UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2017March 31, 2019
OR
o 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: 001-34261
EVOLVING SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Delaware |
| 84-1010843 |
(State or other jurisdiction of incorporation or organization) |
| (I.R.S. Employer Identification No.) |
|
| 80112 |
(Address of principal executive offices) |
| (Zip Code) |
(303) 802-1000
(Registrant’s telephone number, including area code)
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 o
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 o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o |
| Accelerated filer o |
|
|
|
Non-accelerated filer |
| Smaller reporting companyx |
Emerging growth companyo |
|
|
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o¨ No x
Securities registered pursuant to Section 12(b) of the Act.
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
Common Stock, par value $0.001 per share | EVOL | Nasdaq Capital Market |
As of November 7, 2017May 13, 2019, there were 12,527,90712,161,489 shares outstanding of Registrant’s Common Stock (par value $0.001 per share).
Quarterly Report on Form 10-Q
September 30, 2017
PART I — FINANCIAL INFORMATION
EVOLVING SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
(unaudited)
|
| September 30, |
| December 31, |
| |||||||||
|
| 2017 |
| 2016 |
|
| March 31, 2019 |
| December 31, 2018 |
| ||||
ASSETS |
|
|
|
|
|
|
|
|
|
| ||||
Current assets: |
|
|
|
|
|
|
|
|
|
| ||||
Cash and cash equivalents |
| $ | 7,577 |
| $ | 7,614 |
|
| $ | 5,562 |
| $ | 6,732 |
|
Contract receivables, net of allowance for doubtful accounts of $220 at September 30, 2017 and $221 at December 31, 2016 |
| 10,752 |
| 5,867 |
| |||||||||
Unbilled work-in-progress |
| 6,333 |
| 3,376 |
| |||||||||
Contract receivables, net of allowance for doubtful accounts of $942 and $771 at March 31, 2019 and December 31, 2018, respectively |
| 7,676 |
| 7,757 |
| |||||||||
Unbilled work-in-progress, net of allowance for doubtful accounts of $554 and $552 at March 31, 2019 and December 31, 2018, respectively |
| 3,027 |
| 3,044 |
| |||||||||
Prepaid and other current assets |
| 3,016 |
| 1,553 |
|
| 1,920 |
| 1,351 |
| ||||
Income taxes receivable |
| 1,179 |
| 1,137 |
| |||||||||
Total current assets |
| 27,678 |
| 18,410 |
|
| 19,364 |
| 20,021 |
| ||||
Property and equipment, net |
| 335 |
| 546 |
|
| 375 |
| 303 |
| ||||
Amortizable intangible assets, net |
| 5,797 |
| 4,200 |
|
| 4,356 |
| 4,550 |
| ||||
Operating leases - right to use assets |
| 1,534 |
| — |
| |||||||||
Goodwill |
| 24,956 |
| 20,599 |
|
| 6,828 |
| 6,738 |
| ||||
Deferred income taxes, net |
| 1,144 |
| 1,140 |
| |||||||||
Total assets |
| $ | 58,766 |
| $ | 43,755 |
|
| $ | 33,601 |
| $ | 32,752 |
|
|
|
|
|
|
|
|
|
|
|
| ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
|
| ||||
Current liabilities: |
|
|
|
|
|
|
|
|
|
| ||||
Term loans - current portion |
| $ | 2,403 |
| $ | 1,997 |
|
| $ | 5,149 |
| $ | 3,573 |
|
Accounts payable and accrued liabilities |
| 7,404 |
| 4,275 |
|
| 5,174 |
| 4,483 |
| ||||
Income taxes payable |
| 1,016 |
| 617 |
| |||||||||
Contingent earn-out obligation |
| 393 |
| — |
| |||||||||
Unearned revenue |
| 6,378 |
| 3,532 |
|
| 4,366 |
| 3,911 |
| ||||
Total current liabilities |
| 17,594 |
| 10,421 |
|
| 14,689 |
| 11,967 |
| ||||
Long-term liabilities: |
|
|
|
|
|
|
|
|
|
| ||||
Term loans, net of current portion |
| 7,008 |
| 4,000 |
|
| — |
| 2,365 |
| ||||
Lease obligations - operating leases, net of current portion |
| 1,152 |
| — |
| |||||||||
Total liabilities |
| 24,602 |
| 14,421 |
|
| 15,841 |
| 14,332 |
| ||||
|
|
|
|
|
|
|
|
|
|
| ||||
Commitments and contingencies |
|
|
|
|
| |||||||||
Commitments and contingencies (Note 10) |
|
|
|
|
| |||||||||
|
|
|
|
|
| |||||||||
Stockholders’ equity: |
|
|
|
|
|
|
|
|
|
| ||||
Preferred stock, $0.001 par value; 2,000,000 shares authorized; no shares issued and outstanding as of September 30, 2017 and December 31, 2016 |
| — |
| — |
| |||||||||
Common stock, $0.001 par value; 40,000,000 shares authorized; 12,119,213 shares issued and 11,940,324 outstanding as of September 30, 2017 and 12,086,280 shares issued and 11,907,391 outstanding as of December 31, 2016 |
| 12 |
| 12 |
| |||||||||
Preferred stock, $0.001 par value; 2,000,000 shares authorized; no shares issued and outstanding as of March 31, 2019 and December 31, 2018 |
| — |
| — |
| |||||||||
Common stock, $0.001 par value; 40,000,000 shares authorized; 12,340,378 shares issued and 12,161,489 outstanding as of March 31, 2019 and 12,305,597 shares issued and 12,126,708 outstanding as of December 31, 2018 |
| 12 |
| 12 |
| |||||||||
Additional paid-in capital |
| 98,259 |
| 97,744 |
|
| 99,354 |
| 99,224 |
| ||||
Treasury stock 178,889 shares as of September 30, 2017 and December 31, 2016, at cost |
| (1,253 | ) | (1,253 | ) | |||||||||
Treasury Stock, 178,889 shares as of March 31, 2019 and December 31, 2018, at cost |
| (1,253 | ) | (1,253 | ) | |||||||||
Accumulated other comprehensive loss |
| (8,511 | ) | (9,992 | ) |
| (9,788 | ) | (10,115 | ) | ||||
Accumulated deficit |
| (54,343 | ) | (57,177 | ) |
| (70,565 | ) | (69,448 | ) | ||||
Total stockholders’ equity |
| 34,164 |
| 29,334 |
|
| 17,760 |
| 18,420 |
| ||||
Total liabilities and stockholders’ equity |
| $ | 58,766 |
| $ | 43,755 |
|
| $ | 33,601 |
| $ | 32,752 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.statements
EVOLVING SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOMEOPERATIONS
(in thousands, except per share data)
(unaudited)
|
| For the Three Months Ended |
| For the Nine Months Ended |
|
| For the Three Months Ended March 31, |
| ||||||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 |
|
| 2019 |
| 2018 |
| ||||||
REVENUE |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
License fees |
| $ | 1,068 |
| $ | 850 |
| $ | 2,131 |
| $ | 2,292 |
|
| $ | 714 |
| $ | 335 |
|
Services |
| 6,479 |
| 5,253 |
| 17,513 |
| 16,369 |
|
| 5,983 |
| 7,823 |
| ||||||
Total revenue |
| 7,547 |
| 6,103 |
| 19,644 |
| 18,661 |
|
| 6,697 |
| 8,158 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
COSTS OF REVENUE AND OPERATING EXPENSES |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Costs of revenue, excluding depreciation and amortization |
| 2,569 |
| 1,259 |
| 5,678 |
| 3,971 |
|
| 1,945 |
| 2,857 |
| ||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Sales and marketing |
| 1,439 |
| 1,236 |
| 3,485 |
| 3,807 |
|
| 2,066 |
| 1,637 |
| ||||||
General and administrative |
| 1,562 |
| 952 |
| 3,555 |
| 2,774 |
|
| 1,800 |
| 1,740 |
| ||||||
Product development |
| 356 |
| 697 |
| 1,499 |
| 2,485 |
|
| 1,289 |
| 853 |
| ||||||
Depreciation |
| 55 |
| 57 |
| 156 |
| 205 |
|
| 25 |
| 33 |
| ||||||
Amortization |
| 226 |
| 196 |
| 618 |
| 587 |
|
| 237 |
| 242 |
| ||||||
Restructuring |
| 131 |
| 3 |
| 131 |
| 1,007 |
| |||||||||||
Total costs of revenue and operating expenses |
| 6,338 |
| 4,400 |
| 15,122 |
| 14,836 |
|
| 7,362 |
| 7,362 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Income from operations |
| 1,209 |
| 1,703 |
| 4,522 |
| 3,825 |
| |||||||||||
(Loss) income from operations |
| (665 | ) | 796 |
| |||||||||||||||
|
|
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|
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| ||||||
Other income (expense) |
|
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|
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| |||||||||||
Other (expense) income |
|
|
|
|
| |||||||||||||||
Interest income |
| 1 |
| 1 |
| 2 |
| 4 |
|
| 5 |
| 28 |
| ||||||
Interest expense |
| (91 | ) | (74 | ) | (234 | ) | (265 | ) |
| (93 | ) | (126 | ) | ||||||
Other expense |
| (12 | ) | (31 | ) | |||||||||||||||
Foreign currency exchange loss |
| (176 | ) | (261 | ) | (568 | ) | (508 | ) |
| (261 | ) | (88 | ) | ||||||
Other income (expense), net |
| (266 | ) | (334 | ) | (800 | ) | (769 | ) | |||||||||||
Other expense, net |
| (361 | ) | (217 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Income from operations before income taxes |
| 943 |
| 1,369 |
| 3,722 |
| 3,056 |
| |||||||||||
(Loss) income from operations before income taxes |
| (1,026 | ) | 579 |
| |||||||||||||||
Income tax expense |
| 184 |
| 428 |
| 888 |
| 908 |
|
| 91 |
| 95 |
| ||||||
Net income |
| $ | 759 |
| $ | 941 |
| $ | 2,834 |
| $ | 2,148 |
| |||||||
Net (loss) income |
| $ | (1,117 | ) | $ | 484 |
| |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Basic income per common share |
| $ | 0.06 |
| $ | 0.08 |
| $ | 0.24 |
| $ | 0.18 |
| |||||||
Basic (loss) income per common share |
| $ | (0.09 | ) | $ | 0.04 |
| |||||||||||||
|
|
|
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|
|
|
|
|
|
| ||||||
Diluted income per common share |
| $ | 0.06 |
| $ | 0.08 |
| $ | 0.24 |
| $ | 0.18 |
| |||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Cash dividend declared per common share |
| $ | — |
| $ | — |
| $ | — |
| $ | 0.22 |
| |||||||
Diluted (loss) income per common share |
| $ | (0.09 | ) | $ | 0.04 |
| |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Weighted average basic shares outstanding |
| 11,940 |
| 11,873 |
| 11,932 |
| 11,824 |
|
| 12,138 |
| 12,077 |
| ||||||
Weighted average diluted shares outstanding |
| 11,992 |
| 11,979 |
| 11,975 |
| 11,967 |
|
| 12,138 |
| 12,165 |
| ||||||
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.statements
EVOLVING SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME (LOSS)
(in thousands)
(unaudited)
|
| For the Three Months Ended September 30, |
| For the Nine Months Ended September 30, |
| ||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Net income |
| $ | 759 |
| $ | 941 |
| $ | 2,834 |
| $ | 2,148 |
|
|
|
|
|
|
|
|
|
|
| ||||
Other comprehensive gain (loss): |
|
|
|
|
|
|
|
|
| ||||
Foreign currency translation gain (loss) |
| 314 |
| (753 | ) | 1,481 |
| (2,781 | ) | ||||
|
|
|
|
|
|
|
|
|
| ||||
Comprehensive income (loss) |
| $ | 1,073 |
| $ | 188 |
| $ | 4,315 |
| $ | (633 | ) |
|
| For the Three Months Ended March 31, |
| ||||
|
| 2019 |
| 2018 |
| ||
Net (loss) income |
| $ | (1,117 | ) | $ | 484 |
|
|
|
|
|
|
| ||
Other comprehensive income |
|
|
|
|
| ||
Foreign currency translation gain |
| 327 |
| 722 |
| ||
|
|
|
|
|
| ||
Comprehensive (loss) income |
| $ | (790 | ) | $ | 1,206 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.statements
EVOLVING SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTSTATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(in thousands, except per share data)
(unaudited)
|
|
|
|
|
|
|
|
|
| Accumulated |
|
|
|
|
| ||||||
|
|
|
|
|
| Additional |
|
|
| Other |
|
|
| Total |
| ||||||
|
| Common Stock |
| Paid-in |
| Treasury |
| Comprehensive |
| Accumulated |
| Stockholders’ |
| ||||||||
|
| Shares |
| Amount |
| Capital |
| Stock |
| Loss |
| Deficit |
| Equity |
| ||||||
Balance at December 31, 2016 |
| 11,907,391 |
| $ | 12 |
| $ | 97,744 |
| $ | (1,253 | ) | $ | (9,992 | ) | $ | (57,177 | ) | $ | 29,334 |
|
Stock option exercises |
| 32,239 |
| — |
| 27 |
| — |
| — |
| — |
| 27 |
| ||||||
Common stock issued pursuant to the Employee Stock Purchase Plan |
| 694 |
| — |
| 2 |
| — |
| — |
| — |
| 2 |
| ||||||
Stock-based compensation expense |
| — |
| — |
| 486 |
| — |
| — |
| — |
| 486 |
| ||||||
Net income |
| — |
| — |
| — |
| — |
| — |
| 2,834 |
| 2,834 |
| ||||||
Foreign currency translation adjustment |
| — |
| — |
| — |
| — |
| 1,481 |
| — |
| 1,481 |
| ||||||
Balance at September 30, 2017 |
| 11,940,324 |
| $ | 12 |
| $ | 98,259 |
| $ | (1,253 | ) | $ | (8,511 | ) | $ | (54,343 | ) | $ | 34,164 |
|
Three Months Ended March 31, 2019
|
|
|
|
|
|
|
|
|
| Accumulated |
|
|
|
|
| ||||||
|
|
|
|
|
| Additional |
|
|
| other |
|
|
| Total |
| ||||||
|
| Common Stock |
| paid-in |
| Treasury |
| comprehensive |
| Accumulated |
| Stockholders’ |
| ||||||||
|
| Shares |
| Amount |
| capital |
| stock |
| loss |
| deficit |
| equity |
| ||||||
Balance at January 1, 2019 |
| 12,126,708 |
| $ | 12 |
| $ | 99,224 |
| $ | (1,253 | ) | $ | (10,115 | ) | $ | (69,448 | ) | $ | 18,420 |
|
Restricted stock vested |
| 34,781 |
| — |
| — |
| — |
| — |
| — |
| — |
| ||||||
Share-based compensation expense |
| — |
| — |
| 130 |
| — |
| — |
| — |
| 130 |
| ||||||
Net loss |
| — |
| — |
| — |
| — |
| — |
| (1,117 | ) | (1,117 | ) | ||||||
Foreign currency translation gain |
| — |
| — |
| — |
| — |
| 327 |
| — |
| 327 |
| ||||||
Balance at March 31, 2019 |
| 12,161,489 |
| $ | 12 |
| $ | 99,354 |
| $ | (1,253 | ) | $ | (9,788 | ) | $ | (70,565 | ) | $ | 17,760 |
|
Three Month Ended March 31, 2018
|
|
|
|
|
|
|
|
|
| Accumulated |
|
|
|
|
| ||||||
|
|
|
|
|
| Additional |
|
|
| other |
|
|
| Total |
| ||||||
|
| Common Stock |
| paid-in |
| Treasury |
| comprehensive |
| Accumulated |
| Stockholders’ |
| ||||||||
|
| Shares |
| Amount |
| capital |
| stock |
| loss |
| deficit |
| equity |
| ||||||
Balance at January 1, 2018 |
| 11,941,072 |
| $ | 12 |
| $ | 98,517 |
| $ | (1,253 | ) | $ | (8,202 | ) | $ | (54,661 | ) | $ | 34,413 |
|
Stock option exercises |
| 235 |
| — |
| — |
| — |
| — |
| — |
| — |
| ||||||
Common stock issued pursuant to the Employee Stock Purchase Plan |
| 85 |
| — |
| — |
| — |
| — |
| — |
| — |
| ||||||
Restricted stock vested |
| 174,000 |
| — |
| — |
| — |
| — |
| — |
| — |
| ||||||
Share-based compensation expense |
| — |
| — |
| 366 |
|
| — |
|
| — |
|
| — |
|
| 366 |
| ||
Net income |
| — |
| — |
| — |
|
| — |
|
| — |
|
| 484 |
|
| 484 |
| ||
Foreign currency translation gain |
| — |
| — |
| — |
|
| — |
|
| 722 |
|
| — |
|
| 722 |
| ||
Balance at March 31, 2018 |
| 12,115,392 |
| $ | 12 |
| $ | 98,883 |
| $ | (1,253 | ) | $ | (7,480 | ) | $ | (54,177 | ) | $ | 35,985 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.statements
EVOLVING SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
|
| For the Nine Months Ended September 30, |
|
| For the Three Months Ended March 31, |
| ||||||||
|
| 2017 |
| 2016 |
|
| 2019 |
| 2018 |
| ||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
| ||||
Net income |
| $ | 2,834 |
| $ | 2,148 |
| |||||||
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
| |||||||||
Net (loss) income |
| $ | (1,117 | ) | $ | 484 |
| |||||||
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities: |
|
|
|
|
| |||||||||
Depreciation |
| 156 |
| 205 |
|
| 25 |
| 33 |
| ||||
Amortization of intangible assets |
| 618 |
| 587 |
|
| 237 |
| 242 |
| ||||
Amortization of debt issuance costs |
| 10 |
| 27 |
|
| 6 |
| 5 |
| ||||
Stock based compensation |
| 486 |
| 198 |
| |||||||||
Amortization of operating leases — right to use assets |
| 75 |
| — |
| |||||||||
Share-based compensation expense |
| 130 |
| 366 |
| |||||||||
Unrealized foreign currency transaction loss, net |
| 568 |
| 508 |
|
| 261 |
| 88 |
| ||||
Bad debt expense, net |
| 63 |
| — |
| |||||||||
Provision for deferred income taxes |
| (335 | ) | (18 | ) |
| 31 |
| (135 | ) | ||||
Change in operating assets and liabilities: |
|
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|
|
|
|
|
|
| ||||
Contract receivables |
| (2,474 | ) | 735 |
|
| (5 | ) | (571 | ) | ||||
Unbilled work-in-progress |
| (1,225 | ) | 9 |
|
| 33 |
| 461 |
| ||||
Prepaid and other assets |
| 562 |
| (389 | ) |
| (558 | ) | 453 |
| ||||
Accounts payable and accrued liabilities |
| (759 | ) | 202 |
|
| 276 |
| (784 | ) | ||||
Income taxes receivable |
| (42 | ) | — |
| |||||||||
Unearned revenue |
| 1,831 |
| 1,326 |
|
| 375 |
| 1,232 |
| ||||
Other long-term obligations |
| 376 |
| — |
| |||||||||
Net cash provided by operating activities |
| 2,648 |
| 5,538 |
| |||||||||
Lease obligations — operating leases |
| (87 | ) | — |
| |||||||||
Net cash (used in) provided by operating activities |
| (297 | ) | 1,874 |
| |||||||||
|
|
|
|
|
|
|
|
|
|
| ||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
| ||||
Purchase of property and equipment |
| (71 | ) | (24 | ) | |||||||||
Business combinations, net of cash received |
| (5,938 | ) | — |
| |||||||||
Purchases of property and equipment |
| (95 | ) | (12 | ) | |||||||||
Net cash used in investing activities |
| (6,009 | ) | (24 | ) |
| (95 | ) | (12 | ) | ||||
|
|
|
|
|
|
|
|
|
|
| ||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
| ||||
Capital lease payments |
| (1 | ) | (4 | ) | |||||||||
Payments of the revolving line of credit |
| — |
| (10,000 | ) | |||||||||
Proceeds from term loans |
| 4,730 |
| 6,000 |
| |||||||||
Principal payments on term loans |
| (1,500 | ) | — |
| |||||||||
Payments for debt issuance costs |
| (20 | ) | (20 | ) | |||||||||
Common stock cash dividends |
| — |
| (2,596 | ) | |||||||||
Proceeds from the issuance of stock |
| 29 |
| 65 |
| |||||||||
Net cash provided by (used in) financing activities |
| 3,238 |
| (6,555 | ) | |||||||||
Principal payments on notes payable |
| (781 | ) | (500 | ) | |||||||||
Net cash used in financing activities |
| (781 | ) | (500 | ) | |||||||||
|
|
|
|
|
|
|
|
|
|
| ||||
Effect of exchange rate changes on cash |
| 86 |
| (418 | ) | |||||||||
Effect of exchange rate changes on cash and cash equivalents |
| 3 |
| (250 | ) | |||||||||
|
|
|
|
|
|
|
|
|
|
| ||||
Net decrease in cash and cash equivalents |
| (37 | ) | (1,459 | ) | |||||||||
Net (decrease) increase in cash and cash equivalents |
| (1,170 | ) | 1,112 |
| |||||||||
Cash and cash equivalents at beginning of period |
| 7,614 |
| 8,400 |
|
| 6,732 |
| 7,562 |
| ||||
Cash and cash equivalents at end of period |
| $ | 7,577 |
| $ | 6,941 |
|
| $ | 5,562 |
| $ | 8,674 |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Supplemental disclosure of cash and non-cash transactions: |
|
|
|
|
|
|
|
|
|
| ||||
Interest paid |
| $ | 74 |
| $ | 122 |
| |||||||
Income taxes paid |
| $ | 1,320 |
| $ | 791 |
|
| $ | — |
| $ | 150 |
|
Property and equipment purchased and included in accounts payable |
| 35 |
| 1 |
| |||||||||
Supplemental non-cash amounts of lease liabilities arising from obtaining right of use assets |
| $ | 1,609 |
| $ | — |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.statements
EVOLVING SYSTEMS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTSSTATMENTS
NOTE 1 — BASISORGANIZATION AND SUMMARY OF PRESENTATIONSIGNIFICANT ACCOUNTING POLICIES
Organization — We areEvolving Systems, Inc. (“we,” “us,” “our,” the “Company”, “Evolving” and “Evolving Systems”) is a provider of real-time digital engagement solutions and services of software solutions and services to the wireless wirelinecarrier and cableconsumer financial services markets. We maintain long-standing relationships with many of the largest wireless wireline and cable companies worldwide. Our customers rely on us to develop, deploy, enhanceThe Company’s portfolio includes market-leading solutions and maintain software solutions that provide a variety of serviceservices for real-time analytics, customer acquisition and activation, customer value management and provisioning functions. In 2016, we began a shift from selling technology to offering business solutions. The value proposition has moved from cost savings to revenue increasesloyalty for the carriertelecom industry and our business model has moved from classic capex license and services to opex models based on recurring managed services with performance fees. their partners.
Our software solution platform, Real-time Lifecycle Marketing™ (“RLM”), enablesplatforms enable carriers’ marketing departments to innovate, execute and manage highly-personalizedhighly personalized and contextually-relevant,contextually relevant, interactive campaigns that engage consumers in real time.time and enhance customer retention through deploying loyalty programs. Our service activation solution, Tertio®Tertio® (“TSA”) is used to activate bundles of voice, video and data services for wireless, wireline and cable network operators; our SIM card activation solution,Dynamic SIM Allocation TM (“DSA”) is used to dynamically allocate and assign resources to Mobile Network Operators (“MNOs”) devices that rely on SIM cards; our Mobile Data Enablement TM (“MDE”) solution provides a data consumption and policy management solution for wireless carriers and Mobile Virtual Network Operators (“MVNOs”) that monitor the usage and consumption of data services; our Total Number Management™Management™ (“TNM”) product is a scalable and fully automated database solution that enables operators to reliably and efficiently manage their telephone numbers as well as other communication identifiers (i.e. SIMs, MSISDNs IMSIs, ICCIDs, IPs). Our solutions can be deployed on premiseon-premise or as a Software-as-a-Service (“SaaS”).
On July 6, 2017 we announced the completion of the previously announced acquisition of Business Logic Systems (“BLS”). BLS, headquartered in Newbury, UK, specializes in data-driven customer value management and customer engagement solutions that have been implemented in over 20 mobile operators in Europe, Africa, Asia-Pacific and the Caribbean. BLS solutions turn customer data into actionable insights and personalized contextual offers. Customer engagement occurs through in-bound and out-bound offers and is further extended through a suite of loyalty and retention solutions.
On September 7, 2017 we announced the completion of the acquisition of four business operating units of Lumata Holdings Ltd. (“the Lumata Entities”). The Lumata Entities are a leading global provider of real-time, next generation loyalty and customer lifecycle management software and services that helps businesses gain value from their customer data for relevant and contextual insights and actions of value to both customers and enterprises. Its customers include mobile operators including Orange, Telefonica and other Tier-1 and emerging operators in Europe and around the world. The acquisition is expected to be accretive to Evolving Systems’ operations once the integration of the business is completed by year-end 2017.
We believe the acquisitions of BLS and the Lumata Entities further reinforces our commitment to the customer acquisition and customer value management (“CVM”) domains that began with the acquisition of Sixth Sense Media (“Evolving Systems NC, Inc.”). With these recent acquisitions, we now haveservice a customer base of over 90more than 100 customers spanning 6665 countries across the world. The experienced team
Basis of Presentation — As disclosed in NOTE 7 — DEBT, as of March 31, 2019, we have $5.1 million in outstanding principal obligations on two term loans payable to East West Bank (“EWB”) that require us to maintain specified financial ratios that are defined in the loan agreements. During the first quarter 2019, the Company incurred a net loss and technologynegative cash flows from BLS, which provides actionable insightsoperations. We are current on our loan payment obligations and relevant offers based on customer data, greatly complementswe have made all scheduled loan payments to date. We did not comply with the fixed charge ratio covenant for the quarter ended December 31, 2018 and received a waiver of the non-compliance from EWB. We did not comply with the fixed charge ratio and the leverage ratio covenants for the quarter ended March 31, 2019. We are currently negotiating with EWB to resolve the non-compliance and loan terms.
EWB has the right to demand that we repay the loans sooner than scheduled upon the occurrence and continuance of certain events of default, including the breach of covenants beyond applicable grace periods. To date, EWB has not issued a notice of default or demanded accelerated payment. There can be no assurance that we will successfully renegotiate the loans’ terms, however our software portfoliocurrent liquidity and 25 years of expertise in customer acquisition, activationfunds from our ongoing operations will be sufficient to fund operations and retention. The technology further expands our Managed Services platformmeet the Company’s cash needs for delivering on-tap strategicfuture term loan payments, working capital and tactical solutions. The Lumata Entities’ value lies in its patented technology, industry expertise and strong customer relationships, in particular, those across Western Europe. Led by the explosive growth in mobile,capital expenditure requirements for at least the next generationtwelve months from the date of CVM is moving beyond traditional CRMissuance of these unaudited condensed consolidated financial statements. In making this assessment, we considered our $5.6 million in cash and points based loyalty systemscash equivalents and our $4.7 million in working capital at March 31, 2019, along with our ability to highly personalized and contextual, real-time, omni-channel consumer engagementhistorically generate positive cash flows from operations. Other than classifying the entire $5.1 million in multiple verticals including telecom, finance, and retail. The acquisition of the Lumata Entities is another milestone in Evolving Systems’ transformation from its positionoutstanding debt principal as a market leader in customer acquisition, development and retention serving the telecommunication industry. Through the growth of its CVM technology and portfolio, Evolving Systems is positionedcurrent liability on our March 31, 2019 balance sheet, no adjustments have been made to be a next-generation mobile consumer engagement solutions accelerator across multiple industry verticals.our unaudited condensed consolidated financial statements.
While the Company remains a market leader in core service activation and number management services through established solutions like Tertio and Dynamic SIM Allocation that transformed how customers buy and activate phones, Evolving Systems has also become a leader in Customer Value Management (CVM) solutions through the acquisition of leading real-time marketing specialists including Evolving Systems NC, Inc. in September 2015. This uniquely enables Evolving Systems to provide an end-to-end solution portfolio addressing all stages of the customer lifecycle from activation through retention, allowing the marketing teams to accelerate both reach and customer acquisition, drive ARPU, reward tenure, and accelerate digital adoption leveraging big data analytics and real-time triggers to target customers when it matters most.
Our strategic focus is primarily on delivering a significant competitive advantage to organizations with a large subscriber base in the telecom, banking, retail and other sectors. Reaching a potential 1.9 billion subscribers each day, the Company helps its customers grow market share, increase average revenue per user (ARPU), stem churn or improve business efficiencies in a dynamic market. These acquisitions will enable growth of our CVM technology and portfolio, which will position us to be a next-generation mobile consumer engagement solutions accelerator across multiple industry verticals.
Interim Condensed Consolidated Financial Statements — The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and in conformity with the instructions to Form 10-Q and Rule 8-03Article 8 of Regulation S-X and the related rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, certain information and note disclosures normally included in the consolidated financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. However, we believe that the disclosures included in these condensed consolidated financial statements are adequate to make the information presented not misleading. The unaudited condensed consolidated financial statements included in this document have been prepared on the same basis as the annual consolidated financial statements, and in our opinion reflect all adjustments, which include normal recurring adjustments necessary for a fair presentation in accordance with GAAP and SEC regulations for interim consolidated financial statements. The results for the three and nine months ended September 30, 2017March 31, 2019 are not necessarily indicative of the results that we will have for any subsequent period. These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes to those statements for the year ended December 31, 20162018 included in our Annual Report on Form 10-K.
Reclassifications - Certain reclassifications have been made to10-K as filed with the 2016 financial statements to conform to the consolidated 2017 financial statement presentation. These reclassifications had no effectSEC on net earnings or cash flows as previously reported.April 4, 2019.
Use of Estimates — The preparation of condensed consolidated financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities, at the date of the condensed consolidated financial statements, as well as the reported amounts of revenue and expenses during the reporting period. We made estimates with respect to revenue recognition for estimated hours to complete projects accounted for using the percentage-of-completion method,progress toward completion and direct profit or loss on contracts, allowance for doubtful accounts, deferred taxes and income tax valuation allowance, fair values of long-lived assets, valuation of intangible assets and goodwill, useful lives for property, equipment and intangible assets, business combinations, capitalization of internal software development costs and fair value of stock-based compensation amounts. Actual results could differ from these estimates.
Foreign Currency — Our functional currency is the U.S. dollar. The functional currency of our foreign operations, generally, is the respective local currency for each foreign subsidiary. Assets and liabilities of foreign operations denominated in local currencies are translated at the spot rate in effect at the applicable reporting date. Our condensed consolidated statements of incomeoperations are translated at the weighted average rate of exchange during the applicable period. The resulting unrealized cumulative translation adjustment is recorded as a component of accumulated other comprehensive loss in stockholders’ equity. Realized and unrealized transaction gains and losses generated by transactions denominated in a currency different from the functional currency of the applicable entity are recorded in other income (expense) in the consolidated statements of operationsincome in the period in which they occur.
Principles of Consolidation — The unaudited condensed consolidated financial statements include the accounts of Evolving Systems, Inc. and subsidiaries, all of which are wholly owned. All significant intercompany transactions and balances have been eliminated in consolidation.
GoodwillReclassification — — Goodwill isCertain reclassifications have been made to conform the excess of acquisition cost of an acquired entity over the fair value of the identifiable net assets acquired. Goodwill is not amortized, but tested for impairment annually or whenever indicators of impairment exist. These indicators may include a significant change in the business climate, legal factors, operating performance indicators, competition, sale or disposition of a significant portion of the business or other factors. Application of the goodwill impairment test requires judgment, including the identification of reporting units, assignment of assets and liabilities to reporting units, assignment of goodwill2018 amounts to the reporting unit, and determination of the fair value of the reporting unit.
Intangible Assets — Amortizable intangible assets consist primarily of purchased software and licenses, customer relationships, trademarks and tradenames, non-competition and purchased software acquired in conjunction with our purchase of Telespree Communications (“Evolving Systems Labs, Inc.”), Evolving Systems NC, Inc., BLS and the Lumata Entities. These assets are amortized using the straight-line method over their estimated lives.
We assess the impairment of identifiable intangibles if events or changes in circumstances indicate that the carrying value of the asset may not be recoverable. If we determine that the carrying value of intangibles and/or long-lived assets may not be recoverable, we compare the estimated undiscounted cash flows expected to result from the use of the asset and its eventual disposition to the asset’s carrying amount. If an amortizable intangible or long-lived asset is not deemed to be recoverable, we recognize an impairment loss representing the excess of the asset’s carrying value over its estimated fair value.
Fair Value Measurements — Fair value is the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is estimated by applying the following hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement:
Level 1 — Quoted prices in active markets2019 classifications for identical assets or liabilities.
Level 2 — Observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 — Inputs that are generally unobservable and typically reflect management’s estimate of assumptions that market participants would use in pricing the asset or liability.
Cash and Cash Equivalents — All highly liquid investments with maturities of three months or less at the date of purchase are classified as cash equivalents.comparative purposes.
Revenue Recognition — We recognize revenue when an agreement is signed, the fee is fixed or determinable and collectability is reasonably assured. We recognize revenue from two primary sources: license fees and services. The majority of our license fees and services revenue is generated from fixed-price contracts which provideand provides for licenses to our software products and services tothat customize such software to meet our customers’ use. When theneeds. In most instances, customization services are determined to be essential to the functionality of the delivered software,software. Under ASC 606, revenue is recognized when our customer obtains control of promised goods or services in an amount that reflects the consideration we expect to receive in exchange for those goods or services. We measure revenue based on consideration specified in a contract with a customer and exclude any sales incentives. Furthermore, we recognize revenue usingwhen we satisfy a performance obligation by transferring control over the percentage-of-completion methodservice and/or software to our customer.
A performance obligation is a promise in a contract to transfer a distinct service to the customer. The transaction price of accounting. In these types of arrangements, we do not typically have vendor specific objective evidence (“VSOE”) of fair value ona contract is allocated to each distinct performance obligation and recognized as revenue when or as the license fee/services portion (services are related to customizingcustomer receives the software)benefit of the arrangement dueperformance obligation. Losses on fixed-price projects are recorded when identified. Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction, that are collected by us from a customer, are excluded from revenue.
Nature of goods and services
The following is a description of our products and services from which we generate revenue, as well as the nature, timing of satisfaction of performance obligations, and significant payment terms for each:
i. License Revenue
License fees represent the fees we receive from the licensing of our software products. In most instances, customization services are determined to be essential to the large amount of customization required by our customers; however, we do have VSOE for the warranty/maintenance services based on the renewal ratefunctionality of the first year of maintenance indelivered software. The license along with the arrangement. The license/services portion is recognized using the percentage-of-completion method of accounting and the warranty/maintenancecustomization services are separated based on the renewal rate in the contract and recognized ratablytransferred to our customers over the warranty or maintenance period. We estimate the percentage-of-completion for each contract based on the ratio of direct labor hours incurred to total estimated direct labor hours and recognize revenue based on the percent complete multiplied by the contract amount allocated to the license fee/services. Since estimated direct labor hours, and changes thereto, can havetime generally as a significant impact on revenue recognition, these estimates are critical and we review them regularly. If the arrangement includes a customer acceptance provision, the hours to complete the acceptance testing are included in the total estimated direct labor hours; therefore, the related revenue is recognized as the acceptance testing is performed. Revenue is not recognized in full until the customer has provided proof of acceptance on the arrangement. Generally, our contracts are accounted for individually. However, when certain criteria are met, it may be necessary to account for two or more contracts as one to reflect the substance of the group of contracts. We record amounts billed in advance of services being performed as unearned revenue. Unbilled work-in-progress represents revenue earned but not yet billable under the terms of the fixed-price contracts. All such amounts are expected to be billed and collected within 12 months.
We may encounter budget and schedule overruns on fixed-price contracts caused by increased labor or overhead costs. We make adjustments to cost estimates in the period in which the facts requiring such revisions become known. We record estimated losses, if any, in the period in which current estimates of total contract revenue and contract costs indicate a loss. If revisions to cost estimates are obtained after the balance sheet date but before the issuance of the interim or annual financial statements, we make adjustments to the interim or annual financial statements accordingly.
single performance obligation. In arrangements where the services are not essential to the functionality of the delivered software, we recognize license revenue when athe license agreement has been signed, deliveryapproved and acceptance have occurred, the fee is fixed or determinablesoftware has been delivered at a point in time. We can identify each party’s rights, payment terms, and collectability is reasonably assured.commercial substance of the content. Where applicable, we unbundleidentify multiple performance obligations and record as revenue fees from multiple element arrangements as the elementsperformance obligations are deliveredfulfilled based on their estimated allocated value. The selection of the method to measure progress towards completion requires judgment and is based on the extent that VSOE of fair valueprogress towards completion of the undelivered elements exist. If VSOEperformance obligation. We recognize revenue using the input method of accounting based on labor hours.
ii. Customer Support Revenue
Customer support services includes annual support fees, recurring maintenance fees, and minor product upgrades generally as a single performance obligation. The Company also offers a warranty support fee which represents a separate performance obligation that is provided for up to a year with initial license purchase. The Company allocates the undelivered elements does not exist,contract transaction price related to warranty support fees based on pricing consistent with what we defer fees from such arrangements untilwould offer to other market participants. Upon the earlierconclusion of the date that VSOE does exist onwarranty period, the undelivered elements or all ofcustomer can choose to continue to receive support and maintenance services via our customer support offerings. We recognize revenue from our support ratably over the elements have been delivered.service contract period.
iii. Services Revenue
We recognize revenue from fixed-price service contracts using the proportional performanceinput method of accounting whichbased on labor hours. These contracts generally include a single performance obligation. Under the input method, revenue is similar torecognized on the percentage-of-completion method described above.basis of an entity’s efforts or inputs toward satisfying a performance obligation. We recognize revenue from professional services provided pursuant to time-and-materials based contracts and training services as the services are performed, as that is when our performance obligation to our customers under such arrangements is fulfilled.
iv. Managed Services
We recognize revenue from our managed services contracts primarily ratably over the service contract period.period generally as a single performance obligation. On occasion, our managed services contracts will contain a specified number of hours to work over the term of the contract. Revenue for this type of managed service contract is recognized using the proportional performanceinput method of accounting.accounting, as previously described.
We recognizeDisaggregation of revenue
In the following table, revenue is disaggregated by primary geographical market, major products/service lines, and timing of revenue recognition (in thousands):
|
| For the Three Months Ended March 31, |
| ||||
|
| 2019 |
| 2018 |
| ||
Primary geographical markets |
|
|
|
|
| ||
United Kingdom |
| $ | 1,372 |
| $ | 1,806 |
|
Other |
| 5,325 |
| 6,352 |
| ||
|
| $ | 6,697 |
| $ | 8,158 |
|
|
|
|
|
|
| ||
Major products/service lines |
|
|
|
|
| ||
Licensing fees |
| $ | 714 |
| $ | 335 |
|
Customer support, including warranty support fees |
| 2,232 |
| 2,609 |
| ||
Services |
| 1,581 |
| 2,951 |
| ||
Managed services |
| 2,170 |
| 2,263 |
| ||
Total services |
| 5,983 |
| 7,823 |
| ||
|
| $ | 6,697 |
| $ | 8,158 |
|
|
|
|
|
|
| ||
Timing of revenue recognition |
|
|
|
|
| ||
Products transferred at a point in time |
| $ | 487 |
| $ | 160 |
|
Products and services transferred over time |
| 6,210 |
| 7,998 |
| ||
|
| $ | 6,697 |
| $ | 8,158 |
|
Contract balances
The following table provides information about receivables, assets, and liabilities from our MDE contracts with customers (in thousands):
|
| March 31, 2019 |
| December 31, 2018 |
| ||
Assets |
|
|
|
|
| ||
Contract receivables, net |
| $ | 7,676 |
| $ | 7,757 |
|
Unbilled work-in-progress, net |
| $ | 3,027 |
| $ | 3,044 |
|
Liabilities |
|
|
|
|
| ||
Unearned revenue |
| $ | 4,366 |
| $ | 3,911 |
|
Contract receivables are recorded at the invoiced amount and do not bear interest. Credit is extended based on the numberevaluation of transactions per month multiplied by a factorcustomer’s financial condition and collateral is not required. Unbilled work-in-progress is revenue which has been earned but not invoiced. The contract assets are transferred to the receivables when invoiced.
Management expects that incremental commission fees paid to employees and intermediaries as a result of obtaining contracts are recoverable and therefore the Company capitalized them as contract costs in the amount of $0.2 million and less than $0.1 million at March 31, 2019 and December 31, 2018, respectively.
Capitalized commission fees are amortized based on a unique table for transaction volumes relatingthe transfer of services to each account.which the assets relate which may range from two to three years, and are included in sales and marketing. In the three-month periods ended March 31, 2019 and 2018, the amount of amortization was less than $0.1 million and there was no impairment loss in relation to the costs capitalized. Applying the practical expedient in paragraph 340-40-25-4, the Company recognizes the incremental costs of obtaining contracts as an expense when incurred if the amortization period of the assets that the Company otherwise would have recognized is one year or less. These costs are included in sales and marketing.
We recognize customer support, including maintenanceThe contract liabilities primarily relate to unearned revenue. Amounts billed in advance of performance obligations being satisfied are recognized as unearned revenue.
For the three months ended March 31, 2019 and 2018, we recognized revenue ratably overof $1.8 million, and $3.8 million, respectively, that was included in the servicecorresponding contract period. When maintenance is bundled withliability balance at the original license fee arrangement, its fair value, based upon VSOE, is deferredbeginning of this period and recognized during the periods when services are provided.2018.
We review and update our contract-related estimates regularly. The impact of an adjustment in estimate is recognized prospectively over
Transaction price allocated to the remaining performance obligations
Remaining performance obligations represent the transaction price of firm orders for which work has not been completed as of the period end date and excludes unexercised contract term. No adjustment on any one contract was materialoptions and potential orders under ordering-type contracts (e.g., indefinite-delivery, indefinite-quantity). As of March 31, 2019, the aggregate amount of the transaction price allocated to our unaudited Consolidated Financial Statementsremaining performance obligations with lives greater than one-year totals $5.1 million. The Company expects approximately 65% of remaining performance obligations to be recognized into revenue within the next twelve months, 23% in the three1 to 2 years and nine months ended September 30, 2017 and 2016.12% in 3 to 4 years.
Stock-based Compensation — We account for stock-based compensation by applying a fair-value-based measurement method to account for share-based payment transactions with employees, non-employees and directors. We record compensation costs associated with the vesting of unvested options on a straight-line basis over the vesting period. Stock-based compensation is a non-cash expense because we settle these obligations by issuing shares of our common stock instead of settling such obligations with cash payments. We use the Black-Scholes model to estimate the fair value of each option grant on the date of grant. This model requires the use of estimates for expected term of the options and expected volatility of the price of our common stock.
The fair market value of restricted shares for share-based compensation expensing is equal to the closing price of our common stock on the date of grant. Of the restrictions on the stock awards granted during the three months ended March 31, 2017 and June 30, 2017, 20% will be released in January 2018, and 10% annually beginning on the one year anniversary of their offering thereafter for four years. The remaining 40 % will be released evenly over four years beginning in 2018 contingent upon the attainment of annual performance goals established by our Board of Directors. Of the restrictions on the stock awards granted during the three months ended September 30, 2017, one-fourth will be released on the one-year anniversary of the date of the grant and the balance will be released quarterly over a three year period.
Comprehensive Income (Loss) — Comprehensive income (loss) consists of two components, net income and other comprehensive income (loss). Other comprehensive income (loss) refers to revenue, expenses, gains, and losses that under GAAP are recorded as an element of shareholders’ equity but are excluded from net income. Other comprehensive income (loss) consists of foreign currency translation adjustments from those subsidiaries not using the U.S. dollar as their functional currency.
Restricted Cash — As of June 30, 2017 we had $1. 6 million of restricted cash related to the pending asset purchase of Business Logic Systems Limited. The restricted cash became unrestricted as of July 3, 2017, once the purchase was consummated, and was applied to the purchase. As of September 30, 2017 we had no restricted cash.
Income Taxes — We record deferred tax assets and liabilities for the estimated future tax effects of temporary differences between the tax bases of assets and liabilities and amounts reported in the accompanying condensed consolidated balance sheets, as well as operating losses and tax credit carry-forwards.carryforwards. We measure deferred tax assets and liabilities using enacted tax rates expected to be applied to taxable income in the years in which those temporary differences are expected to be recovered or settled. We reduce deferred tax assets by a valuation allowance if, based on available evidence, it is more likely than not that these benefits will not be realized.
We use a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more likely than not to be sustained upon examination by taxing authorities.
Segment Information — We define operating segments as components of our enterprise for which separate financial information is reviewed regularly by the chief operating decision-makers to evaluate performance and to make operating decisions. We have identified our Chief Executive Officer and Senior Vice President of Finance as our chief operating decision-makers (“CODM”). These chief operating decision makers review revenues by segment and review overall results of operations.
We currently operate our business as one operating segment which includes two revenue types: license fees revenue and services revenue (as shown on the condensed consolidated statements of income)operations). License fees revenue represents the fees received from the license of software products. Services revenue includes services directly related to the delivery of the licensed products, such as fees for custom development, integration services, SaaS service,services, managed services, annual support fees, recurring maintenance fees, fees for maintenance upgrades and warranty services. Warranty services that are similar to software maintenance services are typically bundled with a license sale.
RecentRecently Adopted Accounting Pronouncements — In May 2014,February 2016, the Financial Accounting Standards Board (“FASB”) issuedestablished Topic 842, Leases, by issuing Accounting Standards Update (“ASU”) No. 2014-09, “Revenue2016-02, which requires lessees to recognize leases on-balance sheet and disclose key information about leasing arrangements. Topic 842 was subsequently amended by ASU 2018-01, Land Easement Practical Expedient for Transition to Topic 842; ASU 2018-10, Codification Improvements to Topic 842, Leases; and ASU 2018-11, Targeted Improvements. The new standard establishes a right-of-use model (ROU) that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months. Leases are classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the condensed consolidated statements of operations.
We adopted the new standard on January 1, 2019, its effective date. We used the optional transition method approach with the effective date as the date of initial application. Consequently, prior periods will not be restated, and the disclosures required under ASC 840 will continue to be provided for dates and periods before January 1, 2019.
The new standard provides several optional practical expedients in transition. We elected the ‘package of practical expedients’, which permits us not to reassess under the new standard our prior conclusions about lease identification, lease classification and initial direct costs.
The new standard also provides practical expedients for an entity’s ongoing accounting. We currently have elected the short-term lease recognition exemption for all leases that qualify. This means, for those leases that qualify, we will not recognize ROU assets or lease liabilities, and this includes not recognizing ROU assets or lease liabilities for existing short-term leases of those assets in transition. We also have elected the practical expedient to not separate lease and non-lease components for all our leases and will not reassess whether initial direct costs qualify for capitalization (see Note 10).
The adoption of the standard resulted in the recognition of additional ROU assets and lease liabilities of approximately $1.6 million as of January 1, 2019, that did not change previously reported net income and did not result in a cumulative effect adjustment to accumulated deficit and did not impact cash flows.
In February 2018, the FASB issued ASU 2018-02, Income Statement — Reporting Comprehensive Income (Topic 220) —Reclassification of Certain Tax Effects from Contracts with Customers,” Topic 606.Accumulated Other Comprehensive Income. The amendments in this ASU allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Act. Consequently, the amendments eliminate the stranded tax effects resulting from the Act and will improve the usefulness of information reported to financial statement users. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018. We adopted this ASU as of January 1, 2019. The amendments in this ASU did not have a material impact on our condensed consolidated financial statements.
In June 2018, the FASB issued ASU 2018-07, Compensation - Stock Compensation (Topic 718) — Improvements to Nonemployee Share-Based Payment Accounting. ASU 2018-07 is intended to reduce cost and complexity and to improve financial reporting for share-based payments issued to nonemployees. This Update affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets, unless those contracts are withinASU expands the scope of other standards.ASC Topic 718, Compensation — Stock Compensation, which currently only includes share-based payments issued to employees, to also include share-based payments issued to nonemployees for goods and services. Consequently, the accounting for share-based payments to nonemployees and employees will be substantially aligned. ASU 2018-07 supersedes ASC Subtopic 505-50, Equity - Equity-Based Payments to Non-Employees. The guidanceamendments in this Update supersedes the revenue recognition requirementsASU are effective for fiscal years beginning after December 15, 2018. We adopted this ASU as of January 1, 2019. The amendments in Topic 605, Revenue Recognition and most industry-specific guidance. The core principle of the guidance is that an entity should recognize revenue to illustrate the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new guidance also includesthis ASU did not have a cohesive set of disclosure requirements that will provide users ofmaterial impact on our condensed consolidated financial statements with comprehensive information about the nature, amount, timing, and uncertainty of revenue and cash flows arising from a reporting organization’s contracts with customers.statements.
Recent Accounting Pronouncements — In AprilJune 2016, the FASB issued ASU No. 2016-10, “Revenue from Contracts with Customers,” Topic 606: “Identifying Performance Obligations and Licensing”2016-13, Financial Instruments - Credit Losses (Topic 326) — Measurement of Credit Losses on Financial Instruments (ASU 2016-13). This Update clarifies guidance relatedASU 2016-13 requires entities to identifying performance obligations and licensing
implementation guidance contained in the new revenue recognition standard. The Update includes targeted improvementsestablish an allowance for credit losses for most financial assets. Prior GAAP was based on input the Board received from the Transition Resource Groupan incurred loss methodology for Revenue Recognition and other stakeholders. The update seeks to proactively address areas in which diversity in practice potentially could arise, as well as to reduce therecognizing credit losses on financial assets measured at amortized cost and complexity of applying certain aspects of the guidance both at implementation and on an ongoing basis.
In May 2016, the FASB issued ASU No. 2016-12, “Revenue from Contracts with Customers,” Topic 606: “Narrow-Scope Improvements and Practical Expedients”.available-for sale debt securities. The amendments in this Update address narrow-scope improvements to the guidance on collectability, noncash consideration, and completed contracts at transition. Additionally, the amendments in this Update provide a practical expedient for contract modifications at transition and an accounting policy election related to the presentation of sales taxes and other similar taxes collected from customers. This ASU is the final version of Proposed Accounting Standards Update 2015-320, “Revenue from Contracts with Customers,” (Topic 606): “Narrow-Scope Improvements and Practical Expedients,” which has been deleted.
In December 2016, the FASB issued ASU No. 2016-20, “Revenue from Contracts with Customers,” Topic 606: “Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers”. The amendments in this Update address narrow-scope improvements to the guidance on loan guarantee fees, contract cost-impairment testing, contract costs-interaction of impairment testing with guidance in other topics, provision for losses on construction-type and production-type contracts, scope of topic 606 to exclude all contracts that are within the scope of Topic 944, disclosure of remaining performance obligations, disclosure of prior-period performance obligations, contract modifications, contract asset versus receivable, refund liability, advertising costs, fixed-odds wagering contracts in the casino industry and cost capitalization for advisors to private funds and public funds. The Board decided to issue a separate Update for technical corrections and improvements to Topic 606 and other Topics amended by Update 2014-09 to increase stakeholders’ awareness of the proposals and to expedite improvements to Update 2014-09. This ASUupdate is effective for fiscal years andbeginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted for fiscal years beginning after December 31, 2018. We have not yet assessed the impact on our condensed consolidated financial statements or related disclosures.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (ASC 820) — Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement. ASU 2018-13 removes certain disclosures, modifies certain disclosures and adds additional disclosures. ASU 2018-13 is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2017 for public companies2019. Early adoption is permitted. We have not yet assessed the impact on our condensed consolidated financial statements or related disclosures.
Management has evaluated other recently issued accounting pronouncements and 2018 for non-public entities. We dodoes not expect the adoptionbelieve that any of this standard tothese pronouncements will have a significant impact on our financial position and results of operations.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which requires lessees to put most leases on their balance sheets by recognizing a lessee’s rights and obligations, while expenses will continue to be recognized in a similar manner to today’s legacy lease accounting guidance. This ASU could also significantly affect the financial ratios used for external reporting and other purposes, such as debt covenant compliance. This ASU will be effective for us on January 1, 2019, with early adoption permitted. We are currently in the process of assessing the impact of this ASU on ourcondensed consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-04, Intangibles-Goodwillstatements and Other (Topic 350), which includes provisions intended to simplify the test for goodwill impairment. The standard is effective for annual periods beginning after December 15, 2019, with early adoption permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We do not expect the adoption of this standard to have a significant impact on our financial position and results of operations.
Recently Adopted Accounting Pronouncements —In March 2016, the FASB issued ASU No. 2016-09, Stock Compensation (Topic 718), which includes provisions intended to simplify various aspects related to how share-based payments are accounted for and presented in the financial statements. The standard is effective for annual periods beginning after December 15, 2016. We adopted this ASU during the first quarter 2017. The key effects of the adoption on our financial statements include that the Company will now recognize windfall tax benefits as deferred tax assets instead of tracking the windfall pool and recording such benefits in equity. Additionally, we have elected to recognize forfeitures as they occur rather than estimating them at the time of grant
In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted cash, which requires the statement of cash flows explain the change during the period in the combined total of restricted and unrestricted balances in the statement of cash flows. Therefore, amounts described as restricted cash and restricted cash equivalents should be combined with the unrestricted cash and cash equivalents when reconciling the beginning and end of period balances on the statement of cash flow. The standard is effective for annual periods beginning after December 15, 2017, and interim periods within the fiscal years. We adopted this ASU during the second quarter 2017. The key effects of the adoption on our financial statements include that the statement of cash flows now presents a transfer of restricted cash from a cash balance as a cash transaction. As such, a restricted cash is now classified as operating, investing, or financing, as appropriate.disclosures.
NOTE 2 — ACQUISITION
On July 3, 2017, we completed the purchase by BLS Limited (“EVOL BLS”), a wholly owned subsidiary of Evolving Systems, Inc., a Delaware corporation (the “Company”), of Business Logic Systems Limited (“Seller”). EVOL BLS and Seller are both companies incorporated under the laws of England and Wales. Under the terms of the Asset Purchase Agreement, dated as of May 5, 2017 (the “Purchase Agreement”), the Seller will sell substantially all of its assets and transfer certain liabilities relating to Seller’s business of providing customer value management solutions and data driven marketing solutions for £1.2 million ($1.6
million) in cash, plus (a) an additional sum of £100,000 ($134,000), which was reduced in full by the sums paid by EVOL BLS to certain employees’ severance obligations (collectively, the “Cash Payments”); (b) a percentage of collections on certain receivables over a 24 month period; and (c) an earnout equal to 50% of BLS based revenue over $4.8 million per year for 3 years after the closing date. The Company agreed to guarantee EVOL BLS’ obligations under the Purchase Agreement.
The Purchase Agreement contains a two year “no solicitation” provision which restricts the Seller’s ability to compete with EVOL BLS with respect to the BLS business or to solicit BLS customers or BLS employees serving in an executive, managerial, sales or technical role.
We accounted for this business combination by applying the acquisition method, and accordingly, the purchase price was allocated to the assets and liabilities assumed based upon their fair values at the acquisition date. The excess of the purchase price over the net assets and liabilities, approximately $0.1 million, was recorded as goodwill. The results of EVOL BLS’s operations have been included in the consolidated financial statements since the acquisition date. The amortization of the intangible assets is deductible for tax purposes.
Total purchase price is summarized as follows (in thousands):
|
| July 3, 2017 |
| |
Cash Consideration |
|
|
| |
Total Cash Consideration |
| $ | 1,558 |
|
|
|
|
| |
Earnout |
| 380 |
| |
Total purchase price |
| $ | 1,938 |
|
The following table summarizes the preliminary estimated fair values of the assets and liabilities assumed at the acquisition date (in thousands):
|
| July 3, 2017 |
| |
Contract receivables |
| $ | 962 |
|
Unbilled work-in-progress |
| 1,278 |
| |
Intangible assets |
| 205 |
| |
Prepaid and other current assets |
| 437 |
| |
Other assets, non-current |
| 55 |
| |
Total identifiable assets acquired |
| $ | 2,937 |
|
|
|
|
| |
Accounts payable and accrued liabilities |
| $ | 792 |
|
Deferred revenue |
| 338 |
| |
Total identifiable liabilities acquired |
| $ | 1,130 |
|
|
|
|
| |
Net identifiable assets acquired |
| 1,807 |
| |
|
|
|
| |
Goodwill |
| 131 |
| |
Net assets acquired |
| $ | 1,938 |
|
We recorded $0.2 million in intangible assets as of the acquisition date with a weighted-average amortization period of approximately six years and are amortizing the value of the purchased software, trademarks and trade names, non-competition and customer relationships over an estimated useful life of 5, 0.5, 2 and 7 years, respectively. Amortization expense of approximately $12,000 related to the acquired intangible assets was recorded during the three and nine months ended September 30, 2017.
The $0.1 million of the goodwill recognized is attributed primarily to expected synergies and the assembled workforce of EVOL BLS. As of the date of this report there were no changes in the recognized amounts of goodwill resulting from the acquisition of EVOL BLS.
Intangible assets related to the EVOL BLS’s acquisition as of September 30, 2017 (in thousands):
|
| September 30, 2017 |
| |||||||||||||||
|
| Gross |
| Effects of |
| Net |
| Accumulated |
| Net |
| Weighted- |
| |||||
Purchased software |
| $ | 83 |
| $ | 3 |
| $ | 86 |
| $ | 4 |
| $ | 82 |
| 5 yrs |
|
Trademarks and tradenames |
| 6 |
| 1 |
| 7 |
| 3 |
| 4 |
| 0.5 yrs |
| |||||
Non-competition |
| 4 |
| — |
| 4 |
| 1 |
| 3 |
| 2 yrs |
| |||||
Customer relationships |
| 112 |
| 3 |
| 115 |
| 4 |
| 111 |
| 7 yrs |
| |||||
|
| $ | 205 |
| $ | 7 |
| $ | 212 |
| $ | 12 |
| $ | 200 |
| 5.88 yrs |
|
On September 4, 2017, Evolving Systems Holdings Limited (“EVOL Holdings”), a wholly owned subsidiary of Evolving Systems, Inc., completed the acquisition under a Share Purchase Agreement (the “Purchase Agreement”) with Lumata Holdings Limited (“Lumata Holdings” or “Seller”) and Francisco Partners III (Cayman) L.P, as Guarantor (the “Acquisition”). EVOL Holdings acquired all of the issued and outstanding shares of four (4) Lumata Holdings subsidiaries, Lumata France SAS, Lumata Spain S.L., Lumata UK Ltd and Lumata Deutschland GmbH (collectively, “Lumata Entities”) in exchange for a cash payment totaling €4.0 million ($4.8 million), subject to certain adjustments. The Seller and certain members of the Seller’s management entered into Management Warranty Deeds to secure Lumata Holdings’ representations and warranties under the Purchase Agreement and, to the extent the amounts provided under the Management Warranty Deeds are not sufficient to satisfy post-closing claims, EVOL Holdings may seek recovery from the Guarantor in an amount not to exceed €400,000 ($476,000). EVOL Holdings and Seller are both companies incorporated under the laws of England and Wales.
We accounted for this business combination by applying the acquisition method, and accordingly, the purchase price was allocated to the assets and liabilities assumed based upon their fair values at the acquisition date. The excess of the purchase price over the net assets and liabilities, approximately $2.7 million, was recorded as goodwill. The Company is in the process of finalizing the purchase allocation, thus the provisional measures of deferred income taxes, intangibles and goodwill are subject to change. The Company expects the purchase price allocation will be finalized in 2018. The results of the Lumata Entities’ operations have been included in the consolidated financial statements since the acquisition date. The amortization of the intangible assets is not deductible for tax purposes.
Total purchase price is summarized as follows (in thousands):
|
| September 4, 2017 |
| |
Cash Consideration |
|
|
| |
Total Cash Consideration |
| $ | 4,766 |
|
|
|
|
| |
Total purchase price |
| $ | 4,766 |
|
The following table summarizes the preliminary estimated fair values of the assets and liabilities assumed at the acquisition date (in thousands):
|
| September 4, 2017 |
| |
Cash and cash equivalents |
| $ | 386 |
|
Contract receivables |
| 1,444 |
| |
Unbilled work-in-progress |
| 110 |
| |
Intangible assets |
| 1,935 |
| |
Prepaid and other current assets |
| 1,539 |
| |
Other assets, non-current |
| 19 |
| |
Total identifiable assets acquired |
| $ | 5,433 |
|
|
|
|
| |
Accounts payable and accrued liabilities |
| $ | 3,086 |
|
Deferred tax liability |
| 329 |
| |
Deferred revenue |
| 325 |
| |
Total identifiable liabilities acquired |
| $ | 3,740 |
|
|
|
|
| |
Net identifiable assets acquired |
| 1,693 |
| |
|
|
|
| |
Goodwill |
| 3,073 |
| |
Net assets acquired |
| $ | 4,766 |
|
We recorded $1.9 million in intangible assets as of the acquisition date with a weighted-average amortization period of approximately ten years and are amortizing the value of the purchased software, trademarks and tradename, non-competition and customer relationships over an estimated useful life of 7, 5, 1.5 and 13 years, respectively. Amortization expense of approximately $18,000 related to the acquired intangible assets was recorded during the period ended September 30, 2017.
The $3.1 million of goodwill recognized is attributed to expected synergies and the assembled workforce and residual goodwill of the Lumata Entities. As of the date of this report there were no changes in the recognized amounts of goodwill resulting from the acquisition of the Lumata Entities.
Intangible assets related to the Lumata Entities’ acquisition as of September 4, 2017 (in thousands):
|
| September 30, 2017 |
| |||||||||||||||
|
| Gross |
| Effects of |
| Net |
| Accumulated |
| Net |
| Weighted- |
| |||||
Purchased software |
| $ | 672 |
| $ | 23 |
| $ | 695 |
| $ | 8 |
| $ | 687 |
| 7 yrs |
|
Trademarks and tradenames |
| 111 |
| 4 |
| 115 |
| 2 |
| 113 |
| 5 yrs |
| |||||
Non-competition |
| 2 |
| — |
| 2 |
| — |
| 2 |
| 1.5 yrs |
| |||||
Customer relationships |
| 1,150 |
| 40 |
| 1,190 |
| 8 |
| 1,182 |
| 13 yrs |
| |||||
|
| $ | 1,935 |
| $ | 67 |
| $ | 2,002 |
| $ | 18 |
| $ | 1,984 |
| 10.45 yrs |
|
NOTE 3 — GOODWILL AND INTANGIBLE ASSETS
Changes in the carrying amount of goodwill by reporting unit were as follows (in thousands):
|
| Total |
| |
|
| Goodwill |
| |
Balance at December 31, 2016 |
| $ | 20,599 |
|
Goodwill acquired during the year |
| 3,204 |
| |
Effects of changes in foreign |
|
|
| |
currency exchange rates (1) |
| 1,153 |
| |
Balance at September 30, 2017 |
| $ | 24,956 |
|
|
| Total |
| |
|
| Goodwill |
| |
Balance at January 1, 2019 |
| $ | 6,738 |
|
Effect of changes in foreign currency exchange rates (1) |
| 90 |
| |
Balance at March 31, 2019 |
| $ | 6,828 |
|
(1) Represents the impact of foreign currency translation for instances when goodwill is recorded in foreign entities whose functional currency is also their local currency. Goodwill balances are translated into U.S. dollars using exchange rates in effect at period end. Adjustments related to foreign currency translation are included in other comprehensive income.
We performedperform our annual goodwill impairment test as of July 31, 2017, at which time we had $21.5 million of goodwill. The fair value of the reporting unit was estimated using both market and income based approaches. Specifically, we incorporated observed market multiple data from selected guideline public companies and values arrived at through the application of discounted cash flow analyses, which in turn were based upon our financial projections as of the valuation date. We believe that a market participant would weigh both possibilities without a bias to one or the other. Consequently, we gave equal consideration to both. This analysis requires significant judgments, including estimation of future cash flows, which is dependent on internal forecasts, estimation of the long-term rate of growth for our business, estimation of the useful life over which cash flows will occur, and determination of our weighted average cost of capital.31. Changes in these estimates and assumptions could materially affect the determination of fair value and goodwill impairment for each reporting unit. If the carrying value of a reporting unit were to exceed its fair value, we would then compare the fair value of the reporting unit’s goodwill to its carrying amount, and any excess of the carrying amount over the fair value would be charged to operations as an impairment loss. If the projected future performance of our segment as estimated in the income valuation approach is adjusted downward or is lower than expected in the future, we could be required to record a goodwill impairment charge. As a result of the first step of the 2017 goodwill impairment analysis, the fair value of each reporting unit exceeded its carrying value. Therefore the second step was not necessary.goodwill. Due to our transition of packaging our products and services into a single managed service offering, we have determined we have one reporting unit. We do not believe the aggregation of our reporting units impacts the value of our goodwill nor are there any additional events through the date this Form 10-Q was filed which impactsimpact our assumptions on the determination of the fair value of our goodwill.
We amortized identifiable intangible assets for Evolving Systems Labs, Inc., Evolving Systems NC, Inc., EVOL BLS, and the Lumata Entitiesentities on a straight-line basis over their estimated lives ranging from one to eight years.useful lives. As of September 30, 2017March 31, 2019, and December 31, 2016,2018, identifiable intangibles were as follows (in thousands):
|
| September 30, 2017 |
| December 31, 2016 |
| ||||||||||||||||||||||
|
| Gross |
| Effects |
| Net |
| Accumulated |
| Net |
| Gross |
| Accumulated |
| Net |
| Weighted-Average |
| ||||||||
Purchased software |
| $ | 2,873 |
| $ | 27 |
| $ | 2,900 |
| $ | 647 |
| $ | 2,253 |
| $ | 2,118 |
| $ | 436 |
| $ | 1,682 |
| 7.7 yrs |
|
Trademarks and tradenames |
| 302 |
| 4 |
| 306 |
| 177 |
| 129 |
| 185 |
| 116 |
| 69 |
| 3.7 yrs |
| ||||||||
Non-competition |
| 39 |
| — |
| 39 |
| 34 |
| 5 |
| 33 |
| 21 |
| 12 |
| 2.0 yrs |
| ||||||||
Customer relationships |
| 4,286 |
| 44 |
| 4,330 |
| 920 |
| 3,410 |
| 3,024 |
| 587 |
| 2,437 |
| 8.7 yrs |
| ||||||||
|
| $ | 7,500 |
| $ | 75 |
| $ | 7,575 |
| $ | 1,778 |
| $ | 5,797 |
| $ | 5,360 |
| $ | 1,160 |
| $ | 4,200 |
| 8.1 yrs |
|
|
| March 31, 2019 |
| |||||||
|
| Gross Amount |
| Accumulated |
| Net Carrying |
| |||
Purchased software |
| $ | 2,895 |
| $ | (1,220 | ) | $ | 1,675 |
|
Trademarks and tradenames |
| 306 |
| (229 | ) | 77 |
| |||
Non-competition |
| 39 |
| (39 | ) | — |
| |||
Customer relationships |
| 4,333 |
| (1,729 | ) | 2,604 |
| |||
|
| $ | 7,573 | (1) | $ | (3,217 | )(1) | $ | 4,356 |
|
|
| December 31, 2018 |
| |||||||
|
| Gross Amount |
| Accumulated |
| Net Carrying |
| |||
Purchased software |
| $ | 2,877 |
| $ | (1,121 | ) | $ | 1,756 |
|
Trademarks and tradenames |
| 303 |
| (223 | ) | 80 |
| |||
Non-competition |
| 39 |
| (38 | ) | 1 |
| |||
Customer relationships |
| 4,303 |
| (1,590 | ) | 2,713 |
| |||
|
| $ | 7,522 | (1) | $ | (2,972 | )(1) | $ | 4,550 |
|
(1) Includes foreign currency translation adjustment of less than $0.1 million.
Amortization expense of identifiable intangible assets was $0.2 million for the three months ended March 31, 2019 and $0.6 million for the nine months ended September 30, 2017 and 2016,2018, respectively. Expected future amortization expense related to identifiable intangibles based on our carrying amount as of September 30, 2017 wasMarch 31, 2019 is as follows (in thousands):
Twelve months ending September 30, |
|
|
| |
2018 |
| $ | 960 |
|
2019 |
| 944 |
| |
2020 |
| 940 |
| |
2021 |
| 940 |
| |
2022 |
| 859 |
| |
Thereafter |
| 1,154 |
| |
|
| $ | 5,797 |
|
Twelve Months Ending March 31, |
|
|
| |
2020 |
| $ | 943 |
|
2021 |
| 943 |
| |
2022 |
| 909 |
| |
2023 |
| 632 |
| |
2024 |
| 312 |
| |
NOTE 3 — BALANCE SHEET COMPONENTS
The components of accounts payable and accrued liabilities are as follows (in thousands):
|
| March 31, 2019 |
| December 31, 2018 |
| ||
Accounts payable and accrued liabilities: |
|
|
|
|
| ||
Accounts payable |
| $ | 1,751 |
| $ | 1,276 |
|
Accrued compensation and related expenses |
| 1,765 |
| 1,863 |
| ||
Accrued liabilities |
| 1,288 |
| 1,344 |
| ||
Lease obligations — operating leases - current |
| 370 |
| — |
| ||
|
| $ | 5,174 |
| $ | 4,483 |
|
NOTE 4 — EARNINGS(LOSS) INCOME PER COMMON SHARE
We compute basic earnings(loss) income per share (“EPS”IPS”) by dividing net income or loss available to common stockholders by the weighted average number of shares outstanding during the period, including common stock issuable under participating securities. We compute diluted EPSIPS using the weighted average number of shares outstanding, including participating securities, plus all potentially dilutive common stock equivalents. Common stock equivalents consist of stock options and restricted stock.
Our policy is to treat unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents, whether paid or unpaid, as participating securities, included in the computation of both basic and diluted earnings per share. We exclude unvested restricted stock from our basic earnings per share. Our restricted stock, which vests based on the passage of time are included in dilutive earnings per share. Our restricted stock which vests contingent upon the attainment of annual performance goals are included in dilutive earnings per share as the performance goals are achieved. The following is the reconciliation of the denominator of the basic and diluted EPSIPS computations (in thousands, except per share data):
|
| For the Three Months Ended |
| For the Nine Months Ended |
| ||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 |
| ||||
Basic income per share: |
|
|
|
|
|
|
|
|
| ||||
Net income available to common stockholders |
| $ | 759 |
| $ | 941 |
| $ | 2,834 |
| $ | 2,148 |
|
Basic weighted average shares outstanding |
| 11,940 |
| 11,873 |
| 11,932 |
| 11,824 |
| ||||
Basic income per share: |
| $ | 0.06 |
| $ | 0.08 |
| $ | 0.24 |
| $ | 0.18 |
|
|
|
|
|
|
|
|
|
|
| ||||
Diluted income per share: |
|
|
|
|
|
|
|
|
| ||||
Net income available to common stockholders |
| $ | 759 |
| $ | 941 |
| $ | 2,834 |
| $ | 2,148 |
|
Weighted average shares outstanding |
| 11,940 |
| 11,873 |
| 11,932 |
| 11,824 |
| ||||
Effect of dilutive securities - options and restricted stock |
| 52 |
| 106 |
| 43 |
| 143 |
| ||||
Diluted weighted average shares outstanding |
| 11,992 |
| 11,979 |
| 11,975 |
| 11,967 |
| ||||
Diluted income per share: |
| $ | 0.06 |
| $ | 0.08 |
| $ | 0.24 |
| $ | 0.18 |
|
|
| For the Three Months Ended March 31, |
| ||||
Basic income per common share: |
| 2019 |
| 2018 |
| ||
Net (loss) income |
| $ | (1,117 | ) | $ | 484 |
|
Basic weighted average shares outstanding |
| 12,138 |
| 12,077 |
| ||
Basic (loss) income per common share: |
| $ | (0.09 | ) | $ | 0.04 |
|
Diluted income per common share: |
|
|
|
|
| ||
Net (loss) income |
| $ | (1,117 | ) | $ | 484 |
|
Weighted average shares outstanding |
| 12,138 |
| 12,077 |
| ||
Effect of dilutive securities - options and restricted stock |
| — |
| 88 |
| ||
Diluted weighted average shares outstanding |
| 12,138 |
| 12,165 |
| ||
Diluted (loss) income per common share: |
| $ | (0.09 | ) | $ | 0.04 |
|
As a result of our loss for the three months ended March 31, 2019, basic and diluted loss per common share are $(0.09) because any potentially dilutive shares are excluded from determining the dilutive loss per share. For the three months ended September 30, 2017March 31, 2019 and 2016, 0.42018, 0.6 million and 0.50.3 million shares, respectively, of commonunderlying stock options were excluded from the dilutive stock calculation because their exercise prices were greater than the average fair value of our common stock for the period.
For the nine months ended September 30, 2017 and 2016, 0.4 million and 0.5 million shares, respectively, of common stock were excluded from the dilutive stock calculation because their exercise prices were greater than the average fair value of our common stock for the period.
For the three and nine months ended September 30, 2017, 0.6 million shares of unvested restricted stock were excluded from basic earnings per share but a portion of the 0.6 million shares were included in dilutive earnings per share. No shares of restricted stock were excluded from basic or dilutive earnings per share for the three and nine months ended September 30, 2016.
NOTE 5 — SHARE-BASED COMPENSATION
We account for stock-based compensation by applying a fair-value-based measurement method to account for share-based payment transactions with employees and directors, and record compensation cost for all stock awards granted after January 1, 2006 and awards modified, repurchased, or cancelled after that date, using the modified prospective method. We record compensation costs associated with the vesting of unvested options on a straight-line basis over the vesting period. We recognized $0.2$0.1 million and $0.1$0.4 million of compensation expense in the condensed consolidated statements of operations, with respect to our stock-based compensation plans for the three months ended September 30, 2017March 31, 2019 and 2016 and $0.5 million and $0.2 million for the nine months ended September 30, 2017 and 2016 respectively2018, respectively.
The following table summarizes stock-basedshare-based compensation expenses recorded in the condensed consolidated statement of operations (in thousands):
|
| For the Three Months Ended |
| For the Nine Months Ended |
| ||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 |
| ||||
Cost of revenue, excluding depreciation and amortization |
| $ | 4 |
| $ | 8 |
| $ | 15 |
| $ | 32 |
|
Sales and marketing |
| 5 |
| 7 |
| 9 |
| 20 |
| ||||
General and administrative |
| 199 |
| 20 |
| 414 |
| 90 |
| ||||
Product development |
| 14 |
| 17 |
| 48 |
| 56 |
| ||||
Total share based compensation |
| $ | 222 |
| $ | 52 |
| $ | 486 |
| $ | 198 |
|
|
| For the Three Months Ended March 31, |
| ||||
|
| 2019 |
| 2018 |
| ||
Cost of revenue, excluding depreciation and amortization |
| $ | 4 |
| $ | 13 |
|
Sales and marketing |
| 3 |
| 16 |
| ||
General and administrative |
| 115 |
| 310 |
| ||
Product development |
| 8 |
| 27 |
| ||
Total share-based compensation |
| $ | 130 |
| $ | 366 |
|
Stock Incentive Plans
In June 2007, our stockholders approved the 2007 Stock Incentive Plan (the “2007 Stock Plan”) with a maximum of 1,000,000 shares reserved for issuance. In June 2010, our stockholders approved an amendment to the 2007 Stock Plan which increased the maximum shares that may be awarded under the plan to 1,250,000. In June 2013, our stockholders approved an amendment to the 2007 Stock Plan which increased the maximum shares that may be awarded under the plan to 1,502,209. In June 2015, our stockholders approved an amendment to the 2007 Stock Plan which increased the maximum shares that may be
awarded under the plan to 2,002,209. Awards permitted under the 2007 Stock Plan include: Stock Options, Stock Appreciation Rights, Restricted Stock, Restricted Stock Units, Performance AwardsAt March 31, 2019 and Other Stock-Based Awards. Awards issued under the 2007 Stock Plan are at the discretion of the Board of Directors. As applicable, awards are granted with an exercise price equal to the closing price of our common stock on the date of grant, generally vest over four years for employees and three years for an initial grant and one year for subsequent grants for directors and expire no more than ten years from the date of grant. At September 30, 2017,December 31, 2018, no shares were available for grant under the 2007 Stock Plan, as amended. At September 30, 2017March 31, 2019 and December 31, 2016, 0.82018, 0.5 million options and 0.7 millionrestricted shares were issued and outstanding under the 2007 Stock Plan as amended, respectively.
In June 2016, our stockholders approved the 2016 Stock Incentive Plan (the “2016 Stock Plan”) with a maximum of 250,000 shares reserved for issuance. In June 2017, our stockholders approved an amendment to the 2016 Stock Plan which increased the maximum shares that may be awarded under the plan to 650,000. Awards permitted under the 2016 Stock Plan include: Stock Options, Stock Appreciation Rights, Restricted Stock, Restricted Stock Units, Performance AwardsAt March 31, 2019 and Other Stock-Based Awards. Awards issued under the 2016 Stock Plan are at the discretion of the Board of Directors. As applicable, awards are granted with an exercise price equal to the closing price of our common stock on the date of grant, generally vest over four years for employees and three years for an initial grant and one year for subsequent grants for directors and expire no more than ten years from the date of grant. At September 30, 2017,December 31, 2018, there were approximately 0.30.4 million shares available for grant under the 2016 Stock Plan.Plan, respectively. At September 30, 2017March 31, 2019 and December 31, 2016, 0.32018, 0.4 million options and 0restricted shares were issued and outstanding under the 2016 Stock Plan, respectively.Plan.
During the three months ended September 30, 2017 7,500 shares of restricted stock were granted to a member of our senior management. During the nine months ended September 30, 2017 0.6 million shares of restricted stock were granted to members of our Board of Directors and senior management. During the three and nine months ended September 30, 2016 no shares of restricted stock were granted to members of our Board of Directors or senior management. During the three months ended September 30, 2017 1,250 shares of restricted stock vested. During the nine months ending September 30, 2017 3,750 shares of restricted stock vested. During the three and nine months ended September 30, 2016 5,000 shares of restricted stock vested. During the three and nine months ended September 30, 2017 4,000 and 27,000 of restricted stock were forfeited, respectively. No shares of restricted stock were forfeited during the three and nine months ended September 30, 2016. The fair market value of restricted shares for share-based compensation expensing is equal to the closing price of our common stock on the date of grant. Stock-basedThe restrictions for stock awards generally vest over four years for senior management and over one year for the board of directors. The company did not recognize any share-based compensation expense includes $0.2 millionin connection with its performance vesting conditions during the period. Vested shares are included in the number of Common Stock outstanding shares referenced on the cover of this Quarterly Report on Form 10-Q and $8,000referenced in the table below for the three months ended September 30, 2017 and 2016, respectively, and $0.4 million and $23,000 for the nine month ended September 30, 2017 and 2016, respectively, of expense related to restricted stock grants. Of the restrictions on the stock awards granted during the six months ended June 30, 2017, 20% will be released in January 2018, and 10% annually beginning on the one year anniversary of their offering thereafter for four years. The remaining 40% will be released evenly over four years beginning in 2018 contingent upon the attainment of annual performance goals established by our Board of Directors. Of the restrictions on the stock awards granted during the three months ended September 30, 2017, one-fourth will be released on the one-year anniversary of the date of the grant and the balance will be released quarterly over a three year period.March 31, 2019.
The following is a summary of restricted stock option activity under the plans for the three and nine months ended September 30, 2017:March 31, 2019:
|
| Restricted |
|
| |||
Stock |
| ||
Number of | |||
Shares | |||
| (in thousands) | ||
Unvested restricted stock at |
|
|
|
|
| ||
|
|
| |
Less restricted stock vested |
| ( | ) |
|
|
| ) |
Unvested restricted stock at March 31, 2019 | 176 |
|
The fair value of each option grant is estimated on the date of grant using the Black-Scholes model. The Black-Scholes model uses four assumptions to calculate the fair value of each option grant. The expected term of share options granted is derived using the simplified method, which we adopted in January 2008. The risk-free interest rate is based upon the rate currently available on zero-coupon U.S. Treasury instruments with a remaining term equal to the expected term of the stock options. The expected
volatility is based upon historical volatility of our common stock over a period equal to the expected term of the stock options. The expected dividend yield is based upon anticipated payment of dividends. The weighted-average assumptions used in the fair value calculations are as follows:
|
| For the Three Months Ended September 30, |
| For the Nine Months Ended September 30, |
| ||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 |
|
Expected term (years) |
| 6.4 |
| 6.0 |
| 6.4 |
| 6.0 |
|
Risk-free interest rate |
| 1.88 | % | 1.10 | % | 1.88 | % | 1.32 | % |
Expected volatility |
| 38.74 | % | 36.55 | % | 38.74 | % | 36.81 | % |
Expected dividend yield |
| 0.00 | % | 4.23 | % | 0.00 | % | 7.22 | % |
The following is a summary of stock option activity under the plans for the ninethree months ended September 30, 2017:March 31, 2019:
|
|
|
|
|
| Weighted- |
|
|
| ||
|
|
|
|
|
| Average |
|
|
| ||
|
|
|
| Weighted- |
| Remaining |
| Aggregate |
| ||
|
| Number of |
| Average |
| Contractual |
| Intrinsic |
| ||
|
| Shares |
| Exercise |
| Term |
| Value |
| ||
|
| (in thousands) |
| Price |
| (Years) |
| (in thousands) |
| ||
Options outstanding at December 31, 2016 |
| 684 |
| $ | 6.17 |
| 7.30 |
| $ | 139 |
|
Options granted |
| 50 |
| 4.65 |
|
|
|
|
| ||
Less options forfeited/cancelled |
| (131 | ) | 6.58 |
|
|
|
|
| ||
Less options exercised |
| (108 | ) | 3.31 |
|
|
|
|
| ||
Options outstanding at September 30, 2017 |
| 495 |
| $ | 6.54 |
| 7.47 |
| $ | 86 |
|
|
|
|
|
|
|
|
|
|
| ||
Options exercisable at September 30, 2017 |
| 305 |
| $ | 6.99 |
| 6.82 |
| $ | 76 |
|
|
|
|
|
|
| Weighted- |
|
|
| ||
|
|
|
|
|
| Average |
| Aggregate |
| ||
|
|
|
| Weighted- |
| Remaining |
| Intrinsic |
| ||
|
| Number of |
| Average |
| Contractual |
| Value |
| ||
|
| Shares |
| Exercise |
| Term |
| (in |
| ||
|
| (in thousands) |
| Price |
| (Years) |
| thousands) |
| ||
Options outstanding at January 1, 2019 |
| 591 |
| $ | 5.75 |
| 7.39 |
| $ | — |
|
Less options forfeited/cancelled |
| (23 | ) | 4.56 |
|
|
|
|
| ||
Less options exercised |
| — |
| — |
|
|
|
|
| ||
Options outstanding at March 31, 2019 |
| 568 |
| $ | 5.80 |
| 7.09 |
| $ | — |
|
|
|
|
|
|
|
|
|
|
| ||
Options exercisable at March 31, 2019 |
| 373 |
| $ | 6.55 |
| 6.37 |
| $ | — |
|
There were 50,000 and 40,000no stock options granted during the three months ended September 30, 2017March 31, 2019 and 2016, respectively. There were 50,000 and 118,000 stock options granted during the nine months ended September 30, 2017 and 2016, respectively. The weighted-average grant-date fair value of stock options granted were $1.92 and $1.16 during the three months ended September 30, 2017 and 2016,2018, respectively. As of September 30, 2017,March 31, 2019, there werewas approximately $2.5$0.9 million of total unrecognized compensation costs related to unvested stock options and restricted stock. These costs are expected to be recognized over a weighted average period of 3.382.19 years. The total fair value of stock options and restricted stock vested during the three months ended September 30, 2017March 31, 2019 and 20162018 was approximately $38,000 andless than $0.1 million, respectively. The total fair value of stock options vested during the nine months ended September 30, 2017 and 2016 was approximately $0.1 million and $0.2 million, respectively.
The deferred income tax benefits from stock option expense related to Evolving Systems U.K. totaled approximately $3,000 for the three months ended September 30, 2017 and 2016. The deferred income tax benefits from stock option expense related to Evolving Systems U.K totaled approximately $7,000 and $10,000 for the nine months ended September 30, 2017 and 2016, respectively.
Cash received from stock option exercises for the three months ended September 30, 2017 and 2016 was $3,000 and $9,000, respectively. Cash received from stock option exercises for the nine months ended September 30, 2017 and 2016 was $27,000 and $50,000 respectively.
During the nine months ended September 30, 2017, we had net settlement exercises of stock options, whereby the optionee did not pay cash for the options but instead received the number of shares equal to the difference between the exercise price and the market price on the date of exercise. Net settlement exercises during the nine months ended September 30, 2017, resulted in 18,951 shares issued and 75,327 options cancelled in settlement of shares issued. There were no net settlement exercises during the three months ended September 30, 2017. Net settlement exercises during the three and nine months ended September 30, 2016, resulted in approximately 93,782 shares issued and 32,502 options cancelled in settlement of shares issued.
Employee Stock Purchase Plan
Under the Employee Stock Purchase Plan (“ESPP”), we are authorized to issue up to 550,000 shares. Employees may elect to have up to 15% of their gross compensation withheld through payroll deductions to purchase our common stock, capped at $25,000 annually and no more than 10,000 shares per offering period. The purchase price of the stock is 85% of the lower of the market price at the beginning or end of each three-month participation period. As of September 30, 2017, there were approximately 51,000 shares available for purchase. For the three months ended September 30, 2017 and 2016, we recorded compensation expense of $90 and $160, respectively, and $600 and $2,000, for the nine months ended September 30, 2017 and 2016, respectively, associated with grants under the ESPP which includes the fair value of the look-back feature of each grant as well as the 15% discount on the purchase price. This expense fluctuates each period primarily based on the level of employee participation.
The fair value of each purchase made under our ESPP is estimated on the date of purchase using the Black-Scholes model. The Black-Scholes model uses four assumptions to calculate the fair value of each purchase. The expected term of each purchase is based upon the three-month participation period of each offering. The risk-free interest rate is based upon the rate currently available on zero-coupon U.S. Treasury instruments with a remaining term equal to the expected term of each offering. The expected volatility is based upon historical volatility of our common stock. The expected dividend yield is based upon historical and anticipated payment of dividends. The weighted average assumptions used in the fair value calculations are as follows:
|
| For the Three Months Ended September 30, |
| For the Nine Months Ended September 30, |
| ||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 |
|
Expected term (years) |
| 0.25 |
| 0.25 |
| 0.25 |
| 0.25 |
|
Risk-free interest rate |
| 1.06 | % | 0.27 | % | 0.97 | % | 0.23 | % |
Expected volatility |
| 37.08 | % | 40.28 | % | 41.72 | % | 41.56 | % |
Expected dividend yield |
| 0.00 | % | 5.06 | % | 0.00 | % | 7.58 | % |
Cash received from employee stock plan purchases for the three months ended September 30, 2017 and 2016 was $344 and $1,000, respectively. Cash received from employee stock plan purchases for the nine months ended September 30, 2017 and 2016, was $2,000 and $6,000, respectively.
We issued shares related to the ESPP of approximately 80 and 200 for the three months ended September 30, 2017 and 2016, respectively. We issued shares related to the ESPP of approximately 600 and 1,000 for the nine months ended September 30, 2017 and 2016, respectively.
NOTE 6 — CONCENTRATION OF CREDIT RISK
For the three months ended September 30, 2017,March 31, 2019 and 2018 one significant customer (defined as contributing at least 10%) accounted for 12%11% of revenue from operations.operations, respectively. The significant customer for the three months ended September 30, 2017 is a large telecommunications operator in Europe. For the three months ended September 30, 2016, one significant customer accounted for 13% of revenue from operations. The significant customer for the three months ended September 30, 2016 is a large telecommunications operator in Africa. For the nine months ended September 30, 2017 one significant customer accounted for 13% of revenue from operations. This customer is a large telecommunications operator in Europe. For the nine months ended September 30, 2016, no significant customers accounted for 10% of revenue from operations.
As of September 30, 2017 and December 31, 2016, no significant customers accounted for 10% of contract receivables and unbilled work-in-progress.
NOTE 7 — LONG-TERM DEBT
On February 29, 2016, we entered into the Fifth Amendment to the Loan and Security Agreement with East West Bank which provides for a Term Loan (the “Term Loan”) for $6.0 million. The $6.0 million loan bears interest at a floating rate equal to the U.S.A. Prime Rate plus 1.0%. As of September 30, 2017, the U.S.A. Prime Rate was 4.25%. The Term Loan is secured by substantially all of the assets of Evolving Systems, Inc., including a pledge, subject to certain limitations with respect to stock of foreign subsidiaries, of the stock of the existing and future direct subsidiaries of Evolving Systems, Inc. Interest shall accrue from the date the Term Loan is made at the aforementioned rate and shall be payable monthly. The Term Loan shall be repaid in 36 equal monthly installments of principal, plus accrued but unpaid interest, commencing on January 1, 2017 and continuing on the first day of each month thereafter through and including January 1, 2020. On the Term Loan maturity date, the outstanding principal amount of the Term Loan and all accrued and unpaid interest thereon shall be immediately due and payable. The Term Loan, once repaid, may not be reborrowed. We must maintain a minimum current ratio, a specified ratio of Total Liabilities to EBITDA and a minimum fixed charge coverage ratio which are as defined in the Term Loan. The Term Loan requires us to pay two annual credit facility fees of
$18,750 and legal fee equal to $1,000. The Term Loan agreement required us to use the term loan’s proceeds and $4.0 million from our cash balances to pay off and terminate the Revolving Facilities totaling $10.0 million. The Term Loan matures on January 1, 2020.
The Term Loan includes negative covenants that place restrictions on the Company’s ability to, among other things: incur additional indebtedness; create liens or other encumbrances on assets; make loans, enter into letters of credit, guarantees, investments and acquisitions; sell or otherwise dispose of assets; cause or permit a change of control; merge or consolidate with another entity; make negative pledges; enter into affiliate transactions; limits the amount of cash distributions to our shareholders; and change the nature of our business materially. Outstanding amounts under the Term Loan may be accelerated by East West Bank upon the occurrence and continuance of certain events of default, including without limitation: payment defaults, breach of covenants beyond applicable grace periods, breach of representations and warranties, bankruptcy and insolvency defaults, and the occurrence of a material adverse effect (as defined). Acceleration is automatic upon the occurrence of certain bankruptcy and insolvency defaults.
On August 16, 2017, we entered into a Term Loan Facility Agreement with East West Bank as lender in the amount of $4,730,000$4.7 million (the “Loan Facility”). The purpose of the Loan Facility is to provide funds in connection with the Company’s entry into a Share Purchase Agreement with Lumata Holdings Limited (“Lumata Holdings”) for a cash payment totaling €4 million ($4.8 million). See Note 2 Acquisitions for the Lumata Entities acquisition. The Loan Facility requires the Company to make monthly principal payments of approximately $131,400 commencing$0.1 million that commenced on July 31, 2018 and interest at the greater of (a) 3.5% or (b) the variable rate of interest that appears in the Wall Street Journal on a monthly measurement date plus in either case 1.5%. As of September 30, 2017,March 31, 2019, the U.S.A. Prime Rate was 4.25%5.5%. In the event of a default, the interest rate increases by 5% per annum. EVOL Inc. entered into the Loan Facility as the Parent Guarantor; Evolving Systems BLS LTD and Evolving Systems Limited entered into the Loan Facility as Original Guarantors (the “Original Guarantors”). The Loan Facility is secured overby all of the assets of EVOL Holdings and the Original Guarantors in accordance with the terms of a Debenture entered into by EVOL Holdings and the Original Guarantors in favor of East West Bank. EVOL Holdings, EVOL Inc. and the Original Guarantors also entered into a Subordination Deed whereby each of the parties agreed to subordinate all loans by and among each other to East West Bank. Following completion of the Lumata Acquisition, Lumata France SAS and Lumata UK Ltd are also bound to adhere to the finance documents as additional obligors.
The Loan Facility requires the Company to pay an Arrangement Fee (“Origination Fee”) of $23,650, payable in 4four equal installments, with the first payment due on the date of the Loan Facility and the remaining three payments on the first, second and third anniversary thereof. The Company also agreed to pay East West Bank’s legal fees in connection with the transaction. The Company may prepay the Loan Facility at any time, in a minimum amount of $250,000 and increments of $50,000, subject to a prepayment fee of 2% of the amount prepaid, on any prepayment made before the second anniversary date of the Agreement. The unpaid balance of the Loan Facility is due on August 16, 2021.
On February 29, 2016, we entered into the Fifth Amendment to the Loan and Security Agreement with East West Bank which provides for a Term Loan (the “Term Loan”) for $6.0 million. The $6.0 million Term Loan Facility includes financial covenants as well as negative covenants that place restrictions on EVOL Holdings,bears interest at a floating rate equal to the Parent and Original Guarantors andU.S. Prime Rate plus 1.0%. As of March 31, 2019, the additional obligors’ ability to, among other things: incur additional indebtedness; create liens or other encumbrances on assets; make loans, enter into lettersU.S. Prime Rate was 5.5%. In the event of credit, guarantees, investments and acquisitions; sell or otherwise disposea default, the interest rate increases 5% per annum. The Term Loan is secured by substantially all of assets; declare dividends, cause or permitthe assets of Evolving Systems, including a change of control; merge or consolidate with another entity; enter into affiliate transactions; and change the nature of its business materially,pledge, subject to standard exceptions.
The Loan Facility hascertain limitations with respect to stock of foreign subsidiaries, of the same covenants asstock of the Term Loan.
Asexisting and future direct subsidiaries of September 30, 2017, we were in compliance withEvolving Systems. Interest accrues from the covenants and had a $9.4 million balance underdate the Term Loan was made at the aforementioned rate and is payable monthly. The Term Loan Facility netshall be repaid in 36 equal monthly installments of approximately $14,000principal, plus accrued but unpaid interest, commencing on January 1, 2017 and continuing on the first day of each month thereafter through and including January 1, 2020. We must maintain a minimum current ratio, a specified ratio of Total Liabilities to EBITDA and a minimum fixed charge coverage ratio which are as defined in the Term Loan. The Term Loan requires us to pay two annual credit facility fees of $18,750 and legal fee equal to $1,000. The Term Loan matures on January 1, 2020.
As of December 31, 2018, our fixed charge coverage ratio, was 0.81, which failed to meet the minimum required 1.25 fixed charge coverage ratio. On March 29, 2019, we received a letter from East West Bank that waived the December 31, 2018 violation. As of March 31, 2019, our fixed charge ratio was 0.31, which failed to meet the minimum required 1.25 fixed charge coverage ratio and our leverage ratio was 2.8, which failed to meet the maximum required 2.0 leverage ratio. We are negotiating amendments to the loan agreements. As of March 31, 2019, we classified the entire $5.1 million in outstanding debt issuance costs.as a current liability.
NOTE 8 — INCOME TAXES
We recorded net income tax expense of $0.2 million and $0.4$0.1 million for the three months ended September 30, 2017March 31, 2019 and 2016,2018, respectively. The net expense during the three months ended September 30, 2017March 31, 2019 consisted of current income tax expense of $0.4 million and a deferred tax benefit of ($0.2) million. The current tax expense consists of income tax from our U.S., U.K., France and India based operations. The deferred tax benefit was related primarily to the increase of certain net deferred tax assets and amortization of stock options and the intangible assets related to the acquisition of Evolving Systems NC, Inc. in September 2015. The net expense during the three months ended September 30, 2016 consisted of current income tax expense of $0.3 million and a deferred tax expense of $0.1 million. The current tax expense consists of income tax primarily from our U.S., U.K.Indian and IndiaNigerian based operations. The deferred tax expense primarily related to undistributed U.K. foreign earnings offset by the amortization of intangible assets related to the acquisition of Evolving Systems NC, Inc. in September 2015.
We recorded net income tax expense of $0.9 million for the nine months ended September 30, 2017 and 2016. The net expense during the ninethree months ended September 30, 2017March 31, 2018 consisted of current income tax expense of $1.2$0.2 million and a deferred tax benefit of ($0.3)$(0.1) million. The current tax expense consists of income tax from our U.S., U.K., France and and India based operations. The deferred tax benefit was primarily related to the increase of certain net deferred tax assets and amortization of stock options and the intangible assets related to the acquisition of Evolving Systems NC, Inc. The net expense during the nine months ended
September 30, 2016 consisted of current income tax expense of $0.9 million and a deferred tax benefit of ($19,000). The current tax expense consists primarily of income tax from our U.K. and India based operations. The deferred tax benefit was primarily related to the amortization of intangible assets related todeferred tax liabilities in the acquisition of Evolving Systems NC, Inc. in September 2015 offset by undistributed U.K. foreign earnings.U.S.
Our effective tax rate was 19%(9%) and 31%16% for the three months ended September 30, 2017March 31, 2019 and 2016,2018, respectively. The decrease in our effective tax rate relates to a higher proportion of our net income being generated in the U.K.,coming from our Indian and Nigerian operations and net losses from our other operations for which the statutory corporatewe did not recognize a net deferred tax rate is lower and the acquisition of subsidiaries with lower effective tax rates.benefit.
Our effective tax rate was 24% and 30% for the nine months ended September 30, 2017 and 2016 respectively. The decrease in our effective tax rates relates to a higher proportion of our income being generated in the U.K., for which the statutory corporate tax rate is lower and the acquisition of subsidiaries with lower effective tax rates.
As of September 30, 2017March 31, 2019, and December 31, 20162018 we continued to maintain a valuation allowance on portions of our domestic net deferred tax asset. Such assets primarily consist of Foreign Tax Creditasset for foreign tax credit (“FTC”), carryforwards, certain state Net Operating Loss (“NOL”)NOL carryforwards and research and development tax credits andcredits. We have $0.8 million in U.S. Alternative Minimum Tax (“AMT”) credits. tax credits that are a deferred tax asset that, as a result of U.S. tax reform, carry no valuation allowance. Our deferred tax assets and liabilities as of September 30, 2017March 31, 2019 and December 31, 2016,2018, were comprised of the following (in thousands):
|
| September 30, 2017 |
| December 31, 2016 |
| ||
Deferred tax assets |
|
|
|
|
| ||
Foreign tax credits carryforwards |
| $ | 4,878 |
| $ | 4,360 |
|
Net operating loss carryforwards |
| 3,485 |
| 544 |
| ||
Research & development credits |
| 303 |
| 303 |
| ||
AMT credits |
| 770 |
| 770 |
| ||
Stock compensation |
| 707 |
| 561 |
| ||
Depreciable assets |
| 87 |
| 71 |
| ||
Accrued liabilities and reserves |
| 158 |
| 124 |
| ||
Total deferred tax assets |
| 10,388 |
| 6,733 |
| ||
|
|
|
|
|
| ||
Deferred tax liabilities |
|
|
|
|
| ||
Deferred revenue |
|
|
|
|
| ||
Undistributed foreign earnings |
| $ | (701 | ) | $ | (662 | ) |
Intangibles |
| (1,496 | ) | (1,339 | ) | ||
Total deferred tax liability |
| (2,197 | ) | (2,001 | ) | ||
|
|
|
|
|
| ||
Net deferred tax assets, before valuation allowance |
| $ | 8,191 |
| $ | 4,732 |
|
Valuation allowance |
| (8,191 | ) | (4,732 | ) | ||
Net deferred tax asset |
| $ | — |
| $ | — |
|
In our U.S. Federal income tax returns we historically deducted income taxes paid to various countries. In our 2014 U.S. Federal income tax return we had $2.3 million of NOL carryforwards. Our income tax calculations have historically been under the regular and AMT regulations found in U.S. tax laws. The U.S. tax system contains rules to alleviate the burden of double taxation on income generated in foreign countries and subject to tax in such countries. The U.S. allows for either a deduction or credit of such foreign taxes against U.S. taxable income. An election to either claim a deduction or credit on such foreign income taxes can be made each tax year, independent from elections made in other years. A credit reduces a company’s actual U.S. income tax on a dollar-for-dollar basis, while a deduction reduces only the company’s income subject to tax. We made a comparison of our foreign dividends paid by our foreign subsidiary for which we deducted foreign taxes claimed versus claiming a FTC on the dividend paid by the foreign subsidiary. The dividends received were grossed-up with its corresponding foreign taxes. The U.S. law requires the offset of taxable income with NOL prior to applying the FTC rules. We determined it was beneficial for the company to gross-up the foreign dividends paid by the foreign subsidiary for the years 2012 through 2014 and make the election to claim a FTC. By doing so we fully utilized our December 31, 2014, $2.3 million balance of the federal NOL. As the election to claim the foreign tax credit or deduction is made on an annual basis, we intend to compare benefits to either claim a deduction or foreign tax credit on an annual basis. The company has approximately $4.9 million of FTC’s to carryforward through 2017 and subsequent years as a deferred tax asset.
Two Indian subsidiaries of SSM were acquired pursuant to the terms of the Agreement and Plan of Merger dated September 30, 2015. We have reason to believe there is uncertainty related to the lack of historical US International reporting for these two foreign subsidiaries, and are in the process of determining whether either or both of these subsidiaries are controlled foreign
corporations (“CFCs”) within the meaning of the Internal Revenue Code and related Regulations, or if a “check-the-box” election has taken place to effectively treat one or both of these subsidiaries as disregarded entities for US federal tax reporting purposes. The Company is in the process of obtaining pertinent information to assess the degree of uncertainty and to quantify related costs or liabilities.
|
| March 31, 2019 |
| December 31, 2018 |
| ||
Deferred tax assets: |
|
|
|
|
| ||
Foreign tax credits carryforwards |
| $ | 4,835 |
| $ | 4,788 |
|
Net operating loss carryforwards — Foreign |
| 5,584 |
| 5,531 |
| ||
Net operating loss carryforwards - State |
| 907 |
| 887 |
| ||
Research & development credits |
| — |
| 303 |
| ||
AMT credits |
| 770 |
| 770 |
| ||
Stock compensation |
| 600 |
| 559 |
| ||
Depreciable assets |
| 41 |
| 38 |
| ||
Accrued liabilities and reserves |
| 89 |
| 67 |
| ||
Total deferred tax assets |
| 12,826 |
| 12,943 |
| ||
|
|
|
|
|
| ||
Deferred tax liabilities: |
|
|
|
|
| ||
Intangibles |
| (651 | ) | (697 | ) | ||
Accrued liabilities and reserves |
| (184 | ) | (174 | ) | ||
Total deferred tax liability |
| (835 | ) | (871 | ) | ||
|
|
|
|
|
| ||
Net deferred tax assets, before valuation allowance |
| 11,991 |
| 12,072 |
| ||
Valuation allowance |
| (10,847 | ) | (10,932 | ) | ||
Net deferred tax asset |
| $ | 1,144 |
| $ | 1,140 |
|
As of September 30, 2017March 31, 2019, and December 31, 20162018 we had no liability for unrecognized tax benefits.
We conduct business globally and, as a result, Evolving Systems, Inc. or one or more of our subsidiaries file income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. Throughout the world, inIn the normal course of business, we are subject to examination by taxing authorities up until, twothroughout the world, namely the U.K., France, and India. Although carryovers can always be subject to review by taxing authorities, we are no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations for years before 2013.
Transfer Pricing Adjustments, net
The Company’s tax positions include the Company’s intercompany transfer pricing policies and the associated taxable income and deductions arising from intercompany charges between subsidiaries within the consolidated group. During fiscal year 2018, the Company finalized an Advance Pricing Arrangement (“APA”) with the Evolving Systems, Inc. and its subsidiaries. This APA determined the amount of income which is taxable in each respective jurisdiction. The Company applied this methodology in accordance with the APA and the adjustments necessary to reflect the reduction in U.S. pre-tax income resulted in an increase in domestic income before income tax expense of $1.2 million and a corresponding decrease in foreign income before income tax expense in the U.K. and four years in India, following the end of the accounting period. As of the date of this report, none of our income tax returns are under examination.three months ended March 31, 2019.
NOTE 9 — STOCKHOLDERS’ EQUITY
Certain Anti-Takeover Provisions/Agreements with Stockholders
Our restated certificate of incorporation allows the board of directors to issue up to 2,000,000 shares of preferred stock and to determine the price, rights, preferences and privileges of those shares without any further vote or action by our stockholders. The rights of the holders of our common stock will be subject to, and may be adversely affected by, the rights of the holders of any preferred stock that may be issued in the future. Issuance of preferred stock, while providing desired flexibility in connection with possible acquisitions and other corporate purposes could make it more difficult for a third party to acquire a majority of our outstanding voting stock. As of September 30, 2017 and December 31, 2016, no shares of preferred stock were outstanding.
In addition, we are subject to the anti-takeover provisions of Section 203 of Delaware General Corporation Law which prohibit us from engaging in a “business combination” with an “interested stockholder” for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in the prescribed manner. The application of Section 203 may have the effect of delaying or preventing changes in control of our management, which could adversely affect the market price of our common stock by discouraging or preventing takeover attempts that might result in the payment of a premium price to our stockholders.
NOTE 10 —GEOGRAPHICAL INFORMATION
We are headquartered in Englewood, a suburb of Denver, Colorado. We use customer locations as the basis for attributing revenuesrevenue to individual countries. We provide products and services on a global basis through our headquarters,offices in Colorado, North Carolina and our London-basedU.K.-based Evolving Systems U.K. subsidiary and our North Carolina based Evolving Systems NC, Inc. subsidiary. Additionally, personnel in Cluj, Romania; Grenoble, France; and Bangalore and Kolkata, IndiaIndia; provide software development services and support services to our global operations. Financial information relating to operations by geographic region exceeding the threshold (defined as contributing at least 10%) of revenue from operations is as follows (in thousands):
|
| For the Three Months Ended September 30, |
| |||||||
|
| 2017 |
| |||||||
|
| License |
| Services |
| Total |
| |||
Revenue |
|
|
|
|
|
|
| |||
United Kingdom |
| $ | — |
| $ | 1,381 |
| $ | 1,381 |
|
Other |
| 1,068 |
| 5,098 |
| 6,166 |
| |||
Total revenues |
| $ | 1,068 |
| $ | 6,479 |
| $ | 7,547 |
|
|
| For the Three Months Ended September 30, |
| |||||||
|
| 2016 |
| |||||||
|
| License |
| Services |
| Total |
| |||
Revenue |
|
|
|
|
|
|
| |||
United Kingdom |
| $ | — |
| $ | 722 |
| $ | 722 |
|
Algeria |
| 799 |
| 68 |
| 867 |
| |||
Switzerland |
| — |
| 686 |
| 686 |
| |||
Other |
| 51 |
| 3,777 |
| 3,828 |
| |||
Total revenues |
| $ | 850 |
| $ | 5,253 |
| $ | 6,103 |
|
|
| For the Nine Months Ended September 30, |
| |||||||
|
| 2017 |
| |||||||
|
| License |
| Services |
| Total |
| |||
Revenue |
|
|
|
|
|
|
| |||
United Kingdom |
| $ | — |
| $ | 3,858 |
| $ | 3,858 |
|
Other |
| 2,131 |
| 13,655 |
| 15,786 |
| |||
Total revenues |
| $ | 2,131 |
| $ | 17,513 |
| $ | 19,644 |
|
|
| For the Nine Months Ended September 30, |
| |||||||
|
| 2016 |
| |||||||
|
| License |
| Services |
| Total |
| |||
Revenue |
|
|
|
|
|
|
| |||
United Kingdom |
| $ | — |
| $ | 2,622 |
| $ | 2,622 |
|
Switzerland |
| — |
| 2,109 |
| 2,109 |
| |||
Other |
| 2,292 |
| 11,638 |
| 13,930 |
| |||
Total revenues |
| $ | 2,292 |
| $ | 16,369 |
| $ | 18,661 |
|
|
| September 30, |
| December 31, |
| |||||||||
|
| 2017 |
| 2016 |
|
| March 31, 2019 |
| December 31, 2018 |
| ||||
Long-lived assets, net |
|
|
|
|
|
|
|
|
|
| ||||
United States |
| $ | 11,476 |
| $ | 12,347 |
|
| $ | 2,633 |
| $ | 2,741 |
|
United Kingdom |
| 17,753 |
| 12,680 |
|
| 7,241 |
| 7,098 |
| ||||
Other |
| 1,859 |
| 318 |
|
| 3,219 |
| 1,752 |
| ||||
|
| $ | 31,088 |
| $ | 25,345 |
|
| $ | 13,093 |
| $ | 11,591 |
|
NOTE 1110 — COMMITMENTS AND CONTINGENCIES
(a)Lease Commitments
Under Topic 842, operating lease expense is generally recognized evenly over the term of the lease. The Company has operating leases primarily consisting of facilities with remaining lease terms of one year to seven years. We lease office and operating facilities under non-cancelable operating leases. Current facility leases include our offices in Englewood, Colorado, New York, New York, Durham, North Carolina, London, England Bangalore, Kolkata and Delhi India, Johannesburg, South Africa, Kuala Lumpur, Malaysia, Mexico City, Mexico, Grenoble, France, Cluj-Napoca, Romania and Madrid, Spain. The Company did not enter into any new leases in the three months ended March 31, 2019. Our lease for the Kolkata facility provides us with the option to terminate the lease in August 2020, however we do not expect to exercise our termination option and have included costs through the July 2026 lease end date. Rent expense consisted of operating lease expense of $0.1 million and short-term lease expense of less than $0.1 million for the three months ended March 31, 2019. Certain leases, based on our expected future use of the facilities, are assumed to be renewed for periods beyond their contractual termination dates and the estimated cost for the extended periods are included in determining the lease liabilities and ROU assets. Rent expense was $0.2 million for the three months ended March 31, 2019 and 2018, respectively. There was no sublease rental income for the three months ended March 31, 2019 and 2018. We paid $0.2 million against Lease obligations — operating leases in the three months ended March 31, 2019.
Leases with an initial term of twelve months or less are not recorded on the condensed consolidated balance sheet. For lease agreements entered into or reassessed after the adoption of Topic 842, we combine the lease and non-lease components in determining the lease liabilities and ROU assets.
Our lease agreements generally do not provide an implicit borrowing rate; therefore, an internal incremental borrowing rate is determined based on information available at lease commencement date for purposes of determining the present value of lease payments. We used the incremental borrowing rate on December 31, 2018 for all leases that commenced prior to that date.
ROU lease assets and lease liabilities for our operating leases were recorded in the condensed consolidated balance sheet as follows:
|
| March 31, 2019 |
| |
|
|
|
| |
Other long-term assets |
| $ | 1,534 |
|
|
|
|
| |
Accounts payable and accrued liabilities |
| 370 |
| |
Lease obligations — operating leases, net of current portion |
| 1,152 |
| |
Total lease liability |
| $ | 1,522 |
|
|
|
|
| |
Weighted average remaining lease term (in years) |
| 4.9 |
| |
Weighted average discount rate |
| 6.75 | % |
Future lease payments included in the measurement of lease liabilities on the condensed consolidated balance sheet as of March 31, 2019, for the following five fiscal years and thereafter were as follows:
|
| March 31, 2019 |
| |
2019 — Remaining |
| $ | 393 |
|
2020 |
| 403 |
| |
2021 |
| 337 |
| |
2022 |
| 313 |
| |
2023 |
| 178 |
| |
Thereafter |
| 168 |
| |
Total future minimum lease payments |
| 1,792 |
| |
Present value adjustment |
| 270 |
| |
Total |
| $ | 1,522 |
|
(b)Other Commitments
As permitted under Delaware law, we have agreements with officers and directors under which we agree to indemnify them for certain events or occurrences while the officer or director is, or was, serving at our request in this capacity. The term of the indemnification period is indefinite. There is no limit on the amount of future payments we could be required to make under these indemnification agreements; however, we maintain Director and Officer insurance policies, as well as an Employment Practices Liability Insurance Policy, that may enable us to recover a portion of any amounts paid. As a result of our insurance policy coverage, we believe the estimated fair value of these indemnification agreements is minimal. Accordingly, there were no liabilities recorded for these agreements as of September 30, 2017March 31, 2019 or December 31, 2016.2018.
We enter into standard indemnification terms with customers and suppliers, in the ordinary course of business, for third party claims arising under our contracts. In addition, as we may subcontract the development of deliverables under customer contracts, we could be required to indemnify customers for work performed by subcontractors. Depending upon the nature of the indemnification, the potential amount of future payments we could be required to make under these indemnification agreements may be unlimited. We may be able to recover damages from a subcontractor or other supplier if the indemnification results from the subcontractor’s or supplier’s failure to perform. To the extent we are unable to recover damages from a subcontractor or other supplier, we could be required to reimburse the indemnified party for the full amount. We have never incurred costs to defend lawsuits or settle claims relating to an indemnification. As a result, we believe the estimated fair value of these agreements is minimal. Accordingly, there were no liabilities recorded for these agreements as of September 30, 2017March 31, 2019 or December 31, 2016.2018.
Our standard license agreements contain product warranties that the software will be free of material defects and will operate in accordance with the stated requirements for a limited period of time. The product warranty provisions require us to cure any defects through any reasonable means. We believe the estimated fair value of the product warranty provisions in the license agreements in place with our customers is minimal. Accordingly, there were no liabilities recorded for these product warranty provisions as of September 30, 2017March 31, 2019 or December 31, 2016.2018.
Our software arrangements generally include a product indemnification provision whereby we will indemnify and defend a customer in actions brought against the customer for claims that our products infringe upon a copyright, trade secret, or valid patent of a third party. We have not historically incurred any significant costs related to product indemnification claims. Accordingly, there were no liabilities recorded for these indemnification provisions as of September 30, 2017March 31, 2019 or December 31, 2016.
In connection with our acquisition of Telespree on October 24, 2013, we agreed to make a cash payment of $0.5 million on the one year anniversary of the closing. This payment was subject to reduction for certain claims and has not been paid to date. We have made claims against this payment which are currently under dispute. Once settled the final payment will be released.
In connection with our acquisition of SSM on September 30, 2015, we agreed to make a cash payment of $0.3 million on the one year anniversary of the closing. This payment is subject to reduction for certain claims and has not been paid to date. Once settled the final payment will be released.
In connection with our acquisition of BLS on July 3, 2017, we agreed to an earnout equal to 50% of BLS based revenue over $4.8 million per year for 3 years after the closing date. The Company also agreed to guarantee EVOL BLS’ obligations under the Purchase Agreement.2018.
(b) (c)Litigation
From time to time, we are involved in various legal matters arising in the normal course of business. We also receive letters from former employees claiming that upon exiting the final compensation was not properly calculated. We currently do not expect the outcome of such proceedings, either individually or in the aggregate, to have a material effect on our financial position, cash flows or results of operations.
NOTE 12 — RESTRUCTURING
During the third quarter of 2017, we undertook a reduction in workforce involving the termination of employees resulting in an expense of $0.1 million primarily related to severance for the affected employees. The reduction in workforce was related to the consolidations of duplicative functions and alignment of staff with ongoing business activity as a result of the acquisition of EVOL BLS in the third quarter of 2017. During the third quarter of 2016, we undertook a reduction in workforce involving the termination of employees resulting in an expense adjustment of $3,000 for the three months ending September 30, 2016, primarily related to severance for the affected employees. The reduction in workforce was related to the consolidations of duplicative functions and alignment of staff with ongoing business activity as a result of the acquisition of Evolving Systems NC, Inc. in the third quarter of 2015.
For the nine months ending September 30, 2017 and 2016 we had $0.1 million and $1.0 million of restructuring expense, respectively. During the first quarter of 2016, we undertook a reduction in workforce involving the termination of employees resulting in an expense of $0.9 million primarily related to severance for the affected employees. The reduction in workforce was related to the consolidations of duplicative functions and alignment of staff with ongoing business activity as a result of the acquisition of Evolving Systems NC, Inc. in the third quarter of 2015.
There was no restructuring liability as of September 30, 2017 and December 31, 2016.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SPECIAL NOTE ABOUT FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements that have been made pursuant to the provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on current expectations, estimates, and projections about Evolving Systems’ industry, management’s beliefs, and certain assumptions made by management. Forward-looking statements include our expectations regarding product, services, and maintenance revenue, annual savings associated with
the organizational changes effected in prior years, and short- and long-term cash needs. In some cases, words such as “anticipates,” “expects,” “intends,” “plans,” “believes,” “estimates,” variations of these words, and similar expressions are intended to identify forward-looking statements. The statements are not guarantees of future performance and are subject to certain risks, uncertainties, and assumptions that are difficult to predict; therefore, actual results may differ materially from those expressed or forecasted in any forward-looking statements. Risks and uncertainties of our business include those set forth in our Annual Report on Form 10-K for the year ended December 31, 20162018, as filed with the SEC on April 4, 2019, under “Item 1A. Risk Factors” as well as additional risks described in this Form 10-Q. Unless required by law, we undertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future events, or otherwise. However, readers should carefully review the risk factors set forth in other reports or documents we file from time to time with the Securities and Exchange Commission, particularly the Quarterly Reports on Form 10-Q and any Current Reports on Form 8-K.
OVERVIEW
We areEvolving Systems, Inc. is a provider of softwarereal-time digital engagement solutions, SIM and number management services to the wireless wireline and cable markets.operators. We operate a managed services business model through which we maintain long-standing relationships with many of the largest wireless wireline and cable companies worldwide. Our customers rely on us to develop, deploy, enhanceThe Company’s portfolio includes market-leading solutions and maintain software solutions including managed services that provide a variety of service activation and provisioning functions. RLM enables carrier marketing departments to innovate, execute and manage highly-personalized and contextually-relevant, interactive campaigns that engage consumers in real time; our service activation solution, TSA is used to activate bundles of voice, video and data services for wireless, wirelinereal-time analytics, customer acquisition and cable network operators; our SIM card activation, solution, DSA is used to dynamically allocate and assign resources to MNO devices that rely on SIM cards; our MDE solution provides a data consumption and policy management solution for wireless carriers and MVNOs that monitor the usage and consumption of data services; our TNM product is a scalable and fully automated database solution that enables operators to reliably and efficiently manage their telephone numbers as well as other communication identifiers (i.e. SIMs, MSISDNs, IMSIs, ICCIDs, IPs). Our portfolio of managed services for ‘engagement & retention’ accelerates deployment and maximizes impact of marketing objectives such as driving revenue growth (ARPU), rewarding tenure through loyalty solutions, accelerating digital adoption, and improving Net Promoter Scores. Combining Customer Value Management (CVM) specialists and the cutting-edge Evolution platform, we are able to deliver a full-service solution in a cloud SaaS model or hosted on-site, worldwide.
We recognize revenue in accordance with the prescribed accounting standards for software revenue recognition under generally accepted accounting principles. Our license fees and services revenues fluctuate from period to period as a result of the timing of revenue recognition on existing projects.
RECENT DEVELOPMENTS
On July 6, 2017 we announced the completion of the previously announced acquisition of Business Logic Systems (“BLS”). BLS, headquartered in Newbury, UK, specializes in data-driven customer value management and customer engagement solutions that have been implemented in over 20 mobile operators in Europe, Africa, Asia-Pacificloyalty for the telecom industry. The Company has moved from selling technology to offering business solutions. The value proposition likewise has moved away from cost savings to a focus on revenue increases for the carrier and our business model has moved from classic capital expenditure license and services to operating expense models based on managed services with performance fees.
In 2017, we completed our acquisitions of BLS and the Caribbean.four business operating units of the “Lumata Entities”. BLS solutions can turn customer data into actionable insights and personalized contextual offers. Customer engagement occurs through in-bound and out-bound offers and is further extended through a suite of loyalty and retention solutions.
On September 7, 2017 we announced the completion of the acquisition of four business operating units of Lumata Holdings Ltd. (“the Lumata Entities”). The Lumata Entities are a leading global provider of real-time, next generation loyalty and customer lifecycle management software and services that helpshelp businesses gain value from their customer data for relevant and contextual insights and actions of value to both customers and enterprises. Its customersThe acquisitions grew our customer base to include mobile operators includingwireless carriers Orange, Telefonica and other Tier-1 and emerging operatorswireless carriers in Europe, Asia, the Middle East, Africa, the Caribbean and aroundCentral and South America.
RECENT DEVELOPMENTS
In 2019, we announced Evolution, the world. Thenew platform that supersedes and provides an upgrade path to the former loyalty and CVM platforms from both Evolving and its acquired companies — BLS, Lumata and SSM. Evolution was built by combining, integrating, and improving upon the best components and features of those previous platforms. We believe that Evolution provides a unique capability, and we expect much of 2019 to focus on selling and promoting this significant new product. Our experienced team and the new technology provide actionable insights and relevant offers based on customer data, all of which greatly complements our software portfolio and 25 years of expertise in customer acquisition, is expected to be accretiveactivation and retention. Enhancements to our operations once the integration of the business is completed by year-end 2017.technology further expands our managed services platform for delivering on-tap strategic and tactical solutions.
Consolidated revenue was $7.5$6.7 million and $6.1$8.2 million for the three months ended September 30, 2017March 31, 2019 and 2016, respectively, and $19.6 million and $18.7 million for the nine months ended September 30, 2017 and 2016,2018, respectively. The increase in revenue for the three and nine months ended is due primarily to the acquisitions of EVOL BLS and the Lumata Entities July 3, 2017 and September 4, 2017, respectively. The increase in revenue for the nine months ended isdecrease was due to the acquisitions of EVOL BLS and the Lumata Entities.decline in Services revenue with our historical client relationships, offset by a slight increase in License fees.
We have operations in foreign countries where the local currency is used to prepare the condensed consolidated financial statements which are translated into our reporting currency, U.S. Dollars.dollars. Changes in the exchange rates between these currencies and our reporting currency are partially responsible for some of the changes from period to period in our financial statement amounts. The majority of the changes in 2019 and 2018 are a result of the U.S. dollar strengthening on average versus the British Pound Sterling. The chart below summarizes howwhat the effects on our revenue and expenses would change had they been reportedbe on a constant currency basis. The constant currency basis assumes that the exchange rate was constant for the periods presented (in thousands).:
|
| For the Three Months Ended |
| For the Nine Months Ended |
|
| For the Three Months Ended March 31, |
| |||
|
| 2017 vs. 2016 |
| 2017 vs. 2016 |
|
| 2019 vs. 2018 |
| |||
Changes in: |
|
|
|
|
|
|
|
| |||
Revenue |
| $ | 9 |
| $ | (417 | ) |
| $ | (125 | ) |
Costs of revenue and operating expenses |
| 55 |
| (342 | ) |
| (593 | ) | |||
Operating loss |
| $ | (46 | ) | $ | (75 | ) | ||||
Income from operations |
| $ | (718 | ) |
The net effect of our foreign currency translations for the three months ended March 31, 2019 was a $0.1 million decrease in revenue and a $0.6 million decrease in operating expenses versus the three months ended March 31, 2018.
RESULTS OF OPERATIONS
The following table presents the unaudited condensed consolidated statements of operations reflected as a percentage of total revenue.revenue:
|
| For the Three Months Ended September |
| For the Nine Months Ended September |
|
| For the Three Months Ended March 31, |
| ||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 |
|
| 2019 |
| 2018 |
|
REVENUE |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
License fees |
| 14 | % | 14 | % | 11 | % | 12 | % |
| 11 | % | 4 | % |
Services |
| 86 | % | 86 | % | 89 | % | 88 | % |
| 89 | % | 96 | % |
Total revenue |
| 100 | % | 100 | % | 100 | % | 100 | % |
| 100 | % | 100 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COSTS OF REVENUE AND OPERATING EXPENSES |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs of revenue, excluding depreciation and amortization |
| 34 | % | 21 | % | 29 | % | 21 | % |
| 29 | % | 35 | % |
Sales and marketing |
| 19 | % | 20 | % | 18 | % | 20 | % |
| 31 | % | 20 | % |
General and administrative |
| 20 | % | 16 | % | 18 | % | 15 | % |
| 27 | % | 21 | % |
Product development |
| 5 | % | 11 | % | 7 | % | 13 | % |
| 19 | % | 10 | % |
Depreciation |
| 1 | % | 1 | % | 1 | % | 1 | % |
| 0 | % | 0 | % |
Amortization |
| 3 | % | 3 | % | 3 | % | 3 | % |
| 4 | % | 3 | % |
Restructuring |
| 2 | % | 0 | % | 1 | % | 5 | % | |||||
Total costs of revenue and operating expenses |
| 84 | % | 72 | % | 77 | % | 78 | % |
| 110 | % | 89 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
| 16 | % | 28 | % | 23 | % | 22 | % | |||||
(Loss) income from operations |
| (10 | )% | 11 | % | |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense) |
|
|
|
|
|
|
|
|
| |||||
Other (expense) income |
|
|
|
|
| |||||||||
Interest income |
| 0 | % | 0 | % | 0 | % | 0 | % |
| 0 | % | 0 | % |
Interest expense |
| (1 | )% | (2 | )% | (1 | )% | (1 | )% |
| (1 | )% | (2 | )% |
Foreign currency exchange gain (loss) |
| (3 | )% | (4 | )% | (3 | )% | (4 | )% | |||||
Other income (expense), net |
| (4 | )% | (6 | )% | (4 | )% | (5 | )% | |||||
Other loss |
| (0 | )% | (0 | )% | |||||||||
Foreign currency exchange loss |
| (4 | )% | (1 | )% | |||||||||
Other expense, net |
| (5 | )% | (3 | )% | |||||||||
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Income from operations before income taxes |
| 12 | % | 22 | % | 19 | % | 17 | % | |||||
(Loss) income from operations before income taxes |
| (15 | )% | 8 | % | |||||||||
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Income tax expense |
| 2 | % | 7 | % | 5 | % | 5 | % |
| 1 | % | 1 | % |
Net income |
| 10 | % | 15 | % | 14 | % | 12 | % | |||||
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Net (loss) income |
| (16 | )% | 7 | % |
Revenue
Revenue is comprised of license fees and services. License fees represent the fees we receive from the licensing of our software products. Services revenue are directly related to the delivery of the licensed product as well as integration services, managed services, SaaS services, time and materials work and customer support services. Customer support services include annual support fees, recurring maintenance fees, minor product upgrades and warranty fees. Warranty fees are typically bundled with a license sale and the related revenue, based on Vendor Specific Objective Evidence (“VSOE”), is deferred and recognized ratably over the warranty period.
Revenue for the three months ended September 30, 2017 and 2016 was $7.5 million and $6.1 million respectively. The license fees revenue increased for the three months is primarily due to license fees from the acquisition of Evolving Systems BLS LTD and the Lumata Entities slightly offset by lower FUAs fees in the current period. Services revenue increased for the three months due to from the acquisition of Evolving Systems BLS LTD and the Lumata Entities. Revenue for the nine months ended September 30, 2017 and 2016 was $19.6 million and $18.7 million, respectively. License fee revenue decreased primarily due to lower FUAs fees in the current period offset by license fee revenue from the acquisition of Evolving Systems BLS LTD and the Lumata Entities. Services revenue increased during the period primarily due from the acquisition of Evolving Systems BLS LTD and the Lumata Entities.
License Fees
License fees revenue increased $0.2was $0.7 million or 26%, to $1.1and $0.3 million for the three months ended September 30, 2017 from $0.9 million for the three months ended September 30, 2016.March 31, 2019 and 2018, respectively. The increase in revenues of $0.4 million is due primarily related to the acquisitionan increase in number of Evolving Systems BLS LTD offset by lower prepaid license fee revenue from FUAs.
License fees revenue decreased $0.2 million, or 7%,incremental licenses to $2.1 million for the nine months ended September 30, 2017 from $2.3 million for the nine months ended September 30, 2016. The decrease in revenue is due to lower prepaid license fee revenue from FUAs during the first quarter in 2017 and the migration of business to a managed services model offset by license fees from the acquisition of Evolving Systems BLS LTD.an existing client.
Services
Services revenue increased $1.2decreased $1.8 million, or 23%, to $6.5$6.0 million for the three months ended September 30, 2017March 31, 2019 from $5.3$7.8 million for the three months ended September 30, 2016.March 31, 2018. The increasedecrease is duerelated to $1.3 million in lost service revenue from the accounts not renewing or decrease in services or pricing to existing accounts. First quarter 2018 had many large projects, mostly related to the acquisitionsacquired companies, that were completed causing a decrease of EVOL BLS and the Lumata Entities.
Services revenue increased $1.1$0.7 million or 7%, to $17.5partially offset by an increase of $0.4 million for the nine months ended September 30, 2017 from $16.4 million for the nine months ended September 30, 2016. The increase in revenue is due to the acquisitions of EVOL BLS and the Lumata Entities.related new implementations.
Costs of Revenue, Excluding Depreciation and Amortization
Costs of revenue, excluding depreciation and amortization, consist primarily of personnel costs and other direct costs associated with these personnel, facilities costs, costs of third-party software and partner commissions. Costs of revenue includes Product Developmentproduct development expenses related to software features requested in advance of their scheduled availability which are funded by customers as part of a managed service offering. Costs of revenue, excluding depreciation and amortization, increased $1.3decreased $1.0 million, or 104%34%, to $2.6$1.9 million for the three months ended September 30, 2017March 31, 2019 from $1.3$2.9 million for the three months ended September 30, 2016.March 31, 2018. The increasedecrease in costs of revenue is primarily attributable to the cost of revenue from the acquisitions of EVOL BLSlower service project hours allowing resources to work on internal projects and the Lumata Entities.product development. As a percentage of revenue, costs of revenue, excluding depreciation and amortization, increaseddecreased to 34%29% for the three months ended September 30, 2017March 31, 2019 from 21%35% for the three months ended September 30, 2016.March 31, 2018. The increasedecrease as a percentage of revenue is primarily due to the aforementioned higher costs.
Costs of revenue, excluding depreciation and amortization, increased $1.7 million, or 43%,decreased hours worked on client projects as staff was used to $5.7 million for the nine months ended September 30, 2017 from $4.0 million for the nine months ended September 30, 2016. The increase in costs is primarily attributable to the cost of revenue from the acquisitions of EVOL BLS and the Lumata Entities. As a percentage of license fees and services revenue, costs of license fees and services, excluding depreciation and amortization, increased to 29% for the nine months ended September 30, 2017 from 21% for the nine months ended September 30, 2016. The increase in costs as a percentage of revenue is primarily due to the aforementioned higher costs during the period.support internal efforts including product development.
Sales and Marketing
Sales and marketing expenses primarily consist of compensation costs, including incentive compensation and commissions, travel expenses, advertising, marketing and facilities expenses. Sales and marketing expenses increased $0.2$0.5 million, or 16%31%, to $1.4
$2.1 million for the three months ended September 30, 2017March 31, 2019 from $1.2$1.6 million for the three months ended September 30, 2016.March 31, 2018. The increase in expenses is attributable to $0.2 million in costs from additional staff and increased related expense to meeting existing and potential new customers and a $0.2 million increase in commission expense related to the sales and marketing expenses fromtiming of the acquisition of Evolving Systems BLS LTD.expense related to increased bookings near quarter end before projects can fully start. As a percentage of total revenue, sales and marketing expenses decreasedincreased to 19%31% for the three months ended September 30, 2017March 31, 2019 from 20% for the three months ended September 30, 2016.March 31, 2018. The decrease in sales and marketing expenses as a percentage of revenue is primarily due to the increase in revenue during the period.
Sales and marketing expenses decreased $0.3 million, or 8%, to $3.5 million for the nine months ended September 30, 2017 from $3.8 million for the nine months ended September 30, 2016. The decrease in costs is primarily attributable to lower employee expenses, travel expense and marketing expenses offset by the sales and marketing expenses from the acquisition of EVOL BLS. As a percentage of total revenue, sales and marketing expenses decreased to 18% for the nine months ended September 30, 2017 from 20% for the nine months ended September 30, 2016. The decrease in sales and marketing expenses as a percentage of revenue is primarily due to the aforementioned decrease in expenses and increased revenue duringhigher costs as proportioned to the period.lower revenues.
General and Administrative
General and administrative expenses consist principally of employee relatedemployee-related costs and professional fees for the following departments: facilities, finance, legal, human resources, and certain executive management.management; facilities costs; and professional and legal fees. General and administrative expenses increased $0.6increased $0.1 million, or 64%,6% to $1.6$1.8 million for the three months ended September 30, 2017March 31, 2019 from $1.0$1.7 million for the three months ended September 30, 2016. TheMarch 31, 2018, respectively. An increase inof $0.3 million of costs is primarily attributablerelated to professional fees related asset acquisition ofservices for the Lumata Entities, higher stock incentive compensation expense due to restricted stock grantsaudit and the general and administrative expenses from the acquisitions of EVOL BLS and the Lumata Entities.other accounting projects were offset by a $0.2 million decrease in legal fees. As a percentage of revenue, general and administrative expenses increased to 27% compared to 21% for the three months ended September 30, 2017 from 16%March 31, 2019 and 2018, respectively as these costs have remained fixed and are a greater percentage in relation to the lower revenues.
Product Development
Product development expenses consist primarily of employee-related costs and subcontractor expenses. Product development expenses increased $0.4 million, or 44%, to $1.3 million for the three months ended September 30, 2016.March 31, 2019 from $0.9 million for the three months ended March 31, 2018. The increase is primarily related to $0.4 million of additional work by the technical staff in building and enhancing our product offerings. As a percentage of revenue, product development expenses increased to 19 % for the three months ended March 31, 2019 from 10% for the three months ended March 31, 2018. The increase in general and administrativeproduct development expenses as a percentage of revenue is primarily due to the aforementioned increase in expenses.
General and administrative expenses increased $0.8 million, or 28%, to $3.6 million from $2.8 million for the nine months ended September 30, 2017 and 2016, respectively. The increase inhigher costs is primarily related to higher professional fees relatedas proportioned to the recent acquisitions, higher stock incentive compensation expense due to restricted stock grants and the general and administrative expenses from the acquisitions of EVOL BLS and the Lumata Entities. As a percentage of total revenue, general and administrative expenses increased to 18% for the nine months ended September 30, 2017 from 15% for the nine months ended September 30, 2016. The increase in general and administrative expenses as a percentage of revenue is primarily due to the aforementioned increase in expenses.
Product Development
Product development expenses consist primarily of employee related costs and subcontractor expenses. Product development expenses decreased $0.3 million, or 49%, to $0.4 million for the three months ended September 30, 2017 from $0.7 million for the three months ended September 30, 2016. The decrease in product development expenses was due to hours worked on projects related to managed services which are charged to cost of revenue offset by the product and development expenses from the acquisitions of EVOL BLS and the Lumata Entities. As a percentage of revenue, product development expenses decreased to 5% for the three months ended September 30, 2017 from 11% for the three months ended and 2016. The decrease as a percentage of revenue is primarily due to the aforementioned decrease of expenses during the period.
Product development expenses decreased $1.0 million, or 40%, to $1.5 million for the nine months ended September 30, 2017 from $2.5 million for the nine months ended September 30, 2016. The decrease in product development expenses is primarily attributable to lower salary expense due to the restructuring in 2016, hours worked on projects related to managed services offset by the product and development expenses from the acquisitions of EVOL BLS and the Lumata Entities. As a percentage of revenue, product development expenses for the nine months ended September 30, 2017 decreased to 8% from 13% for the nine months ended September 30, 2016. The decrease as a percentage of revenue is primarily due to the aforementioned decrease of expenses during the period.revenues.
Depreciation
Depreciation expense consists of depreciation of long-lived property and equipment. Depreciation expense was less than $0.1 million for the three months ended September 30, 2017March 31, 2019 and 2016.2018, respectively. As a percentage of total revenue, depreciation expense for the three months ended September 30, 2017March 31, 2019 and 2016 remained at2018 was less than 1%., respectively.
Depreciation expense was $0.2 million for the nine months ended September 30, 2017 and 2016. As a percentage of total revenue, depreciation expense for the nine months ended September 30, 2017 and 2016 remained at 1%.
Amortization
Amortization expense consists of amortization of identifiable intangible assets acquired throughintangibles related to our acquisitionacquisitions of Evolving Systems Labs, Inc., Evolving Systems NC, Inc, Evolving SystemsEVOL BLS, LTD and the Lumata Entities. Amortization expense was $0.2 million the three months ended March 31, 2019 and 2018, respectively. As a percentage of revenue, amortization expense increased to 4% for the three months ended September 30, 2017 and 2016. As a percentage of total revenue, amortization expense remained atMarch 31, 2019 from 3% for the three months ended September 30, 2017March 31, 2018, as these costs have remained fixed and 2016.
Amortization expense was $0.6 million for the nine months ended September 30, 2017 and 2016. Asare a greater percentage of total revenue, amortization expense remained at 3% for the nine months ended September 30, 2017 and 2016.
Restructuring
Restructuring expense includes the costs associated with a reduction in workforce duerelation to the consolidation of duplicative functions and alignment of staff with ongoing business activity as a result of the acquisition of Evolving Systems NC, Inc. in the third quarter of 2015 and Evolving Systems BLS LTD in third quarter of 2017. Restructuring expense was $0.1 million and $3,000 for the three months ended September 30, 2017 and 2016, respectively. As a percentage of revenue, restructuring expense was 2% and 0% for the three months ended September 30, 2017 and 2016.
Restructuring was $0.1 million and $1.0 million for the nine months ended September 30, 2017 and 2016, respectively. As a percentage of revenue, restructuring expense was 1% and 5% for the nine months ended September 30, 2017 and 2016, respectively.
Interest Income
Interest income includes interest income earned on cash and cash equivalents. Interest income was $1,000 for the three months ended September 30, 2017 and 2016, respectively.
Interest income was $2,000 and $4,000 for the nine months ended September 30, 2017 and 2016, respectively.lower revenues.
Interest Expense
Interest expense includes the amortization of debt issuance costs from our debt facility,and interest expense from our term loan and interest expense from our capital lease obligations.loans. Interest expense was $0.1 million for the three months ended September 30, 2017March 31, 2019 and 2016.2018, remained at $0.1 million. As a percent of revenue, interest expense was 1% and 2% for the three months ended September 30, 2017March 31, 2019 and 2016.
Interest expense was $0.2 million and $0.3 million for the nine months ended September 30, 2017 and 2016,2018, respectively. The decrease of $0.1 million is primarily due to the Fifth Amendment to the loan and security agreement with East West Bank which provided for a Term Loan of $6.0 million. The agreement required us to use the term loan’s proceeds and $4.0 million from our cash balances to pay off and terminate the Revolving Facilities totaling $10.0 million. The result of the $4.0 million payment in February 2016 from our cash reserves and reducing the $10 million revolving facility to $6.0 million lowered the interest expense in the current period. As a percent of revenue, interest expense was 1% for the nine months ended September 30, 2017 and 2016.
Foreign Currency Exchange Loss
Foreign currency transaction lossesexchange loss resulted from transactions denominated in a currency other than the functional currency of the respective subsidiary and wasincreased $0.2 million andor 200% to $0.3 million for the three months ended September 30, 2017 and 2016, respectively, and $0.6 million and $0.5March 31, 2019 from $0.1 million for the ninethree months ended September 30, 2017 and 2016, respectively.March 31, 2018. The losses were generated primarily through the re-measurement of certain non-functional currency denominated financial assets and liabilities of our Evolving Systems U.K., BLS, the Lumata Entities and Indiaforeign subsidiaries.
Other Comprehensive Gain (Loss)(Expense) Income
Other comprehensive loss refers to revenue, expenses, gains, and losses that under GAAP are recorded as an element of shareholders’ equity but are excluded from net income. Other comprehensive loss consists of foreign currency translation adjustments from those subsidiaries not using the U.S. dollar as their functional currency. Other comprehensive gain was $0.3 million during the three months ended September 30, 2017 compared to ($0.8) million during the three months ended September 30, 2016. The current period gain is related to a strengthening British Pound Sterling and the related translation of our U.K. subsidiary’s assets and liabilities to the United States Dollar for consolidation purposes.
For the ninethree months ended September 30, 2017March 31, 2019 and 2018, other comprehensive gainincome was $1.5 million compared to a comprehensive loss of ($2.8) million for the nine months ended September 30, 2016. The gain for the for the nine months ended September 30, 2017 was due to British Pound Sterling strengthening during the period and the related translation of our U.K. subsidiary’s assets and liabilities to the United States Dollar for consolidation purposes. The loss generated during the nine months ended September 30, 2016 was due to a weaker British Pound Sterling and the related translation of our U.K. subsidiary’s assets and liabilities to the United States Dollar for consolidation purposes.less than $0.1 million.
Income Taxes
We recorded net income tax expense of $0.2 million and $0.4$0.1 million for the three months ended September 30, 2017March 31, 2019 and 2016,2018, respectively. The net expense during the three months ended September 30, 2017March 31, 2019 consisted of current income tax expense of $0.4 million and a deferred tax benefit of ($0.2) million. The current tax expense consists of income tax from our U.S., U.K., France and India based operations. The deferred tax benefit was related primarily to the increase of certain net deferred tax assets and amortization of stock options and the intangible assets related to the acquisition of Evolving Systems NC, Inc. in September 2015. The net expense during the three months ended September 30, 2016 consisted of current income tax expense of $0.3 million and a deferred tax expense of $0.1 million. The current tax expense primarily consists of income tax from our U.S., U.K.Indian and IndiaNigerian based operations. The deferred tax expense primarily related to undistributed U.K. foreign earnings offset by the amortization of intangible assets related to the acquisition of Evolving Systems NC, Inc. in September 2015.
We recorded net income tax expense of $0.9 million for the nine months ended September 30, 2017 and 2016. The net expense during the ninethree months ended September 30, 2017March 31, 2018 consisted of current income tax expense of $1.2$0.2 million and a deferred tax benefit of ($0.3)approximately $(0.1) million. The current tax expense consists of income tax from our U.S., U.K., France and India based operations. The deferred tax benefit was primarily related to the increase of certain net deferred tax assets and amortization of stock options and the intangible assets related to the acquisition of Evolving Systems NC, Inc. The net expense during the nine months ended September 30, 2016 consisted of current income tax expense of $0.9 million and a deferred tax benefit of ($19,000). The current tax expense consists primarily of income tax from our U.K. and India based operations. The deferred tax benefit was primarily related to theprimarily amortization of intangible assets related to the acquisition of Evolving Systems NC, Inc. in September 2015 offset by undistributed U.K. foreign earnings.
Our effectivedeferred tax rate was 19% and 31% for the three months ended September 30, 2017 and 2016, respectively. The decrease in our effective tax rate relates to a higher proportion of our income being generatedliabilities in the U.K., for which the statutory corporate tax rate is lower and the acquisition of subsidiaries with lower effective tax rates.U.S.
Our effective tax rate was 24%(9%) and 30%16% for the ninethree months ended September 30, 2017March 31, 2019 and 20162018, respectively. The decrease in ourOur effective tax ratesrate relates to a higher proportion of our net income being generates in the U.K.,coming from our Indian and Nigerian based operations and net losses from our other U.S. operations for which the statutory corporatewe did not recognize a net deferred tax rate is lower and the acquisition of subsidiaries with lower effective tax rates.benefit.
As of September 30, 2017 and December 31, 2016 we continued toWe maintain a valuation allowance on ourthe domestic net deferred tax asset.assets other than $0.7 million in AMT credits and $0.5 million in FTC, and $0.3 million of foreign net deferred tax assets, as we have determined it is more likely than not that we will not realize our domestic deferred tax assets. Such domestic assets primarily consist of FTC,certain net state Net Operating Loss (“NOL”)operating loss carryforwards research and developmentForeign Tax Credits. We assessed the realizability of our domestic deferred tax creditsassets using all available evidence. In particular, we considered both historical results and Alternative Minimum Tax (“AMT”) credits.projections of profitability for the reasonably foreseeable future periods. We are required to reassess our conclusions regarding the realization of our deferred tax assets at each financial reporting date. A future evaluation could
result in a conclusion that all or a portion of the valuation allowance is no longer necessary which could have a material impact on our results of operations and financial position. See Note 78 to the financial statements for a summary of our deferred tax assets and liabilities.
FINANCIAL CONDITION
Our working capital position increased $2.1decreased $3.4 million, or 26%42%, to $10.1$4.7 million as of September 30, 2017March 31, 2019 from $8.0$8.1 million as of December 31, 2016.2018. The increasedecrease in working capital is related to increasesa decrease in contract receivables,cash and cash equivalents, accounts receivable and unbilled work-in-progresswork in progress along with an increase in unearned revenue and accounts payable and accrued liabilities, including the recording of an additional current liability related to Topic 842, and an increase in notes payable due to the reclassification to short-term offset by an increase in prepaid and other current assets primarily as a result of the acquisitions of EVOL BLS and the Lumata Entities.assets.
CONTRACTUAL OBLIGATIONS
There have been no material changes to the contractual obligations as disclosed in our 20162018 Annual Report on Form 10-K.10-K, except that as of March 31, 2019, our fixed charge ratio was 0.31, which failed to meet the minimum required 1.25 fixed charge coverage ratio and our leverage ratio was 2.8, which failed to meet the maximum required 2.0 leverage ratio. We are negotiating amendments to the 2019 quarterly ratios.
LIQUIDITY AND CAPITAL RESOURCES
We have historically financed operations through cash flows from operations and equity transactions.bank borrowings. At September 30, 2017,March 31, 2019, our principal source of liquidity was $7.6$5.6 million in cash and cash equivalents and $10.8$7.6 million in contract receivables, net of allowances. Our anticipated uses of cash in the future will be to make term loan payments and fund the expansiongrowth of our business through both organic growth as well as possible acquisition activities, the expansion oforganically and by expanding our customer base internationally and debt service payments on the Term Loan.internationally. Other uses of cash may include quarterly dividends, capital expenditures and products technology expansion.
Net cash (used in) provided by operating activities for the ninethree months ended September 30, 2017March 31, 2019 and 20162018 was $2.6$(0.3) million and $5.5$1.9 million, respectively. Cash used in operating activities for the three months ended March 31, 2019 was primarily due to the net loss of $1.1 million (offset by noncash charges of $0.8 million) and an increase in prepaid and other assets of $0.6 million. This was partially offset by increases of $0.4 million in unearned revenue and $0.3 million of accounts payable and accrued liabilities. Cash provided by operating activities for the ninethree months ended September 30, 2017March 31, 2018 was primarily due to net income coupled with collection of contract receivables, invoicing$0.5 million, plus noncash charges of unbilled work-in-progress,$0.6 million, an increase in unearned revenue of $1.2 million and a $0.5 million decrease in prepaid and other assets, payment ofassets. This was partially offset by a $0.8 million decrease in accounts payable and accrued liabilities and increased unearned revenue.liabilities.
Net cash used in investing activities during the ninethree months ended September 30, 2017March 31, 2019 and 2018 of $0.1 million and less than $0.1 million, respectively, was $6.0 millionprimarily due to the acquisition of EVOL BLS and the Lumata Entities, net of cash received, which were completed in the third quarter 2017. Cash used in investing activities for the nine months ended September 30, 2016 was $24,000 for the purchase of property and equipment.
Net cash provided by (used in)used in financing activities forof $0.8 million compared to net cash used in financing activities of $0.5 million during the ninethree months ended September 30, 2017March 31, 2019 and 2016 was $3.2 million and ($6.6) million, respectively. The cash provided by financing activities for the nine months ended September 30, 20172018, respectively, was primarily related to the proceeds from the Loan Facility entered into August 2017 to acquire the Lumata Entities offset by the principal payments on our term loan and the payment for second year debt issuance costs. The cash used in financing activities for the nine months ended September 30, 2016 was primarily due to converting our debt by retiring our $10.0 million revolving line of credit with a $6.0 million term loan and a $4.0 million principal payment and a $2.6 million dividend payment.loan.
We believe that our current cash and cash equivalents, together with anticipated cash flow from operations will be sufficient to meet our term loan payments, working capital and capital expenditure and financing requirements for at least the next twelve months.months from the date of issuance of these condensed consolidated financial statements. In making this assessment we considered the following:
· Our cash and cash equivalents balance at September 30, 2017March 31, 2019 of $7.6$5.6 million;
· Our working capital balance of $10.1$4.7 million; and
· Our demonstrated ability to historically generate positive cash flows from operations;operations.
· Our planned capital expendituresAs set forth in our Annual Report on Form 10-K for the year ended December 31, 2018 under “Item 1A. Risk Factors”, our term loan borrowings require us to maintain a minimum current ratio, a specified ratio of less than $0.5Total Liabilities to EBITDA and a minimum fixed charge coverage ratio, as defined in the Term Loan and the Loan Facility. As of December 31, 2018, our fixed charge coverage ratio was 0.81, which failed to meet the minimum required 1.25 fixed charge coverage ratio. On March 29, 2019, we received a letter from East West Bank that waived the December 31, 2018 violation. As of March 31, 2019, our fixed charge ratio was 0.31, which failed to meet the minimum required 1.25 fixed charge coverage ratio and our leverage ratio was 2.8, which failed to meet the maximum required 2.0 leverage ratio. We are negotiating amendments to the loan agreements. As of March 31, 2019, we classified the entire $5.1 million during 2017; and
· The repayment of our long-termin outstanding debt facility of which the first principal payment began in January 2017.as a current liability.
We are exposed to foreign currency rate risks which impact the carrying amount of our foreign subsidiaries and our consolidated equity, as well as our consolidated cash position due to translation adjustments. For the ninethree months ended September 30, 2017March 31, 2019 and 2016,2018, the effect of exchange rate changes resulted in a less than $0.1 million increase and $0.4$0.2 million decrease to consolidated cash, respectively. We do not currently hedge our foreign currency exposure, but we monitor rate changes and may hedge our exposures if we see significant negative trends in exchange rates.
OFF-BALANCE SHEET ARRANGEMENTS
We have no off-balance sheet arrangements that have a material current effect or that are reasonably likely to have a material future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK DISCLOSURES
In the ordinary course of business, we are exposed to certain market risks, including changes in interest rates and foreign currency exchange rates. Uncertainties that are either non-financial or non-quantifiable such as political, economic, tax, other regulatory, or credit risks are not included in the following assessment of market risks.Not applicable
Interest Rate Risks
Our cash balances are subject to interest rate fluctuations and as a result, interest income amounts may fluctuate from current levels.
Foreign Currency Risk
We are exposed to favorable and unfavorable fluctuations of the U.S. dollar (our functional currency) against the currencies of our operating subsidiaries. Any increase (decrease) in the value of the U.S. dollar against any foreign currency that is the functional currency of one of our operating subsidiaries will cause the parent company to experience unrealized foreign currency translation losses (gains) with respect to amounts already invested in such foreign currencies. In addition, we and our operating subsidiaries are exposed to foreign currency risk to the extent that we enter into transactions denominated in currencies other than our respective functional currencies, such as accounts receivable (including intercompany amounts) that are denominated in a currency other than their own functional currency. Changes in exchange rates with respect to these items will result in unrealized (based upon period-end exchange rates) or realized foreign currency transaction gains and losses upon settlement of the transactions. In addition, we are exposed to foreign exchange rate fluctuations related to our operating subsidiaries’ monetary assets and liabilities and the financial results of foreign subsidiaries and affiliates when their respective financial statements are translated into U.S. dollars for inclusion in our consolidated financial statements. Cumulative translation adjustments are recorded in accumulated other comprehensive income (loss) as a separate component of equity. As a result of foreign currency risk, we may experience economic loss and a negative impact on earnings and equity with respect to our holdings solely as a result of foreign currency exchange rate fluctuations.
The relationship between the British pound sterling, Indian rupee and the U.S. dollar, which is our functional currency, is shown below, per one U.S. dollar:
|
| September 30, |
| December 31, |
|
|
| 2017 |
| 2016 |
|
Spot rates: |
|
|
|
|
|
British pound sterling |
| 0.74627 |
| 0.81103 |
|
Indian rupee |
| 65.30500 |
| 67.95500 |
|
|
| For the Three Months Ended September 30, |
| For the Nine Months Ended September 30, |
| ||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 |
|
Average rates: |
|
|
|
|
|
|
|
|
|
British pound sterling |
| 0.76414 |
| 0.76151 |
| 0.78463 |
| 0.71919 |
|
Indian rupee |
| 64.27852 |
| 66.96207 |
| 65.24591 |
| 67.11474 |
|
At the present time, we do not hedge our foreign currency exposure or use derivative financial instruments that are designed to reduce our long-term exposure to foreign currency exchange risk. To the extent that translation and transaction gain and losses become significant, we will consider various options to reduce this risk.
ITEM 4. CONTROLS AND PROCEDURES
We maintain “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”), that are designed to provide reasonable assurance that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Senior Vice President of Finance, as appropriate, to allow timely decisions regarding required disclosure.
Our management, including our Chief Executive Officer and Senior Vice President of Finance, has evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, our Chief Executive Officer and Senior Vice President of Finance have concluded that our disclosure controls and procedures were effective as of the end of such period.
In designing and evaluating our disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
During the three months ended September 30, 2017,March 31, 2019, there were no changes in our internal controlscontrol over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) or in other factors that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
We are involved in various legal matters arising in the normal course of business. Losses, including estimated costs to defend, are recorded for these matters to the extent they were probable of loss and the amount of loss could be reasonably estimated. We do not believe that any such matters, either individually or in the aggregate, will have a material impact on our results of operations and financial position.
There have been no material changes in the risk factors previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016,2018, filed with the SEC on March 28, 2017.April 4, 2019.
This Quarterly Report on Form 10-Q should be read in conjunction with the risk factors defined in our Annual Report on Form 10-K for the year ended December 31, 20162018 under “Item 1A. Risk Factors.”
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. MINE SAFETY DISCLOSURES
None
None
(a) Exhibits
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Exhibit 31.1 — Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 Exhibit 31.2 — Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 Exhibit 32.1 — Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Exhibit 32.2 — Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Exhibit 101 — The following financial information from the quarterly report on Form 10-Q of Evolving Systems, Inc. for the quarter ended March 31, 2019, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Operations, (iii) Condensed Consolidated Statements of Comprehensive (Loss) Income, (iv) Condensed Consolidated Statements |
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| Senior Vice President of Finance |
| (Principal Financial and Accounting Officer) |