Spok Holdings, Inc (SPOK) FY 2021 MD&A

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis should be read in conjunction with our consolidated financial statements and related notes and the discussion under "Organization and Significant Accounting Policies” (refer to Note 1 in the Notes to the Consolidated Financial Statements), which describes key estimates and assumptions we make in the preparation of our consolidated financial statements; the cautionary language that appears under the title "Forward Looking Statements" immediately following the Table of Contents; "Item 1. Business," which describes our operations; and "Item 1A. Risk Factors," which describes key risks associated with our operations and markets in which we operate. A reference to a "Note" in this section refers to the accompanying Notes to Consolidated Financial Statements.

Overview and Highlights

We offer a focused suite of unified clinical communication 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. Our customers rely on Spok for workflow improvement, secure texting, paging services, contact center optimization and public safety response. Our product offerings are capable of addressing a customer’s clinical communications needs. We develop, sell and support enterprise-wide systems for healthcare and other organizations needing to automate, centralize and standardize their approach to clinical communications. While our primary market has been the healthcare industry with a focus on prominent hospitals, our solutions can also be found in large government agencies; leading public safety institutions; colleges and universities; large hotels, resorts and casinos; and well-known manufacturers.

Revenue generated by wireless messaging services (including voice mail, personalized greetings, message storage and retrieval), equipment, maintenance plans and/or equipment loss protection to both one-way and two-way messaging subscribers is presented as wireless revenue in our statements of operations. Revenue generated by the sale of our software solutions, which includes software license, professional services (installation, consulting and training), equipment procured by us from third parties (to be used in conjunction with our software) and post-contract support (on-going maintenance), is presented as software revenue in our statements of operations. Our software is licensed to end users under an industry standard software license agreement.

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New Strategic Business Plan

In February 2022, our Board of Directors announced a new strategic business plan that includes a restructuring of our business to discontinue Spok Go, eliminate all associated costs and optimize the Company’s existing structure to drive continued cost improvement. The strategic business plan includes a renewed focus on our existing and established business, including the Spok Care Connect Suite and our wireless service offerings. While there are numerous factors that went into this decision, the ongoing challenge of the COVID-19 pandemic made it difficult for the Spok Go platform to gain sufficient traction with customers or for our business to continue operating with our current level of costs and personnel. This shift in focus will allow us to prioritize cash flow generation and the return of capital to stockholders. As a result of this new strategic business plan, our Board of Directors has increased the regular quarterly dividend from $0.125 to $0.3125 and has authorized a share repurchase program of up to $10 million of our common stock.

As part of the restructuring program, we intend to eliminate approximately 175 positions, primarily in research and development, but also in professional services, selling and marketing, and back-office support functions. We expect to record one-time pre-tax restructuring charges of approximately $6.4 million to $10.2 million, comprised of approximately $5.0 million to $6.6 million in severance and personnel related costs and approximately $1.4 million to $3.6 million in contractual terminations. Future cash payments related to these charges are expected to generally be within the same range. The restructuring actions associated with these charges are expected to be substantially complete in 2022.

COVID-19

In March 2020, the World Health Organization declared COVID-19 a global pandemic, and the virus 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 late February 2020 as hospitals began to delay purchasing decisions and address staff reductions. These delays continued to affect our software bookings, which directly impacted license and equipment revenues during 2020 and 2021.

We also experienced delays in our ability to deliver on-site implementation services, which has impacted 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 completely implement. These impacts primarily resulted in delays in the timing of revenue recognition during 2020 and 2021, as associated revenue corresponds to our backlog of performance obligations ready for delivery at some point in the future.

While many hospitals relaxed their initial capacity and social distancing guidelines in the second half of 2020, some of our customers continued such restrictions into 2021 to ensure the safety of their personnel and patients. Such restrictions, which have varied considerably depending on the size of the organization, geographical location and local regulations, can make it difficult for external personnel who are not critical to the immediate operating needs of a hospital, such as our implementation staff, to gain access.

As we return to normal operating levels, much of our business continues to be 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 most organizations began to see improved operating levels during the second half of 2020 and into 2021 as the number of overall U.S. virus cases declined, some of our customers in certain geographic areas continued to experience periodic capacity constraints due to the emergence of new COVID-19 variants.

The length and severity of pandemic-related challenges 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. Any significant spikes in U.S. virus cases could delay or reverse progress towards returning to normal operational levels. 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 continue to improve as pandemic-related restrictions are lifted.

While we are likely to see some lingering and continued effects from COVID-19, barring the emergence of a severe COVID-19 variant of concern, which might have significant negative effects on the overall economy and our customer base specifically, we anticipate a return to pre-pandemic operating levels in 2022. 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. Likewise, we are optimistic that any lingering effects from COVID-19 will have a lesser impact on our financial results in 2022 than they did in 2020 and 2021.

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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 the years ended December 31, 2021 and 2020, these reduced work schedules resulted in realized savings of $1.8 million and $5.6 million in compensation expense, respectively. While we originally expected this plan to continue for all of 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 expected this plan to continue for all of 2021, we subsequently concluded that continuing the plan for the fourth quarter of 2021 was unnecessary, for the same reasons as explained above. For the year ended December 31, 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 year ended December 31, 2021, we achieved cash savings of $0.3 million. We do not anticipate any further savings from this plan. (Refer to Note 9, "Stockholders' Equity," in the Notes to 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 no plans to resume its countermeasures, we anticipate re-evaluating our position on a quarterly basis based on the progression of COVID-19 and any variants of concern, impacts on our business, and other facts and circumstances as deemed relevant by management.

2021 Highlights

Total revenue declined by $6.0 million or 4.1% during 2021 compared to 2020, primarily as a result of the continued and expected decline in wireless revenue.

The wireless revenue attrition rate in 2021 was 5.7%, an increase from a 5.2% attrition rate in 2020. This increase was driven by product and other revenue which is highly variable. The attrition rate within recurring paging revenue categories was 5.1% as compared to an attrition rate of 6.1% in both 2020 and 2019.

For the year ended December 31, 2021 we recognized impairment charges of $15.7 million pertaining to capitalized software development, and for the year ended December 31, 2020, we recognized impairment charges of $25.0 million pertaining to goodwill. Excluding these impairment charges, our operating expenses increased by $8.4 million or 5.7% during 2021 compared to 2020, driven primarily by the 2021 curtailment of the pandemic-related cost mitigation measures that we enacted in 2020, as discussed above, our utilization of certain provisions under The Coronavirus Aid Relief and Economic Security ("CARES") Act in 2020 that were not available in 2021, and costs related to our strategic alternatives review.

We returned approximately $10.0 million of capital to stockholders in the form of cash dividends.

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Results of Operations

The following table is a summary of our Consolidated Statements of Operations for the years ended December 31, 2021, 2020 and 2019 and the discussion that follows compares the year ended December 31, 2021 to the year ended December 31, 2020. For a discussion and analysis of the year ended December 31, 2020, compared to the year ended December 31, 2019, please refer to Management's Discussion and Analysis of Financial Condition and Results of Operations included in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2020, filed with the SEC on February 18, 2021:

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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 have historically identified 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), equipment, maintenance plans and/or equipment loss 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, 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 4, "Revenue, Deferred Revenue and Prepaid Commissions," in the Notes to Consolidated Financial Statements for additional information on our wireless and software revenue streams.

The table below details total revenue for the periods stated:

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, sales of paging devices and charges for devices that are not returned and are net of anticipated credits. See Item 1. "Business" for more details.

We offer subscriptions to one-way or two-way messaging services for a periodic (monthly, quarterly, semiannual, or annual) service fee. The level of service fees 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. We also sell devices to resellers who lease or resell such devices to their subscribers and then sell messaging services utilizing our networks.

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A subscriber to one-way messaging services may select coverage on a local, regional or nationwide basis to best meet their messaging needs, while two-way messaging is generally offered on a nationwide basis. In addition, subscribers either contract to use a messaging device that we own and provide for an additional fixed monthly fee or they own the device used, after either purchasing it either from us or from another vendor.

We offer exclusive one-way (T5) and two-way (T52) alphanumeric pagers, which are configurable to support unencrypted 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 HIPAA security capabilities to the low cost, highly reliable and availability benefits of paging . We also 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.

The decrease in wireless revenue during 2021 compared to 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.

For the year ended December 31, 2021, ARPU was $7.30, unchanged from the prior year. Total units in service were 0.8 million and 0.9 million as of December 31, 2021, and 2020, respectively. Overall ARPU remained steady as compared to the prior year as the decrease from lower variable revenue and the anticipated decline in service revenue was 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.

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 optimistic 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 narrowband wireless service offerings to broadband technology services, our wireless revenue will continue to decrease.

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

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

In late 2021, we began offering our newest pager, GenA. This one-way alphanumeric pager features a high resolution ePaper display, intuitive modern user interface, advanced encryption and security features, over-the-air remote programming, and an antimicrobial housing. Users can select from various font sizes, and the large GenA display also leverages proportional fonts to maximize key information on a single screen.

The GenA pager is the only product available on the market with these capabilities, and we maintain an exclusive arrangement with the product's manufacturer. Given the product differentiation of the GenA pager, its development is a key initiative providing a competitive advantage, and we expect this new technology will be popular for our customers in clinical environments and may help slow our wireless revenue attrition.

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 facilitate 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 our software solutions or related equipment, typically for a period of one year after project completion.

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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.

Revenue items impacted by timing generally relate to specific renewal contracts that do not have auto-renewal terms and for which we must negotiate at the end of each term. We are generally precluded from recognizing revenue on these contracts until new terms have been agreed to even though we continue to provide maintenance service for these customers while negotiations are ongoing. While certain commercial customers require this type of contract renewal, these contracts are generally limited to government organizations, including federal, state and local entities. When a renewal of this nature has been contracted, it is often accompanied by several months of "catch-up" revenue from services performed in past periods resulting in a one-time value that is greater than the normal monthly revenue expected over the life of the remaining term.

While we have not seen a meaningful increase in our normal customer churn as it relates to maintenance revenue, 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. Given these dynamics, we believe annual maintenance revenue is likely to be relatively flat or slightly down as we move forward, until such time that we are able t to develop new licenses that can provide an avenue for additional maintenance revenue.

During 2021, we continued to experience disruptions to our business due to the COVID-19 pandemic, however we believe that such disruptions will subside in 2022 and that our software revenues will resume their pre-pandemic growth.

Operations Revenue

Software operations revenue decreased during 2021 when compared to 2020. Service revenue declined largely as a result of employing fewer billable FTE's in 2021 as compared to 2020. Like many other companies, we experienced relatively high personnel attrition and slower time-to-hire rates given the macroeconomic environment in 2021. The decline in services revenue was partially offset by an increase in license and subscription revenues overall, given an improving economy and selling environment when compared to the prior year and the early stages of the pandemic.

Maintenance Revenue

Software maintenance revenue decreased during 2021 when compared to 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.

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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 that 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 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 for the foreseeable future as we continue to consolidate our networks, 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 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 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 service 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.

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The following is a review of our operating expense categories for the years ended December 31, 2021, and 2020.

Cost of Revenue

Cost of revenue consisted primarily of the following items:

Cost of revenue increased for the year ended December 31, 2021, compared to December 31, 2020, driven by increases in payroll and related expenses, stock-based compensation, and cost of sales.

Despite the decline in FTE's, payroll and related costs increased as we recognized lower cost savings from reduced work schedules during the year. 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. 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 was effective for the first three quarters of 2021. These temporary cash savings measure are outlined in more detail within our earlier discussion on COVID-19.

Cost of sales increased largely due to an increase in recoverable taxes and regulatory fees associated with our wireless revenue, offset by lower equipment costs. The Company reclassified $3.3 million from general and administrative to cost of sales for the year ended December 31, 2021. Corresponding reclassifications of $2.8 million and $2.5 million were made to the Consolidated Statement of Operations for presentation purposes for the years ended December 31, 2020, and 2019, respectively.

Research and Development

Research and development consisted primarily of the following items:

Research and development expenses increased for the year ended December 31, 2021, compared to 2020, driven by higher stock-based compensation, and lower capitalized software development costs, and higher other 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 was effective for the first three quarters of 2021. Our temporary cash savings measures are outlined in more detail within the earlier discussion on COVID-19. Although payroll and related expenses within each of our other functional categories increased during 2021, as explained in more detail in those sections, Research and Development payroll costs were essentially flat for the year due to the decline in FTEs within the category.

We capitalized fewer costs related to software development due to fewer FTE's in 2021, as well as reduced spending on outside services. Refer to Note 1, "Organization and Significant Accounting Policies," and Note 7, "Goodwill, Capitalized Software Development and Intangible Assets, Net," in the Notes to Consolidated Financial Statements for further detail.

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The increase in other expenses was driven by a $0.9 million loss contingency we recorded in the fourth quarter of 2021 related to a license and service contract from which we do not believe we will be able to realize any benefits. Due to a change in standards required for electronic heath records, we no longer need the product enhancements that would be provided under this contract. Refer to Note 11, "Commitments and Contingencies," in the Notes to Consolidated Financial Statements for further detail.

While development costs have continued to grow, they have done so at a slower pace when compared to prior years. We will 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, however these efforts will be targeted to specific enhancements. Total research and development costs are expected to significantly decrease in 2022 as part of our new strategic business plan and our intent to eliminate all Spok Go related costs.

Technology Operations

Technology operations consisted primarily of the following items:

Technology operations expenses decreased for the year ended December 31, 2021, compared to 2020, driven by lower site rent and by lower telecommunications costs, which resulted from cost savings initiatives applicable to our wireless network. These declines were partially offset by higher payroll and related and stock-based compensation costs.

The number of active transmitters, which directly affects our site rent expenses, declined 4.9% from December 31, 2020, to December 31, 2021. The number of active transmitters directly relates to the amount of site rent expenses we generally incur on a recurring basis. As we reach certain minimum frequency commitments, as outlined by the FCC, we may be unable to continue our efforts to rationalize and consolidate our networks.

Payroll and related expenses increased as we recognized lower cost savings from reduced work schedules during 2021 as compared to 2020. 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 tax credits in 2020 that were not available in 2021. Refer to Note 10, "Income Taxes," in the Notes to Consolidated Financial Statements for additional information on our temporary use of the CARES Act provisions. 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 was effective for the first three quarters of 2021. Our temporary cash savings measures are outlined in more detail within the earlier discussion on COVID-19.

Selling and Marketing

Selling and marketing consisted primarily of the following items:

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Selling and marketing expense increased for the year ended December 31, 2021, compared to 2020, driven by increases in payroll and related expenses and stock-based compensation, partially offset by a decline in other expenses.

Payroll and related expenses increased as we recognized lower cost savings from reduced work schedules during the year compared to 2020. Additionally, payroll and related costs were lower in 2020 relative to historical trends and normal operating costs as a result of our utilization of certain provisions under the CARES Act for payroll and employee tax credits in 2020 that were not available in 2021. Refer to Note 10, "Income Taxes," in the Notes to Consolidated Financial Statements for additional information on our temporary use of the CARES Act provisions. Furthermore, the significant decrease in FTE's largely occurred during the second half of 2021 and payroll and related costs do not reflect full annualized savings. 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. The reduced work schedules and share compensation plan were part of our temporary cash savings measures, outlined in more detail within the earlier discussion on COVID-19.

The decline in other expenses was primarily driven by savings from precautionary COVID-19 measures whereby we did not hold our annual offsite event for recognition of outstanding employees, and we held virtual internal sales training and conferences in lieu of in-person training.

General and Administrative

General and administrative consisted primarily of the following items:

General and administrative expenses increased for the year ended December 31, 2021, compared to 2020, driven by increases in outside services, facility rent, office and technology costs, payroll and related costs, taxes, licenses and permits,, and stock-based compensation. These increases were partially offset by decreases in bad debt and other expenses.

Outside services increased primarily due to the use of professional services in connection with our strategic alternatives review, which we announced on September 3, 2021. The increase in facility rent, office and technology costs was primarily due to higher expenses for software, hardware and IT related costs as well as increased rent for our headquarters lease. Refer to Note 5, "Leases," in the Notes to Consolidated Financial Statements for additional information on our headquarters lease.

Payroll and related costs increased as we recognized lower cost savings from reduced work schedules during the year as compared to 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 was effective for the first three quarters of 2021. These temporary cash savings measures are outlined in more detail within our earlier discussion on COVID-19.

The increases in taxes, licenses and permits was due in large part to temporary reductions in certain usage taxes in 2020 that were not incurred in 2021. Furthermore, we reclassified $3.3 million from taxes, licenses and permits to cost of revenue for the year ended December 31, 2021. Corresponding reclassifications of $2.8 million and $2.5 million were made to the Consolidated Statement of Operations for presentation purposes for the years ended December 31, 2020, and 2019, respectively. These reclassification were related to the recoverable taxes and regulatory fees associated with our wireless revenue.

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Depreciation, Amortization and Accretion

For the year ended December 31, 2021, compared to 2020, depreciation, amortization and accretion expenses increased by $1.4 million. Amortization expense increased by $2.2 million for the year due to an increase in amortization of software development costs. This was partially offset by a $1.0 million decline in depreciation expenses for the year, largely due to lower depreciation for paging equipment, including a large purchase of pagers becoming fully depreciated in 2021. Refer to Note 6, "Consolidated Financial Statement Components," in the Notes to Consolidated Financial Statements for further discussion.

Goodwill and Long-Lived Asset Impairment

We perform our annual goodwill impairment testing in the fourth quarter of each year. For the year ended December 31, 2021, we recognized no goodwill impairment. For the year ended December 31, 2020, we recognized a non-cash, pre-tax goodwill impairment charge of $25.0 million.

We evaluate our long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset group may not be recoverable. For the year ended December 31, 2021, we recognized a capitalized software development impairment charge of $15.7 million. For the year ended December 31, 2020, we recognized no capitalized software development impairment.

Refer to Note 1, "Organization and Significant Accounting Policies," and Note 7, "Goodwill, Capitalized Software Development and Intangible Assets, Net" in the Notes to Consolidated Financial Statements for further discussion.

Interest Income, Other Income (Expense) and Income Tax (Benefit) Expense

Interest Income

Interest income decreased by $0.4 million for the year ended December 31, 2021, compared to 2020, primarily due to a decrease in interest earned on the Company's cash balances and short-term investments. This was driven by lower interest rates during the year.

Other Income

For the year ended December 31, 2021, compared to 2020, other income decreased by $0.1 million, largely as a result of a decrease in gains on foreign currency.

Provision for (Benefit from) Income Taxes

The effects of foreign taxes are immaterial for all periods presented. The following provides the effective tax rate reconciliation for the years ended December 31, 2021, 2020 and 2019, respectively (See Note 10, "Income Taxes" in the Notes to Consolidated Financial Statements for further discussion on our income taxes):

Benefit from income taxes changed by $27.6 million for the year ended December 31, 2021, from 2020 due primarily to the deferred tax asset valuation allowance and goodwill impairment in 2020 that did not occur in 2021. Our investment in research and development qualifies for the research and development income tax credit under Section 41 of the Internal Revenue Code. Unused research and development tax credits have a 20-year carryover and will provide future tax benefits once Spok’s net operating losses are fully utilized.

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We assess the recoverability of our deferred income tax assets, which represent the tax benefits of future tax deductions, based on available positive and negative evidence, and by considering the adequacy of future taxable income from all sources, including prudent and feasible tax planning strategies. This assessment is required to determine whether, based on all available evidence, it is more likely than not" (meaning a probability of greater than 50%) that all or some portion of our deferred income tax assets will be realized in future periods.

The cumulative loss incurred by the Company over the three-year period ended December 31, 2021, constitutes a piece of objective negative evidence that limits our ability to consider other subjective evidence. In addition, the uncertainty created by COVID-19 has significantly limited our ability to consider our projections for future profitability and growth in our assessment of the recoverability of our deferred income tax assets. We traditionally perform this evaluation in the fourth quarter of each year, utilizing our annual long-range planning and forecasting updates. As of December 31, 2021, and 2020, our deferred tax assets were net of valuation allowances of $24.2 million and $22.1 million, respectively. COVID-19 has significantly limited our ability to consider projections for future profitability as objectively verifiable positive evidence to support the realizability of deferred tax assets. As a result, we continue to maintain a valuation allowance against deferred tax assets associated with net operating losses and credits with set expiration dates.

Those deferred income tax assets which are not currently covered by a valuation allowance are those that are indefinite-lived, or whose temporary differences would reverse in the future and may result in the creation of an indefinite-lived deferred income tax asset, which we consider to be realized through future taxable income despite near term uncertainties. The amount of deferred income tax assets considered realizable, however, could be adjusted in the future if objective negative evidence in the form of cumulative losses is no longer present, additional weight is given to subjective evidence such as our projections for future profitability and growth, or other relevant factors arise. We did not record a valuation allowance in 2019.

Refer to Note 1, "Organization and Significant Accounting Policies," and Note 10, "Income Taxes," in the Notes to Consolidated Financial Statements for further discussion.

Liquidity and Capital Resources

Cash and Cash Equivalents

At December 31, 2021, we held cash, cash equivalents and short-term investments of $59.6 million. The available cash and cash equivalents consist of cash in our operating accounts and cash invested in interest-bearing funds managed by third-party financial institutions. These funds invest in U.S. Treasury securities and are therefore classified as held-to-maturity and reported at amortized cost in our 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. Our short-term investments consist entirely of U.S. Treasury securities, which are classified as held-to-maturity and are measured at amortized cost on our Condensed Consolidated Balance Sheets.

We maintain a level of liquidity sufficient to allow us to meet our cash needs in both the short term (next 12 months) and long term (beyond 12 months). At any point in time, we maintain approximately $5.0 to $10.0 million in our operating accounts at 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 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. As part of the restructuring program in connection with our new strategic business plan, we expect to record one-time pre-tax restructuring charges of approximately $6.4 million to $10.2 million, comprised of approximately $5.0 million to $6.6 million in severance and personnel related costs and approximately $1.4 million to $3.4 million in contractual terminations. Future cash payments related to these charges are expected to generally be within the same range. The restructuring actions associated with these charges are expected to be substantially complete in 2022. Because of these cash payments related to the restructuring program, we anticipate that our cash on hand will decrease during 2022. However, our restructuring efforts are meant to refocus our operational efforts towards cash flow generation and the return of capital to our stockholders. Should our restructuring efforts be successful, we anticipate future operating periods will return to historically positive cash flow generation.

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On February 16, 2022, the Board of Directors declared an increase in the regular quarterly cash dividend to $0.3125 per share of common stock, with a record date of March 16, 2022, and a payment date of March 30, 2022. This cash dividend of approximately $6.2 million is expected to be paid from available cash on hand. The Board of Directors also authorized a share repurchase program of up to $10 million of the Company's common stock.

Cash Flows Overview

In response to COVID-19, management enacted certain temporary cost mitigation measures, as previously discussed. While we have previously discussed the impact on our revenues from the pandemic, we do not expect COVID-19 will have a material impact on our liquidity 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 repurchase shares of our common stock under the share 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 additional 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 at December 31, 2021, should be adequate to meet anticipated cash requirements for the short term (next 12 months) and long term (beyond 12 months).

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

Operating Activities

As discussed above, we are dependent on cash flows from operating activities to meet our cash requirements. Cash from operations varies depending on changes in various working capital items, including deferred revenues, accounts payable, accounts receivable, prepaid expenses and various accrued expenses.

For the year ended December 31, 2021, net cash provided by operating activities was $8.0 million. This decline was driven by the net loss of $22.2 million, the deferred income tax benefit of $5.5 million, and changes in deferred revenue of $3.4 million and accounts payable, accrued liabilities and other of $0.7 million. These declines were partially offset by non-cash items such as capitalized software development impairment of $15.7 million, depreciation, amortization and accretion of $10.4 million, stock-based compensation of $7.2 million, and the provision for credit losses, service provisions and other of $1.2 million, as well as changes in prepaid expenses and other assets of $2.6 million, accounts receivable of $1.8 million, and lease liability of $0.8 million.

For the year ended December 31, 2020, net cash provided by operating activities was $26.2 million, due primarily to non-cash items such as goodwill impairment of $25 million, valuation allowance of $22.1 million, depreciation, amortization and accretion of $9.1 million, stock-based compensation of $5.5 million, and other non-cash items of $1.8 million, partially offset by the 2020 net loss of $44.2 million. Cash provided by operating activities also increased resulting from changes in accounts payable, accrued liabilities and other of $3.8 million, deferred revenue of $3.2 million and prepaid and other assets of $1.4 million, partially offset by a change in accounts receivable of $1.6 million.

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Investing Activities

For the years ended December 31, 2021, and 2020, net cash used in investing activities was $0.2 million and $14.6 million, respectively, due primarily to the purchase and maturity of U.S. treasury securities, capital expenditures and capitalization of certain software development costs.

Financing Activities

For the years ended December 31, 2021, and 2020, net cash used in financing activities was $11.8 million and $10.4 million, respectively, primarily due to cash distributions to stockholders of $10.0 million and $9.8 million, respectively.

Commitments and Contingencies

In the ordinary course of our operations, we enter into certain contractual obligations. Such obligations include data processing services, operating leases for premises and equipment, agreements with respect to borrowed funds and deposit liabilities.

Purchase obligations are defined as agreements to purchase goods or services that are enforceable, legally binding, non-cancelable, have a remaining term in excess of one year and that specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable pricing provisions; and the approximate timing of transactions. The amounts of such obligations are based on our contractual commitments, however, it is possible that we may be able to negotiate lower payments if we choose to exit these contracts before their expiration date.

Our contractual payment obligations for operating leases apply to leases for office space and transmitter locations. In March 2021, we relocated our corporate headquarters to office space located in Alexandria, Virginia, consisting of approximately 26,000 square feet of space under a lease that will expire on September 30, 2026. Over the life of this lease, cash payments are expected to total approximately $4.9 million.

The following table provides the Company's significant commitments and contractual obligations as of December 31, 2021:

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

The Company evaluates contingencies on an ongoing basis and establishes loss provisions for matters in which losses are probable and the amount of loss can be reasonably estimated. As part of this evaluation, the Company recognized a loss of $0.9 million in the fourth quarter of 2021 related to a license and service contract from which we do not believe we will realize any benefits. Due to a change in standards required for electronic heath records, we no longer need the product enhancements that would be provided under this contract.

Refer to Note 5, "Leases," and Note 11, "Commitments and Contingencies," in the Notes to Consolidated Financial statements for further discussion of commitments and contingencies.

Related Parties

Refer to Note 13, "Related Parties" in the Notes to Consolidated Financial Statements for further discussion on our related party transactions.

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Inflation

Inflation has not had a material effect on our operations to date. System equipment and operating costs have not significantly increased in price, and the price of wireless messaging devices has tended to decline in recent years. Our general operating expenses, such as salaries, site rent for transmitter locations, employee benefits and occupancy costs, are subject to normal inflationary pressures.

Critical Accounting Estimates

The Company’s accounting policies are more fully described in Note 1 of the Consolidated Financial Statements. As disclosed in Note 1, the preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions about future events that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ significantly from those estimates. We believe that the following discussion addresses the Company’s most critical accounting estimates, which are those that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on the Company’s financial condition and results of operations.

Revenue Recognition

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. Wireless service contracts are generally considered to be a single promise and therefore accounted for as a single performance obligation. Contracts which include goods or services related to our software solutions and subscriptions 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.

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 standalone selling price ("SSP") of the promised goods or services underlying each performance obligation. We rarely sell goods or services as 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.

Our wireless, professional, maintenance, and subscription 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 that include wireless, maintenance, or subscription 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 at completion ("EAC") for each contract. Our initial EAC is primarily based on prior experience also taking into consideration any specific facts and circumstances for a given contract. As projects progress, the EAC is periodically updated and reviewed to ensure the timing of revenue recognition is appropriate. The creation, maintenance and review of a project's EAC 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. 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.

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Income Taxes

Deferred income tax assets and liabilities are calculated based on temporary differences between the financial statement values and the tax bases of assets and liabilities including net operating loss and tax credit carryforwards at the enacted tax rates expected to apply to taxable income when taxes are actually paid or recovered. Changes in deferred income tax assets and liabilities are included as a component of deferred income tax expense. Deferred income tax assets represent amounts available to reduce future income taxes payable. We assess the recoverability of our deferred income tax assets, which represent the tax benefits of future tax deductions, based on available positive and negative evidence and by considering the adequacy of future taxable income from all sources, including prudent and feasible tax planning strategies. This assessment is required to determine whether, based on all available evidence, it is "more likely than not" (meaning a probability of greater than 50%) that all or some portion of our deferred income tax assets will be realized in future periods. We provide a valuation allowance when we consider it "more likely than not" that a deferred income tax asset will not be fully recovered. The assessment of our deferred income tax assets requires significant judgment, however, our methods, assumptions, and estimates used in assessing the need for a valuation allowance remained materially unchanged in 2021.

Impairment of Goodwill, Long-Lived Assets and Intangible Assets Subject to Amortization

We are required to evaluate the carrying value of our goodwill, long-lived assets and intangible assets subject to amortization.

Goodwill is not amortized but is evaluated for impairment at least annually, or when events or circumstances suggest a potential impairment has occurred. We generally perform this annual impairment test in the fourth quarter of the fiscal year. We evaluate goodwill for impairment between annual tests if indicators of impairment exist. Significant judgment is required in the determination of a triggering event given the qualitative nature of the assessment. The fair value of the reporting unit is estimated under a market-based approach using the fair value of the Company's common stock. The estimated fair value requires significant judgments, including timing and appropriateness of the price of common stock used (e.g. point-in-time application, simple moving average, exponential moving average), as well as application of an estimated control premium, if necessary. The estimated control premium is based on a review of current and past market information published by a third-party resource, assessment of the Company's future projected discounted cash flows and other relevant information if available. Our methods, assumptions, and estimates used in assessing goodwill in a quantitative form remained materially unchanged in 2021. We recorded no impairment of goodwill for the year ended December 31, 2021, and impairment of $25.0 million and $8.9 million for the years ended December 31, 2020, and 2019, respectively.

Quarterly, we assess whether circumstances exist which suggest that the carrying value of long-lived and amortizable intangible assets (asset groups) may not be recoverable. Similar to our quarterly assessment of goodwill, significant judgment is required in the determination of a triggering event given the qualitative nature of the assessment. During the quarter ended December 31, 2021, we determined that a triggering event had occurred based on a number of factors including a continuing trend of unsatisfactory Spok Go sales relative to our expectations, a significant accumulation of costs combined with a reduction of future sales projections which indicated continuing losses associated with Spok Go, and our expectation that Spok Go would not provide substantive future service potential.

We assessed recoverability based on the sum of the estimated undiscounted net cash flows of the long-lived asset group. The assessment of recoverability requires significant judgment, including timing and appropriateness of the estimated undiscounted future net cash flows. Given our lack of operational history with Spok Go, there is significant uncertainty in regards to an estimate of future cash flows. Our assessment determined that the carrying amount of the long-lived asset group was greater than the estimated undiscounted cash flows and further assessment of fair value was necessary to determine whether an impairment loss should be recognized.

We estimated fair value taking into consideration a number of factors including estimates used in our assessment of recoverability, discounted cash flow methods incorporating market-based information that we gathered as part of our on-going strategic alternatives process, and the projected continuance of costs necessary to create substantive future service potential. Given the nature of these capitalized software development costs where observable market prices are not readily available, the assessment of fair value requires significant judgment and estimates. This analysis determined that the remaining balance of capitalized software development costs had no fair value, and as a result, we recorded an impairment charge of $15.7 million for the year ended December 31, 2021. We did not record any impairment of long-lived assets or definite lived intangible assets for the years ended December 31, 2020, and 2019.

For additional details refer to Note 7, "Goodwill, Capitalized Software Development and Intangible Assets, Net," in the Notes to Consolidated Financial Statements.

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Recent accounting pronouncements

Refer to Note 2, "Recent Accounting Standards," in the Notes to Consolidated Financial Statements for a summary of recent and pending accounting standards.