SPOK HOLDINGS, INC.
Forward-Looking Statements
This Quarterly Report on Form 10-Q ("Quarterly Report") contains forward-looking
statements and information relating to Spok Holdings, Inc. and its subsidiaries
(collectively, "we," "Spok," "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
Results of Operations ("MD&A")," and "Risk Factors" in our Annual Report on Form
10-K for the year ended December 31, 2020 ("2020 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 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 2020 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.
19
--------------------------------------------------------------------------------Overview
The following MD&A is intended to help the reader understand the results of operations and financial condition of Spok. This MD&A is provided as a supplement to, and should be read in conjunction with, our 2020 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 operating subsidiary,Spok, Inc. , delivers smart, reliable clinical communication and collaboration solutions to organizations, primarily in theU.S. healthcare industry, to help protect the health, well-being and safety of individuals. Organizations rely on Spok for workflow improvement, secure messaging, 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 and Item 1. "Business" of Part I of the 2020 Annual Report, which describe our business in further detail. COVID-19 InMarch 2020 , theWorld Health Organization declared COVID-19 a global pandemic, and the virus has significantly impacted the global economy. Although federal and state restrictions were not widely adopted until late in the first quarter of 2020, we began to experience a direct impact on our sales cycle in lateFebruary 2020 as hospitals began to delay purchasing decisions and address staff reductions. These delays have continued to affect our software bookings, which directly impact license and equipment revenues. We have also experienced delays in our ability to deliver on-site implementation services, which have continued to impact our services revenue since the onset of the pandemic. While much of our implementation process can be performed remotely, the on-premise nature of certain of our solutions requires some level of on-site availability to complete the implementation of customer software solutions. These impacts have primarily resulted in delays in the timing of revenue recognition, as associated revenue corresponds to our backlog of performance obligations ready for delivery at some point in the future. While many hospitals have relaxed their initial capacity and social distancing guidelines, some of our customers have continued such restrictions to ensure the safety of their personnel and patients. These restrictions can make it difficult for external personnelwho are not critical to the immediate operating needs of a hospital, such as our implementation staff, to gain access. These factors can vary considerably depending on the size of an organization, geographical location and local regulations. Given that we anticipate some level of continued disruptions to our business, we believe our software revenues will continue to be impacted by the pandemic for the remainder of 2021, although we are optimistic that such disruptions will subside over time and our software revenues will improve. Our ability to return to normal operating levels is largely driven by our customers and their ability to resume operations beyond providing just critical needs and emergency services. Many hospitals initially reduced the number of elective surgeries as a result of government restrictions, as well as patients delaying or canceling elective procedures during the pandemic. While many organizations began to see improved operating levels during the second half of 2020 and into 2021 as the number of overallU.S. virus cases declined, some of our customers in certain geographic areas have continued to experience periodic capacity constraints due to the emergence of new COVID-19 variants. Furthermore, any significant spikes inU.S. virus cases could further delay progress towards returning to normal operational levels. The length and severity of pandemic-related restrictions affecting our customer base remain uncertain, and we continue to monitor new COVID-19 variants of concern that may indicate risks of increased transmission and more severe disease. With continued distribution of effective vaccines, however, we are optimistic that spikes in virus cases will be mitigated and that our customers' operating levels will improve as pandemic-related restrictions continue to be lifted. Although we are likely to see some lingering and continued effects from COVID-19 throughout the remainder of 2021, we anticipate a return to normal operating levels by the end of the year. Since the fourth quarter of 2020, we have seen modest improvements in each of the aforementioned areas impacted by the pandemic, and we remain cautiously optimistic that we will continue seeing sequential improvement in these areas over the next several quarters. We are also optimistic that any lingering effects from COVID-19 will have a lesser impact on our financial results in 2021 than they did in 2020. 20 -------------------------------------------------------------------------------- As facts and circumstances continue to evolve over the coming months, we will continue to assess and communicate the anticipated impact on our business, and we will continue to diligently pursue countermeasures to prudently manage operating expenses and liquidity during this time, with a goal of neutralizing the impact of the pandemic on our cash flows. Each of these measures is described in further detail below and is subject to actual operating conditions experienced during the year. •Reduced work schedules: We enacted a Company-wide plan that reduced work schedules, resulting in a temporary reduction in compensation expenses during the second, third and fourth quarters of 2020 and continuing for the first half of 2021, whereby each of our employees, including our executive officers, was subject to one to two weeks of a reduced work schedule per quarter. For 2020 and 2021, these reduced work schedules resulted in realized savings of$5.6 million and$1.8 million in compensation expense, respectively. While we originally enacted this plan for the full-year 2021, we subsequently concluded that continuing the plan for the second half of the year was unnecessary given our positive results during the first half of the year, as well as management's confidence in mitigating short-term uncertainties with regard to the pandemic. •Equity in Lieu of Cash Compensation: We also enacted a plan for the first three quarters of 2021 whereby qualified employees received a portion of their compensation in the form of shares of the Company's common stock in lieu of cash. These awards, which affected approximately 450 of our employees, were made in advance on a quarterly basis and vested immediately. While we originally enacted this plan for the full-year 2021, we subsequently concluded that continuing the plan for the fourth quarter of the year was unnecessary, for the same reasons as explained above. For the nine months endedSeptember 30, 2021 , we achieved cash savings of$1.9 million . •Non-Employee Director Alternative DSU or Restricted Stock Plan: Since inception of this alternative payment plan, which began in the third quarter of 2020, all non-employee directors have voluntarily elected to receive either DSUs or restricted stock in lieu of the entire cash portion of their compensation. As a result, for the nine months endedSeptember 30, 2021 , we achieved cash savings of$0.3 million . We do not anticipate any further savings from this plan. (Refer to Note 10, "Stockholder's Equity" in the Notes to Condensed Consolidated Financial Statements for further detail related to the alternative DSU or restricted stock plan). As we continue to see improvements in our operating levels, we are confident that the need to mitigate cash flow impacts through direct expense management will also continue to decline. While the Company has the ability to continue its countermeasures for the foreseeable future, we anticipate re-evaluating our position on a quarterly basis based on the progression of COVID-19, impacts on our business, and other facts and circumstances as deemed relevant by management. We believe our cost mitigation efforts, in addition to relief provided by the CARES Act and natural cost savings that will materialize as a result of COVID-19 (e.g., reduced travel and events), will allow us to continue to offset any negative cash flow impact resulting from the pandemic during 2021. 21 -------------------------------------------------------------------------------- Results of Operations The following table is a summary of our Condensed Consolidated Statement of Operations for the Three and Nine Months EndedSeptember 30, 2021 , and 2020: For the Three Months Ended For the Nine Months Ended September 30, Change September 30, Change (Dollars in thousands) 2021 2020 Total % 2021 2020 Total % Revenue: Wireless$ 19,644 $ 20,828 $ (1,184) (5.7) %$ 59,623 $ 63,293 $ (3,670) (5.8) % Software 16,207 16,865 (658) (3.9) % 47,987 47,406 581 1.2 % Total revenue 35,851 37,693 (1,842) (4.9) % 107,610 110,699 (3,089) (2.8) % Operating expenses: Cost of revenue (exclusive of items shown separately below) 7,520 6,544 976 14.9 % 21,734 20,709 1,025 4.9 % Research and development 4,178 3,459 719 20.8 % 12,962 11,662 1,300 11.1 % Technology operations 7,439 7,357 82 1.1 % 21,778 22,472 (694) (3.1) % Selling and marketing 5,165 4,272 893 20.9 % 15,045 14,463 582 4.0 % General and administrative 12,538 10,994 1,544 14.0 % 35,245 33,056 2,189 6.6 % Depreciation, amortization and accretion 2,568 2,335 233 10.0 % 7,752 6,553 1,199 18.3 % Total operating expenses 39,408 34,961 4,447 12.7 % 114,516 108,915 5,601 5.1 % Operating (loss) income (3,557) 2,732 (6,289) (230.2) % (6,906) 1,784 (8,690) (487.1) % Interest income 141 127 14 11.0 % 263 636 (373) (58.6) % Other income 10 151 (141) (93.4) % 13 113 (100) (88.5) % (Loss) income before income taxes (3,406) 3,010 (6,416) (213.2) % (6,630) 2,533 (9,163) (361.7) % Benefit from (provision for) income taxes 912 155 757 488.4 % 1,120 (149) 1,269 (851.7) % Net (loss) income$ (2,494) $ 3,165 $ (5,659) (178.8) %$ (5,510) $ 2,384 $ (7,894) (331.1) % Supplemental Information Full-Time Equivalent ("FTE") Employees 581 613 (32) (5.2) % Active transmitters 3,497 3,716 (219) (5.9) % 22
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Revenue
We offer a focused suite of unified clinical communications and collaboration
solutions that include call center applications, 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 is the
healthcare industry, particularly hospitals. While we continue to identify
hospitals with 200 or more beds as the primary targets for our software
solutions as well as our paging services, we have recently expanded our focus to
include smaller hospitals with shorter sales cycles, including academic medical
centers.
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 license, SaaS,
professional services (installation, consulting and training), equipment (to be
used in conjunction with the software), and post-contract support (ongoing
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.
Refer to Note 5, "Revenue, Deferred Revenue and Prepaid Commissions" in the
Notes to Condensed Consolidated Financial Statements for additional information
on our wireless and software revenue streams.
The table below details revenue for the periods stated:
For the Three Months Ended For the Nine Months Ended
September 30, Change September 30, Change
(Dollars in thousands) 2021 2020 Total % 2021 2020 Total %
Revenue - wireless:
Paging revenue $ 18,844 $ 19,961 $ (1,117) (5.6) % $ 57,332 $ 60,403 $ (3,071) (5.1) %
Product and other revenue 800 867 (67) (7.7) % 2,291 2,890 (599) (20.7) %
Total wireless revenue 19,644 20,828 (1,184) (5.7) % 59,623 63,293 (3,670) (5.8) %
Revenue - software:
License 1,674 1,988 (314) (15.8) % 3,999 3,692 307 8.3 %
Services 4,159 4,772 (613) (12.8) % 13,378 13,132 246 1.9 %
Equipment 596 554 42 7.6 % 1,694 1,880 (186) (9.9) %
Subscription 133 24 109 454.2 % 268 24 244 1,016.7 %
Operations revenue 6,562 7,338 (776) (10.6) % 19,339 18,728 611 3.3 %
Maintenance revenue 9,645 9,527 118 1.2 % 28,648 28,678 (30) (0.1) %
Total software revenue 16,207 16,865 (658) (3.9) % 47,987 47,406 581 1.2 %
Total revenue $ 35,851 $ 37,693 $ (1,842) (4.9) % $ 107,610 $ 110,699 $ (3,089) (2.8) %
23-------------------------------------------------------------------------------- Wireless Revenue The decrease in wireless revenue for the three and nine months endedSeptember 30, 2021 , compared to the same periods in 2020, reflects the secular decrease in demand for our wireless services. Wireless revenue is generally reflective of the number of units in service and measured monthly as 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 was$7.29 and$7.34 for the three months endedSeptember 30, 2021 , and 2020, respectively. Total units in service were 0.9 million as of bothSeptember 30, 2021 , and 2020. The decrease in ARPU was primarily due to lower variable revenue and an expected decline in service revenue, partially offset by revenue from the Telecommunications Relay Service Charge ("TRS") which we began to recover from customers in 2021, as well as general increases of Universal Service Fees ("USF"). USF and TRS fees are effectively pass-through items that have corresponding costs associated with them. Excluding these pass-through items, ARPU would have declined in-line with historical trends. We believe that demand will continue to decline for the foreseeable future in line with recent and historical trends, as our wireless products and services are replaced with other competing technologies, such as the shift from narrowband wireless service offerings to broadband technology services. The following reflects the impact of subscribers and ARPU on the change in paging revenue: For the Three Months Ended September 30, Change Due To: (in thousands) 2021 2020 Change ARPU Units Paging revenue$ 18,844 $ 19,961 $ (1,117) $ (125) $ (992) For the Nine Months Ended September 30, Change Due To: (in thousands) 2021 2020 Change ARPU Units Paging revenue$ 57,332 $ 60,403 $ (3,071) $ 149 $ (3,320) 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 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. 24 -------------------------------------------------------------------------------- Software Revenue Software revenue consists of two components: operations revenue and maintenance revenue. Operations revenue consists primarily of license and subscription revenues for our healthcare communications solutions, revenue from the sale of equipment that facilitates the use of our software solutions, and professional services revenue related to the implementation of our solutions. Maintenance revenue is generated from our ongoing support of software solutions or related equipment, typically for a period of one year after project completion. To a large degree, software revenue corresponds to our backlog of performance obligations ready to deliver at some point in the future, and any delays in implementation may affect the timing of revenue recognition. Our software projects generally originate from fixed-bid contracts, although many involve a protracted sales cycle and may result in unforeseen complexity and deviation from original scope. The time needed to complete projects, therefore, may not align with our original expectations, which affects our backlog. As a result, software revenue may fluctuate on a short-term basis, and we generally evaluate longer-term trends when managing this business. Given that we anticipate some level of continued disruptions to our business due to the COVID-19 pandemic, we believe our software revenues will continue to be impacted by the pandemic for the remainder of 2021, although we are optimistic that such disruptions will improve. Operations Revenue Compared to the same period in 2020, license revenue decreased for the three months endedSeptember 30, 2021 , as a result of a decline in bookings coinciding with slowing sales as our customer base has experienced mixed operating levels due to lingering effects of the pandemic. For the three months endedSeptember 30, 2021 , services revenue decreased compared to the same period in 2020, largely the result of higher-than-normal services revenue recorded in the third quarter of 2020 from certain projects that had been deferred from the second quarter of 2020 due to the onset of the pandemic. Compared to the same period in 2020, license and services revenue each increased for the nine months endedSeptember 30, 2021 , as customers slowly continue to re-engage on-site implementations and projects in 2021, despite the lingering effects of the pandemic. These results also reflected an improving economy and selling environment on a year-over-year basis due to the weakness experienced in 2020 during the early months of the pandemic. Maintenance Revenue Compared to the same periods in 2020, maintenance revenue increased for the three months endedSeptember 30, 2021 , and was relatively in line with prior year results for the nine months endedSeptember 30, 2021 . The fluctuations in the results were attributable to the timing of certain renewals as compared to the same period in 2020. Current trends in revenue churn rates remain relatively stable and are in line with historical trends. However, the deterioration of maintenance revenue from new license bookings has created an environment where churn is greater than the inflow of new revenue. Historically, this revenue churn had been offset by the growth in our license sales. As we continue to focus the majority of our development efforts on Spok Go, we anticipate a continued decline in our ability to sell new licenses for the Care Connect Suite of products. While we have not seen a meaningful increase in our normal customer churn, our ability to replace this churn with new revenues will not likely replicate what we have accomplished historically nor do we expect to fully offset this with annual increases of our existing base. Our intent is to replace this churn with the sale of Spok Go as well as transition existing on-premise customers to our cloud-based solution over the next several years. Given these dynamics, we believe annual maintenance revenue is likely to be relatively flat or slightly down as we move forward, especially as we continue the process of transitioning existing customers to a subscription model. 25 -------------------------------------------------------------------------------- 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 we incur for the delivery of products and services to our customers and consist primarily of 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. Research and development expenses exclude any development costs which qualify for capitalization. •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 service, rental and maintenance operations in order to maintain an efficient network while simultaneously ensuring adequate service for our customers. We believe continued reductions in these expenses will occur for the foreseeable future as our networks continue to consolidate, although the benefits of such network rationalization efforts and resulting costs savings will continue to decline. •Selling and Marketing. The sales and marketing staff are involved in selling our communication solutions primarily inthe 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 maintain a centralized marketing function that 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, including 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. •Depreciation, Amortization and Accretion. These are expenses that may be associated with one or more of the aforementioned functional categories. This classification generally consists of depreciation from capital expenditures or other assets that are core to our ongoing operations, amortization of intangible assets, amortization of capitalized software development costs, and accretion of asset retirement obligations. 26 -------------------------------------------------------------------------------- The following is a review of our operating expense categories for the three and nine months endedSeptember 30, 2021 , and 2020. 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 For the Nine Months Ended September 30, Change September 30, Change (Dollars in thousands) 2021 2020 Total % 2021 2020 Total % Payroll and related$ 5,435 $ 4,941 $ 494 10.0 %$ 15,724 $ 15,077 $ 647 4.3 % Cost of sales 1,414 1,064 350 32.9 % 4,092 4,101 (9) (0.2) % Stock-based compensation 250 148 102 68.9 % 859 401 458 114.2 % Other 421 391 30 7.7 % 1,059 1,130 (71) (6.3) % Total cost of revenue$ 7,520 $ 6,544 $ 976 14.9 %$ 21,734 $ 20,709 $ 1,025 4.9 % FTE Employees 194 199 (5) (2.5) % For the three months endedSeptember 30, 2021 , cost of revenue increased compared to the same period in 2020, driven by increases in payroll and related expenses and cost of sales. Payroll and related costs increased as we recognized lower cost savings from reduced work schedules during the three months endedSeptember 30, 2021 , as compared to the same period in 2020. Our temporary cash savings measures utilized earlier in 2021 are outlined in more detail within the earlier discussion on COVID-19. Additionally, payroll and related costs were lower in 2020 relative to historical trend and normal operating costs as a result of our utilization of certain provisions under the CARES Act for payroll and employee taxes last year that were not available in 2021. Refer to Note 11 - Income Taxes in the Notes to Condensed Consolidated Financial Statements for additional information on our temporary use of the CARES Act provisions. Cost of sales expenses grew primarily from an increase in costs related to services and hardware costs. For the nine months endedSeptember 30, 2021 , cost of revenue also increased compared to the same period in 2020, driven by increases in payroll and related expenses, as described above in the quarterly discussion. Stock-based compensation also increased, the result of our plan to provide a portion of compensation for certain employees in the form of shares of the Company's common stock in lieu of cash, which we implemented at the beginning of 2021. This temporary cash savings measure is outlined in more detail within our earlier discussion on COVID-19. Research and Development Research and development expenses consisted of the following items: For the Three Months Ended For the Nine Months Ended September 30, Change September 30, Change (Dollars in thousands) 2021 2020 Total % 2021 2020 Total % Payroll and related$ 4,291 $ 4,147 $ 144 3.5 %$ 13,099 $ 13,023 $ 76 0.6 % Outside services 1,759 2,113 (354) (16.8) % 6,096 5,500 596 10.8 % Capitalized software development (2,621) (2,906) 285 (9.8) % (8,239) (8,206) (33) 0.4 % Stock-based compensation 435 240 195 81.3 % 1,215 719 496 69.0 % Other 314 (135) 449 (332.6) % 791 626 165 26.4 % Total research and development$ 4,178 $ 3,459 $ 719 20.8 %$ 12,962 $ 11,662 $ 1,300 11.1 % FTE Employees 105 125 (20) (16.0) % For the three months endedSeptember 30, 2021 , research and development expenses increased compared to the same period in 2020, driven by lower capitalized software development and higher stock-based compensation and payroll and related costs, partially offset by lower outside services. 27 -------------------------------------------------------------------------------- Research and development expenses that qualify for capitalization are limited to certain of our Spok Go development activities that are a subset of our total research and development spend. For the three months endedSeptember 30, 2021 , we capitalized lower amounts for software development compared to the same period in 2020, reflecting lower headcount and outside services activity specific to Spok Go development as well as fewer development activities that qualified for capitalization. Outside service costs tend to vary based on the timing of professional services, attributable to our full suite of products (not limited to Spok Go). As the research and development of Spok Go matures, we anticipate costs which qualify for capitalization will decrease as a percentage of total research and development expenses. Stock-based compensation increased as a result of our plan to provide a portion of compensation for certain employees in the form of shares of the Company's common stock in lieu of cash, which we implemented at the beginning of 2021. Payroll and related costs grew primarily due to our curtailment of reduced work schedules compared to the same period in 2020, although the effects of this were largely offset by a decline in employees. Our temporary cash savings measures are outlined in more detail within the earlier discussion on COVID-19. For the nine months endedSeptember 30, 2021 , research and development increased compared to the same period in 2020, driven by higher outside services expenses and stock-based compensation, as described above in the quarterly discussion. We continue to focus on the development efforts of our software solutions and intend to maintain these efforts based on their importance to our continued success. While development costs have continued to grow, they have done so at a slower pace when compared to prior years. Excluding the effects of capitalization, these costs will continue to substantially impact margins and our cash flow from operations. The benefits from our development efforts are contingent upon successful adoption of Spok Go in the marketplace, which we expect to take place gradually over the next several years. Technology Operations Technology operations expenses consisted primarily of the following items: For the Three Months Ended For the Nine Months Ended September 30, Change September 30, Change (Dollars in thousands) 2021 2020 Total % 2021 2020 Total % Payroll and related$ 2,585 $ 2,246 $ 339 15.1 %$ 7,375 $ 7,170 $ 205 2.9 % Site rent 3,122 3,467 (345) (10.0) % 9,461 10,265 (804) (7.8) % Telecommunications 828 949 (121) (12.8) % 2,490 2,911 (421) (14.5) % Stock-based compensation 139 52 87 167.3 % 405 142 263 185.2 % Other 765 643 122 19.0 % 2,047 1,984 63 3.2 % Technology Operations$ 7,439 $ 7,357 $ 82 1.1 %$ 21,778 $ 22,472 $ (694) (3.1) % FTE Employees 87 89 (2) (2.2) % For the three months endedSeptember 30, 2021 , technology operations expenses increased slightly compared to the same period in 2020, the result of increases in payroll and related expenses partially offset by lower site rent and telecommunications costs. Payroll and related expenses increased as we recognized lower cost savings from reduced work schedules during the three months endedSeptember 30, 2021 , as compared to the same period in 2020. Our temporary cash savings measures are outlined in more detail within the earlier discussion on COVID-19. Additionally, payroll and related costs were lower in 2020 relative to historical trend and normal operating costs as a result of our utilization of certain provisions under the CARES Act for payroll and employee taxes last year that were not available in 2021. Refer to Note 11 - Income Taxes in the Notes to Condensed Consolidated Financial Statements for additional information on our temporary use of the CARES Act provisions. The number of active transmitters, which directly affects our site rent expenses, declined 5.9% fromSeptember 30, 2020 , toSeptember 30, 2021 , a result of our network rationalization efforts. As we reach certain minimum frequency commitments, as outlined by theUnited States Federal Communications Commission , we may be unable to continue our efforts to rationalize and consolidate our networks. 28 -------------------------------------------------------------------------------- For the nine months endedSeptember 30, 2021 , technology operations expenses decreased compared to the same period in 2020, driven by lower site rent, as explained above in our quarterly discussion, and by lower telecommunications costs, which resulted from cost savings initiatives applicable to our wireless network. Selling and Marketing Selling and marketing expenses consisted of the following items: For the Three Months Ended For the Nine Months Ended September 30, Change September 30, Change (Dollars in thousands) 2021 2020 Total % 2021 2020 Total % Payroll and related$ 3,365 $ 2,773 $ 592 21.3 %$ 9,661 $ 8,894 $ 767 8.6 % Commissions 924 1,059 (135) (12.7) % 3,273 3,123 150 4.8 % Stock-based compensation 234 208 26 12.5 % 805 575 230 40.0 % Advertising and events 527 151 376 249.0 % 935 1,095 (160) (14.6) % Other 115 81 34 42.0 % 371 776 (405) (52.2) % Total selling and marketing$ 5,165 $ 4,272 $ 893 20.9 %$ 15,045 $ 14,463 $ 582 4.0 % FTE Employees 93 98 (5) (5.1) % For the three months endedSeptember 30, 2021 , selling and marketing expenses increased compared to the same period in 2020, driven by increases in payroll and related expenses and advertising and events. Payroll and related expenses increased as we recognized lower cost savings from reduced work schedules during the three months endedSeptember 30, 2021 , as compared to the same period in 2020. The reduced work schedules were part of our temporary cash savings measures, outlined in more detail within the earlier discussion on COVID-19. Additionally, payroll and related costs were lower in 2020 relative to historical trend and normal operating costs as a result of our utilization of certain provisions under the CARES Act for payroll and employee taxes last year that were not available in 2021. Refer to Note 11 - Income Taxes in the Notes to Condensed Consolidated Financial Statements for additional information on our temporary use of the CARES Act provisions. The increase in advertising and events largely reflects an increase in trade show participation compared to the same period last year which was still in the early months of the pandemic. Nationwide travel and in-person participation in larger marketing events has improved but remains below historical levels. For the nine months endedSeptember 30, 2021 , selling and marketing expenses increased compared to the same period in 2020, driven by increases in payroll and related expenses, as described above in the quarterly discussion. Stock-based compensation also increased as a result of our plan to provide a portion of compensation for certain employees in the form of shares of the Company's common stock in lieu of cash, which we implemented at the beginning of 2021. These were offset by a decline in other expenses, driven by decreases in rewards and recognition. 29 -------------------------------------------------------------------------------- General and Administrative General and administrative expenses consisted of the following items: For the Three Months Ended For the Nine Months Ended September 30, Change September 30, Change (Dollars in thousands) 2021 2020 Total % 2021 2020 Total % Payroll and related$ 3,911 $ 3,476 $ 435 12.5 %$ 11,293 $ 10,965 $ 328 3.0 % Stock-based compensation 958 968 (10) (1.0) % 2,752 2,323 429 18.5 % Facility rent, office and technology costs 2,692 2,259 433 19.2 % 7,656 6,604 1,052 15.9 % Outside services 3,078 2,148 930 43.3 % 7,122 6,227 895 14.4 % Taxes, licenses and permits 1,003 994 9 0.9 % 3,201 2,657 544 20.5 % Bad debt (29) 178 (207) (116.3) % 405 849 (444) (52.3) % Other 925 971 (46) (4.7) % 2,816 3,431 (615) (17.9) %
Total general and administrative
$ 1,544 14.0 %$ 35,245 $ 33,056 $ 2,189 6.6 % FTE Employees 102 102 - - % For the three months endedSeptember 30, 2021 , general and administrative expenses increased compared to the same period in 2020, driven by increases in outside services, payroll and related costs, and facility rent, office and technology costs. These increases were partially offset by a decrease in bad debt expenses. Outside services expenses increased primarily due to the use of professional services in connection with our strategic alternatives review, which we announced onSeptember 3, 2021 . Payroll and related costs increased as we recognized lower cost savings from reduced work schedules during the three months endedSeptember 30, 2021 as compared to the same period in 2020. This temporary cash savings measure is outlined in more detail within our earlier discussion on COVID-19. The increase in facility rent, office and technology costs was primarily due to higher expenses for software, hardware and IT related costs. For the nine months endedSeptember 30, 2021 , general and administrative expenses increased compared to the same period in 2020, driven by increases in facility rent, office and technology costs, outside services, and payroll and related costs, as described above in the quarterly discussion. Taxes, licenses and permits and stock-based compensation also increased. These increases were partially offset by a decrease in bad debt and other expenses. The increases in taxes, licenses and permits was primarily due to general year over year increases by theFederal Communications Commission ("FCC ") in the universal service contribution factor for USF as well as the inclusion of TRS fees that did not go into effect until the fourth quarter of 2020. The increase in stock-based compensation was due to our plan to provide a portion of compensation for certain employees in the form of shares of the Company's common stock in lieu of cash, which we implemented at the beginning of 2021. This temporary cash savings measure is outlined in more detail within our earlier discussion on COVID-19. Depreciation, Amortization and Accretion For the three months endedSeptember 30, 2021 , and 2020, depreciation, amortization and accretion expenses were$2.6 million and$2.3 million , respectively. For the nine months endedSeptember 30, 2021 , and 2020, depreciation, amortization and accretion expenses were$7.8 million and$6.6 million , respectively. Expenses increased for both the three and nine months endedSeptember 30, 2021 , compared to the same periods in 2020, primarily due to increased amortization of software development costs, partially offset by lower depreciation for certain computer hardware and software assets becoming fully depreciated in 2020. The capitalization of software development costs began in the first quarter of 2020, and amortization of those costs began in the third quarter of 2020. For additional details regarding depreciation, amortization and accretion expenses refer to Note 7 - Consolidated Financial Statement Components in the Notes to Condensed Consolidated Financial Statements. 30 -------------------------------------------------------------------------------- Income Taxes Benefit from income taxes was$0.9 million and$0.2 million for the three months endedSeptember 30, 2021 , and 2020, respectively. Benefit from (provision for) income taxes was$1.1 million and$(0.1) million for the nine months endedSeptember 30, 2021 , and 2020, respectively. Benefit from (provision for) income taxes changed for the three and nine months endedSeptember 30, 2021 , compared to the same periods in 2020 due to the difference in the anticipated annual effective tax rate as a result of certain permanent tax differences, estimated research and development tax credits and related valuation allowance, and certain discrete items. Further details can be found in Note 11, "Income Taxes" in the Notes to Condensed Consolidated Financial Statements. Liquidity and Capital Resources Cash and Cash Equivalents AtSeptember 30, 2021 , we held cash, cash equivalents and short-term investments of$67.5 million . The available cash and cash equivalents consist of invested cash and in our operating accounts. The invested cash is invested in interest-bearing funds managed by third-party financial institutions. These funds invest inU.S. Treasury securities which are classified as held-to-maturity and are measured at amortized cost on our Condensed Consolidated Balance Sheets. 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. We maintain a level of liquidity sufficient to allow us to meet our cash needs in both the short- and long-term. At any point in time, we typically maintain approximately$5.0 million to$10.0 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 invest heavily in the development of Spok Go 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 Spok Go begin to be realized. Cash Flows Overview 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. 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 or seek additional 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 that net cash provided by operating activities, together with the available cash on hand atSeptember 30, 2021 , should be adequate to meet our anticipated cash requirements for the foreseeable future. 31 --------------------------------------------------------------------------------
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,
(Dollars in thousands) 2021 2020 Change
Net cash provided by operating activities $ 9,528
$ 20,954 $ (11,426) Net cash used in investing activities (11,332) (10,900) (432) Net cash used in financing activities (9,318) (8,125) (1,193) Operating Activities For the nine months endedSeptember 30, 2021 , net cash provided by operating activities was$9.5 million due primarily to non-cash items such as depreciation, amortization and accretion of$7.8 million , stock-based compensation of$6.0 million , changes in accounts receivable of$2.2 million , changes in lease liability of$0.8 million and a change in prepaid expenses and other assets of$0.2 million . This was partially offset by a net loss of$5.5 million , deferred income tax benefit of$0.9 million , and deferred revenue of$2.1 million . For the nine months endedSeptember 30, 2020 , net cash provided by operating activities was$21.0 million due primarily to net income of$2.4 million , non-cash items such as depreciation, amortization and accretion of$6.6 million , stock-based compensation of$4.1 million , and other non-cash items of$0.9 million . Net cash provided by operating activities also increased resulting from the change in prepaid expenses, inventory, and other assets of$3.7 million , accounts payable, accrued liabilities and other of$1.6 million and deferred revenue of$2.7 million , partially offset by changes in account receivable of$1.0 million . Investing Activities For the nine months endedSeptember 30, 2021 , and 2020, net cash used in investing activities was$11.3 million and$10.9 million , respectively, due primarily to the capitalization of software development costs, purchases of property and equipment, and purchase and maturity of short-term investments. Financing Activities For the nine months endedSeptember 30, 2021 , and 2020, net cash used in financing activities was$9.3 million and$8.1 million , respectively, due primarily to cash distributions to stockholders and the purchase of common stock for tax withholding purposes on vested equity awards. We currently expect to pay dividends of$0.125 per share of common stock each quarter for the remainder of 2021, subject to declaration by the Board of Directors. OnNovember 3, 2021 , our Board of Directors declared a regular quarterly cash dividend of$0.125 per share of common stock with a record date ofNovember 16, 2021 , and a payment date ofDecember 10, 2021 . This cash dividend of approximately$2.4 million will be paid from available cash on hand. Commitments and Contingencies See Note 12, "Commitments and Contingencies" in the Notes to Condensed Consolidated Financial Statements for further discussion on our 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 theUnited 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$4.2 million and$4.4 million for the three months endedSeptember 30, 2021 , and 2020, respectively, and$12.6 million and$13.0 million for the nine months endedSeptember 30, 2021 , and 2020, respectively. 32
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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, that 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. Related Party Transactions See Note 13, "Related Parties" in the Notes to Condensed Consolidated Financial Statements 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 inthe 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 ongoing 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 2020 Annual Report that affect our significant judgments and estimates used in the preparation of our Condensed Consolidated Financial Statements.
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