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EX-31.1 - EXHIBIT 31.1 - Spok Holdings, Inca2q1810qex311.htm
EX-32.2 - EXHIBIT 32.2 - Spok Holdings, Inca2q1810qex322.htm
EX-32.1 - EXHIBIT 32.1 - Spok Holdings, Inca2q1810qex321.htm
EX-31.2 - EXHIBIT 31.2 - Spok Holdings, Inca2q1810qex312.htm
 
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 June 30, 2018
 
¨
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)
 

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).    Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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
¨  (Do not check if a smaller reporting company)
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 Securities 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
19,458,125 shares of the registrant’s common stock ($0.0001 par value per share) were outstanding as of July 20, 2018.
 




SPOK HOLDINGS, INC.
QUARTERLY REPORT ON FORM 10-Q
INDEX
 
 
Page  
PART I.
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
Item 3.
 
Item 4.
PART II.
 
 
Item 1.
 
Item 1A.
 
Item 2.
 
Item 6.
 




PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SPOK HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS 
(in thousands)
June 30, 2018
 
December 31, 2017
ASSETS
(Unaudited)
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
94,068

 
$
107,157

Accounts receivable, net
35,574

 
32,279

Prepaid expenses and other
7,050

 
5,752

Inventory
1,505

 
1,672

Total current assets
138,197

 
146,860

Non-current assets:
 
 
 
Property and equipment, net
13,035

 
13,399

Goodwill
133,031

 
133,031

Intangible assets, net
6,667

 
7,917

Deferred income tax assets
46,344

 
47,679

Other non-current assets
1,431

 
1,675

Total non-current assets
200,508

 
203,701

Total assets
$
338,705

 
$
350,561

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
310

 
$
1,305

Accrued compensation and benefits
9,261

 
11,018

Accrued taxes
2,055

 
2,547

Deferred revenue
32,449

 
31,414

Other current liabilities
4,010

 
4,610

Total current liabilities
48,085

 
50,894

Non-current liabilities:
 
 
 
Deferred revenue
961

 
1,063

Other non-current liabilities
8,393

 
8,075

Total non-current liabilities
9,354

 
9,138

Total liabilities
57,439

 
60,032

Commitments and contingencies (Note 11)


 


Stockholders' equity:
 
 
 
Preferred stock
$

 
$

Common stock
2

 
2

Additional paid-in capital
92,102

 
99,819

Accumulated other comprehensive loss
(1,850
)
 
(1,088
)
Retained earnings
191,012

 
191,796

Total stockholders’ equity
281,266

 
290,529

Total liabilities and stockholders' equity
$
338,705

 
$
350,561

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

2



SPOK HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
 
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
(Unaudited and in thousands except share and per share amounts)
 
2018
 
2017
 
2018
 
2017
Revenue:
 
 
 
 
 
 
 
 
Wireless
 
$
23,658

 
$
25,639

 
$
47,927

 
$
51,499

Software
 
16,970

 
16,686

 
35,815

 
32,270

Total revenue
 
40,628

 
42,325

 
83,742

 
83,769

Operating expenses:
 
 
 
 
 
 
 
 
Cost of revenue
 
7,400

 
7,190

 
15,133

 
14,226

Research and development
 
6,177

 
4,662

 
11,912

 
8,767

Service, rental and maintenance
 
7,698

 
7,944

 
15,448

 
16,010

Selling and marketing
 
6,093

 
5,329

 
12,562

 
11,251

General and administrative
 
12,741

 
11,939

 
24,704

 
23,649

Depreciation, amortization and accretion
 
2,669

 
2,851

 
5,382

 
6,074

Total operating expenses
 
42,778

 
39,915

 
85,141

 
79,977

Operating (loss) income
 
(2,150
)
 
2,410

 
(1,399
)
 
3,792

Interest income
 
342

 
154

 
625

 
276

Other income
 
102

 
89

 
54

 
58

(Loss) income before income taxes
 
(1,706
)
 
2,653

 
(720
)
 
4,126

Benefit from (provision for) income taxes
 
730

 
(1,155
)
 
255

 
(1,774
)
Net (loss) income
 
$
(976
)
 
$
1,498

 
$
(465
)
 
$
2,352

Basic net (loss) income per common share
 
$
(0.05
)
 
$
0.07

 
$
(0.02
)
 
$
0.12

Diluted net (loss) income per common share
 
$
(0.05
)
 
$
0.07

 
$
(0.02
)
 
$
0.11

Basic weighted average common shares outstanding
 
19,750,941

 
20,353,801

 
19,888,606

 
20,441,781

Diluted weighted average common shares outstanding
 
19,750,941

 
20,366,102

 
19,888,606

 
20,508,473

Cash dividends declared per common share
 
$
0.125

 
$
0.125

 
$
0.250

 
$
0.250


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

3



SPOK HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

 
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
 
2018
 
2017
 
2018
 
2017
(Unaudited and in thousands)
 
 
 
 
 
 
Net (loss) income
 
$
(976
)
 
$
1,498

 
$
(465
)
 
$
2,352

Other comprehensive (loss) income, net of tax:
 
 
 
 
 
 
 
 
Foreign currency translation adjustments
 
(342
)
 
82

 
(598
)
 
86

Other comprehensive (loss) income
 
(342
)
 
82

 
(598
)
 
86

Comprehensive (loss) income
 
$
(1,318
)
 
$
1,580

 
$
(1,063
)
 
$
2,438


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


4



SPOK HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
 
 
For the Six Months Ended June 30,
(Unaudited and in thousands)
 
2018
 
2017
Cash flows provided by operating activities:
 
 
 
 
Net (loss) income
 
$
(465
)
 
$
2,352

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Depreciation, amortization and accretion
 
5,382

 
6,074

Deferred income tax (benefit) expense
 
(472
)
 
1,069

Stock based compensation
 
2,501

 
1,953

Provision for doubtful accounts, service credits and other
 
1,016

 
458

Adjustment of non-cash transaction taxes
 
(104
)
 
(700
)
Changes in assets and liabilities:
 
 
 
 
Accounts receivable
 
(2,986
)
 
(1,242
)
Prepaid expenses, inventory, and other assets
 
(277
)
 
(2,684
)
Accounts payable, accrued liabilities and other
 
(3,394
)
 
(3,261
)
Deferred revenue
 
5,191

 
2,561

Net cash provided by operating activities
 
6,392

 
6,580

Cash flows used in investing activities:
 
 
 
 
Purchase of property and equipment
 
(3,464
)
 
(5,198
)
Net cash used in investing activities
 
(3,464
)
 
(5,198
)
Cash flows used in financing activities:
 
 
 
 
Cash distributions to stockholders
 
(5,201
)
 
(10,239
)
Purchase of common stock for tax withholding on vested equity awards
 
(894
)
 

Purchase of common stock (including commissions)
 
(9,467
)
 
(10,024
)
Proceeds from issuance of common stock under the Employee Stock Purchase Plan
 
143

 
130

Net cash used in financing activities
 
(15,419
)
 
(20,133
)
Effect of exchange rate on cash
 
(598
)
 
86

Net decrease in cash and cash equivalents
 
(13,089
)
 
(18,665
)
Cash and cash equivalents, beginning of period
 
107,157

 
125,816

Cash and cash equivalents, end of period
 
$
94,068

 
$
107,151

Supplemental disclosure:
 
 
 
 
Income taxes paid
 
$
457

 
$
1,964


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

5

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 subsidiary Spok, Inc., is the global leader in healthcare communications. We deliver clinical information to care teams when and where it matters most to improve patient outcomes. Many hospitals rely on the Spok Care Connect platform to enhance workflows for clinicians, support administrative compliance, and provide a better experience for patients. Our customers send over 100 million messages each month through their Spok solutions.
We offer a focused suite of unified critical communication solutions that include call center operations, clinical alerting and notifications, one-way and advanced two-way wireless messaging services, mobile communications and public safety solutions.
We provide one-way and advanced two-way wireless messaging services including information services throughout the United States. These services are offered on a local, regional and nationwide basis employing digital networks. One-way messaging consists of numeric and alphanumeric messaging services. Numeric messaging services enable subscribers to receive messages that are composed entirely of numbers, such as a phone number, while alphanumeric messages may include numbers and letters, which enable subscribers to receive text messages. Two-way messaging services enable subscribers to send and receive messages to and from other wireless messaging devices, including pagers, mobile devices and personal computers. We also offer voice mail, personalized greeting, message storage and retrieval, and equipment loss and/or maintenance protection to both one-way and two-way messaging subscribers. These services are commonly referred to as wireless messaging and information services.
We also develop, sell and support enterprise-wide systems for hospitals and other organizations needing to automate, centralize and standardize mission critical communications. These solutions are used for contact centers, clinical alerting and notification, mobile communications and messaging and for public safety notifications. These areas of market focus complement the market focus of our wireless services outlined above. These products and services are commonly referred to as software solutions and services.
Basis of Presentation
The accompanying Condensed Consolidated Financial Statements include our accounts and the accounts of our 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 a fair presentation of the results of all interim periods reported herein and all such adjustments are of a normal, recurring nature. As a result of the adoption of Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers, and our application of the modified retrospective approach, prior period amounts have not been restated under ASC 606.
Amounts shown on the Condensed Consolidated Statement of Operations within the operating expense categories of Cost of revenue; Research and development; Service, rental and maintenance; 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, 2017, is unaudited. The Condensed Consolidated Balance Sheet at December 31, 2017 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, 2017.
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, 2017 (the “2017 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. These reclassifications had no effect on the reported results of operations or the statement of financial position. In the first quarter of 2018, the Company reclassified ($1.5) million from additional paid-in capital to accumulated other comprehensive income. Corresponding reclassifications of ($1.1) million were made to the Condensed Consolidated Balance Sheets for the year ended December 31, 2017.

6

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 obligations; variable consideration; depreciation expense; asset retirement obligations; severance and income taxes. We base our estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
NOTE 2 - RISKS AND OTHER IMPORTANT FACTORS
See “Item 1A. Risk Factors” of Part II of this Quarterly Report on Form 10-Q (“Quarterly Report”) and "Item 1A. Risk Factors" of Part I of the 2017 Annual Report, which describe key risks associated with our operations and industry. 
NOTE 3 - RECENT AND PENDING ACCOUNTING STANDARDS
Recently Adopted
Revenue - In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers. ASU No. 2014-09 creates a five-step model that requires companies to exercise judgment when considering all relevant facts and circumstances in the determination of when and how revenue is recognized and requires entities to recognize revenues when control of the promised goods or services is transferred to customers at an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. On January 1, 2018, we adopted ASC 606 using the modified retrospective method applied to those contracts which were not completed as of January 1, 2018. As a result, our beginning retained earnings as of January 1, 2018 was $6.4 million greater than what was reported at December 31, 2017. This was due to a $4.2 million decrease in deferred revenue, a $0.2 million decrease in accumulated other comprehensive income related to translation adjustments, an increase in unbilled receivables of $1.3 million and an increase of $0.7 million in deferred commissions that resulted from the adoption of ASC 606. Results for reporting periods beginning after January 1, 2018 are presented under ASC 606, while prior period amounts are not adjusted and continue to be reported in accordance with our historic accounting under ASC 605. For additional details refer to Note 4, "Significant Accounting Policies Update" and Note 5, "Revenues."
Pending Adoption
Leases - In February 2016, the FASB issued ASU No. 2016-02, Leases. The new standard establishes a right of use (“ROU”) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet 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.
ASU No. 2016-02 will be effective beginning on January 1, 2019, including interim periods within that fiscal year, and while early adoption is permitted, we have elected not to early adopt. A modified retrospective transition approach is required for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the Condensed Consolidated Financial Statements, with certain practical expedients available. While we are still evaluating the impact of the potential new standard on our consolidated Financial Statements, we expect that upon adoption we will recognize ROU assets and lease liabilities and that the amounts could be material. We do not anticipate a material change in how our lease expense is recognized in future Consolidated Statements of Operations as a result of the adoption of ASU No. 2016-02.
NOTE 4 - SIGNIFICANT ACCOUNTING POLICIES UPDATE
Our significant accounting policies are detailed in Note 1 “Organization and Significant Accounting Policies” of our Annual Report on Form 10-K for the year ended December 31, 2017. Significant changes to our accounting policies as a result of adopting ASC 606 are discussed below.
Revenue Recognition - Adoption of ASC 606 “Revenue from Contracts with Customers”
The majority of our revenues are derived from short-term contracts related to the sale of wireless paging services and software solutions. Our arrangements exist primarily with customers in the healthcare market and to a lesser extent State and Federal governments, as well as large enterprise businesses.

7

SPOK HOLDINGS, INC.
UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


Under the typical payment terms of our software contracts customers will normally pay a material amount of the contract price immediately upon execution of the contract. The remaining payments are required when product is delivered, when services begin and, to a lesser extent, when services are completed. Wireless services are generally billed as incurred on a monthly basis. Our contracts will generally result in billings in excess of revenue recognized, which we present as deferred revenues on the Condensed Consolidated Balance Sheets, primarily due to the receipt of payment in advance of product or services being provided. Amounts billed and due from our customers are classified as receivables on the Condensed Consolidated Balance Sheets. At times, we may have contracts which require us to perform work or provide products prior to billing which will generally result in revenue recognized in excess of billings. This excess is presented as unbilled receivables in the Notes to the Condensed Consolidated Balance Sheets. We generally do not have transactions that include a significant financing component (whether payments are made in advance or in arrears) as our contracts typically take less than 12 months to complete once started. We would not adjust the total consideration for the effects of a significant financing component if we anticipate, at contract inception, that the period between when we transfer a promised good or service to a customer and when the customer pays for that good or service will be one year or less.
We account for a contract when: (1) both parties have approved the contract through mutually signed agreements but at times may be done through other methods such as purchase orders or master agreements; (2) the rights of the parties have been identified; (3) payment terms have been identified; (4) the contract has commercial substance; and (5) collectability of consideration is probable. We also evaluate whether two or more contracts should be combined and accounted for as a single contract. In our evaluation, we consider criteria such as, but not limited to, whether: (1) the contracts are negotiated as a package with a single commercial objective; (2) the amount of consideration to be paid in one contract is dependent on the price or performance of another contract; and (3) some or all of the goods or services promised in the contracts are a single performance obligation. Should we consider contracts related, we would account for those contracts as if they were a single contract. Evaluating whether two or more contracts should be combined and accounted for as a single contract requires significant judgment. In the aggregate, a decision to combine a group of contracts could significantly impact the amount of revenue and profit recorded in a given period.
We review each contract to determine whether to account for the various promises as one or more performance obligations. The assessment and determination of performance obligations for a given contract requires significant judgment. Contracts which include wireless services are generally considered to be a single promise and therefore accounted for as a single performance obligation. Less commonly, however, we may promise to provide other distinct goods or services in conjunction with wireless services in which case we would account for the contract as having multiple performance obligations. Contracts which include goods or services related to our software solutions are generally sold with multiple promises and therefore will often include multiple performance obligations. Material performance obligations related to the sale of our software solutions include software licenses, professional services, hardware and maintenance, of which professional services and maintenance are generally considered a series of performance obligations.
More often than not, total consideration will equate to the stated value on the contract taking into consideration any period or term over which services are to be provided, if applicable. However, we could have contracts in which variable consideration is present. It is common for our contracts which include wireless services to contain customer penalties if rental pagers are not returned and fees for usage of services in excess of the contractually allotted amount for a given period. It is also common for our contracts that include professional services to include travel related costs. These are costs which we incur in the normal course of delivering professional services and are generally billable to the customer based on our incurred expenses. These elements of variable consideration are fully constrained when an agreement is initially executed and are generally not considered estimable until the penalties, fees or costs have been incurred or are otherwise known. We include estimated amounts in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. Estimating variable consideration requires significant judgment and our assessment includes all relevant information that is reasonably available to us including historical, current and forecasted information. We have elected to exclude from revenue, all amounts collected on behalf of third parties, and therefore, items such as sales and use tax are excluded from our calculation of the total transaction price.
If a contract is separated into more than one performance obligation we allocate the total transaction price to each performance obligation proportionately based on the estimated relative SSPs of the promised goods or services underlying each performance obligation. We rarely sell goods or services with readily observable standalone sales, however, if we do, the observable standalone sales are used to determine the SSP. In most cases, we must estimate the relative SSP which requires significant judgment and estimates. In instances where SSP is not directly observable we determine the SSP using information that may include contractually stated prices, market conditions, costs, renewal contracts, list prices and other observable inputs. A discount is present if the total transaction price is less than the sum of the estimated SSPs of the goods or services promised in the contract. Discounts are generally allocated proportionately based on the relative SSP of the identified performance obligations for a given contract.

8

SPOK HOLDINGS, INC.
UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


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. This is a significant area of judgment as it requires an estimate to complete (“ETC”) for each contract. Our initial ETC is primarily based on prior experience also taking into consideration any specific facts and circumstances for a given contract. As projects progress, the ETC is periodically updated and reviewed to ensure the timing of revenue recognition is appropriate. The creation, maintenance and review of a projects ETC requires significant judgment to determine an appropriate number of hours over which the remaining project is expected to be completed.
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 Intellectual 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 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. Assessing when transfer of control has occurred requires significant judgment. In most contracts transfer of control for software licenses occurs in a short period of time after a contract has been executed and licenses are made electronically available.
Contracts may be modified to account for changes in a project's scope or other customer requirements. Most of our contract modifications are for goods or services that are distinct from the existing contract or may or may not be distinct but are for services which relate to a series of performance obligations. In these instances, the contract modification would either be recognized as an entirely new and separate contract or the modification would be treated as if it were a termination of the existing contract and the creation of a new contract including all untransferred goods and services under the previous contract. Revenue would be recognized on a prospective basis and a cumulative catch-up would not be recognized.
Incremental costs of obtaining a contract and costs to fulfill a contract
Commissions Expense - Our incremental costs primarily relate to sales commissions. We capitalize commissions and proportionally recognize the related expense to revenue as it is recognized on the underlying performance obligations. Some of these costs may relate to specific future anticipated contracts, specifically future maintenance renewals, which we do not pay commensurate sales commissions on. We amortize commission costs proportionally with revenue, thus it is necessary for us to estimate future revenues when there are future anticipated contracts. We estimate future revenues based on anticipated renewal amounts over an expected useful life (e.g. the period over which we believe the initial sales commissions relate to future anticipated contracts). The expected useful life is based on a review of our product life cycles, customer upgrade patterns and the rate at which customers renew maintenance. Commissions expenses are classified as Selling and Marketing on the Condensed Consolidated Statement of Operations.

9

SPOK HOLDINGS, INC.
UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


Summary of Results under ASC 605 “Revenue Recognition”
The following table presents Financial Statement components impacted as a result of adopting ASC 606, stated under ASC 605 for comparative purposes:
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
(Dollars in thousands)
ASC 606
 
ASC 605
 
ASC 605
 
ASC 606
 
ASC 605
 
ASC 605
Condensed Consolidated Statement of Operations
 
 
 
 
 
 
 
 
 
 
 
Revenues: Software
$
16,970

 
$
18,136

 
$
16,686

 
$
35,815

 
$
36,324

 
$
32,270

Operating expenses: Selling and marketing
$
6,093

 
$
6,198

 
$
5,329

 
$
12,562

 
$
12,228

 
$
11,251

 
 
 
 
 
 
 
 
 
 
 
 
Condensed Consolidated Statement of Comprehensive Income
 
 
 
 
 
 
 
 
 
 
 
Other comprehensive (loss) income, net of tax:
foreign currency translation adjustments
$
(342
)
 
$
(308
)
 
$
82

 
$
(598
)
 
$
(472
)
 
$
86

 
June 30, 2018
 
December 31, 2017
(Dollars in thousands)
ASC 606
 
ASC 605
 
ASC 605
Condensed Consolidated Balance Sheets
 
 
 
 
 
Current assets: Accounts receivable, net
$
35,574

 
$
33,010

 
$
32,279

Current assets: Prepaid expenses and other
$
7,050

 
$
6,710

 
$
5,752

Current liabilities: Deferred revenue
$
32,449

 
$
34,667

 
$
31,414

Non-current liabilities: Deferred revenue
$
961

 
$
1,176

 
$
1,063

Stockholder equity: Accumulated other comprehensive loss
$
(1,850
)
 
$
(1,604
)
 
$
(1,088
)
Stockholder equity: Retained earnings
$
191,012

 
$
185,429

 
$
191,796

NOTE 5 - REVENUE, DEFERRED REVENUE AND DEFERRED 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 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 help increase the monthly recurring revenue we receive along with these traditional messaging services. In 2015 and 2016 we launched new and exclusive one-way (T5) and two-way (T52) alphanumeric pagers, respectively. Both pagers 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 new 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 2017 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).

10

SPOK HOLDINGS, INC.
UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


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 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 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.
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.
The following table presents our revenues disaggregated by revenue type:
 
For the Three months ended June 30,
 
For the Six Months Ended June 30,
(Dollars in thousands)
2018
 
2017(1)
 
2018
 
2017(1)
Wireless products and services
$
23,658

 
$
25,639

 
$
47,927

 
$
51,499

Subscription
441

 
623

 
861

 
1,167

Software licenses
1,552

 
1,641

 
5,508

 
2,812

Professional services
4,363

 
3,650

 
8,433

 
7,003

Hardware
1,107

 
1,127

 
2,132

 
2,100

Maintenance
9,507

 
9,645

 
18,881

 
19,188

Total revenue
$
40,628

 
$
42,325

 
$
83,742

 
$
83,769

(1) Prior period amounts have not been adjusted under the modified retrospective method for the adoption of ASC 606.
The U.S. was the only country that accounted for more than 10% of the Company’s total revenue for the three and six ended June 30, 2018 and 2017 Revenue by geographic region consisted of the following for the periods stated:
 
For the Three months ended June 30,
 
For the Six Months Ended June 30,
(Dollars in thousands)
2018
 
2017(1)
 
2018
 
2017(1)
Revenue
 
 
 
 
 
 
 
United States
$
39,109

 
$
40,869

 
$
81,044

 
$
81,374

International
1,519

 
1,456

 
2,698

 
2,395

Total revenue
$
40,628

 
$
42,325

 
$
83,742

 
$
83,769

(1) Prior period amounts have not been adjusted under the modified retrospective method for the adoption of ASC 606.
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 six months ended June 30, 2018 are as follows:
(Dollars in thousands)
December 31, 2017
 
Additions
 
Revenue Recognized(1)
 
June 30, 2018
Deferred Revenue
$
32,477

 
$
30,976

 
$
(30,043
)
 
$
33,410

(1)Includes $4.2 million which went to retained earnings and was not recognized as revenue resulting from the adoption of ASC 606.
During the six months ended June 30, 2018, the Company recognized $16.5 million related to amounts deferred as of December 31, 2017.

11

SPOK HOLDINGS, INC.
UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


Deferred Commissions
Our deferred commissions represent payments made to employees in advance of our performance on the related underlying contracts. These costs have been incurred directly in relation with obtaining a contract. As such, these costs are amortized over the estimated period of benefit. Changes in the balance of total deferred commissions during the six months ended June 30, 2018 are as follows:
(Dollars in thousands)
December 31, 2017
 
Additions(1)
 
Commissions Recognized
 
June 30, 2018
Deferred Commissions
$
1,676

 
$
3,647

 
$
(3,168
)
 
$
2,155

(1)Includes $0.7 million in previously recognized commissions expense which was removed from retained earnings and included in deferred commissions resulting from the adoption of ASC 606.
Deferred commissions are included within prepaid assets on the Condensed Consolidated Balance Sheets and commissions expense is included within Selling and marketing on the Condensed Consolidated Statement of Operations.

Remaining Performance Obligations
We have elected not to disclose the value of unsatisfied performance obligations for contracts with an original expected length of one year or less and for variable consideration which is allocated entirely to a wholly unsatisfied performance obligation or to a wholly unsatisfied promise to transfer a distinct good or service that forms part of a single performance obligation. The remaining backlog is immaterial to our Condensed Consolidated Financial Statements.
NOTE 6 - 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 June 30,
 
For the Six Months Ended June 30,
(Dollars in thousands)
2018
 
2017
 
2018
 
2017
Depreciation
 
 
 
 
 
 
 
Leasehold improvements
$
67

 
$
75

 
$
135

 
$
125

Asset retirement costs
(76
)
 
(97
)
 
(152
)
 
(195
)
Paging and computer equipment
1,815

 
2,028

 
3,670

 
4,087

Furniture, fixtures and vehicles
103

 
76

 
209

 
141

Total depreciation
1,909

 
2,082

 
3,862

 
4,158

Amortization
625

 
629

 
1,250

 
1,636

Accretion
135

 
140

 
270

 
280

Total depreciation, amortization and accretion expense
$
2,669

 
$
2,851

 
$
5,382

 
$
6,074

Accounts Receivable, Net
Accounts receivable was recorded net of an allowance of $1.5 million and $1.1 million at June 30, 2018 and December 31, 2017, respectively. Accounts receivable, net includes $10.1 million and $7.3 million of unbilled receivables at June 30, 2018 and December 31, 2017, 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 increase in unbilled receivables was primarily due to the adoption of ASC 606 and the acceleration of license revenue for the six months ended June 30, 2018 .

12

SPOK HOLDINGS, INC.
UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


Property and Equipment, Net
Property and equipment, net consisted of the following as of the date stated:
(Dollars in thousands)
Useful Life
(In Years)
 
June 30, 2018
 
December 31, 2017
Leasehold improvements
shorter of useful life or lease term
 
$
4,135

 
$
4,107

Asset retirement costs
1-5
 
3,267

 
3,228

Paging and computer equipment
1-5
 
101,526

 
103,520

Furniture, fixtures and vehicles
3-5
 
5,345

 
4,545

Total property and equipment

 
114,273

 
115,400

Accumulated depreciation

 
(101,238
)
 
(102,001
)
Total property and equipment, net

 
$
13,035

 
$
13,399

Other Current Liabilities
Other current liabilities consisted of the following as of the date stated:
(Dollars in thousands)
June 30, 2018
 
December 31, 2017
Accrued network costs, asset retirement obligations and other
$
2,496

 
$
2,173

Accrued outside services
1,514

 
2,437

Total other current liabilities
$
4,010

 
$
4,610

Other Non-Current Liabilities
Other non-current liabilities consisted of the following as of the date stated:
(Dollars in thousands)
June 30, 2018
 
December 31, 2017
Asset retirement obligations
$
7,351

 
$
7,174

Other
1,042

 
901

Total other non-current liabilities
$
8,393

 
$
8,075

NOTE 7 - INTANGIBLE ASSETS, NET
Intangible Assets
Amortizable intangible assets at June 30, 2018 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.
The net consolidated balance of intangible assets consisted of the following at June 30, 2018:
 
 
 
 
June 30, 2018
(Dollars in thousands)
 
Useful Life
(In Years)
 
Gross Carrying
Amount
 
Accumulated
Amortization
 
Net Balance
Customer relationships
 
10
 
$
25,002

 
$
(18,335
)
 
$
6,667

Total amortizable intangible assets
 

 
$
25,002

 
$
(18,335
)
 
$
6,667


13

SPOK HOLDINGS, INC.
UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


Estimated amortization of intangible assets for future periods was as follows:
 
(Dollars in thousands)
For the remaining six months ending December 31, 2018
$
1,250

For the year ending December 31:
 
2019
2,500

2020
2,500

2021
417

Total amortizable intangible assets
$
6,667

NOTE 8 - 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
Balance at January 1, 2018
 
$
235

 
$
7,174

 
$
7,409

Accretion
 
(45
)
 
315

 
270

Amounts paid
 
(83
)
 

 
(83
)
Increases
 

 
39

 
39

Reclassifications
 
177

 
(177
)
 

Balance at June 30, 2018
 
$
284

 
$
7,351

 
$
7,635

The balances above were included within other current liabilities and other non-current liabilities on the Condensed Consolidated Balance Sheet, respectively, at June 30, 2018.
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 $9.0 million. The total estimated liability is based on the transmitter locations remaining after we have consolidated the number of networks we operate and assume the underlying leases continue to be renewed to that future date.
Accretion expense was $0.3 million for the six months ended June 30, 2018 and 2017. Accretion expense related solely to asset retirement obligations and was recorded based on the interest method.
NOTE 9 - 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 June 30, 2018 and December 31, 2017, we had no stock options outstanding.
At June 30, 2018 and December 31, 2017, there were 19,472,249 and 20,135,514 shares of common stock outstanding, respectively, and no shares of preferred stock outstanding.

14

SPOK HOLDINGS, INC.
UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


Changes in Stockholders' Equity
Changes in stockholders’ equity for the six months ended June 30, 2018 consisted of the following:
 
(Dollars in thousands)
Balance at January 1, 2018
$
290,529

Adjustment to beginning balance resulting from adoption of ASC 606
6,258

Net loss for the six months, ended June 30, 2018
(465
)
Estimated tax impact resulting from adoption of ASC 606
(1,614
)
Cash dividends declared
(5,127
)
Common stock repurchase program
(9,467
)
Amortization of stock based compensation
2,501

Repurchase of common stock for tax withholdings
(894
)
Cumulative translation adjustment
(598
)
Issuance of common stock under the Employee Stock Purchase Plan
143

Balance at June 30, 2018
$
281,266

Dividends
The following table details our cash dividends declared in 2018. Cash dividends paid as disclosed in the Condensed Consolidated Statement of Cash Flows for the six months ended June 30, 2018 and 2017 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 28, 2018
 
March 16, 2018
 
March 30, 2018
 
$
0.125

 
$
2,589

April 25, 2018
 
May 25, 2018
 
June 22, 2018
 
0.125

 
2,538

 
 
Total
 
 
 
$
0.250

 
$
5,127

(1) The total declared reflects the cash dividends declared in relation to common stock and unvested RSUs.
On July 25, 2018, our Board of Directors declared a regular quarterly cash dividend of $0.125 per share of common stock with a record date of August 17, 2018, and a payment date of September 10, 2018. This cash dividend of approximately $2.4 million will be paid from available cash on hand.
Common Stock Repurchase Program
On February 28, 2018, the Company's Board of Directors authorized the repurchase of up to $10.0 million of the Company's common stock through 2018 on the open market or in privately negotiated transactions. The following table presents information with respect to purchases made by the Company during the six months ended June 30, 2018:
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)
Three Months Ended March 31, 2018
 
127,792

 
$
15.04

 
127,792

 
$
8,077

Three Months Ended June 30, 2018
 
501,782

 
14.99

 
501,782

 
$
558

Total
 
629,574

 
$
15.00

 
629,574

 
 
(1) Average price paid per share excludes commissions of approximately $25,183.
The above table excludes shares repurchased to settle employee tax withholding related to the vesting of equity awards.

15

SPOK HOLDINGS, INC.
UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


Net (Loss) Income per Common Share
Basic net (loss) income per common share is computed on the basis of the weighted average common shares outstanding. Diluted net (loss) income per common share is computed on the basis of the weighted average common shares outstanding plus the effect of all potentially dilutive common shares including outstanding restricted stock and RSUs, which are treated as contingently issuable shares, using the “treasury stock” method.
The components of basic and diluted net (loss) income per common share were as follows for the periods stated:
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
(in thousands, except for share and per share amounts)
2018
 
2017
 
2018
 
2017
Numerator:
 
 
 
 
 
 
 
Net (loss) income
$
(976
)
 
$
1,498

 
$
(465
)
 
$
2,352

 
 
 
 
 
 
 
 
Denominator:
 
 
 
 
 
 
 
Basic weighted average outstanding shares of common stock
19,750,941

 
20,353,801

 
19,888,606

 
20,441,781

Diluted weighted average outstanding shares of common stock
19,750,941

 
20,366,102

 
19,888,606

 
20,508,473

Basic net (loss) income per common share
$
(0.05
)
 
$
0.07

 
$
(0.02
)
 
$
0.12

Diluted net (loss) income per common share
$
(0.05
)
 
$
0.07

 
$
(0.02
)
 
$
0.11


For the three and six months ended June 30, 2018 and 2017 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 June 30,
 
For the Six Months Ended June 30,
 
2018
 
2017
 
2018
 
2017
Restricted stock units
$
77,190

 
$

 
$
145,526

 
$

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 Plan”) that was subsequently approved by our stockholders on May 16, 2012. A total of 2,194,986 shares of common stock have been reserved for issuance under this plan. Awards under the 2012 Equity Plan may be in the form of stock options, common stock, restricted stock, RSUs, performance awards, dividend equivalents, deferred stock, deferred stock units, or stock appreciation rights. Restricted stock awards generally vest one year from the date of grant. Related dividends accumulate during the vesting period and are paid at the time of vesting. Contingent RSUs generally vest over a three year performance period upon successful completion of the performance objectives. Non-contingent RSUs generally vest in thirds, annually, over a three year period. Dividend equivalents rights generally accompany each RSU award and those rights accumulate and vest along with the underlying RSU.
The following table summarizes the activities under the 2012 Equity Incentive Award Plan ("2012 Equity Plan") from January 1, 2018 through June 30, 2018:
 
Activity
Total equity securities available at January 1, 2018
1,140,658

RSU and restricted stock awarded to eligible employees, net of forfeitures
(337,640
)
Total equity securities available at June 30, 2018
803,018


16

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 six months ended June 30, 2018:
 
Shares
 
Weighted-
Average Grant
Date Fair Value
Unvested at January 1, 2018(1)
393,084

 
$
18.54

Granted
334,035

 
16.47

Vested

 

Forfeited
(8,489
)
 
17.72

Unvested at June 30, 2018(1)
718,630

 
$
17.59

(1) Approximately 99,451 RSUs from the 2016 grant are not expected to vest based on the Company's current assessment of the related performance obligations.
Of the 718,630 unvested RSUs and restricted stock outstanding at June 30, 2018, 362,974 RSUs include contingent performance requirements for vesting purposes. At June 30, 2018, there was $5.9 million of unrecognized net compensation cost related to RSUs and restricted stock, which is expected to be recognized over a weighted average period of 1.86 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.
For the three and six months ended June 30, 2018 and 2017, 11,581 and 8,983 shares of the Company's common stock were purchased, respectively, for a total cost of $0.1 million.
The following table summarizes the activities under the ESPP from January 1, 2018 through June 30, 2018:
 
Activity
Total ESPP equity securities available at January 1, 2018
228,279

ESPP common stock purchased by eligible employees
(11,581
)
Total ESPP securities available at June 30, 2018
216,698

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.

17

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 of Operations for the periods stated:
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
(Dollars in thousands)
2018
 
2017
 
2018
 
2017
Performance-based RSUs
$
526

 
$
508

 
$
1,030

 
$
998

Time-based and restricted stock
724

 
475

 
1,437

 
744

ESPP
17

 
15

 
34

 
211

Total stock based compensation
$
1,267

 
$
998

 
$
2,501

 
$
1,953

In the fourth quarter of 2016 we determined that only 50% of the 2015 and 2016 performance grants made under the 2015 LTIP are expected to vest based on the related performance criteria and our assessment of the anticipated future performance applied to the performance criteria. As such, expenses listed in the table above reflect only the portion of grants and related expense that we anticipate will vest for those awards.
NOTE 10 - INCOME TAXES
Spok files a consolidated U.S. Federal income tax return and income tax returns in various state, local and foreign jurisdictions as required.
The Tax Cuts and Jobs Act of 2017 ("2017 Tax Act") was signed into law on December 22, 2017. As we complete our analysis of the 2017 Tax Act, collect and prepare necessary data, and interpret any additional guidance issued by the U.S. Treasury Department, the IRS, and other standard-setting bodies, we may make adjustments to the provisional amounts that were included in our 2017 Annual Report. Provisional amounts particularly include calculation of earnings and profits in foreign jurisdictions. Those adjustments may materially impact our provision for income taxes in the period in which the adjustments are made.
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 2018, 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 June 30, 2018, we had total deferred income tax assets ("DTAs") of $46.3 million and no valuation allowance. This reflects a decrease of $1.4 million from the December 31, 2017 balance of DTAs of $47.7 million and no valuation allowance. The change from December 31, 2017 to June 30, 2018 primarily reflects the tax impact related to the acceleration of revenues and adjustment to beginning retained earnings resulting from the adoption of ASC 606 partially offset by assets created from estimated net operating losses incurred during the six months months ended June 30, 2018.
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.
NOTE 11 - COMMITMENTS AND CONTINGENCIES
There have been no material changes during the six months ended June 30, 2018 to the commitments and contingencies previously reported in the 2017 Annual Report and and our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2018.

18

SPOK HOLDINGS, INC.
UNAUDITED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


NOTE 12 - 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 the three months ended June 30, 2018 and 2017, we incurred site rent expenses of $0.9 million and $1.0 million, respectively, and for the six months ended June 30, 2018 and 2017, we incurred site rent expenses of $1.8 million and $2.0 million, respectively, from the entity on which the individual serves as a director. Site rent expenses are included in Service, Rental and Maintenance expenses on the Condensed Consolidated Statement of Operations.
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" 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 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 2017 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 on Form 10-Q and Form 8-K that it will file with the SEC. Also note that, in the risk factors disclosed in the Company’s 2017 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 of Operations and Financial Position of Spok. This MD&A is provided as a supplement to, and should be read in conjunction with, our 2017 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 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 to our Unaudited Notes to Condensed Consolidated Financial Statements of Part I of this Quarterly Report on Form 10-Q ("Quarterly Report") and "Item 1. Business" of Part I of the 2017 Annual Report, which describes our business in further detail.
Revenue
We offer a suite of unified critical communication solutions that include call center operations, clinical alerting and notifications, one-way and advanced two-way wireless messaging services, mobile communications and public safety response.
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 critical communications. 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.

19



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 six months ended June 30, 2018 wireless revenue represented approximately 57.2% and software revenue represented approximately 42.8% of our consolidated revenue.
Refer to Note 5, "Revenues," 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 service 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.
Service, rental and maintenance. 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 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 includes finance and accounting, human resources and executive management. This classification consists primarily of payroll and related expenses, outside service expenses, taxes, licenses and permit expenses, and facility rent expenses.

20



Results of Operations
The following table is a summary of our Consolidated Statement of Operations for the Three and Six Months Ended June 30, 2018 and 2017
 
For the Three Months Ended June 30,
 
Change
 
For the Six Months Ended June 30,
 
Change
(Dollars in thousands)
2018
 
2017
 
Total
 
%
 
2018
 
2017
 
Total
 
%
Revenue:
 
 





 
 
 
 
 
 
 
 
Wireless
$
23,658

 
$
25,639


$
(1,981
)

(7.7
)%
 
$
47,927

 
$
51,499

 
$
(3,572
)
 
(6.9
)%
Software
16,970

 
16,686


284


1.7
 %
 
35,815

 
32,270

 
3,545

 
11.0
 %
Total revenue
40,628

 
42,325


(1,697
)

(4.0
)%
 
83,742

 
83,769

 
(27
)
 
 %
Operating expenses:
 
 
 




 
 
 
 
 
 
 
 
Cost of revenue
7,400

 
7,190


210


2.9
 %
 
15,133

 
14,226

 
907

 
6.4
 %
Research and development
6,177

 
4,662


1,515


32.5
 %
 
11,912

 
8,767

 
3,145

 
35.9
 %
Service, rental and maintenance
7,698

 
7,944


(246
)

(3.1
)%
 
15,448

 
16,010

 
(562
)
 
(3.5
)%
Selling and marketing
6,093

 
5,329


764


14.3
 %
 
12,562

 
11,251

 
1,311

 
11.7
 %
General and administrative
12,741

 
11,939


802


6.7
 %
 
24,704

 
23,649

 
1,055

 
4.5
 %
Depreciation, amortization and accretion
2,669

 
2,851


(182
)

(6.4
)%
 
5,382

 
6,074

 
(692
)
 
(11.4
)%
Total operating expenses
42,778

 
39,915


2,863


7.2
 %
 
85,141

 
79,977

 
5,164

 
6.5
 %
Operating (loss) income
(2,150
)
 
2,410


(4,560
)

(189.2
)%
 
(1,399
)
 
3,792

 
(5,191
)
 
(136.9
)%
Interest income
342

 
154


188


122.1
 %
 
625

 
276

 
349

 
126.4
 %
Other income
102

 
89


13


14.6
 %
 
54

 
58

 
(4
)
 
(6.9
)%
(Loss) income before income taxes
(1,706
)
 
2,653


(4,359
)

(164.3
)%
 
(720
)
 
4,126

 
(4,846
)
 
(117.5
)%
Benefit from (provision for) income taxes

730

 
(1,155
)

1,885


(163.2
)%
 
255

 
(1,774
)
 
2,029

 
(114.4
)%
Net (loss) income
$
(976
)
 
$
1,498


$
(2,474
)

(165.2
)%
 
$
(465
)
 
$
2,352

 
$
(2,817
)
 
(119.8
)%
 
 
 
 






 
 
 
 
 
 
 
 
Supplemental Information
 
 
 






 
 
 
 
 
 
 
 
FTEs
607

 
604


3


0.5
 %
 
607

 
604

 
3

 
0.5
 %
Active transmitters
3,961

 
4,073


(112
)

(2.7
)%
 
3,961

 
4,073

 
(112
)
 
(2.7
)%


21



The following table is a summary of our Consolidated Statement of Operations for the Three and Six Months Ended June 30, 2018 and 2017 adjusted to exclude the adoption of ASC 606
 
For the Three Months Ended June 30,
 
Change
 
For the Six Months Ended June 30,
 
Change
(Dollars in thousands)
2018(1)
 
2017
 
Total
 
%
 
2018(1)

 
2017
 
Total
 
%
Revenue:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Wireless
$
23,658

 
$
25,639

 
$
(1,981
)
 
(7.7
)%
 
$
47,927

 
$
51,499

 
$
(3,572
)
 
(6.9
)%
Software
18,136

 
16,686

 
1,450

 
8.7
 %
 
36,324

 
32,270

 
4,054

 
12.6
 %
Total revenue
41,794

 
42,325

 
(531
)
 
(1.3
)%
 
84,251

 
83,769

 
482

 
0.6
 %
Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cost of revenue
7,399

 
7,190

 
209

 
2.9
 %
 
15,128

 
14,226

 
902

 
6.3
 %
Research and development
6,177

 
4,662

 
1,515

 
32.5
 %
 
11,912

 
8,767

 
3,145

 
35.9
 %
Service, rental and maintenance
7,698

 
7,944

 
(246
)
 
(3.1
)%
 
15,448

 
16,010

 
(562
)
 
(3.5
)%
Selling and marketing
6,198

 
5,329

 
869

 
16.3
 %
 
12,228

 
11,251

 
977

 
8.7
 %
General and administrative
12,763

 
11,939

 
824

 
6.9
 %
 
24,704

 
23,649

 
1,055

 
4.5
 %
Depreciation, amortization and accretion
2,669

 
2,851

 
(182
)
 
(6.4
)%
 
5,382

 
6,074

 
(692
)
 
(11.4
)%
Total operating expenses
42,904

 
39,915

 
2,989

 
7.5
 %
 
84,802

 
79,977

 
4,825

 
6.0
 %
Operating (loss) income
(1,110
)
 
2,410

 
(3,520
)
 
(146.1
)%
 
(551
)
 
3,792

 
(4,343
)
 
(114.5
)%
Interest income
342

 
154

 
188

 
122.1
 %
 
625

 
276

 
349

 
126.4
 %
Other income
74

 
89

 
(15
)
 
(16.9
)%
 
39

 
58

 
(19
)
 
(32.8
)%
(Loss) income before income taxes
(694
)
 
2,653

 
(3,347
)
 
(126.2
)%
 
113

 
4,126

 
(4,013
)
 
(97.3
)%
Benefit from (provision for) income taxes
730

 
(1,155
)
 
1,885

 
(163.2
)%
 
255

 
(1,774
)
 
2,029

 
(114.4
)%
Net income
$
36

 
$
1,498

 
$
(1,462
)
 
(97.6
)%
 
$
368

 
$
2,352

 
$
(1,984
)
 
(84.4
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Supplemental Information
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
FTEs
607

 
604

 
3

 
0.5
 %
 
607

 
604

 
3

 
0.5
 %
Active transmitters
3,961

 
4,073

 
(112
)
 
(2.7
)%
 
3,961

 
4,073

 
(112
)
 
(2.7
)%
(1)Adjusted to exclude the adoption of ASC 606

22



Revenue
The table below details total revenue for the periods stated:
 
For the Three Months Ended June 30,
 
Change
 
For the Six Months Ended June 30,
 
Change
(Dollars in thousands)
2018
 
2017
 
Total
 
%
 
2018
 
2017
 
Total
 
%
Revenue - wireless:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Paging revenue
$
22,824

 
$
24,572

 
$
(1,748
)
 
(7.1
)%
 
$
46,132

 
$
49,544

 
$
(3,412
)
 
(6.9
)%
Product and other revenue
834

 
1,067

 
(233
)
 
(21.8
)%
 
1,795

 
1,955

 
(160
)
 
(8.2
)%
Total wireless revenue
23,658

 
25,639

 
(1,981
)
 
(7.7
)%
 
47,927

 
51,499

 
(3,572
)
 
(6.9
)%
 
 
 
 
 
 
 
 
 


 


 


 


Revenue - software:
 
 
 
 
 
 
 
 


 


 
 
 
 
Subscription
$
441

 
$
623

 
$
(182
)
 
(29.2
)%
 
$
861

 
$
1,167

 
$
(306
)
 
(26.2
)%
License
1,552

 
1,641

 
(89
)
 
(5.4
)%
 
5,508

 
2,812

 
2,696

 
95.9
 %
Services
4,363

 
3,650

 
713

 
19.5
 %
 
8,433

 
7,003

 
1,430

 
20.4
 %
Equipment
1,107

 
1,127

 
(20
)
 
(1.8
)%
 
2,132

 
2,100

 
32

 
1.5
 %
Operations revenue
7,463

 
7,041

 
422

 
6.0
 %
 
16,934

 
13,082

 
3,852

 
29.4
 %
Maintenance revenue
9,507

 
9,645

 
(138
)
 
(1.4
)%
 
18,881

 
19,188

 
(307
)
 
(1.6
)%
Total software revenue
16,970

 
16,686

 
284

 
1.7
 %
 
35,815

 
32,270

 
3,545

 
11.0
 %
Total revenue
$
40,628

 
$
42,325

 
$
(1,697
)
 
(4.0
)%
 
$
83,742

 
$
83,769

 
$
(27
)
 
 %
The decrease in wireless revenue for the three and six months ended June 30, 2018 compared to the same periods in 2017 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 June 30, 2018 and 2017 was $7.41 and $7.52, respectively, while total units in service were 1.0 million and 1.1 million, respectively. While demand for wireless services continues to decline it has done so at a slower rate for each of the periods presented. 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 June 30,
 
Revenue for the Three Months Ended June 30,
 
Change Due To:
(in thousands)
 
2018