staffing and the use of outside services~~development costs have grown at a slower pace ~~during 2019.~~when compared to prior years. These costs will continue to substantially impact margins

and our cash flow from ~~operations as the~~operations. The benefits from our development efforts ~~will not immediately be realized for at least one~~are contingent upon successful introduction and adoption of Spok Go in the marketplace which we expect to ~~three~~gradually take place over the next several years. We anticipate that certain of these costs will begin to qualify for capitalization under Generally Accepted Accounting Principles beginning in late fourth quarter of 2019 or early 2020 as it relates to the development of the Care Connect Platform. Refer to "Item 1. Business" of Part I of the 2018 Annual Report, which describes our development efforts in further detail.

Technology Operations. Technology operations expenses consisted primarily of the following items:


	For the Three Months Ended September 30,				Change					For the Nine Months Ended September 30,				Change					For the Three Months Ended March 31,				Change
(Dollars in thousands)	2019		2018		Total			%		2019		2018		Total			%		2020		2019		Total			%
Payroll and related	$	2,823	$	2,866	$	(43	)	(1.5	)%	$	8,132	$	8,177	$	(45	)	(0.6	)%	$	2,712	$	2,647	$	65		2.5	%
Site rent	3,269		3,482		(213		)	(6.1	)%	10,046		10,516		(470		)	(4.5	)%	3,398		3,296		102			3.1	%
Telecommunications	1,016		950		66			6.9	%	3,031		2,783		248			8.9	%	1,001		996		5			0.5	%
Stock-based compensation	30		24		6			25.0	%	91		71		20			28.2	%	43		30		13			43.3	%
Other	667		465		202			43.4	%	2,045		1,688		357			21.1	%	750		705		45			6.4	%
Technology Operations	$	7,805	$	7,787	$	18		0.2	%	$	23,345	$	23,235	$	110		0.5	%	$	7,904	$	7,674	$	230		3.0	%
FTEs	90		91		(1		)	(1.1	)%	90		91		(1		)	(1.1	)%
FTE Employees																			90		92		(2		)	(2.2	)%

Technology operations expense ~~remained relatively flat~~increased for the three ~~and nine~~ months ended ~~September 30, 2019~~March 31, 2020 compared to the same ~~periods~~period in ~~2018~~2019 primarily due to the increase in ~~telecommunications~~site rent and other minor ~~expenses offset by the reduction~~expenses. The increase in site ~~rent.~~rent is primarily related to a one time reduction made during the first quarter of 2019 which did not similarly impact the first quarter of 2020. Excluding this one time reduction, site rent costs decreased as a result of our continued efforts related to network rationalization. The number of active transmitters declined ~~2.4% from September 30, 2019~~2.5% in March 31, 2020 compared to ~~September 30, 2018.~~March 31, 2019. The number of active transmitters directly relates to the amount of site rent expenses we generally incur on a recurring basis. As we reach certain minimum frequency commitments, as outlined by the United States Federal Communications Commission, we may be unable to continue our efforts to rationalize and consolidate our networks.

Selling and Marketing. Selling and marketing expenses consisted of the following items:


	For the Three Months Ended September 30,				Change					For the Nine Months Ended September 30,				Change					For the Three Months Ended March 31,				Change
(Dollars in thousands)	2019		2018		Total			%		2019		2018		Total			%		2020		2019		Total			%
Payroll and related	$	3,524	$	3,401	$	123		3.6	%	$	10,126	$	10,005	$	121		1.2	%	$	3,583	$	3,273	$	310		9.5	%
Commissions	1,114		1,225		(111		)	(9.1	)%	3,836		4,393		(557		)	(12.7	)%	1,212		1,424		(212		)	(14.9	)%
Stock-based compensation	137		135		2			1.5	%	426		404		22			5.4	%	172		161		11			6.8	%
Advertising and events	703		857		(154		)	(18.0	)%	2,293		3,011		(718		)	(23.8	)%	784		933		(149		)	(16.0	)%
Other	117		98		19			19.4	%	598		466		132			28.3	%	610		319		291			91.2	%
Total selling and marketing	$	5,595	$	5,716	$	(121	)	(2.1	)%	$	17,279	$	18,279	$	(1,000	)	(5.5	)%	$	6,361	$	6,110	$	251		4.1	%
FTEs	103		99		4			4.0	%	103		99		4			4.0	%
FTE Employees																			101		95		6			6.3	%

Selling and marketing expenses ~~decreased~~increased for the three ~~and nine~~ months ended ~~September 30, 2019~~March 31, 2020 compared to the same ~~periods~~period in ~~2018~~2019 primarily due to the increase in payroll and related and other various expenses, partially offset by the decrease in commissions and advertising and ~~events expenses partially offset by an increase in payroll and related expenses.~~events. The increase in payroll and related expenses is primarily related to an increase in headcount. The decrease in advertising and events expenses is largely due to ~~managements~~management's focused efforts to reduce marketing costs to augment research and development initiatives. The decrease in commissions expenses primarily relates to the ~~mix of~~decrease in revenue and the related commissions associated with those revenues. ~~Commissions were paid at a lower rate on revenues that were recognized during the three and nine months ended September 30, 2019 as compared to the same periods in 2018.~~

General and Administrative. General and administrative expenses consisted of the following items:


	For the Three Months Ended September 30,				Change					For the Nine Months Ended September 30,				Change					For the Three Months Ended March 31,				Change
(Dollars in thousands)	2019		2018		Total			%		2019		2018		Total			%		2020		2019		Total			%
Payroll and related	$	4,220	$	4,834	$	(614	)	(12.7	)%	$	12,397	$	13,589	$	(1,192	)	(8.8	)%	$	4,134	$	4,041	$	93		2.3	%
Stock-based compensation	674		1,118		(444		)	(39.7	)%	1,584		3,011		(1,427		)	(47.4	)%	612		219		393			179.5	%
Bad debt	402		513		(111		)	(21.6	)%	614		1,321		(707		)	(53.5	)%	43		308		(265		)	(86.0	)%
Facility rent, office, and technology costs	2,369		2,426		(57		)	(2.3	)%	7,147		7,998		(851		)	(10.6	)%	2,068		2,294		(226		)	(9.9	)%
Outside services	2,004		2,363		(359		)	(15.2	)%	6,086		5,621		465			8.3	%	2,036		1,776		260			14.6	%
Taxes, licenses and permits	888		1,081		(193		)	(17.9	)%	2,672		3,185		(513		)	(16.1	)%	859		921		(62		)	(6.7	)%
Other	1,256		1,338		(82		)	(6.1	)%	3,755		3,652		103			2.8	%	1,499		1,188		311			26.2	%
Total general and administrative	$	11,813	$	13,673	$	(1,860	)	(13.6	)%	$	34,255	$	38,377	$	(4,122	)	(10.7	)%	$	11,251	$	10,747	$	504		4.7	%
FTEs	106		111		(5		)	(4.5	)%	106		111		(5		)	(4.5	)%
FTE Employees																			103		106		(3		)	(2.8	)%

General and administrative expenses ~~decreased~~increased for the three ~~and nine~~ months ended ~~September 30, 2019~~March 31, 2020 compared to the same ~~periods~~period in ~~2018~~2019 primarily due to ~~the decrease in payroll and related, stock based compensation, outside services and bad debt expense, partially offset by~~ an increase in ~~facility rent and office costs.~~stock-based compensation. The decrease in payroll and related expenses is primarily due to a decrease in headcount, benefit related costs, and forfeitures related to the resignation of a named executive officer ("NEO"). The decreaseincrease in stock-based compensation is largely due to forfeitures related to the ~~previously mentioned~~resignation of an NEO ~~resignation~~ during the three ~~and nine~~ months ended ~~September 30,~~March 31, 2019 when compared to the same periods in 2018. The decrease in facility rent and office costs is primarily to due to a reduction in certain telephone and technology expenses in addition to repair and maintenance costs during the three and nine months ended September 30, 2019 when compared to the same periods in 2018. The decrease in bad debt expenses is related to a change in methodology meant to provide additional coverage for our exposure to potentially uncollectible accounts receivable during the three and nine months ended September 30, 2018 that did not ~~occur for~~impact the three ~~and nine~~ months ended ~~September 30, 2019.~~March 31, 2020.

Depreciation, Amortization and Accretion. Depreciation, amortization and accretion expenses were ~~$2.3~~$2.1 million and ~~$2.8~~$2.4 million for the three months ended ~~September 30,~~March 31, 2020 and 2019, ~~and 2018, respectively, and $7.0 million and $8.2 million for the nine months ended September 30, 2019 and 2018,~~ respectively. The decrease of ~~$0.5~~$0.3 million in depreciation, amortization and accretion expenses for the ~~nine~~three months ended ~~September 30, 2019~~March 31, 2020 compared to the same period in ~~2018 and the decrease of $1.2 million for the nine months ended September 30,~~ 2019 ~~compared to the same period in 2018 are~~is primarily due to certain ~~paging~~computer hardware and software assets becoming fully depreciated in ~~2018~~2019 and continued efforts to reduce capital expenditures. For additional details regarding depreciation, amortization and accretion expenses refer to Note 7, "Consolidated Financial Statement Components."

~~Benefit from~~Provision for income taxes. ~~Benefit~~Expense from income taxes ~~were $0.8~~was $0.7 million and ~~$0.4~~$0.6 million for the three months ended ~~September 30,~~March 31, 2020 and 2019, ~~and 2018, respectively, and $0.5 million and $0.7 million for the nine months ended September 30, 2019 and 2018,~~ respectively. Income tax ~~benefit~~expense increased ~~$0.4~~$0.1 million for the three months ended ~~September 30, 2019~~March 31, 2020 compared to the same ~~periods~~period in ~~2018 and decreased $0.2 million for the nine months ended September 30, 2019 compared to the same periods in 2018.~~2019. The change in the provision for income taxes for the three months ended ~~September 30, 2019~~March 31, 2020 as compared to the same period in ~~2018~~2019 primarily relates ~~to an increase in pre-tax book loss partially offset by~~ the ~~change~~difference in the projected annual effective tax rate as a result of certain permanent tax differences, estimated research and development tax credits and certain discrete items. The change in the provision for income taxes for the nine months ended September 30, 2019 as compared to the same period in 2018 primarily relates to a decrease in pre-tax book loss and partially offset by the change in the projectedanticipated annual effective tax rate as a result of certain permanent tax differences, estimated research and development tax credits and certain discrete items. Further details can be found in Note 11, "Income Taxes."

Liquidity and Capital Resources

At ~~September 30, 2019,~~March 31, 2020, we had cash and cash equivalents and short-term investments of ~~$79.2~~$72.2 million.

The available cash and cash equivalents are held in accounts managed by third-party financial institutions and consist of invested cash and cash in our operating accounts. The invested cash is invested in interest bearing funds managed by third-party financial institutions. These funds invest in direct obligations of the government of the United States. To date, we have experienced no loss or lack of access to our invested cash or cash equivalents; however, we can provide no assurance that access to our invested cash and cash equivalents will not be impacted by adverse market conditions. 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 Condensed Consolidated Balance ~~Sheet.~~

Sheets.

At any point in time, we have approximately $7.0 to $12.0 million in our operating accounts that are with third-party financial institutions. While we monitor daily the cash balances in our operating accounts and adjust the cash balances as appropriate, these cash balances could be impacted if the underlying financial institutions fail or are subject to other adverse conditions in the financial markets. To date, we have experienced no loss or lack of access to cash in our operating accounts.

We intend to use our cash on hand to provide working capital, to support operations, to invest in our business, and to return value to stockholders through cash dividends and possible repurchases of our common stock. We may also consider using cash to fund or complete opportunistic investments and acquisitions that we believe will provide a measure of growth or revenue stability while supporting our existing operations. Because we intend to continue to substantially invest in the development of our integrated communications platform over the next several years, commensurate with declining revenues from our wireless business, we anticipate that our cash on hand will decrease significantly during that period, and possibly longer until revenues from ~~our~~ Spok ~~Care Connect platform~~Go begin to be realized.

In response to COVID-19, management has enacted certain cost mitigation measures, as previously discussed, that it believes will allow the Company to operate in a cash flow positive manner for the remainder of the year. While we had previously mentioned the potential impact on our revenues, we do not expect COVID-19 will have a material impact on our liquidity at this time given our ability to reduce costs further, if necessary.

Overview

In the event that net cash provided by operating activities and cash on hand are not sufficient to meet future cash requirements, we may be required to reduce planned capital expenses, reduce or eliminate our cash dividends to stockholders, not resume our common stock repurchase program, sell assets and/or seek outside financing. We can provide no assurance that reductions in planned capital expenses or proceeds from asset sales would be sufficient to cover shortfalls in available cash or that outside financing would be available on acceptable terms.

Based on current and anticipated levels of operations, we anticipate net cash provided by operating activities, together with the available cash on hand at ~~September 30, 2019,~~March 31, 2020, should be adequate to meet our anticipated cash requirements for the foreseeable future.

The following table sets forth information on our net cash flows from operating, investing, and financing activities for the periods stated:


	Nine Months Ended September 30,						Change			Three Months Ended March 31,						Change
(Dollars in thousands)	2019			2018			Change			2020			2019			Change
Net cash provided by operating activities	$	10,748		$	11,856		$	(1,108	)	$	1,317		$	1,223		$	94
Net cash used in investing activities	(29,661		)	(5,005		)	(24,656		)	(2,642		)	(16,111		)	13,469
Net cash used in financing activities	(14,913		)	(18,492		)	3,579			(3,532		)	(5,468		)	1,936

Net Cash Provided by Operating Activities. ~~As discussed above, we are dependent on~~For the three months ended March 31, 2020 cash ~~flows~~ provided by operating activities was $1.3 million due primarily to ~~meet our cash requirements.~~non-cash items such as depreciation, amortization and accretion of $2.1 million, stock-based compensation of $1.1 million, deferred income tax expense of $0.8 million, partially offset by net loss of $4.5 million. Cash provided by operating activities ~~varies depending on changes~~also increase resulting from the change in ~~various working capital items including deferred revenue, accounts payable,~~ accounts receivable of $2.4 million and prepaid expenses, inventory, and ~~various accrued expenses. Net cash provided by operating activities decreased by $1.1~~other assets of $1.0 million, for the nine months ended September 30, 2019 compared to the same period in 2018. The decrease of $1.1 million is related to an increase in net income of $0.4 million (increase in cash flow), a decrease of $1.2 million in depreciation, amortization and accretion expenses (decrease in cash flow), a decrease in non-cash items of $0.4 million (decrease in cash flow), and a decrease in stock-based compensation of $1.4 million (decrease in cash flow). With respect to changes in assets and liabilities the net cash provided by operating activities reflects a net $5.9 million greater increase to assets (increase in cash flow), partially offset by ~~a $3.6 million greater decrease in deferred revenue (decrease in cash flow), a $0.8 million greater decrease~~changes in accounts payable, accrued liabilities and other ~~(decrease~~of $1.1 million and deferred revenue of $0.5 million

Cash provided by operating activities for the three months ended March 31, 2019 was $1.2 million, due primarily to net income of $0.7 million and non-cash items such as depreciation, amortization and accretion of $2.4 million, stock-based compensation of $0.5 million, deferred income tax expense of $0.5 million and other non-cash items of $0.4 million. Cash provided by operating activities also increased resulting from the change in ~~cash flow).~~prepaid expenses, inventory, and other assets of $2.2 million and deferred revenue of $1.8 million, partially offset by the changes in account receivable of $4.8 million and accounts payable, accrued liabilities, and other of $2.5 million.

Net Cash Used in Investing Activities. ~~Net cash~~Cash used in investing activities ~~increased by $24.7 million~~ for the ~~nine~~three months ended ~~September 30,~~March 31, 2020 and 2019 ~~compared~~was $2.6 million and $16.1 million, respectively, due primarily to the ~~same period in 2018 primarily due to the purchase~~capitalization of ~~additional U.S. treasury securities.~~software development costs and purchases of property and equipment.

Net Cash Used in Financing Activities. ~~Net cash~~Cash used in financing activities ~~decreased by $3.6 million~~ for the ~~nine~~three months ended ~~September 30, 2019 compared~~March 31, 2020 was $3.5 million due primarily to cash distributions to stockholders. Cash used in financing activities for the ~~same period in 2018. The decrease was largely due to common stock repurchases during~~ the ~~nine~~three months ended ~~September 30, 2018 that did not take place during~~March 31, 2019 was $5.5 million due primarily to cash distributions to stockholder and the ~~same period in 2019.~~purchase of common stock.

Future Cash Dividends to Stockholders. On ~~October 23, 2019,~~April 29, 2020, our Board of Directors declared a regular quarterly cash dividend of $0.125 per share of common stock with a record date of ~~November 15, 2019,~~May 25, 2020, and a payment date of ~~December 10, 2019.~~June 24, 2020. This cash dividend of approximately $2.4 million will be paid from available cash on hand.

~~Common Stock Repurchase Program.~~ In August 2018, the Company's Board of Directors authorized the repurchase of up to $10.0 million of the Company's common stock through December 31, 2018 on the open market or in privately negotiated transactions. In November 2018, the Company's Board of Directors extended the repurchase authority through December 31, 2019. The Company fully exhausted the repurchase authority as of September 30, 2019. For additional details regarding the common stock repurchase program refer to Note 10~~, "Stockholders' Equity."~~

Other. For ~~2019,~~2020, the Board of Directors currently expects to pay dividends of $0.125 per common share each quarter, subject to declaration by the Board of Directors.

Commitments and Contingencies

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. As we reach certain minimum frequency commitments, as outlined by the United States Federal Communications Commission, we may be unable to continue our efforts to rationalize and consolidate our networks. Total rent expense under operating leases was ~~$4.4~~$4.2 million for the three months ended ~~September 30,~~March 31, 2020 and 2019, ~~and 2018, and $13.2 million for the nine months ended September 30, 2019 and 2018,~~ respectively.

Off-Balance Sheet Arrangements. We do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As such, we are not exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.

Commitments and Contingencies. See Note 12, "Commitments and Contingencies" for further discussion on our commitments and contingencies.

Related Party Transactions

See Note 13, "Related Parties" for a discussion regarding our related party transactions.

Critical Accounting Policies and Estimates

The preceding discussion and analysis of financial condition and operations is based on our Condensed Consolidated Financial Statements, which have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”). The preparation of our Condensed Consolidated Financial Statements requires management to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenue, 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 and intangible assets subject to amortization and goodwill, accounts receivable, revenue recognition, 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.

There have been no changes to the critical accounting policies reported in the ~~2018~~2019 Annual Report that affect our significant judgments and estimates used in the preparation of our Condensed Consolidated Financial Statements other than those outlined in Note 4, "Significant Accounting Policies Update."

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk

As of ~~September 30, 2019,~~March 31, 2020, we had no outstanding debt and no revolving credit facility.

Foreign Currency Exchange Rate Risk

We conduct a limited amount of business outside the United States. The financial impact of transactions billed in foreign currencies is immaterial to our financial results and, consequently, we do not have any material exposure to the risk of foreign currency exchange rate fluctuations.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our management carried out an evaluation, as required by Rule 13a-15(b) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), with the participation of our principal executive officer and our principal financial officer, of the effectiveness of our disclosure controls and procedures, as of the end of our last fiscal quarter. Disclosure controls and procedures are defined under Rule 13a-15(e) under the Exchange Act as controls and other procedures of an issuer that are designed to ensure that the information required to be disclosed by the issuer in the reports that it files or submits under the Exchange Act (i) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (ii) is accumulated and communicated to the issuer’s management, including its principal executive officer and principal financial officer, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure. Based upon this evaluation, our principal executive officer and our principal financial officer have concluded that our disclosure controls and procedures were effective as of ~~September 30, 2019.~~March 31, 2020.

Changes in Internal Control Over Financial Reporting

There were no changes made to the Company’s internal control over financial reporting during the three months ended ~~September 30, 2019~~March 31, 2020 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Refer to Note 12, "Commitments and Contingencies" in the Notes to Financial Statements for information regarding legal proceedings in which we are involved.

ITEM 1A. RISK FACTORS

The risk factors included in “Part I – Item 1A – Risk Factors” of the ~~2018~~2019 Annual Report have not materially changed during the quarter ended ~~September 30, 2019~~March 31, 2020. other than the additional risk factor provided below:

Our business, financial condition and operating results have been, and will continue to be, adversely affected by the recent COVID-19 pandemic.

The COVID-19 pandemic has resulted in a widespread health crisis that has adversely affected businesses, economies and financial markets worldwide, and has caused significant volatility in U.S. and international debt and equity markets. In particular, health care organizations, have faced, and will continue to face, substantial challenges in treating patients with COVID-19, such as the diversion of hospital staff and resources from ordinary functions to the treatment of COVID-19, supply, resource and capital shortages and the overburdening of staff and resource capacity.

Our business, financial condition and operating results have been, and will continue to be, adversely affected by the COVID-19 pandemic. For example, the COVID-19 pandemic has caused, and will continue to cause, delays in or the loss of revenue from services that require onsite implementation as well as delays in or the loss of software bookings, as health care organizations are putting these projects on hold to focus limited resources and personnel capacity toward the treatment of COVID-19. We also may be affected by the cancellation of or delay in healthcare information technology and management systems conferences and exhibitions, like the Healthcare Information and Management Systems Society (HIMSS) Global Health Conference & Exhibition, which was scheduled to take place in early March and would have allowed us to continue the rollout of Spok Go. The cancellation of or delay in these types of conferences and exhibitions may negatively affect our growth in Spok Go revenues.

The extent to which COVID-19 impacts our results will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of COVID-19 and the actions taken to contain it or treat its impact.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The ~~following table presents information with respect to purchases made by the~~ Company did not repurchase any shares of ~~the Company's~~its common stock during the

three months ended ~~September 30, 2019:~~March 31, 2020.

Period Total Number of Shares Purchased
Average Price Paid Per Share⁽¹⁾
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs
(Dollars in thousands)
Balance at June 30, 2019 4,749
July 1 to 31, 2019 —
$ —
—
4,749
August 1 to 31, 2019 352,059
$ 11.88
352,059
568
September 1 to 30, 2019 49,283
$ 11.52
49,283
—
For the three months ended September 30, 2019 401,342
$ 11.83
401,342

⁽¹⁾~~Average price paid per share excludes commissions of approximately $16,054~~

For additional details regarding purchases made by the Company of the Company's stock refer to Note 10, "Stockholders' Equity." The above table excludes shares repurchased to settle employee tax withholding related to the vesting of equity awards.

ITEM 6. EXHIBITS

The exhibits listed in the accompanying Exhibit Index below are filed or incorporated by reference as part of this report.

EXHIBIT INDEX

Incorporated by Reference

Exhibit Number

Exhibit Description

Form

File No.

Exhibit

Filing Date

Filed/Furnished Herewith

31.1

Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended, dated ~~October 24, 2019~~April 30, 2020

Filed

31.2

Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended, dated ~~October 24, 2019~~April 30, 2020

Filed

32.1

Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 dated ~~October 24, 2019~~April 30, 2020

Furnished

32.2

Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 dated ~~October 24, 2019~~April 30, 2020

Furnished

101.INS

XBRL Instance Document*

Furnished

101.SCH

XBRL Taxonomy Extension Schema*

Furnished

101.CAL

XBRL Taxonomy Extension Calculation*

Furnished

101.DEF

XBRL Taxonomy Extension Definition*

Furnished

101.LAB

XBRL Taxonomy Extension Labels*

Furnished

101.PRE

XBRL Taxonomy Extension Presentation*

Furnished



*	The financial information contained in these XBRL documents is unaudited.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



	SPOK HOLDINGS, INC.

Dated: ~~October 24, 2019~~April 30, 2020	/s/ Michael W. Wallace
	Name:	Michael W. Wallace
	Title:	Chief Financial Officer
		(Principal Financial Officer and duly authorized officer)



For the Year Ended December 31,	(Dollars in thousands)
For the remaining three months ending December 31, 2019	$	1,416
2020	5,095
2021	4,049
2022	2,475
2023	1,725
Thereafter	4,968
Total future lease payments	19,728
Imputed interest	(2,767		)
Total	$	16,961



	(Dollars in thousands)
For the remaining three months ending December 31, 2019	$	625
For the year ending December 31:
2020	2,500
2021	417
Total amortizable intangible assets	$	3,542



Period	Total Number of Shares Purchased	Average Price Paid Per Share⁽¹⁾		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Approximate Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs
					(Dollars in thousands)
Balance at January 1, 2019					$	6,555
Three Months Ended March 31, 2019	131,012	$	13.77	131,012	$	4,749
Three Months Ended June 30, 2019	—	—		—	$	4,749
Three Months Ended September 30, 2019	401,342	$	11.83	401,342	—
Total	532,354	$	12.31	532,354

For the Three Months Ended March 31,

Restricted stock units