EVOLVING SYSTEMS, INC.

~~Quarterly Report on Form 10-Q~~

~~September 30, 2017~~

PART I — FINANCIAL INFORMATION
Item 1	Financial Statements (Unaudited)	3
	Condensed Consolidated Balance Sheets ~~as of September 30, 2017 and December 31, 2016 (Unaudited)~~	3
	Condensed Consolidated Statements of ~~Income for the Three and Nine Months Ended September 30, 2017 and 2016 (Unaudited)~~Operations	4
	Condensed Consolidated Statements of Comprehensive ~~Income (Loss) for the Three and Nine Months Ended September 30, 2017 and 2016 (Unaudited)~~Loss	5
	Condensed Consolidated ~~Statement~~Statements of Changes in Stockholders’ Equity ~~for the Nine Months Ended September 30, 2017 (Unaudited)~~	6
	Condensed Consolidated Statements of Cash Flows ~~for the Nine Months Ended September 30, 2017 and 2016 (Unaudited)~~	8
	Notes to Unaudited Condensed Consolidated Financial Statements	9
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23
Item 3	Quantitative and Qualitative Disclosures About Market Risk	30
Item 4	Controls and Procedures	31

PART II — OTHER INFORMATION
Item 1	Legal Proceedings	32
Item 1A	Risk Factors	32
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	33
Item 3	Defaults upon Senior Securities	33
Item 4	Mine Safety Disclosures	33
Item 5	Other Information	33
Item 6	Exhibits	33

Signatures	34

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

EVOLVING SYSTEMS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)

~~(unaudited)~~

	September 30,			December 31,			September 30, 2019			December 31, 2018
	2017			2016			(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	7,577		$	7,614		$	4,251		$	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 $773 and $771 at September 30, 2019 and December 31, 2018, respectively							5,963			7,757
Unbilled work-in-progress, net of allowance for doubtful accounts of $644 and $552 at September 30, 2019 and December 31, 2018, respectively							2,696			3,044
Prepaid and other current assets	3,016			1,553			1,827			1,351
Income taxes receivable							1,577			1,137
Total current assets	27,678			18,410			16,314			20,021
Property and equipment, net	335			546			443			303
Amortizable intangible assets, net	5,797			4,200			3,794			4,550
Operating leases - right of use assets							1,295			—
Goodwill	24,956			20,599			—			6,738
Deferred income taxes, net							1,186			1,140
Total assets	$	58,766		$	43,755		$	23,032		$	32,752

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Term loans - current portion	$	2,403		$	1,997
Term loans - current portion, net							$	2,737		$	3,573
Accounts payable and accrued liabilities	7,404			4,275			4,180			4,483
Income taxes payable	1,016			617
Contingent earn-out obligation	393			—
Unearned revenue	6,378			3,532			4,451			3,911
Total current liabilities	17,594			10,421			11,368			11,967
Long-term liabilities:
Term loans, net of current portion	7,008			4,000
Term loans, net of current portion, net							516			2,365
Lease obligations - operating leases, net of current portion							951			—
Total liabilities	24,602			14,421			12,835			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							—			—
Common stock, $0.001 par value; 40,000,000 shares authorized; 12,341,940 shares issued and 12,163,051 shares outstanding as of September 30, 2019 and 12,305,597 shares issued and 12,126,708 shares outstanding as of December 31, 2018							12			12
Additional paid-in capital	98,259			97,744			99,487			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 September 30, 2019 and December 31, 2018, at cost							(1,253		)	(1,253		)
Accumulated other comprehensive loss	(8,511		)	(9,992		)	(10,285		)	(10,115		)
Accumulated deficit	(54,343		)	(57,177		)	(77,764		)	(69,448		)
Total stockholders’ equity	34,164			29,334			10,197			18,420
Total liabilities and stockholders’ equity	$	58,766		$	43,755		$	23,032		$	32,752

The accompanying notes are an integral part of these condensed consolidated financial ~~statements.~~statements

EVOLVING SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF ~~INCOME~~OPERATIONS

(in thousands, except per share data)

(unaudited)

	For the Three Months						For the Nine Months
	Ended September 30,						Ended September 30,
	2019			2018			2019			2018
REVENUE
License fees	$	185		$	255		$	1,152		$	839
Services	5,928			7,165			17,914			22,876
Total revenue	6,113			7,420			19,066			23,715

COSTS OF REVENUE AND OPERATING EXPENSES
Costs of revenue, excluding depreciation and amortization	2,144			2,357			6,249			8,105
Sales and marketing	1,815			1,663			5,574			4,899
General and administrative	979			1,511			3,985			5,439
Product development	1,183			1,074			3,676			2,882
Depreciation	61			20			150			101
Amortization	232			240			704			733
Goodwill impairment loss	—			—			6,687			—
Total costs of revenue and operating expenses	6,414			6,865			27,025			22,159

(Loss) income from operations	(301		)	555			(7,959		)	1,556

Other income (expense)
Interest income	1			23			10			53
Interest expense	(71		)	(120		)	(255		)	(369		)
Other income, net	13			71			1			58
Foreign currency exchange gain	250			362			183			498
Other income (expense), net	193			336			(61		)	240

(Loss) income from operations before income taxes	(108		)	891			(8,020		)	1,796
Income tax expense	109			342			296			604
Net (loss) income	$	(217	)	$	549		$	(8,316	)	$	1,192

Basic (loss) income per common share	$	(0.02	)	$	0.05		$	(0.68	)	$	0.10

Diluted (loss) income per common share	$	(0.02	)	$	0.05		$	(0.68	)	$	0.10

Weighted average basic shares outstanding	12,163			12,117			12,154			12,103
Weighted average diluted shares outstanding	12,163			12,124			12,154			12,124

The accompanying notes are an integral part of these condensed consolidated financial statements

EVOLVING SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(in thousands)

(unaudited)

	For the Three Months Ended						For the Nine Months Ended
	September 30,						September 30,
	2019			2018			2019			2018
Net (loss) income	$	(217	)	$	549		$	(8,316	)	$	1,192

Other comprehensive loss
Foreign currency translation loss	(156		)	(569		)	(170		)	(1,510		)
Comprehensive loss	$	(373	)	$	(20	)	$	(8,486	)	$	(318	)

The accompanying notes are an integral part of these condensed consolidated financial statements

EVOLVING SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(in thousands, except per share data)

(unaudited)

Nine Months Ended September 30, 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	36,343	—		—		—			—			—			—
Share-based compensation expense	—	—		263		—			—			—			263
Net loss	—	—		—		—			—			(8,316		)	(8,316		)
Foreign currency translation loss	—	—		—		—			(170		)	—			(170		)
Balance at September 30, 2019	12,163,051	$	12	$	99,487	$	(1,253	)	$	(10,285	)	$	(77,764	)	$	10,197

Nine Months Ended September 30, 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	1,857	—		—		—			—			—			—
Common stock issued pursuant to the Employee Stock Purchase Plan	85	—		—		—			—			—			—
Restricted stock vested	174,000	—		—		—			—			—			—
Share-based compensation expense	—	—		590		—			—			—			590
Net income	—	—		—		—			—			1,192			1,192
Foreign currency translation loss	—	—		—		—			(1,510		)	—			(1,510		)
Balance at September 30, 2018	12,117,014	$	12	$	99,107	$	(1,253	)	$	(9,712	)	$	(53,469	)	$	34,685

The accompanying notes are an integral part of these condensed consolidated financial statements

EVOLVING SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(in thousands, except per share data)

(unaudited)

For the Three Months Ended
September 30,

For the Nine Months Ended
September 30,

2017

2016

2017

2016

REVENUE

License fees

$
1,068

$
850

$
2,131

$
2,292

Services

6,479

5,253

17,513

16,369

Total revenue

7,547

6,103

19,644

18,661

COSTS OF REVENUE AND OPERATING EXPENSES

Costs of revenue, excluding depreciation and amortization

2,569

1,259

5,678

3,971

Sales and marketing

1,439

1,236

3,485

3,807

General and administrative

1,562

952

3,555

2,774

Product development

356

697

1,499

2,485

Depreciation

55

57

156

205

Amortization

226

196

618

587

Restructuring

131

3

131

1,007

Total costs of revenue and operating expenses

6,338

4,400

15,122

14,836

Income from operations

1,209

1,703

4,522

3,825

Other income (expense)

Interest income

1

1

2

4

Interest expense

(91
)
(74
)
(234
)
(265
)
Foreign currency exchange loss

(176
)
(261
)
(568
)
(508
)
Other income (expense), net

(266
)
(334
)
(800
)
(769
)

Income from operations before income taxes

943

1,369

3,722

3,056

Income tax expense

184

428

888

908

Net income

$
759

$
941

$
2,834

$
2,148

Basic income per common share

$
0.06

$
0.08

$
0.24

$
0.18

Diluted income per common share

$
0.06

$
0.08

$
0.24

$
0.18

Cash dividend declared per common share

$
—

$
—

$
—

$
0.22

Weighted average basic shares outstanding

11,940

11,873

11,932

11,824

Weighted average diluted shares outstanding

11,992

11,979

11,975

11,967

Continued

Three Months Ended September 30, 2019

									Accumulated
				Additional					other						Total
	Common stock			paid-in		Treasury			comprehensive			Accumulated			stockholders’
	Shares	Amount		capital		stock			loss			deficit			equity
Balance at June 30, 2019	12,162,270	$	12	$	99,417	$	(1,253	)	$	(10,129	)	$	(77,547	)	$	10,500
Restricted stock vested	781	—		—		—			—			—			—
Share-based compensation expense	—	—		70		—			—			—			70
Net loss	—	—		—		—			—			(217		)	(217		)
Foreign currency translation loss	—	—		—		—			(156		)	—			(156		)
Balance at September 30, 2019	12,163,051	$	12	$	99,487	$	(1,253	)	$	(10,285	)	$	(77,764	)	$	10,197

Three Months Ended September 30, 2018

									Accumulated
				Additional					other						Total
	Common stock			paid-in		Treasury			comprehensive			Accumulated			stockholders’
	Shares	Amount		capital		stock			loss			deficit			equity
Balance at June 30, 2018	12,117,014	$	12	$	99,010	$	(1,253	)	$	(9,143	)	$	(54,018	)	$	34,608
Share-based compensation expense	—	—		97		—			—			—			97
Net income	—	—		—		—			—			549			549
Foreign currency translation loss	—	—		—		—			(569		)	—			(569		)
Balance at September 30, 2018	12,117,014	$	12	$	99,107	$	(1,253	)	$	(9,712	)	$	(53,469	)	$	34,685

The accompanying notes are an integral part of these condensed consolidated financial ~~statements.~~statements

EVOLVING SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF ~~COMPREHENSIVE INCOME (LOSS)~~CASH FLOWS

(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 Nine Months Ended September 30,
	2019			2018
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income	$	(8,316	)	$	1,192
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Depreciation	150			101
Amortization of intangible assets	704			733
Amortization of debt issuance costs	4			8
Amortization of operating leases — right of use assets	306			—
Share-based compensation expense	263			590
Unrealized foreign currency transaction gain, net	(183		)	(498		)
Bad debt expense, net	113			410
Change in fair value of contingent earn-out	—			413
Provision for deferred income taxes	(49		)	(165		)
Goodwill impairment loss	6,687			—
Change in operating assets and liabilities:
Contract receivables	1,936			2,098
Unbilled work-in-progress	149			1,137
Prepaid and other assets	(510		)	235
Accounts payable and accrued liabilities	(537		)	(2,927		)
Income taxes receivable	(508		)	—
Unearned revenue	677			(501		)
Lease obligations — operating leases	(316		)	—
Net cash provided by operating activities	570			2,826

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment	(309		)	(48		)
Net cash used in investing activities	(309		)	(48		)

CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on notes payable	(2,684		)	(1,763		)
Net cash used in financing activities	(2,684		)	(1,763		)

Effect of exchange rate changes on cash and cash equivalents	(58		)	(55		)

Net (decrease) increase in cash and cash equivalents	(2,481		)	960
Cash and cash equivalents at beginning of period	6,732			7,562
Cash and cash equivalents at end of period	$	4,251		$	8,522

Supplemental disclosure of cash and non-cash transactions:
Interest paid	$	246		$	365
Income taxes paid	$	159		$	1,623
Measurement period adjustment to goodwill and intangible assets	$	—		$	281
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.~~

~~EVOLVING SYSTEMS, INC.~~

~~CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY~~

~~(in thousands, except 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

~~The accompanying notes are an integral part of these condensed consolidated financial statements.~~

~~EVOLVING SYSTEMS, INC.~~

~~CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS~~

~~(in thousands)~~

~~(unaudited)~~

For the Nine Months Ended September 30,

2017

2016

CASH FLOWS FROM OPERATING ACTIVITIES:

Net income

$
2,834

$
2,148

Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation

156

205

Amortization of intangible assets

618

587

Amortization of debt issuance costs

10

27

Stock based compensation

486

198

Unrealized foreign currency transaction loss, net

568

508

Provision for deferred income taxes

(335
)
(18
)
Change in operating assets and liabilities:

Contract receivables

(2,474
)
735

Unbilled work-in-progress

(1,225
)
9

Prepaid and other assets

562

(389
)
Accounts payable and accrued liabilities

(759
)
202

Unearned revenue

1,831

1,326

Other long-term obligations

376

—

Net cash provided by operating activities

2,648

5,538

CASH FLOWS FROM INVESTING ACTIVITIES:

Purchase of property and equipment

(71
)
(24
)
Business combinations, net of cash received

(5,938
)
—

Net cash used in investing activities

(6,009
)
(24
)

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
)

Effect of exchange rate changes on cash

86

(418
)

Net decrease in cash and cash equivalents

(37
)
(1,459
)
Cash and cash equivalents at beginning of period

7,614

8,400

Cash and cash equivalents at end of period

$
7,577

$
6,941

Supplemental disclosure of cash and non-cash transactions:

Income taxes paid

$
1,320

$
791

Property and equipment purchased and included in accounts payable

35

1

~~The accompanying notes are an integral part of these condensed consolidated financial statements.~~statements

EVOLVING SYSTEMS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL ~~STATEMENTS~~STATMENTS

NOTE 1 — ~~BASIS~~ORGANIZATION AND SUMMARY OF ~~PRESENTATION~~SIGNIFICANT ACCOUNTING POLICIES

Organization — ~~We are~~Evolving Systems, Inc. (“we,” “us,” “our,” the “Company”, “Evolving” and “Evolving Systems”) is a provider of ~~software~~realtime digital engagement solutions and services to the wireless ~~wireline~~carrier and ~~cable~~consumer 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, enhance~~The Company’s portfolio includes market-leading solutions and ~~maintain software solutions that provide a variety of service~~services 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 increases~~loyalty for the ~~carrier~~telecom 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”), enables~~platforms enable carriers’ marketing departments to innovate, execute and manage ~~highly-personalized~~highly 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 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 premise~~on-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 have a customer base of over 90 customers spanning 66 countries across the world. The experienced team and technology from BLS, which provides actionable insights and relevant offers based on customer data, greatly complements our software portfolio and 25 years of expertise in customer acquisition, activation and retention. The technology further expands our Managed Services platform for delivering on-tap strategic 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, the next generation of CVM is moving beyond traditional CRM and points based loyalty systems to highly personalized and contextual, real-time, omni-channel consumer engagement in multiple verticals including telecom, finance, and retail. The acquisition of the Lumata Entities is another milestone in Evolving Systems’ transformation from its position 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 positioned to be a next-generation mobile consumer engagement solutions accelerator across multiple industry verticals.

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 8-03~~Article 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, ~~2017~~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, ~~2016~~2018 included in our Annual Report on Form ~~10-K.~~

~~Reclassifications~~ - ~~Certain reclassifications have been made to~~10-K as filed with the ~~2016 financial statements to conform to the consolidated 2017 financial statement presentation. These reclassifications had no effect~~SEC 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~~reporting 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 ~~income~~operations 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 operations 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.

~~Goodwill~~ — Goodwill is 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 goodwill 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 asses~~s 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 markets 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.~~

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 provide~~and provides for licenses to our software products and services tothat customize such software to meet our customers’ ~~use. When the~~needs. 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 including any sales incentives. Furthermore, we recognize revenue ~~using~~when we satisfy a performance obligation by transferring control over the ~~percentage-of-completion method~~service 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 on~~a contract is allocated to each distinct performance obligation and recognized as revenue when or as the ~~license fee/services portion (services are related to customizing~~customer receives the ~~software)~~benefit of the ~~arrangement due~~performance 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 rate~~functionality of the ~~first year of maintenance in~~delivered software. The license along with the ~~arrangement. The license/services portion is recognized using the percentage-of-completion method of accounting and the warranty/maintenance~~customization services are ~~separated based on the renewal rate in the contract and recognized ratably~~transferred 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, delivery~~approved and ~~acceptance have occurred,~~ the ~~fee is fixed or determinable~~software 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 ~~unbundle~~identify multiple performance obligations and record as revenue ~~fees from multiple element arrangements~~ as the ~~elements~~performance obligations are ~~delivered~~fulfilled 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 value~~progress towards completion of the ~~undelivered elements exist. If VSOE~~performance 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 until~~would offer to other market participants. Upon the ~~earlier~~conclusion of the ~~date that VSOE does exist on~~warranty period, the ~~undelivered elements or all of~~customer 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 performance~~input method of accounting ~~which~~based on labor hours. These contracts generally include a single performance obligation. Under the input method, revenue is ~~similar to~~recognized 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 performance~~input method of ~~accounting.~~accounting, as previously described.

~~We recognize~~Disaggregation 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 September 30,				For the Nine Months Ended September 30,
	2019		2018		2019		2018
Primary geographical markets
United Kingdom	$	1,042	$	1,512	$	3,758	$	4,945
Other	5,071		5,908		15,308		18,770
	$	6,113	$	7,420	$	19,066	$	23,715

Major products/service lines
Licensing fees	$	185	$	255	$	1,152	$	839
Customer support, including warranty support fees	2,261		2,481		6,841		7,602
Services	1,700		2,034		4,896		7,337
Managed services	1,967		2,650		6,177		7,937
Total services	5,928		7,165		17,914		22,876
	$	6,113	$	7,420	$	19,066	$	23,715

Timing of revenue recognition
Products transferred at a point in time	$	39	$	187	$	560	$	509
Products and services transferred over time	6,074		7,233		18,506		23,206
	$	6,113	$	7,420	$	19,066	$	23,715

Contract balances

The following table provides information about receivables, assets, and liabilities from ~~our MDE~~ contracts with customers (in thousands):

	September 30, 2019		December 31, 2018
Assets
Contract receivables, net	$	5,963	$	7,757
Unbilled work-in-progress, net	$	2,696	$	3,044
Liabilities
Unearned revenue	$	4,451	$	3,911

Contract receivables are recorded at the invoiced amount and do not bear interest. Credit is extended based on the ~~number~~evaluation of ~~transactions per month multiplied by~~ a ~~factor~~customer’s financial condition and collateral is not required. Unbilled work-in-progress is revenue which has been earned but not invoiced. The contract assets (unbilled work-in-progress) 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 September 30, 2019 and December 31, 2018, respectively.

Capitalized commission fees are amortized based on ~~a unique table for transaction volumes relating~~the 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 and nine month periods ended September 30, 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 ASC 606 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 maintenance~~The 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 September 30, 2019 and 2018, we recognized revenue ~~ratably over the service contract period. When maintenance is bundled with the original license fee arrangement, its fair value, based upon VSOE, is deferred~~of $2.1 million and ~~recognized during the periods when services are provided.~~

~~We review and update our contract-related estimates regularly. The impact of an adjustment in estimate is recognized prospectively over the remaining contract term. No adjustment on any one contract~~$3.3 million, respectively, that was ~~material to our unaudited Consolidated Financial Statements~~included in the ~~three and~~corresponding contract liability balance at the beginning of the period. For the nine months ended September 30, ~~2017~~2019 and ~~2016.~~2018, we recognized revenue of $2.5 million and $4.2 million, respectively, that was included in the corresponding contract liability balance at the beginning of the period.

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 options and potential orders under ordering-type contracts (e.g., indefinite-delivery, indefinite-quantity). As of September 30, 2019, the aggregate amount of the transaction price allocated to remaining performance obligations with lives greater than one-year totals $3.9 million. The Company expects approximately 67% of remaining performance obligations to be recognized into revenue within the next twelve months, with the remaining 27% in 1-2 years and 6% in 3-4 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”).~~decision-makers. 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.

~~Recent~~Recently Adopted Accounting Pronouncements — In ~~May 2014,~~February 2016, the Financial Accounting Standards Board (“FASB”) ~~issued~~established Topic 842, Leases, by issuing Accounting Standards Update (“ASU”) ~~No. 2014-09, “Revenue from Contracts~~2016-02, 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 ~~Customers,” Topic 606.~~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 ~~Update affects any entity~~means, for those leases that ~~either enters into contracts with customers~~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 ~~transfer goods or services or enters into contracts~~not separate lease and non-lease components for ~~the transfer of nonfinancial assets, unless those contracts are within the scope of other standards.~~ all our leases and will not reassess whether initial direct costs qualify for capitalization (see Note 10).

The ~~guidance in this Update supersedes the revenue recognition requirements in Topic 605, Revenue Recognition and most industry-specific guidance. The core principle~~adoption of the ~~guidance is~~standard resulted in the recognition of additional ROU assets and lease liabilities of approximately $1.6 million as of January 1, 2019, that ~~an entity should recognize revenue~~did not change previously reported net income and did not result in a cumulative effect adjustment 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 includes a cohesive set of disclosure requirements that will provide users of financial statements with comprehensive information about the nature, amount, timing,accumulated deficit and ~~uncertainty of revenue and~~did not impact cash ~~flows arising from a reporting organization’s contracts with customers.~~flows.

Recent Accounting Pronouncements — In ~~April~~June 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 related~~ASU 2016-13 requires entities to ~~identifying performance obligations and licensing~~

~~implementation guidance contained in the new revenue recognition standard. The Update includes targeted improvements~~establish an allowance for credit losses for most financial assets. Prior GAAP was based on ~~input the Board received from the Transition Resource Group~~an 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 the~~recognizing 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 ~~and~~beginning 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 completed the full assessment of the impact on our condensed consolidated financial statements or related disclosures, however management does not believe there will be a significant impact.

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 companies~~2019. Early adoption is permitted. We have not yet completed the full assessment of the impact on our condensed consolidated financial statements or related disclosures, however management does not believe there will be a significant impact.

Management has evaluated other recently issued accounting pronouncements and ~~2018 for non-public entities. We do~~does not ~~expect the adoption~~believe that any of ~~this standard to~~these 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-Goodwill~~statements 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.

~~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
Amount

Effects of
changes in
foreign
currency
exchange
rates

Net
Amount

Accumulated
Amortization

Net
Carrying
Amount

Weighted-
Average
Amortization
Period

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
Amount

Effects of
changes in
foreign
currency
exchange
rates

Net
Amount

Accumulated
Amortization

Net
Carrying
Amount

Weighted-
Average
Amortization
Period

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
Goodwill impairment loss	(6,687		)
Effect of changes in foreign currency exchange rates (1)	(51		)
Balance at September 30, 2019	$	—

(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.~~loss.

WeDue to a sustained decline in the market capitalization of our common stock during the second quarter of 2019, we performed ~~our annual~~an interim goodwill impairment ~~test as of July 31, 2017, at which time we had $21.5 million of goodwill. The fair value~~test. Management considered that, along with other possible factors affecting the assessment of the Company’s reporting unit ~~was~~for the purposes of performing a goodwill impairment assessment, including management assumptions about expected future revenue forecasts and discount rates, changes in the overall economy, trends in the stock price, estimated ~~using both market~~control premium, other operating conditions, and ~~income based approaches. Specifically, we incorporated observed market multiple data from selected guideline public companies and values arrived at through~~ the ~~application~~effect of ~~discounted cash flow analyses, which~~changes 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. Changes in these estimates and assumptions that 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.goodwill. As a result of the ~~first step~~significant decline in the current market capitalization despite any of the ~~2017~~other positive factors contemplated and the absence of any changes in our business operations, the outcome of this goodwill impairment ~~analysis,~~test resulted in a charge for the ~~fair~~impairment of goodwill for the remaining carrying value of ~~each reporting unit exceeded its carrying value. Therefore~~$6.7 million, which has been recorded in the ~~second step was not necessary. Due to our transition of packaging our products and services into a managed service offering, we have determined we have one reporting unit. We do not believe~~condensed consolidated financial statements for the aggregation of our reporting units impacts the value of our goodwill nor are there any events through the date this Form 10-Q was filed which impacts our assumptions on the determination of the fair value of our goodwill.nine months ended September 30, 2019.

We ~~amortized~~amortize identifiable intangible assets ~~for Evolving Systems Labs, Inc., Evolving Systems NC, Inc., EVOL BLS, and the Lumata Entities~~ on a straight-line basis over their estimated ~~lives ranging from one to eight years.~~useful lives. As of September 30, ~~2017~~2019, and December 31, ~~2016,~~2018, identifiable intangibles were as follows (in thousands):

September 30, 2017

December 31, 2016

Gross
Amount

Effects
of
changes
in
foreign
currency
exchange
rates

Net
Amount

Accumulated
Amortization

Net
Carrying
Amount

Gross
Amount

Accumulated
Amortization

Net
Carrying
Amount

Weighted-Average
Amortization
Period

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

	September 30, 2019
	Gross Amount			Accumulated Amortization			Net Carrying Amount
Purchased software	$	2,854		$	(1,398	)	$	1,456
Trademarks and tradenames	299			(237		)	62
Non-competition	39			(39		)	—
Customer relationships	4,262			(1,986		)	2,276
	$	7,454	(1)	$	(3,660	)(1)	$	3,794

	December 31, 2018
	Gross Amount			Accumulated Amortization			Net Carrying Amount
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 September 30, 2019 and ~~$0.6~~2018, respectively, and $0.7 million for the nine ~~months~~month periods ended September 30, ~~2017~~2019 and ~~2016, respectively.~~2018. Expected future amortization expense related to identifiable intangibles based on our carrying amount as of September 30, ~~2017 was~~2019 for the following five years 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 September 30,
2020	$	929
2021	929
2022	848
2023	406
2024	183

NOTE 3 — BALANCE SHEET COMPONENTS

The components of accounts payable and accrued liabilities are as follows (in thousands):

	September 30, 2019		December 31, 2018
Accounts payable and accrued liabilities:
Accounts payable	$	828	$	1,276
Accrued compensation and related expenses	1,817		1,863
Accrued liabilities	1,200		1,344
Lease obligation — operating leases - current	335		—
	$	4,180	$	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 ~~EPS~~IPS 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 ~~EPS~~IPS computations (in thousands, except per share data):

For the Three Months Ended
September 30,

For the Nine Months Ended
September 30,

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					For the Nine Months Ended
	September 30,					September 30,
	2019			2018		2019			2018
Basic income per common share:
Net (loss) income	$	(217	)	$	549	$	(8,316	)	$	1,192
Basic weighted average shares outstanding	12,163			12,117		12,154			12,103
Basic (loss) income per common share:	$	(0.02	)	$	0.05	$	(0.68	)	$	0.10

Diluted income per common share:
Net (loss) income	$	(217	)	$	549	$	(8,316	)	$	1,192
Weighted average shares outstanding	12,163			12,117		12,154			12,103
Effect of dilutive securities - options and restricted stock	—			7		—			21
Diluted weighted average shares outstanding	12,163			12,124		12,154			12,124
Diluted (loss) income per common share:	$	(0.02	)	$	0.05	$	(0.68	)	$	0.10

~~For~~As a result of our loss for the three and nine months ended September 30, ~~2017~~2019, basic and ~~2016, 0.4 million~~diluted IPS are $(0.02) and ~~0.5~~$(0.68), respectively, because any potentially dilutive shares are excluded from determining the dilutive IPS per share (there were no dilutive shares during the periods). All stock options were excluded from basic and dilutive IPS for the three and nine months ended September 30, 2019 (see Note 5). For each of the three and nine months ended September 30, 2018, 0.6 million shares, ~~respectively, of common~~underlying 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~~All shares of unvested performance-based 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~~and dilutive earnings per share for the three and nine months ended September 30, ~~2016.~~2019 (see Note 5). For the three and nine months ended September 30, 2018 0.4 million shares of unvested restricted stock was excluded from basic earnings per share, but a portion of the 0.4 million was included in the dilutive IPS calculation with the results being antidilutive.

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 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, ~~2017~~2019 and ~~2016~~2018, and ~~$0.5~~$0.3 million and ~~$0.2~~$0.6 million for the nine months ended September 30, ~~2017~~2019 and ~~2016 respectively~~2018, respectively.

The following table summarizes ~~stock-based~~share-based compensation expenses recorded in the condensed consolidated statement of operations (in thousands):

For the Three Months Ended
September 30,

For the Nine Months Ended
September 30,

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 September 30,				For the Nine Months Ended September 30,
	2019		2018		2019		2018
Cost of revenue, excluding
depreciation and amortization	$	13	$	14	$	30	$	40
Sales and marketing	6		10		17		30
General and administrative	43		73		192		496
Product development	8		—		24		24
Total share-based compensation	$	70	$	97	$	263	$	590

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 Awards 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,~~2019 and December 31, 2018, no shares were available for grant under the 2007 Stock Plan, as amended. At September 30, ~~2017~~2019 and December 31, ~~2016, 0.8~~2018, 0.3 million and ~~0.7~~0.5 million options and restricted 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 Awards 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,~~2019 and December 31, 2018, there were approximately ~~0.3~~0.4 million shares available for grant under the 2016 Stock Plan. At September 30, ~~2017~~2019 and December 31, ~~2016,~~2018, 0.3 million and 00.4 million options and restricted shares were issued and outstanding under the 2016 Stock Plan, respectively.

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-based~~The 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 million~~in 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 ~~$8,000 for~~referenced in the ~~three months ended September 30, 2017 and 2016, respectively, and $0.4 million and $23,000~~table below for the nine ~~month~~months 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.2019.

The following is a summary of restricted stock ~~option~~ activity under the plans for the ~~three and~~ nine months ended September 30, ~~2017:~~2019:

		Restricted ~~Stock~~ ~~Number of~~ ~~Shares~~ ~~(in thousands)~~

	Stock
		Number of
		Shares
~~Shares outstanding~~		(in thousands)
Unvested restricted stock at ~~December 31, 2016~~January 1, 2019		15349
~~Restricted stock granted~~		~~615~~
~~Less restricted stock forfeited~~		~~(27~~	)
Less restricted stock vested		(436	)
~~Shares outstanding at September 30, 2017~~Less restricted stock forfeited/expired		~~599~~(154	)
Unvested restricted stock at September 30, 2019		159

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 nine months ended September 30, ~~2017:~~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
			Weighted-		Remaining	Aggregate
	Number of		Average		Contractual	Intrinsic
	Shares		Exercise		Term	Value
	(in thousands)		Price		(Years)	(in thousands)
Options outstanding at January 1, 2019	591		$	5.75	7.39	$	—
Less options forfeited/cancelled	(145	)	6.12
Less options exercised	—		—
Options outstanding at September 30, 2019	446		$	5.63	6.80	$	—

Options exercisable at September 30, 2019	308		$	6.28	6.17	$	—

There were ~~50,000 and 40,000 stock options granted during the three months ended September 30, 2017 and 2016, respectively. There were 50,000 and 118,000~~no stock options granted during the nine months ended September 30, ~~2017~~2019 and ~~2016, respectively. The weighted-average grant-date fair value of stock options granted were $1.92 and $1.16 during~~30,000 for the ~~three~~nine months ended September 30, ~~2017 and 2016,~~2018, respectively. As of September 30, ~~2017,~~2019, there ~~were~~was approximately $~~2.5~~$0.8 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 ~~3.38~~1.71 years. The total fair value of stock options ~~vested during the three months ended September 30, 2017~~ and ~~2016 was approximately $38,000 and $0.1 million, respectively. The total fair value of~~restricted stock ~~options~~ vested during the nine months ended September 30, ~~2017~~2019 and ~~2016~~2018 was ~~approximately $0.1~~$0.3 million and ~~$0.2~~less than $0.1 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,~~2019 and 2018 one significant customer (defined as contributing at least 10%) accounted for ~~12%~~10% and 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~~2019 and 2018 one significant ~~customers~~customer (defined as contributing at least 10%) accounted for ~~10%~~11% and 11% of revenue from ~~operations.~~operations, respectively. The significant customer is a large telecommunications operator in Europe.

As of September 30, ~~2017~~2019, a significant customer, a telecommunication carrier in Africa, accounted for approximately 13% of contract receivables and unbilled work-in-progress. As of December 31, ~~2016,~~ 2018, 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,~~2019, the U.S.A. Prime Rate was ~~4.25%~~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 ~~over~~by 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~~$50,000.

On September 24, 2019 the Company agreed in principal to the terms of a ~~prepayment fee of 2%~~new amendment and on October 4, 2019, we entered into the First Amendment (“First Amendment”) to the Loan Facility. The purpose of the ~~amount prepaid, on any prepayment made before the second anniversary date~~First Amendment is to waive certain events of ~~the Agreement.~~non-compliance with respect to covenants not achieved in prior periods and to amend future covenant requirements. The ~~unpaid balance~~First Amendment also required Evolving Systems to make an advance payment of principal of $666,666.66. The remaining terms and conditions of the Loan Facility and payment schedule remain unchanged. The Company also agreed to pay East West Bank’s legal fees in connection with the transaction. The last payment is ~~due on August 16,~~scheduled to be made January 31, 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 and the additional obligors’ 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; declare dividends, cause or permit a change of control; merge or consolidate with another entity; enter into affiliate transactions; and change the nature of its business materially, subject to standard exceptions.

~~The Loan Facility has the same covenants as the Term Loan.~~

U.S. Prime Rate plus 1.0%. As of September 30, 2019, the U.S. Prime Rate was 5%. In the event of a default, the interest rate increases 5% per annum. The Term Loan is secured by substantially all of the assets of Evolving Systems, 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. Interest accrues from the date the Term Loan was made at the aforementioned rate and is 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. 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 fees equal to $1,000.

On September 24, 2019, the Company agreed in principal to the terms of a new amendment and on October 4, 2019, we ~~were~~entered into the Sixth Amendment to the Loan and Security Agreement (“Sixth Amendment”) with East West Bank to the Term Loan. The purpose of the Sixth Amendment is to waive certain events of non-compliance with respect to covenants not achieved in prior periods and to amend future covenant requirements. The Sixth Amendment also required Evolving Systems to make an advance payment of principal of $333,333.33. In addition, the Sixth Amendment added any default under the Loan Facility discussed above as an Event of Default under the Loan Facility. The remaining terms and conditions of the Term Loan and payment schedule remain unchanged. The Company also agreed to pay East West Bank’s legal fees in connection with the transaction. The last payment of principal and interest was made November 1, 2019.

Financial covenants previously included in the credit facilities have been replaced by a minimum consolidated cash balance of no less than the total bank debt outstanding and a minimum trailing three month consolidated EBITDA fixed dollar amount mutually agreed to by the Company and East West bank in the amendments. Evolving Systems has transacted all loan payments as originally scheduled and was in compliance with the new covenants ~~and had a $9.4 million balance under the Term Loan and Loan Facility net~~as of ~~approximately $14,000 of debt issuance costs.~~September 30, 2019.

NOTE 8 — INCOME TAXES

We recorded ~~net~~ income tax expense of ~~$0.2~~$0.1 million and ~~$0.4~~$0.3 million for the three months ended September 30, ~~2017~~2019 and ~~2016,~~2018, respectively. The net expense during the three months ended September 30, ~~2017~~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. and India~~Indian 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 ~~nine~~three months ended September 30, ~~2017~~2018 consisted of current income tax expense of $~~1.2~~ ~~million and a deferred tax benefit of ($0.3)~~$0.3 million. The current tax expense consists of income tax from our ~~U.S.,~~ U.K.~~, France~~ based operations.

We recorded income tax expense of $0.3 million and ~~India based operations. The deferred tax benefit was primarily related to~~$0.6 million for the ~~increase of certain net deferred tax assets~~nine months ended September 30, 2019 and ~~amortization of stock options and the intangible assets related to the acquisition of Evolving Systems NC, Inc.~~2018, respectively. The net expense during the nine months ended

September 30, ~~2016~~2019 consisted of current income tax expense of $0.3 million. The current tax expense consists of income tax primarily from our Indian and Nigerian based operations. The net expense during the nine months ended September 30, 2018 consisted of current income tax expense of $0.9 million and a deferred tax benefit of ~~($19,000).~~$0.3 million. The current tax expense consists ~~primarily~~ of income tax from our U.K. ~~and India~~ based operations. The deferred tax benefit was related primarily ~~related~~ to the amortization of ~~intangible assets related to~~deferred 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%~~(101%) and ~~31%~~38% for the three months ended September 30, ~~2017~~2019 and ~~2016,~~2018, respectively. The ~~decrease in our~~2019 effective tax rate relates to ~~a higher proportion of~~ our net income ~~being generated in the U.K.,~~coming from our Indian operations and net losses from our other operations for which ~~the statutory corporate~~we 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%~~(4%) and ~~30%~~34% for the nine months ended September 30, ~~2017~~2019 and ~~2016~~2018, respectively. The ~~decrease in our~~2019 effective tax ~~rates~~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 corporate~~we 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~~2019, and December 31, ~~2016~~2018 we continued to maintain a valuation allowance on ~~portions of~~ our domestic net deferred tax ~~asset. Such assets primarily consist of Foreign Tax Credit~~asset for foreign tax credit (“FTC”), carryforwards, certain state ~~Net Operating Loss (“NOL”)~~NOL carryforwards and research and development tax ~~credits and~~credits. 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, ~~2017~~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.

	September 30, 2019			December 31, 2018
Deferred tax assets:
Foreign tax credits carryforwards	$	4,748		$	4,788
Net operating loss carryforwards — Foreign	5,843			5,531
Net operating loss carryforwards — State	888			887
Research & development credits	—			303
AMT credits	770			770
Stock compensation	610			559
Depreciable assets	60			38
Accrued liabilities and reserves	103			67
Total deferred tax assets	13,022			12,943

Deferred tax liabilities:
Intangibles	(184		)	(697		)
Accrued liabilities and reserves	(537		)	(174		)
Total deferred tax liability	(721		)	(871		)

Net deferred tax assets, before valuation allowance	12,301			12,072
Valuation allowance	(11,115		)	(10,932		)
Net deferred tax asset	$	1,186		$	1,140

As of September 30, ~~2017~~2019, and December 31, ~~2016~~2018 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, in~~In the normal course of business, we are subject to

examination by taxing authorities ~~up until, two~~throughout the world, namely the U.S., 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 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 $3.6 million and a corresponding decrease in foreign income before income tax expense in the ~~U.K.~~three 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.~~nine months ended September 30, 2019, respectively.

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~~GEOGRAPHICAL INFORMATION

We are headquartered in Englewood, a suburb of Denver, Colorado. We use customer locations as the basis for attributing ~~revenues~~revenue to individual countries. We provide products and services on a global basis through our ~~headquarters, our London-based Evolving Systems U.K. subsidiary~~offices in North Carolina and our ~~North Carolina based Evolving Systems NC, Inc. subsidiary.~~U.K.-based subsidiaries. Additionally, personnel in Cluj, Romania; Grenoble, France; and Bangalore and Kolkata, ~~India~~India; provide software development services and support ~~services~~ to our global operations. Financial information relating to ~~operations~~U.S. based companies and by ~~geographic region~~international geographical regions 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		September 30, 2019		December 31, 2018
Long-lived assets, net
United States	$	11,476	$	12,347	$	2,247	$	2,741
United Kingdom	17,753		12,680		1,686		7,098
Other	1,859		318		1,599		1,752
	$	31,088	$	25,345	$	5,532	$	11,591

NOTE 1110 — COMMITMENTS AND CONTINGENCIES

(a) ~~Other~~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 nine months ended September 30, 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 September 30, 2019. Total rent expense consisted of operating lease expense of $0.4 million and short-term lease expense of $0.1 million for the nine months ended September 30, 2019. Rent expense was $0.1 million and $0.5 million for the three and nine months ended September 30, 2019 and 2018, respectively. There was no sublease rental income for the three and nine months ended September 30, 2019 and 2018. We paid $0.1 million and $0.4 million against Lease obligations — operating leases in the three and nine months ended September 30, 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 right-of-use (“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:

	As of
	September 30, 2019
Operating leases - right of use assets	$	1,295

Accounts payable and accrued liabilities	$	335
Lease obligations — operating leases, net of current portion	951
Total lease liability	$	1,286

Weighted average remaining lease term (in years)	4.6
Weighted average discount rate	6.75		%

Future lease payments included in the measurement of lease liabilities on the condensed consolidated balance sheet as of September 30, 2019, for the following five fiscal years and thereafter were as follows:

	For the year ending
	December 31,
2019 - Remaining	$	128
2020	395
2021	331
2022	308
2023	176
Thereafter	191
Total future minimum lease payments	1,529
Present value adjustment	243
Total	$	1,286

(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, ~~2017~~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, ~~2017~~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, ~~2017~~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, ~~2017~~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 doalso receive letters from former employees claiming that upon exiting their final compensation was not ~~expect~~properly calculated. One such complaint from the Company’s former Chief Executive Officer has been lodged but not served, claiming he was not properly compensated upon termination along with additional allegations. The Company has engaged legal counsel through our insurance carrier and intends to defend rigorously. The ultimate outcome of ~~such proceedings, either individually~~this matter is not estimable or ~~in the aggregate, to have a material effect on our financial position, cash flows or results of operations.~~determinable at this time.

NOTE 1211 — ~~RESTRUCTURING~~SUBSEQUENT EVENTS

~~During~~Our common stock is currently listed on The Nasdaq Capital Market. In order to maintain that listing, we must satisfy minimum financial and other listing requirements. On July 8, 2019, the ~~third quarter~~Nasdaq Listing Qualifications Department notified us that we no longer complied with Rule 5550(a)(2) (the “Minimum Bid Price Rule”), as the bid price of ~~2017, we undertook a reduction in workforce involving~~our shares of common stock closed below the ~~termination of employees resulting in an expense of $0.1 million primarily related to severance~~minimum $1.00 per share for the ~~affected employees. The reduction in workforce was related~~30 consecutive business days prior to the ~~consolidations of duplicative functions and alignment of staff with ongoing business activity as a result~~date of the ~~acquisition of EVOL BLS in~~letter. In accordance with Rule 5810(c)(3)(A), we had 180 calendar days, or until January 6, 2020, to regain compliance with the ~~third quarter of 2017. During~~Minimum Bid Price Rule. If we were unable to demonstrate compliance with the ~~third quarter of 2016,~~Minimum Bid Price Rule during the applicable grace period, our common stock would be subject to delisting after that time.

On October 24, 2019, we ~~undertook~~received a ~~reduction in workforce involving~~written notification from the ~~termination of employees resulting in an expense adjustment of $3,000~~Nasdaq Listing Qualifications Staff indicating that the Company has regained compliance with the $1.00 minimum bid price requirement for continued listing on the ~~three months ending September 30, 2016, primarily related~~Nasdaq Stock Market pursuant to ~~severance for~~Nasdaq Listing Rule 5550(a)(2) (the “Minimum Bid Price Requirement”) and that the ~~affected employees.~~ matter is now closed.

The ~~reduction in workforce was related to the consolidations of duplicative functions and alignment of staff with ongoing business activity as a result~~closing bid price of the ~~acquisition of Evolving Systems NC, Inc. in~~Company’s common stock was greater than $1.00 per share from October 10, 2019 to October 23, 2019. Accordingly, the ~~third quarter of 2015.~~

~~For~~Company has regained compliance with 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.Minimum Bid Price Requirement.

~~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, ~~2016~~2018, 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.~~8-K.

OVERVIEW

~~We are~~Evolving Systems, Inc. is a provider of ~~software~~real-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, enhance~~The 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, wireline~~real-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-Pacific~~loyalty 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 ~~helps~~help businesses gain value from their customer data for relevant and contextual insights and actions of value to both customers and enterprises. ~~Its customers~~The acquisitions grew our customer base to include ~~mobile operators including~~wireless carriers Orange, Telefonica and other Tier-1 and emerging ~~operators~~wireless carriers in Europe, Asia, the Middle East, Africa, the Caribbean and ~~around~~Central and South America.

RECENT DEVELOPMENTS

In 2019, we announced Evolution, the ~~world. The~~new 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 to continue 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 accretive~~activation and retention. Enhancements to our ~~operations once~~technology further expands our managed services platform for delivering on-tap strategic and tactical solutions.

During the ~~integration~~three months ended June 30, 2019, there was a sustained decline in the market capitalization of our common stock. We performed an interim goodwill impairment test. Management considered that, along with other possible factors affecting the assessment of the Company’s reporting unit for the purposes of performing a goodwill impairment assessment, including management assumptions about expected future revenue forecasts and discount rates, changes in the overall economy, trends in the stock price, estimated control premium, other operating conditions, and the effect of changes in estimates and assumptions that could materially affect the determination of fair value and goodwill. As a result of the significant decline in the current market capitalization despite any of the other positive factors contemplated and the absence of any changes in our business ~~is completed by year-end 2017.~~operations, the outcome of this goodwill impairment test resulted in a charge for the impairment of goodwill for the remaining carrying value of $6.7 million, which was recorded in the condensed consolidated financial statements.

Consolidated revenue was ~~$7.5~~$6.1 million and ~~$6.1~~$7.4 million for the three months ended September 30, ~~2017~~2019 and ~~2016,~~2018, respectively, and ~~$19.6~~$19.1 million and ~~$18.7~~$23.7 million~~for the nine months ended~~ September 30, 2017 and 2016, 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 isSeptember 30, 2019 and 2018. The decrease was due to the ~~acquisitions~~decline in Services revenue from our historical client relationships through non-renewals of ~~EVOL BLS and the Lumata Entities.~~on-going services or conclusion of large projects, offset by a slight increase in new client engagements.

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 ~~how~~what the effects on our revenue and expenses would ~~change had they been reported~~be 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			For the Nine Months
	Ended September 30,			Ended September 30,
	2019 vs. 2018			2019 vs. 2018
Changes in:
Revenue	$	(165	)	$	(380	)
Costs of revenue and operating expenses	(433		)	(1,535		)
Loss from operations	$	268		$	1,155

The net effect of our foreign currency translations for the three months ended September 30, 2019 was a $0.2 million decrease in revenue and a $0.4 million decrease in operating expenses versus the three months ended September 30, 2018. The net effect of our foreign currency translations for the nine months ended September 30, 2019 was a $0.4 million decrease in revenue and a $1.5 million increase in operating expenses versus the nine months ended September 30, 2018.

For the Three Months Ended
September 30,

For the Nine Months Ended
September 30,

2017 vs. 2016

2017 vs. 2016

Changes in:

Revenue

$
9

$
(417
)
Costs of revenue and operating expenses

55

(342
)
Operating loss

$
(46
)
$
(75
)

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				For the Nine Months Ended
	For the Three Months Ended September 30,				For the Nine Months Ended September 30,				September 30,				September 30,
	2017		2016		2017		2016		2019		2018		2019		2018
REVENUE
License fees	14	%	14	%	11	%	12	%	3	%	3	%	6	%	4	%
Services	86	%	86	%	89	%	88	%	97	%	97	%	94	%	96	%
Total revenue	100	%	100	%	100	%	100	%	100	%	100	%	100	%	100	%

COSTS OF REVENUE AND OPERATING EXPENSES
Costs of revenue, excluding depreciation and amortization	34	%	21	%	29	%	21	%	35	%	32	%	33	%	34	%
Sales and marketing	19	%	20	%	18	%	20	%	30	%	22	%	29	%	21	%
General and administrative	20	%	16	%	18	%	15	%	16	%	20	%	21	%	23	%
Product development	5	%	11	%	7	%	13	%	19	%	15	%	19	%	12	%
Depreciation	1	%	1	%	1	%	1	%	1	%	0	%	1	%	0	%
Amortization	3	%	3	%	3	%	3	%	4	%	3	%	4	%	3	%
Restructuring	2	%	0	%	1	%	5	%
Goodwill impairment loss									0	%	0	%	35	%	0	%
Total costs of revenue and operating expenses	84	%	72	%	77	%	78	%	105	%	92	%	142	%	93	%

Income from operations	16	%	28	%	23	%	22	%
(Loss) income from operations									(5	)%	8	%	(42	)%	7	%

Other income (expense)
Interest income	0	%	0	%	0	%	0	%	0	%	0	%	0	%	0	%
Interest expense	(1	)%	(2	)%	(1	)%	(1	)%	(1	)%	(2	)%	(1	)%	(2	)%
Foreign currency exchange gain (loss)	(3	)%	(4	)%	(3	)%	(4	)%
Other income, net									0	%	1	%	0	%	0	%
Foreign currency exchange gain									4	%	5	%	1	%	2	%
Other income (expense), net	(4	)%	(6	)%	(4	)%	(5	)%	3	%	4	%	0	%	0	%

Income from operations before income taxes	12	%	22	%	19	%	17	%
(Loss) income from operations before income taxes									(2	)%	12	%	(42	)%	7	%

Income tax expense	2	%	7	%	5	%	5	%	2	%	5	%	2	%	3	%
Net income	10	%	15	%	14	%	12	%

Net (loss) income									(4	)%	7	%	(44	)%	4	%

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~~was $0.2 million ~~or 26%, to $1.1~~and $0.3 million for the three months ended September 30, ~~2017 from $0.9~~2019 and 2018, respectively. The decrease in revenues of $0.1 million ~~for~~is primarily related to lower number of incremental licenses sold during this three month period than the corresponding three ~~months ended September 30, 2016. The increase is due primarily to~~month period in the ~~acquisition of Evolving Systems BLS LTD offset by~~ ~~lower prepaid license fee revenue from FUAs~~prior year.

License fees revenue ~~decreased $0.2~~was $1.2 million ~~or 7%, to $2.1~~and $0.8 million for the nine months ended September 30, ~~2017 from $2.3~~2019 and 2018, respectively. The increase in revenues of $0.4 million ~~for the nine months ended September 30, 2016. The decrease~~is primarily related to an increase in ~~revenue is due~~number of incremental licenses 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 $1.2~~decreased $1.3 million, or ~~23%~~18%, to ~~$6.5~~$5.9 million for the three months ended September 30, ~~2017~~2019 from ~~$5.3~~$7.2 million for the three months ended September 30, ~~2016.~~2018. The decrease is related to $0.7 million in lost service revenue from customer accounts not renewing or decrease in services or pricing to existing customer accounts. Also, during third quarter 2018 many on-going large projects, were completed or terminated services causing a decrease of $0.9 million partially offset by an increase ~~is due~~of $0.3 million related to ~~the acquisitions of EVOL BLS and the Lumata Entities.~~new implementations.

Services revenue ~~increased $1.1~~decreased $5.0 million, or 7%22%, to ~~$17.5~~$17.9 million for the nine months ended September 30, ~~2017~~2019 from ~~$16.4~~$22.9 million for the nine months ~~ended~~ September 30, ~~2016.~~2018. The decrease is related to $2.4 million in lost service revenue from customer accounts not renewing or decrease in services or pricing to existing customer accounts. Also, during 2018 many large projects, mainly related to the companies that we acquired, were completed or terminated services causing a decrease of $3.6 million partially offset by an increase ~~in revenue is due~~of $1.0 million related to ~~the acquisitions of EVOL BLS and the Lumata Entities.~~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 Development~~product 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 $1.3~~decreased $0.3 million, or ~~104%~~13%, to ~~$2.6~~$2.1 million for the three months ended September 30, ~~2017~~2019 from ~~$1.3~~$2.4 million for the three months ended September 30, ~~2016.~~2018. The ~~increase~~decrease in costs of revenue of $0.2 million is ~~primarily~~ attributable to lower service project hours allowing resources to work on internal projects and product development. In addition, a reduction in workforce through attrition and reduction in employee costs as well as the ~~cost~~transfer of ~~revenue from~~associates to Sales and Marketing teams to grow our existing client relationships by providing local resources also attributed $0.1 million to the ~~acquisitions of EVOL BLS and the Lumata Entities.~~decrease. As a percentage of revenue, costs of revenue, excluding depreciation and amortization, increased 3% to ~~34%~~35% for the three months ended September 30, ~~2017 from 21%~~2019 as compared to 32% for the three months ended September 30, ~~2016.~~2018, this is primarily due to the costs as proportioned to the lower revenues.

Costs of revenue, excluding depreciation and amortization, decreased $1.9 million, or 23%, to $6.2 million for the nine months ended September 30, 2019 from $8.1 million for the nine months ended September 30, 2018. The ~~increase~~decrease in costs of revenue of $1.3 million is attributable to lower service project hours allowing resources to work on internal projects and product development. In addition, a reduction in workforce through attrition and reduction in employee costs as well as the transfer of associates to Sales and Marketing teams to grow our existing client relationships by providing local resources also attributed $0.4 million to the decrease and $0.1 million reduction in training and employee recognition costs as the focus was towards product enhancement. As a percentage of revenue, costs of revenue, excluding depreciation and amortization, decreased to 33% for the nine months ended September 30, 2019 from 34% for the nine months ended September 30, 2018. The decrease as a percentage of revenue is primarily due to the ~~aforementioned higher costs.~~

~~Costs of revenue, excluding depreciation~~decreased hours worked on client projects as staff was used to support internal efforts including product development and ~~amortization, increased $1.7 million, or 43%, 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~~reduction 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.expenses.

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~~$0.1 million, or ~~16%~~6%, to ~~$1.4~~

$1.8 million for the three months ended September 30, ~~2017~~2019 from ~~$1.2~~$1.7 million for the three months ended September 30, ~~2016.~~2018. The increase in expenses is attributable to ~~the sales~~$0.1 million in costs from additional staff to secure and ~~marketing expenses from the acquisition of Evolving Systems BLS LTD.~~foster growth within existing clients. As a percentage of total revenue, sales and marketing expenses ~~decreased~~increased to ~~19%~~30% for the three months ended September 30, ~~2017~~2019 from ~~20%~~22% for the three months ended September 30, ~~2016.~~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~~higher costs as proportioned to the lower revenues.

Sales and marketing expenses increased $0.7 million, or 14%, to $5.6 million for the nine months ended September 30, 2019 from $4.9 million for the nine months ended September 30, 2018. The increase in expenses is attributable to $0.5 million in costs from additional staff, increased marketing efforts by $0.1 million to promote our products and increased related expense of $0.1 million related travel for meeting existing and potential new customers. As a percentage of total revenue, ~~during~~sales and marketing expenses increased to 29% for the ~~period.~~nine months ended September 30, 2019 from 21% for the nine months ended September 30, 2018. The increase in sales and marketing expenses as a percentage of revenue is primarily due to the aforementioned higher costs as proportioned to the lower revenues.

General and Administrative

General and administrative expenses consist principally of ~~employee related~~employee-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 in~~creased $0.6~~decreased $0.5 million, or ~~64%,~~33% to ~~$1.6 million for the three months ended September 30, 2017 from~~ $1.0 million for the three months ended September 30, ~~2016.~~2019 from $1.5 million for the three months ended September 30, 2018, respectively. The ~~increase in costs is~~decrease was primarily attributable to ~~professional~~lower legal fees ~~related asset acquisition~~ of $0.2 million, and a reduction in outside director and contractor fees of $0.1 million. In addition, the ~~Lumata Entities, higher stock incentive compensation expense due~~Company collected funds previously determined to ~~restricted stock grants and~~be uncollectable ~~the general and administrative expenses from the acquisitions~~resulting in a change of ~~EVOL BLS and the Lumata Entities.~~$0.1 million. As a percentage of revenue, general and administrative expenses ~~increased~~decreased to ~~21%~~16% compared to 20% for the three months ended September 30, ~~2017~~2019 and 2018, respectively. The decrease in general and administrative expense is primarily due to the aforementioned lower expenses as proportioned to the lower revenues.

General and administrative expenses decreased $1.4 million, or 26% to $4.0 million for the nine months ended September 30, 2019 from ~~16%~~$5.4 million for the nine months ended September 30, 2018, respectively. The decrease was primarily attributable to lower legal fees of $0.6 million due to closure of an employee matter in the prior year, a reduction in employee and equity compensation of $0.3 million, a $0.1 million reduction in outside director and contractor fees, and reduction in travel and entertainment costs of $0.1 million. In addition, the Company collected $0.2 million of funds previously determined to be uncollectable. As a percentage of revenue, general and administrative expenses decreased to 21% compared to 23% for the nine months ended September 30, 2019 and 2018, respectively. The decrease in general and administrative expense is primarily due to the aforementioned lower expenses as proportioned to the lower revenues.

Product Development

Product development expenses consist primarily of employee-related costs and subcontractor expenses. Product development expenses increased $0.1 million, or 9%, to $1.2 million for the three months ended September 30, ~~2016.~~2019 from $1.1 million for the three months ended September 30, 2018. The increase is primarily related to $0.1 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 September 30, 2019 from 15% for the three months ended September 30, 2018. The increase in ~~general and administrative~~product development expenses as a percentage of revenue is primarily due to the aforementioned ~~increase in expenses.~~higher costs as proportioned to the lower revenues.

~~General and administrative~~Product development expenses increased $0.8 million, or 28%, to ~~$3.6 million from $2.8~~$3.7 million for the nine months ended September 30, 2017 and 2016, respectively. The increase in costs is primarily related to higher professional fees related to the recent acquisitions, higher stock incentive compensation expense due to restricted stock grants and ~~the general and administrative expenses~~2019 from ~~the acquisitions of EVOL BLS and the Lumata Entities. As a percentage of total revenue, general and administrative expenses increased to 18%~~$2.9 million for the nine months ended September 30, ~~2017 from 15%~~2018. The increase is primarily related to $0.8 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 nine months ended September 30, ~~2016.~~2019 from 12% for the nine months ended September 30, 2018. The increase in ~~general and administrative~~product development 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~~higher 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~~proportioned 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, ~~2017~~2019 and ~~2016.~~2018, respectively. As a percentage of total revenue, depreciation expense for the three months ended September 30, ~~2017~~2019 and ~~2016 remained at~~2018 was 1%. and 0%, respectively.

Depreciation expense was $0.2 million and $0.1 million for the nine months ended September 30, ~~2017~~2019 and ~~2016.~~2018, respectively. As a percentage of total revenue, depreciation expense for the nine months ended September 30, ~~2017~~2019 and ~~2016 remained at~~2018 was 1%. and 0%, respectively.

Amortization

Amortization expense consists of amortization of identifiable ~~intangible assets acquired through~~intangibles related to our ~~acquisition~~acquisitions of Evolving Systems Labs, ~~Inc.,~~ Evolving Systems NC, ~~Inc, Evolving Systems~~EVOL BLS, ~~LTD~~ and the Lumata Entities. Amortization expense was $0.2 million for the three months ended September 30, ~~2017~~2019 and ~~2016.~~2018, respectively. As a percentage of ~~total~~ revenue, amortization expense ~~remained at~~increased to 4% for the three months ended September 30, 2019 from 3% for the three months ended September 30, ~~2017~~2018, as these costs have remained fixed and ~~2016.~~are a greater percentage in relation to the lower revenues.

Amortization expense was ~~$0.6~~$0.7 million for the nine months ended September 30, ~~2017~~2019 and ~~2016.~~2018, respectively. As a percentage of ~~total~~ revenue, amortization expense ~~remained at~~increased to 4% for the nine months ended September 30, 2019 from 3% for the nine months ended September 30, ~~2017~~2018, as these costs have remained fixed and ~~2016.~~are a greater percentage in relation to the lower revenues.

~~Restructuring~~Goodwill Impairment Loss

~~Restructuring expense includes~~During the ~~costs associated with~~quarter ended June 30, 2019, our market capitalization declined to a ~~reduction in workforce due to~~level that was less than the ~~consolidation~~net book value of ~~duplicative functions and alignment~~our stockholders’ equity. We performed a goodwill impairment analysis as of ~~staff with ongoing business activity as a result~~June 30, 2019. In the view of the ~~acquisition~~market capitalization and the associated impairment analysis, the Company recorded a $6.7 million write-off 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~~all goodwill. We had no goodwill impairment loss for the three months ended September 30, ~~2017~~2019 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.~~2018.

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, ~~2017~~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, ~~2017~~2019 and ~~2016.~~2018, respectively.

Interest expense ~~was $0.2 million~~includes the amortization of debt issuance costs and ~~$0.3 million~~interest expense from our term loans. Interest expense for the nine months ended September 30, ~~2017~~2019 and ~~2016,~~2018, was $0.3 million and $0.4 million, 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% and 2% for the nine months ended September 30, ~~2017~~2019 and ~~2016.~~2018, respectively.

Foreign Currency Exchange ~~Loss~~Gain

Foreign currency ~~transaction losses~~exchange gains resulted from transactions denominated in a currency other than the functional currency of the respective subsidiary and ~~was $0.2~~decreased $0.1 million ~~and~~or 25% to $0.3 million for the three months ended September 30, 2019 from $0.4 million for the three months ended September 30, ~~2017 and 2016, respectively,~~ ~~and $0.6 million and $0.5 million for the nine months ended September 30, 2017 and 2016, respectively.~~2018. The ~~losses~~gains were generated primarily through the re-measurement of certain non-functional currency denominated financial assets and liabilities of our ~~Evolving Systems U.K., BLS,~~foreign subsidiaries.

Foreign currency exchange gains decreased $0.3 million or 60% to $0.2 million for the ~~Lumata Entities~~nine months ended September 30, 2019 from $0.5 million for the nine months ended September 30, 2018. The gains were generated primarily through the re-measurement of certain non-functional currency denominated financial assets and ~~India~~liabilities of our foreign subsidiaries.

Interest Income and Total Other ~~Comprehensive Gain (Loss)~~Income, Net

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 duringFor 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~~2019 and ~~the related translation of our U.K. subsidiary’s assets and liabilities to the United States Dollar for consolidation purposes.~~2018, other income was less than $0.1 million.

For the nine months ended September 30, ~~2017~~2019 and 2018, other ~~comprehensive gain~~income was ~~$1.5~~less than $0.1 million ~~compared to a comprehensive loss of ($2.8)~~and $0.1 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.respectively.

Income Taxes

We recorded net income tax expense of ~~$0.2~~$0.1 million and ~~$0.4~~$0.3 million for the three months ended September 30, ~~2017~~2019 and ~~2016,~~2018, respectively. The net expense during the three months ended September 30, ~~2017~~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. and India~~Indian 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 $0.3 million and ~~India based operations. The deferred tax benefit was primarily related to~~$0.6 million for the ~~increase of certain net deferred tax assets~~nine months ended September 30, 2019 and ~~amortization of stock options and the intangible assets related to the acquisition of Evolving Systems NC, Inc.~~2018, respectively. The net expense during the nine months ended September 30, ~~2016~~2019 consisted of current income tax expense of $0.3 million. The current tax expense consists of income tax primarily from our Indian and Nigerian based operations. The net expense during the nine months ended September 30, 2018 consisted of current income tax expense of $0.9 million and a deferred tax benefit of ~~($19,000).~~$0.3 million. The current tax expense consists ~~primarily~~ of income tax from our U.K. ~~and India~~ based operations. The deferred tax benefit was related primarily ~~related~~ to the ~~amortization of intangible assets related to~~decrease in deferred 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%~~(101%) and ~~31%~~38% for the three months ended September 30, ~~2017~~2019 and ~~2016,~~2018, respectively. ~~The decrease in our~~Our 2019 effective tax rate relates to ~~a higher proportion of~~ our net income ~~being generated in the U.K.,~~coming from our Indian based operations and net losses from our other operations for which ~~the statutory corporate~~we 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%~~(4%) and ~~30%~~34% for the nine months ended September 30, ~~2017~~2019 and ~~2016~~2018, respectively. ~~The decrease in our~~Our 2019 effective tax ~~rates~~rate 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 operations for which ~~the statutory corporate~~we 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 to~~We maintain a valuation allowance on ~~our~~the domestic net deferred tax ~~asset.~~assets other than $0.8 million in AMT credits and $0.5 million in FTC, 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 ~~development~~foreign tax ~~credits~~credits. We assessed the realizability of our domestic deferred tax assets 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 $2.1~~decreased $3.2 million, or ~~26%~~40%, to ~~$10.1~~$4.9 million as of September 30, ~~2017~~2019 from ~~$8.0~~$8.1 million as of December 31, ~~2016.~~2018. The ~~increase~~decrease in working capital is related to ~~increases~~a decrease in ~~contract receivables,~~cash and cash equivalents, accounts receivable, unbilled ~~work-in-progress and prepaid and other~~work in progress along with an increase in unearned revenue, the recording of an additional current ~~assets primarily as~~liability related to Topic 842 offset by a ~~result of the acquisitions of EVOL BLS~~decrease trade accounts payable and the ~~Lumata Entities.~~current portion of long term debt.

CONTRACTUAL OBLIGATIONS

There have been no material changes to the contractual obligations as disclosed in our ~~2016~~2018 Annual Report on Form ~~10-K.~~10-K, except that as of September 30, 2019, Evolving Systems had agreed in principal to enter into amendments (See Note 7) for the two credit facilities with East West Bank. The purpose of the amendments was to receive a waiver of certain covenants not achieved and to amend future covenant requirements.

LIQUIDITY AND CAPITAL RESOURCES

We have historically financed operations through cash flows from operations and ~~equity transactions.~~bank borrowings. At September 30, ~~2017,~~2019, our principal source of liquidity was ~~$7.6~~$4.3 million in cash and cash equivalents and ~~$10.8~~$6.0 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 ~~expansion~~growth of our business ~~through~~ both ~~organic growth as well as possible acquisition activities, the expansion of~~organically and by expanding our customer base ~~internationally and debt service payments on the Term Loan.~~internationally. Other uses of cash ~~may~~will include ~~quarterly dividends,~~product development, technology expansion, and capital ~~expenditures and technology expansion.~~expenditures.

Net cash provided by operating activities for ~~the~~ nine months ended September 30, ~~2017~~2019 and ~~2016~~2018 was ~~$2.6~~$0.6 million and ~~$5.5~~$2.8 million, respectively. Cash provided by operating activities for the nine months ended September 30, ~~2017~~2019 was primarily due to decreases of $2.1 million in accounts receivable and unbilled work-in-progress net of allowances and collection and an increase of $0.7 million to unearned revenues. This was partially offset by the net loss of $8.3 million (offset by noncash charges of $8.0 million), an increase in prepaid and other assets of $0.5 million, an increase in income tax receivable of $0.5 million, a decrease in current lease obligations of $0.3 million, and a decrease in accounts payables and accrued liabilities of $0.5 million. Cash provided by operating activities for the nine months ended September 30, 2018 was primarily due to net income ~~coupled with collection~~$1.2 million plus noncash charges of $1.6 million, and decreases in contract receivables ~~invoicing~~ of $2.1 million, unbilled ~~work-in-progress,~~work-in-process of $1.1 million, and prepaid and other assets ~~payment~~ of $0.2 million, partially offset by a decrease in unearned revenue of $0.5 million, and accounts payable and accrued liabilities ~~and increased unearned revenue.~~of approximately $2.9 million related primarily to vendor payments.

Net cash used in investing activities was $0.3 million compared to net cash used in financing activities of less than $0.1 million during the nine months ended September 30, ~~2017~~2019 and 2018, respectively, and was ~~$6.0 million~~primarily due to the ~~acquisition~~purchase of ~~EVOL BLS~~property and ~~the Lumata Entities, net of~~equipment.

Net cash ~~received, which were completed in the third quarter 2017. Cash~~ used in ~~investing~~financing activities ~~for~~was $2.7 million compared to net cash used in financing activities of $1.8 million during the nine months ended September 30, ~~2016 was $24,000 for the purchase of property~~2019 and ~~equipment.~~

~~Net cash provided by (used in) financing activities for the nine months ended September 30, 2017~~2018, respectively, and ~~2016 was $3.2 million and ($6.6) million, respectively. The cash provided by financing activities for the nine months ended September 30, 2017~~ 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 this Quarterly Report on Form 10-Q. In making this assessment we considered the following:

· Our cash and cash equivalents balance at September 30, ~~2017~~2019 of ~~$7.6~~$4.3 million;

· Our working capital balance of ~~$10.1~~$4.9 million; and

· Our ~~demonstrated~~ ability to historically generate positive cash flows from ~~operations;~~

· ~~Our planned capital expenditures~~operations of ~~less than~~ $0.5 million ~~during 2017;~~for the nine months ended September 30, 2019, and

· ~~The repayment of our long-term debt facility of which the first principal payment began in January 2017.~~ $2.6 million and $3.5 million for full years ended 2018, and 2017, respectively.

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 nine months ended September 30, ~~2017~~2019 and ~~2016,~~2018, the effect of exchange rate changes resulted in adecreases in cash of less than $0.1 million, ~~increase and $0.4 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.

~~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.Not applicable

~~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,~~2019, there were no changes in our internal ~~controls~~control 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.

PART II — OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

WeFrom time to time, we are involved in various legal matters arising in the normal course of business. ~~Losses, including estimated costs~~We also receive letters from former employees claiming that upon exiting their final compensation was not properly calculated. One such complaint from the Company’s former Chief Executive Officer has been lodged but not served, claiming he was not properly compensated upon termination along with additional allegations. The Company has engaged legal counsel through our insurance carrier and intends to defend ~~are recorded for these matters to the extent they were probable~~rigorously. The ultimate outcome of ~~loss and the amount of loss could be reasonably estimated.~~this matter is not estimable or determinable at this time.

ITEM 1A. RISK FACTORS

There ~~have~~has been nothe following material ~~changes~~change 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, ~~2016~~2018 under “Item 1A. Risk Factors.”

We incurred debt in connection with our acquisitions in prior years acquisitions of Lumata and SSM which could adversely affect our financial condition and restrict our operating flexibility.

In connection with our acquisition of “Lumata Entities” completed on September 4, 2017, we entered into a Term Loan Facility Agreement with East West Bank as lender in the amount of $4.7 million (the “Lumata Facility”) and we used the full amount of the Lumata Loan Facility to fund the acquisition. The Lumata Facility requires us to make monthly principal payments of approximately $0.1 million, which commenced 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%. The Lumata Facility is secured by substantially all of our assets.

In connection with our acquisition of SSM in September 2015, we increased our revolving credit facility with East West Bank from $5.0 million to $10.0 million (the “Revolving Facility”) and we used the full amount of the Revolving Facility to fund the acquisition. On February 29, 2016, we retired the Revolving Facility and we entered into a term loan agreement with East West Bank (“Term Loan”) for $6.0 million. The Term Loan bears interest at a floating rate equal to the U.S. Prime Rate plus 1.0% and is secured by substantially all of our assets, 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 the Company.

Both in the Lumata Facility and the Term Loan (collectively, “Loans”) include negative covenants that place restrictions on our 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 stockholders; and change the nature of our business materially.

On October 4, 2019 we entered into the First Amendment to the Lumata Facility and Sixth Amendment to the Term Loan (“Amendments”) to the Loans that replaced previous financial covenants with new covenants requiring a minimum consolidated cash balance of no less than the total bank debt outstanding and a minimum trailing three month consolidated EBITDA fixed dollar amount mutually agreed to by the Company and East West bank in the amendments

Outstanding amounts under the Loans 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.

The Loans and related obligations, including interest payments, covenants and restrictions, could have important consequences, including the following:

· reserving cash in order to satisfy the obligations relating to the Loans could adversely affect the amount or timing of investments to grow our business, impairing our ability to invest in and successfully grow our business;

· the Loans could limit our ability to obtain additional financing on satisfactory terms to fund our working capital requirements, capital expenditures, acquisitions, debt obligations and other general corporate requirements;

· the Loans may increase our vulnerability to general economic downturns, competition and industry conditions and we may be unable to take advantage of opportunities that our leverage prevents us from exploiting, placing us at a disadvantage to our competitors that are less leveraged; and

· the Loans impose restrictions on the manner in which we conduct our business, including restrictions on our ability to pay dividends, incur additional debt and sell assets.

The obligations under the Loans could have an adverse effect on our business, financial condition, operating results or cash flows. In addition, our failure to comply with the covenants under the Loans could result in an event of default and acceleration of the outstanding balance, which could significantly harm our business and cause our stock price to decline. The new Amendments included a waiver of any prior non-compliance from East West Bank.

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

ITEM 5. OTHER INFORMATION

None

ITEM 6. EXHIBITS

(a) Exhibits

~~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 September 30, 2017,~~ Exhibit 10.1 — Employment Agreement entered into between Evolving Systems, Inc. and Matthew Stecker, as filed as Exhibit 10.1 to the Registrant’s Form 8-K filed on July 23, 2019 and incorporated herein by reference. 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 September 30, 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, (iv) Condensed Consolidated Statements ~~of Income, (iii) Condensed Consolidated Statements of Comprehensive Income (Loss), (iv) Condensed Consolidated Statement~~ of Changes in Stockholders’ Equity, (v) Condensed Consolidated Statements of Cash Flows, and (vi) Notes to the Condensed Consolidated Financial Statements.

SIGNATURE

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.

Date: November ~~14, 2017~~12, 2019	/s/ ~~JULIE GOSAL HOARAU~~Mark P. Szynkowski
	~~Julie Gosal Hoarau~~Mark P. Szynkowski
	Senior Vice President of Finance ~~Treasurer~~ and Secretary
	(Principal Financial and Accounting Officer)

3634

Delaware		84-1010843
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

~~9777~~9800 Pyramid Court, Suite ~~100~~ 400 Englewood, Colorado		80112
(Address of principal executive offices)		(Zip Code)

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

Large ~~accelerated filer~~Accelerated Filer o		Accelerated ~~filer~~Filer o

Non-accelerated ~~filer~~Filer ox ~~(Do not check if a smaller reporting~~ ~~company)~~		Smaller ~~reporting company~~Reporting Company x

Emerging ~~growth company~~Growth Company o

	July 3, 2017
Cash Consideration
Total Cash Consideration	$	1,558

Earnout	380
Total purchase price	$	1,938

	September 30, 2017
	Gross Amount		Effects of changes in foreign currency exchange rates		Net Amount		Accumulated Amortization		Net Carrying Amount		Weighted- Average Amortization Period
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

	September 4, 2017
Cash Consideration
Total Cash Consideration	$	4,766

Total purchase price	$	4,766

	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

	September 30, 2017										December 31, 2016
	Gross Amount		Effects of changes in foreign currency exchange rates		Net Amount		Accumulated Amortization		Net Carrying Amount		Gross Amount		Accumulated Amortization		Net Carrying Amount		Weighted-Average Amortization Period
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

Twelve months ending September 30,
2018	$	960
2019	944
2020	940
2021	940
2022	859
Thereafter	1,154
	$	5,797

	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	$	—		$	—

	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,			For the Nine Months Ended September 30,
	2017 vs. 2016			2017 vs. 2016
Changes in:
Revenue	$	9		$	(417	)
Costs of revenue and operating expenses	55			(342		)
Operating loss	$	(46	)	$	(75	)