UNITED STATES
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒xQuarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended ended: September 30, 20172022
OR
OR☐
oTransition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from to
Commission File Number: Number 001-34261
SYMBOLIC LOGIC, INC.
EVOLVING SYSTEMS, INC.f/k/a Evolving Systems, Inc.
(Exact name of registrant as specified in its charter)
Delaware |
| 84-1010843 |
(State or other jurisdiction of incorporation or organization) | | ( Identification No.) |
Englewood |
| 80112 |
(Address of principal executive offices) | | (Zip |
(303) (303) 802-1000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| | | | |
Title of Each Class | Trading Symbol(s) | Name of each exchange on which registered | ||
Common Stock, par value $0.001 per share | EVOL | NONE |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x☒ No o☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§(Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x☒ No o☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, or a smaller reporting company or an emerging growth company. See definitionthe definitions of “large accelerated filer”,filer,” “accelerated filer”filer,” “smaller reporting company,” and “smaller reporting“emerging growth company” in Rule 12b-2 of the Exchange Act.Act:
Large accelerated filer |
| Accelerated filer |
Non-accelerated filer ☒ | | Smaller reporting company ☒ |
| |
|
Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act oAct. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o☐ No x☒
As of November 7, 20172022, there were 12,527,90710,668,992 shares outstanding of Registrant’s Common Stock (par value $0.001 per share).
EVOLVING SYSTEMS, INC.
Quarterly Report on Form 10-Q
September 30, 2017
2
PART I —- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SYMBOLIC LOGIC, INC.
EVOLVING SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and par value data)
(unaudited)
| | | | | | |
|
| September 30, 2022 |
| December 31, 2021 | ||
| | (unaudited) | | | | |
ASSETS |
| |
|
| |
|
Current assets: |
| |
|
| |
|
Cash and cash equivalents | | $ | 16,776 | | $ | 39,445 |
Prepaid and other current assets | |
| 467 | |
| 106 |
Fixed maturity securities, available for sale, fair value | |
| 4,345 | |
| — |
Equity securities, fair value | | | 6,031 | | | — |
Debt securities, available for sale, fair value | | | 1,575 | | | — |
Total current assets | |
| 29,194 | |
| 39,551 |
Property and equipment, net | |
| 4 | |
| 4 |
Investments, at cost | | | 1,000 | | | — |
Total assets | | $ | 30,198 | | $ | 39,555 |
| | | | | | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | |
|
| |
|
|
Current liabilities: | |
|
| |
|
|
Accounts payable and accrued liabilities | | $ | 703 | | $ | 1,252 |
Escrow liability | | | 172 | | | — |
Income taxes payable | |
| 441 | |
| 575 |
Other liabilities | |
| 33 | |
| — |
Total current liabilities | |
| 1,349 | |
| 1,827 |
Total liabilities | |
| 1,349 | |
| 1,827 |
| | | | | | |
Commitments and contingencies (Note 8) | |
| | |
| |
| | | | | | |
Stockholders’ equity: | |
|
| |
|
|
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; 11,110,881 shares issued and 10,668,992 shares outstanding as of September 30, 2022 and 12,437,073 shares issued and 12,258,184 shares outstanding as of December 31, 2021 | |
| 11 | |
| 12 |
Additional paid-in capital | |
| 97,920 | |
| 100,024 |
Treasury stock, 441,889 shares as of September 30, 2022 and 178,889 shares December 31, 2021, at cost | |
| (1,661) | |
| (1,253) |
Accumulated other comprehensive loss | |
| (3,153) | |
| — |
Accumulated deficit | |
| (64,268) | |
| (61,055) |
Total stockholders’ equity | |
| 28,849 | |
| 37,728 |
Total liabilities and stockholders’ equity | | $ | 30,198 | | $ | 39,555 |
|
| September 30, |
| December 31, |
| ||
|
| 2017 |
| 2016 |
| ||
ASSETS |
|
|
|
|
| ||
Current assets: |
|
|
|
|
| ||
Cash and cash equivalents |
| $ | 7,577 |
| $ | 7,614 |
|
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 |
| ||
Prepaid and other current assets |
| 3,016 |
| 1,553 |
| ||
Total current assets |
| 27,678 |
| 18,410 |
| ||
Property and equipment, net |
| 335 |
| 546 |
| ||
Amortizable intangible assets, net |
| 5,797 |
| 4,200 |
| ||
Goodwill |
| 24,956 |
| 20,599 |
| ||
Total assets |
| $ | 58,766 |
| $ | 43,755 |
|
|
|
|
|
|
| ||
LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
|
|
|
| ||
Current liabilities: |
|
|
|
|
| ||
Term loans - current portion |
| $ | 2,403 |
| $ | 1,997 |
|
Accounts payable and accrued liabilities |
| 7,404 |
| 4,275 |
| ||
Income taxes payable |
| 1,016 |
| 617 |
| ||
Contingent earn-out obligation |
| 393 |
| — |
| ||
Unearned revenue |
| 6,378 |
| 3,532 |
| ||
Total current liabilities |
| 17,594 |
| 10,421 |
| ||
Long-term liabilities: |
|
|
|
|
| ||
Term loans, net of current portion |
| 7,008 |
| 4,000 |
| ||
Total liabilities |
| 24,602 |
| 14,421 |
| ||
|
|
|
|
|
| ||
Commitments and contingencies |
|
|
|
|
| ||
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 |
| ||
Additional paid-in capital |
| 98,259 |
| 97,744 |
| ||
Treasury stock 178,889 shares as of September 30, 2017 and December 31, 2016, at cost |
| (1,253 | ) | (1,253 | ) | ||
Accumulated other comprehensive loss |
| (8,511 | ) | (9,992 | ) | ||
Accumulated deficit |
| (54,343 | ) | (57,177 | ) | ||
Total stockholders’ equity |
| 34,164 |
| 29,334 |
| ||
Total liabilities and stockholders’ equity |
| $ | 58,766 |
| $ | 43,755 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.statements
3
SYMBOLIC LOGIC, INC.
EVOLVING SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOMEOPERATIONS
(in thousands, except per share data)
(unaudited)
| | | | | | | | | | | | |
|
| For the Three Months Ended September 30, |
| For the Nine Months Ended September 30, | ||||||||
|
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||
| | | | | | | | | | | | |
Revenue | | $ | — | | $ | — | | $ | — | | $ | — |
| | | | | | | | | | | | |
OPERATING EXPENSES | |
| | |
|
| | | | | | |
General and administrative | |
| 1,097 | |
| 637 | | | 3,185 | | | 2,295 |
Depreciation | |
| 1 | |
| 1 | | | 2 | | | 2 |
Total operating expenses | |
| 1,098 | |
| 638 | | | 3,187 | | | 2,297 |
| | | | | | | | | | | | |
Loss from operations | |
| (1,098) | |
| (638) | | | (3,187) | | | (2,297) |
| | | | | | | | | | | | |
Other income (expense) | |
| | |
| | | | | | | |
Interest income | |
| 517 | |
| — | | | 1,096 | | | 2 |
Interest expense | |
| — | |
| (2) | | | (2) | | | (2) |
Other income (expense), net | |
| 93 | |
| — | | | 2 | | | (1) |
Realized gain on investments, net | |
| 127 | |
| — | | | 521 | | | — |
Unrealized loss on investments, net | |
| (144) | |
| — | | | (1,702) | | | — |
Other income (expense), net | |
| 593 | |
| (2) | | | (85) | | | (1) |
| | | | | | | | | | | | |
Loss from continuing operations before income taxes | |
| (505) | |
| (640) | | | (3,272) | | | (2,298) |
Income tax expense (benefit) | |
| 55 | |
| 15 | | | (10) | | | 23 |
Net loss from continuing operations | |
| (560) | |
| (655) | | | (3,262) | | | (2,321) |
| | | | | | | | | | | | |
Income from discontinued operations before income taxes | |
| — | |
| 1,009 | | | — | | | 2,925 |
Income tax expense (benefit) from discontinued operations | |
| — | |
| 279 | | | (49) | | | 492 |
Net income from discontinued operations | |
| — | |
| 730 | | | 49 | | | 2,433 |
| | | | | | | | | | | | |
Net (loss) income | | $ | (560) | | $ | 75 | | $ | (3,213) | | $ | 112 |
| | | | | | | | | | | | |
Basic loss per common share from continuing operations | | $ | (0.05) | | $ | (0.05) | | $ | (0.28) | | $ | (0.19) |
Basic earnings per common share from discontinued operations | | $ | — | | $ | 0.06 | | $ | — | | $ | 0.20 |
| | | | | | | | | | | | |
Diluted loss per common share from continuing operations | | $ | (0.05) | | $ | (0.05) | | $ | (0.28) | | $ | (0.19) |
Diluted earnings per common share from discontinued operations | | $ | — | | $ | 0.06 | | $ | — | | $ | 0.20 |
| | | | | | | | | | | | |
Weighted average basic shares outstanding | |
| 10,803 | |
| 12,258 | | | 11,801 | | | 12,240 |
Weighted average diluted shares outstanding | |
| 10,803 | |
| 12,258 | | | 11,801 | | | 12,258 |
|
| For the Three Months Ended |
| For the Nine Months Ended |
| ||||||||
|
| 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 |
| ||||
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.statements
4
SYMBOLIC LOGIC, INC.
EVOLVING SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME (LOSS)
(in thousands)
(in thousands)(unaudited)
| | | | | | | | | | | | |
|
| For the Three Months Ended September 30, |
| For the Nine Months Ended September 30, | ||||||||
|
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||
Net (loss) income | | $ | (560) | | $ | 75 | | $ | (3,213) | | $ | 112 |
| | | | | | | | | | | | |
Other comprehensive (loss) | |
| | |
| | |
| | |
| |
Foreign currency translation (loss) | |
| — | |
| (36) | |
| — | |
| (14) |
Unrealized loss on available-for-sale investments | |
| (579) | |
| — | |
| (3,153) | |
| — |
Comprehensive (loss) income | | $ | (1,139) | | $ | 39 | | $ | (6,366) | | $ | 98 |
(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 | ) |
The accompanying notes are an integral part of these condensed consolidated financial statements.statements
5
SYMBOLIC LOGIC, INC.
EVOLVING SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTSTATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(in thousands, except share data)
(unaudited)
Nine Months Ended September 30, 2022
|
|
|
|
|
|
|
|
|
| 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 |
|
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | Accumulated | | | | | | | |
| | | | | | | Additional | | | | | other | | | | | Total | |||
| | Common Stock | | paid-in | | Treasury | | comprehensive | | Accumulated | | stockholders’ | ||||||||
|
| Shares |
| Amount |
| capital |
| stock |
| loss |
| deficit |
| equity | ||||||
Balance at January 1, 2022 |
| 12,258,184 | | $ | 12 | | $ | 100,024 | | $ | (1,253) | | $ | — | | $ | (61,055) | | $ | 37,728 |
Restricted stock vested |
| 175,000 | |
| — | |
| — | |
| — | |
| — | |
| — | |
| — |
Stock-based compensation expense |
| — | |
| — | |
| 365 | |
| — | |
| — | |
| — | |
| 365 |
Treasury stock acquired | | (263,000) | | | — | | | — | | | (408) | | | — | | | — | | | (408) |
Retirement of common stock |
| (1,501,192) | |
| (1) | |
| (2,469) | |
| — | |
| — | |
| — | |
| (2,470) |
Net loss |
| — | |
| — | |
| — | |
| — | |
| — | |
| (3,213) | |
| (3,213) |
Unrealized loss on available-for-sale investments |
| — | |
| — | |
| — | |
| — | |
| (3,153) | |
| — | |
| (3,153) |
Balance at September 30, 2022 |
| 10,668,992 | | $ | 11 | | $ | 97,920 | | $ | (1,661) | | $ | (3,153) | | $ | (64,268) | | $ | 28,849 |
Nine Months Ended September 30, 2021
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | Accumulated | | | | | | | |
| | | | | | | Additional | | | | | other | | | | | Total | |||
| | Common Stock | | paid-in | | Treasury | | comprehensive | | Accumulated | | stockholders’ | ||||||||
|
| Shares |
| Amount |
| capital |
| stock |
| loss |
| deficit |
| equity | ||||||
Balance at January 1, 2021 |
| 12,195,909 | | $ | 12 | | $ | 99,776 | | $ | (1,253) | | $ | (10,345) | | $ | (78,500) | | $ | 9,690 |
Restricted stock vested |
| 61,806 | |
| — | |
| — | |
| — | |
| — | |
| — | |
| — |
Stock-based compensation expense |
| — | |
| — | |
| 242 | |
| — | |
| — | |
| — | |
| 242 |
Net income |
| — | |
| — | |
| — | |
| — | |
| — | |
| 112 | |
| 112 |
Foreign currency translation loss |
| — | |
| — | |
| — | |
| — | |
| (14) | |
| — | |
| (14) |
Balance at September 30, 2021 |
| 12,257,715 | | $ | 12 | | $ | 100,018 | | $ | (1,253) | | $ | (10,359) | | $ | (78,388) | | $ | 10,030 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
EVOLVING SYSTEMS, INC.statements
6
SYMBOLIC LOGIC, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWSCHANGES IN STOCKHOLDERS’ EQUITY
(in thousands, except share data)
(in thousands)(unaudited)
(unaudited)Three Months Ended September 30, 2022
|
| 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 |
|
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | Accumulated | | | | | | | |
| | | | | | | Additional | | | | | other | | | | | Total | |||
| | Common Stock | | paid-in | | Treasury | | comprehensive | | Accumulated | | stockholders’ | ||||||||
|
| Shares |
| Amount |
| capital |
| stock |
| loss |
| deficit |
| equity | ||||||
Balance at June 30, 2022 |
| 10,831,992 | | $ | 11 | | $ | 97,760 | | $ | (1,253) | | $ | (2,574) | | $ | (63,708) | | $ | 30,236 |
Restricted stock vested |
| 100,000 | |
| — | |
| — | |
| — | |
| — | |
| — | |
| — |
Stock-based compensation expense | | — | | | — | | | 160 | | | — | | | — | | | — | | | 160 |
Treasury stock acquired |
| (263,000) | |
| — | |
| — | |
| (408) | |
| — | |
| — | |
| (408) |
Net loss |
| — | |
| — | |
| — | |
| — | |
| — | |
| (560) | |
| (560) |
Unrealized loss on available-for-sale investments |
| — | |
| — | |
| — | |
| — | |
| (579) | |
| — | |
| (579) |
Balance at September 30, 2022 |
| 10,668,992 | | $ | 11 | | $ | 97,920 | | $ | (1,661) | | $ | (3,153) | | $ | (64,268) | | $ | 28,849 |
Three Months Ended September 30, 2021
| | | | | | | | | | | | | | | | | | | | |
| | |
| | | | | | | | | | Accumulated | | | | | | | |
| | | | | | | Additional | | | | | other | | | | | Total | |||
| | Common Stock | | paid-in | | Treasury | | comprehensive | | Accumulated | | stockholders’ | ||||||||
|
| Shares |
| Amount |
| capital |
| stock |
| loss |
| deficit |
| equity | ||||||
Balance at June 30, 2021 |
| 12,257,246 | | $ | 12 | | $ | 99,990 | | $ | (1,253) | | $ | (10,323) | | $ | (78,463) | | $ | 9,963 |
Restricted stock vested |
| 469 | |
| — | |
| — | |
| — | |
| — | |
| — | |
| — |
Stock-based compensation expense |
| — | |
| — | |
| 28 | |
| — | |
| — | |
| — | |
| 28 |
Net income |
| — | |
| — | |
| — | |
| — | |
| — | |
| 75 | |
| 75 |
Foreign currency translation loss |
| — | |
| — | |
| — | |
| — | |
| (36) | |
| — | |
| (36) |
Balance at September 30, 2021 |
| 12,257,715 | | $ | 12 | | $ | 100,018 | | $ | (1,253) | | $ | (10,359) | | $ | (78,388) | | $ | 10,030 |
The accompanying notes are an integral part of these condensed consolidated financial statements.statements
7
SYMBOLIC LOGIC, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
EVOLVING SYSTEMS, INC.(in thousands)
(unaudited)
| | | | | | |
|
| For the Nine Months Ended September 30, | ||||
|
| 2022 |
| 2021 | ||
CASH FLOWS FROM OPERATING ACTIVITIES: |
| |
|
| |
|
Net (loss) income | | $ | (3,213) | | $ | 112 |
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities: | |
|
| |
|
|
Depreciation | |
| 2 | |
| 308 |
Amortization of intangible assets | |
| — | |
| 717 |
Amortization of operating leases — right of use assets | |
| — | |
| 284 |
Stock-based compensation expense | |
| 365 | |
| 242 |
Foreign currency transaction loss, net | |
| — | |
| 148 |
Bad debt expense | |
| — | |
| 14 |
Provision for deferred income taxes | |
| — | |
| (5) |
Loan origination income | | | (14) | | | — |
Gain on PPP Loan forgiveness | | | — | | | (319) |
Realized gains on investments | | | (521) | | | — |
Unrealized losses on investments | |
| 1,702 | |
| — |
Change in operating assets and liabilities: | |
| | |
| |
Contract receivables | |
| — | |
| 462 |
Unbilled work-in-progress | |
| — | |
| (502) |
Prepaid and other assets | |
| (360) | |
| (25) |
Accounts payable and accrued liabilities | |
| 97 | |
| (153) |
Escrow liability | | | 172 | | | — |
Income taxes receivable | |
| — | |
| (417) |
Income taxes payable | |
| (134) | |
| — |
Unearned revenue | |
| — | |
| 1,015 |
Long-term assets - other | |
| — | |
| (256) |
Lease obligations — operating leases | |
| — | |
| (285) |
Net cash (used in) provided by operating activities | |
| (1,904) | |
| 1,340 |
| | | | | | |
CASH FLOWS FROM INVESTING ACTIVITIES: | |
| | |
| |
Purchases of property and equipment | |
| (2) | |
| (316) |
Purchases of investments | |
| (21,484) | |
| — |
Proceeds on sale of investments | |
| 4,245 | |
| — |
Transaction fees related to prior period disposition | | | (646) | | | — |
Net cash used in investing activities | |
| (17,887) | |
| (316) |
| | | | | | |
CASH FLOWS FROM FINANCING ACTIVITIES: | |
| | |
| |
Principal payments on notes payable | |
| — | |
| (143) |
Purchase of treasury stock | | | (408) | | | — |
Retirement of common stock | |
| (2,470) | |
| — |
Net cash used in financing activities | |
| (2,878) | |
| (143) |
| | | | | | |
Effect of exchange rate changes on cash and cash equivalents | |
| — | |
| (63) |
| | | | | | |
Net (decrease) increase in cash and cash equivalents | |
| (22,669) | |
| 818 |
Cash and cash equivalents at beginning of period | |
| 39,445 | |
| 2,763 |
Cash and cash equivalents at end of period | | $ | 16,776 | | $ | 3,581 |
| | | | | | |
Supplemental disclosure of cash and non-cash transactions: | |
| | |
| |
Interest paid | | $ | 2 | | $ | 4 |
Income taxes paid, net of refunds | | $ | 82 | | $ | 788 |
Deferred loan origination income | | $ | 33 | | $ | — |
Supplemental non-cash amounts of lease liabilities arising from obtaining right of use assets | | $ | — | | $ | 370 |
The accompanying notes are an integral part of these condensed consolidated financial statements
8
SYMBOLIC LOGIC, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 — BASISORGANIZATION AND SUMMARY OF PRESENTATION
SIGNIFICANT ACCOUNTING POLICIES
Organization — We are On December 31, 2021, Symbolic Logic, Inc. (the “Company” or “Symbolic Logic”) f/k/a providerEvolving Systems, Inc. (“Evolving Systems”) closed on the terms of software solutionsthe Equity Purchase Agreement (the “Equity Purchase Agreement”) and servicestwo Software Purchase Agreements (the “Software Purchase Agreements” and, together with the Equity Purchase Agreement and the other transaction documents described therein, the “Purchase Agreements”) dated as of October 15, 2021, with subsidiaries and affiliates of PartnerOne Capital, Inc. (the “Purchasers”). The Purchase Agreements provided for the sale and transfer of substantially all of Evolving Systems’ operating subsidiaries and all of its assets to the wireless, wirelinePurchasers for an aggregate purchase price of $40 million (subject to adjustment as set forth in the Equity Purchase Agreement). The Purchase Agreements included customary terms and cable markets. We maintain long-standing relationships with manyconditions, including an adjustment to the purchase price based on Evolving Systems’ cash and cash equivalents on hand as of the largest wireless, wirelineclosing date and cable companies worldwide. Our customers rely on usprovisions that require Evolving Systems to develop, deploy, enhanceindemnify the Purchasers for certain losses that it incurs as a result of a breach by Evolving Systems of its representations and maintain software solutions that providewarranties in the Purchase Agreements and certain other matters. Evolving Systems received cash proceeds of $36,032,899 and may receive up to an additional $2,500,000 in consideration pursuant to the terms of an escrow agreement entered into in connection with the Equity Purchase Agreement.
Results of the sold subsidiaries are retrospectively reported as discontinued operations in the accompanying condensed consolidated financial statements for all periods presented. Prior year information has been adjusted to conform to the current year presentation. Unless otherwise stated, the information disclosed in the footnotes accompanying the condensed consolidated financial statements refers to continuing operations. See Note 2 “Discontinued Operations” for more information regarding results from discontinued operations.
Simultaneously with the approval by the board of directors of the Company to execute the Purchase Agreements, the board formed a varietysubcommittee of service activationthe board (the “Investment Committee”) to evaluate options to maximize the value of the Company’s assets, which, following the closing of the transactions contemplated under the Purchase Agreements, consists primarily of cash and provisioning functions. In 2016, we began a shiftcash equivalents. The board of directors has authorized the Investment Committee to retain such counsel, experts, consultants, or other professionals as the Investment Committee shall deem appropriate from selling technologytime to offering business solutions.time to aid the Investment Committee in the performance of its duties. The value proposition has moved from cost savingsCompany’s directors and executives have an extensive background in mergers and acquisitions (“M&A”) activity. The Company plans to revenue increases for the carrieruse its cash assets and our business model has moved from classic capex license and servicesnetwork of relationships to opex models based on recurring managed services with performance fees. Our software solution platform, Real-time Lifecycle Marketing™ (“RLM”), enables carriers’ marketing departmentsseek to innovate, execute and manage highly-personalized and contextually-relevant, interactive campaigns that engage consumers in real time. Our service activation solution, Tertio® (“TSA”) is used to activate bundles of voice, video and data services for wireless, wireline and cable network operators; our SIM card activation solution, Dynamic SIM Allocation TM (“DSA”) is used to dynamically allocate and assign resources to Mobile Network Operators (“MNOs”) devices that rely on SIM cards; our Mobile Data Enablement TM (“MDE”) solution provides a data consumption and policy management solution for wireless carriers and Mobile Virtual Network Operators (“MVNOs”) that monitor the usage and consumption of data services; our Total Number Management™ (“TNM”) product is a scalable and fully automated database solution that enables operators to reliably and efficiently manage their telephone numbersacquire businesses and/or assets as well as other communication identifiers (i.e. SIMs, MSISDNs, IMSIs, ICCIDs, IPs). Our solutions can be deployedto consider strategic partners.
Following the sale of its assets in December 2021, the Company began to evaluate two initial areas of product focus, each of which is in a research-oriented pre-release mode. The two areas of focus relate to the application of self-learning algorithms and the symbolic tagging and organizing of physical objects. The Company continues to selectively seek new opportunities through potential mergers, acquisitions, joint ventures, strategic partnerships, and future product development.
The COVID-19 global outbreak caused instability and volatility in multiple markets throughout the world. We have leveraged our ability to work remotely resulting in limited effect on premise or as a Software-as-a-Service (“SaaS”).
our day-to-day operations.
On July 6, 2017December 9, 2021, the Company received a letter from the Nasdaq Capital Market (“NASDAQ”) regarding the Equity Purchase Agreement and the two Software Purchase Agreements entered into by the Company pursuant to which we announcedsold all of our assets. The NASDAQ staff requested certain information from the completionCompany regarding its on-going business. We provided a response to the staff on January 7, 2022. We received a follow up request from the NASDAQ for additional information and we provided a response to the staff on February 15, 2022.
On April 12, 2022, Evolving Systems, Inc. filed with the Secretary of State of Delaware a Certificate of Amendment to amend its Certificate of Incorporation to change the Company’s name from “Evolving Systems, Inc.” to “Symbolic Logic, Inc.” effective as of April 12, 2022. The Company also amended and restated its Bylaws to change all Company references from “Evolving Systems, Inc.” to “Symbolic Logic, Inc.” No other amendments were made to the Certificate of Incorporation or Bylaws.
9
On April 13, 2022, Symbolic Logic, Inc. f/k/a Evolving Systems, Inc. notified the NASDAQ of its intention to voluntarily withdraw its common stock, par value $0.001 per share (the “Common Stock”), from listing on Nasdaq. The Company filed a Form 25 with the Securities and Exchange Commission (the “SEC”) on Monday, April 25, 2022, relating to delisting the Common Stock under Section 12(b) of the previouslySecurities Exchange Act of 1934, as amended (the “Exchange Act”), to be effective ten days thereafter. After delisting, the Common Stock may be quoted on the OTC Pink Open Market.
On May 23, 2022, the Company announced acquisitiona modified Dutch auction tender offer to purchase with cash up to $9.6 million of Business Logic Systems (“BLS”). BLS, headquarteredshares of its common stock which expired on June 23, 2022. Based on the final count by the depositary for the tender offer, a total of 1,501,192 shares of common stock were validly tendered and not validly withdrawn at or below the price of $1.55 per share. The Company accepted all of these shares of common stock for purchase at the purchase price of $1.55 per share, for a total cost of $2.5 million, including $0.2 million in Newbury, UK, specializes in data-driven customer value managementfees and customer engagement solutions that have been implemented in over 20 mobile operators in Europe, Africa, Asia-Pacific andexpenses. The total of 1,501,192 shares of common stock accepted for purchase represents approximately 12.2 % of 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 extendedCompany’s total shares of common stock outstanding.
During the month of September 2022, the Company through a suitedirect purchase and an open market purchase which were not related to the tender offering conducted in May 2022, acquired an additional 263,000 shares at a purchase price of loyalty and retention solutions.
$1.55 per share, for a total cost of $0.4 million. These shares are currently being held as treasury stock.
On September 7, 2017 we announcedAugust 26, 2022, Matthew Stecker resigned as 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 beganCompany’s Chief Executive Officer. In connection 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.
Whileresignation, the Company remainsand Mr. Stecker entered into an agreement that including a market leader in core service activationrelease of all claims and number management services through established solutions like Tertiocertain obligations under his employment agreement and Dynamic SIM Allocation that transformed how customers buyMr. Stecker received a payment of $0.35 million and activate phones, Evolving Systems has also become a leader in Customer Value Management (CVM) solutions throughaccelerated vesting of his 0.1 million shares of unvested restricted stock awards. On 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 eachsame day, the Company helpsappointed Mr. Igor Volshteyn as its customers grow market share, increase average revenue per user (ARPU), stem churn or improveChief Executive Officer.
On October 21, 2022 the Company’s board of directors determined that “going dark” is in the best interest of the Company and its stockholders as a result of the substantial cost savings from the elimination of accounting and other expense related to maintaining its status as a public reporting company, as well as the increased ability of management to focus on core business efficienciesactivities, among other things. The Company therefore plans to affect a suspension of its reporting obligation under the Securities Exchange Act of 1934, as amended, and expects to file a Form 15 with the Securities and Exchange Commission in a dynamic market. These acquisitionsearly January 2023.
CCUR Holdings Inc. filed an amended schedule 13D on November 2, 2022, announcing that they have acquired in total 6,982,939 common shares of the Company. This represented 65% beneficial ownership of the outstanding shares of the Company as of the date of the announcement.
We believe our current liquidity from our investments and future operations will enable growthbe sufficient to fund operations and meet the Company’s cash needs for future working capital and capital expenditure requirements for at least the next twelve months from the date of issuance of these condensed consolidated financial statements. In making this assessment, we considered our CVM technology$16.8 million in cash and portfolio, which will position us to be a next-generation mobile consumer engagement solutions accelerator across multiple industry verticals.cash equivalents and our $27.8 million in working capital at September 30, 2022.
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 (“US GAAP”) and in conformity with the instructions to Form 10-Q and Rule 8-03Article 8 of Regulation S-X and the related rules and regulations of the Securities and Exchange Commission (“SEC”).SEC. Accordingly, certain information and note disclosures normally included in the consolidated financial statements prepared in accordance with US 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 US GAAP and SEC regulations for interim consolidated financial statements. The results for the three and nine months ended September 30, 20172022 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, 20162021 included in our Annual Report on Form 10-K.
10-K as filed with the SEC on April 11, 2022.
Reclassifications - Certain reclassifications have been made to the 2016 financial statements to conform to the consolidated 2017 financial statement presentation. These reclassifications had no effect on net earnings or cash flows as previously reported.
Use of Estimates — The preparation of condensed consolidated financial statements in conformity with GAAPaccounting principles generally accepted in the United States of America (US 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
10
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, allowance for doubtful accounts, 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 investments and stock-based compensation amounts. Actual results could differ from these estimates.
Foreign Currency — Our functional currency is the U.S. dollar. The functional currency of our foreign operations 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 consolidated statements of income 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.Symbolic Logic 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 assess the impairment of identifiable intangibles if events or changes in circumstances indicate that the carrying value of the asset may not be recoverable. If we determine that the carrying value of intangibles and/or long-lived assets may not be recoverable, we compare the estimated undiscounted cash flows expected to result from the use of the asset and its eventual disposition to the asset’s carrying amount. If an amortizable intangible or long-lived asset is not deemed to be recoverable, we recognize an impairment loss representing the excess of the asset’s carrying value over its estimated fair value.
Fair Value Measurements — Fair value is the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is estimated by applying the following hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement:
Level 1 — Quoted prices in active 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 for licenses to our software products and services to customize such software to meet our customers’ use. When the customization services are determined to be essential to the functionality of the delivered software, we recognize revenue using the percentage-of-completion method of accounting. In these types of arrangements, we do not typically have vendor specific objective evidence (“VSOE”) of fair value on the license fee/services portion (services are related to customizing the software) of the arrangement due 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 of the first year of maintenance in the arrangement. The license/services portion is recognized using the percentage-of-completion method of accounting and the warranty/maintenance services are separated based on the renewal rate in the contract and recognized ratably 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 have 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.
In arrangements where the services are not essential to the functionality of the delivered software, we recognize license revenue when a license agreement has been signed, delivery and acceptance have occurred, the fee is fixed or determinable and collectability is reasonably assured. Where applicable, we unbundle and record as revenue fees from multiple element arrangements as the elements are delivered to the extent that VSOE of fair value of the undelivered elements exist. If VSOE for the undelivered elements does not exist, we defer fees from such arrangements until the earlier of the date that VSOE does exist on the undelivered elements or all of the elements have been delivered.
We recognize revenue from fixed-price service contracts using the proportional performance method of accounting, which is similar to the percentage-of-completion method described above. 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 obligation to our customers under such arrangements is fulfilled.
We recognize revenue from our managed services contracts primarily ratably over the service contract period. 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 method of accounting.
We recognize revenue from our MDE contracts based on the number of transactions per month multiplied by a factor based on a unique table for transaction volumes relating to each account.
We recognize customer support, including maintenance 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 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 was material to our unaudited Consolidated Financial Statements in the three and nine months ended September 30, 2017 and 2016.
Stock-based Compensation — We account for stock-based compensation by applying a fair-value-based measurement method to account for share-basedstock-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 the expected term of the options and expected volatility of the price of our common stock. We recognize forfeitures as they occur rather than estimating them at the time of the grant.
TheInvestments — Investments in entities where the Company owns less than twenty percent of the voting stock of the individual entity, does not exercise significant influence over operating and financial policies of the entity, and the investment does not have a readily determinable fair marketvalue, are accounted for using the cost method. Under the cost method of accounting, the investment is carried at cost less any impairment, adjusted for observable price changes of similar investments of the same issuer. Fair value is not estimated for these investments if there are no identified events or changes in circumstances that may have an effect on the fair value of restricted shares for share-based compensation expensing is equal to the closing price of our common stock oninvestment. Under this method, 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 anniversaryCompany’s share of the dateearnings or losses of such investee companies is not included in the grant and theconsolidated balance will be released quarterly over a three year period.
Comprehensive Income (Loss) — Comprehensive income (loss) consistssheet or consolidated statements 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.operations. As of September 30, 20172022, the Company held one cost method investment for $1,000,000 (see Note 5, “Investments”).
Fair Value Measurements — Fair value is defined as the price that would be received from selling an asset or paid to transfer a liability in an orderly fashion between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be either recorded or disclosed at fair value, we had no restricted cash.consider the most advantageous market in which it would transact and assumptions that market participants would use when pricing the asset or liability.
ASC Topic 820, Fair Value Measurements and Disclosures, requires certain disclosures around fair value and establishes a fair value hierarchy for valuation inputs. The hierarchy prioritizes the inputs into three levels based on the extent to which inputs used in measuring fair value are observable in the market. Each fair value measurement is reported in one of the three levels which are determined by the lowest level input that is significant to the fair value measurement in its entirety. These levels are:
● | Level 1 — Quoted prices (unadjusted) in active markets for identical assets or liabilities; |
● | Level 2 — Inputs other than quoted prices included within Level 1 that are either directly or indirectly observable; and |
● | Level 3 — Assets or liabilities for which fair value is based on valuation models with significant unobservable pricing inputs and which include the use of management estimates. |
Our investment portfolio consists of money market funds, equity securities, and corporate debt. All highly liquid investments with original maturities of three months or less when purchased are considered to be cash equivalents. All cash equivalents are carried at cost less any unamortized premium or discount, which approximates fair value. All investments with original maturities of more than three months when purchased are classified as available-for-sale, trading, or held-to-maturity investments.
Our fixed maturity securities and debt securities are classified as available-for-sale, and are reported at fair value, with unrealized gains and losses, net of tax, reported in the accompanying condensed consolidated balance sheets in stockholders’ equity as a component of accumulated other comprehensive income or loss. Realized gains or losses on available-for-sale investments are reclassified from other comprehensive income (loss) to net income (loss) in the condensed consolidated statements of operations. Investments in equity securities with readily determinable fair values (marketable) are measured at fair value, with changes in the fair value recognized as a component of unrealized gain on investments, net in the condensed consolidated statements of operations.
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Investments in equity investments that do not have readily determinable fair values (non-marketable) are accounted for at cost minus impairment, if any, and any changes resulting from observable price changes in orderly transactions for the identical or similar investment of the same issuer, also referred to as the measurement alternative. Any adjustments to the carrying value of these investments are recorded in unrealized gain on investments, net in the condensed consolidated statements of operations.
Interest on securities is reported in the accompanying condensed consolidated statements of operations in interest income. Dividends paid by securities are reported in the accompanying condensed consolidated statements of operations in other income. Realized gains or losses are reported in the accompanying condensed consolidated statements of operations in net realized gain on investments.
The following table presents the fair value hierarchy for those assets and liabilities the Company measured at fair value on a recurring basis:
| | | | | | | | | | | | |
|
| Fair value at September 30, 2022 | ||||||||||
|
| Total |
| Level 1 |
| Level 2 |
| Level 3 | ||||
Money market funds | | $ | 13,799 | | $ | 13,799 | | $ | — | | $ | — |
Cash and cash equivalents | | $ | 13,799 | | $ | 13,799 | | $ | — | | $ | — |
| | | | | | | | | | | | |
Common stock and common stock options |
| $ | 6,031 |
| $ | 6,031 |
| $ | — |
| $ | — |
Equity securities | | $ | 6,031 | | $ | 6,031 | | $ | — | | $ | — |
| | | | | | | | | | | | |
Debt securities | | $ | 1,575 | | $ | — | | $ | 1,575 | | $ | — |
Debt securities | | $ | 1,575 | | $ | — | | $ | 1,575 | | $ | — |
| | | | | | | | | | | | |
Corporate bonds | | $ | 4,345 | | $ | — | | $ | 4,345 | | $ | — |
Fixed maturity securities | | $ | 4,345 | | $ | — | | $ | 4,345 | | $ | — |
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. We measure deferred tax assets and liabilities using enacted tax rates expected to be applied to taxable income in the years in which those temporary differences are expected to be recovered or settled. We reduce deferred tax assets by a valuation allowance if, based on available evidence, it is more likely than not that these benefits will not be realized.
We use a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more likely than not to be sustained upon examination by taxing authorities.
Segment Information — We define operating segments as components of our enterprise for which separate financial information is reviewed regularly by the chief operating decision-makers to evaluate performance and to make operating decisions. We have identified our Chief Executive Officer and Senior Vice President of Finance as our chief operating decision-makers (“CODM”). These chief operating decision makers review revenues by segment and review overall results of operations.
We currently operate our business as one operating segment which includes two revenue types: license fees revenue and services revenue (as shown on the condensed consolidated statements of income). 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, managed services, annual support fees, recurring maintenance fees, fees for maintenance upgrades and warranty services. Warranty services that are similar to software maintenance services are typically bundled with a license sale.
RecentRecently Adopted Accounting Pronouncements — In May 2014,2021, the Financial Accounting Standards Board (“FASB”)FASB issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from ASU 2021-04—Earnings Per Share (ASC 260), Debt—Modifications and Extinguishments (ASC 470-50), Compensation—Stock Compensation (ASC 718) and Derivatives and Hedging—Contracts in Entity’s Own Equity (ASC 815-40). The amendments in this update affect all entities that issue freestanding written call options that are classified in equity. Specifically, the amendments affect those entities when a freestanding equity-classified written call option is modified or exchanged and remains equity classified after the modification or exchange. The amendments that relate to the recognition and measurement of EPS for certain modifications or exchanges of freestanding equity-classified written call options affect entities that present EPS in accordance with Customers,” Topic 606. This Update affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets, unless those contracts are within the scope of other standards. The guidance in ASC 260, Earnings Per Share. The amendments in this Update supersedes the revenue recognition requirementsupdate are effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. The amendments in Topic 605, Revenue Recognition and most industry-specific guidance. The core principlethis ASU did not have a material impact on our condensed consolidated financial statements.
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Recently Issued Accounting Pronouncements — In AprilJune 2016, the FASB issued ASU No. 2016-10, “Revenue from Contracts with Customers,” Topic 606: “Identifying Performance Obligations2016-13, Financial Instruments - Credit Losses (ASC 326): Measurement of Credit Losses on Financial Instruments, that changes the impairment model for most financial assets and Licensing”. This Update clarifies guidance relatedcertain other instruments. For receivables, loans and other instruments, entities will be required to identifying performance obligations and licensing
implementation guidance containeduse a new forward-looking “expected loss” model that generally will result in the earlier recognition of allowance for losses. In addition, an entity will have to disclose significantly more information about allowances and credit quality indicators. The new revenue recognition standard. The Update includes targeted improvements based on input the Board received from the Transition Resource Group 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 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”. 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 ASUstandard is effective for the Company for fiscal years, and interim periods within those years beginning after December 15, 2017 for public companies and 2018 for non-public entities. We do not expect the adoption of this standard to 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 are2022. The Company is currently in the process of assessing the impact of this new standard on its consolidated financial statements. The Company anticipates presenting amendments on a modified-retrospective basis through a cumulative effect adjustment to opening retained earnings as of the date of adoption.
In June 2022, the FASB issued ASU 2022-03, Fair Value Measurement (ASC 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions. The new standard clarifies that a contractual restriction on ourthe sale of an equity security should not be considered in measuring the fair value of the security. The new standard also requires certain disclosures related to equity securities with contractual sale restrictions. The ASU is effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The standard should be applied prospectively. The Company is currently in the process of assessing the impact of this new standard on its consolidated financial statements.
In January 2017,NOTE 2 — DISCONTINUED OPERATIONS
On December 31, 2021, Evolving Systems, Inc. and certain of its subsidiaries completed the FASB issued ASU No. 2017-04, Intangibles-GoodwillEquity Purchase Agreement and Other (Topic 350), which includes provisions intendedtwo Software Purchase Agreements with subsidiaries and affiliates of PartnerOne Capital, Inc. The Purchase Agreements contemplate the sale and transfer of substantially all of the Company’s operating subsidiaries and all of its assets to simplify the testPurchasers 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 adoptionan aggregate purchase price of this standard$40 million (subject 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 presentedadjustment as set forth in the financial statements.Equity Purchase Agreement). The standard is effective for annual periods beginning after December 15, 2016. We adopted this ASU duringPurchase Agreements include customary terms and conditions, including an adjustment to the first quarter 2017. The key effects ofpurchase price based on 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 unrestrictedCompany’s cash and cash equivalents when reconcilingon hand and other adjustments as of the beginningclosing date and endprovisions that require the Company to indemnify the Purchasers for certain losses that it incurs as a result of period balancesa breach by the Company of its representations and warranties in the Purchase Agreements and certain other matters.
Proceeds from the sale was payable to the Company as follows: (1) a $37.5 million payment to the Company in cash on the statementclosing date of cash flow. The standardDecember 31, 2021 (adjusted as set forth in the Equity Purchase Agreement), and (2) $2.5 million placed in escrow on the closing date as security for the Company’s indemnification obligations to the Purchasers under the Purchase Agreements, which amount will be released to the Company on or before the date that is effective for annual periods beginning after December 15, 2017, and interim periods withintwelve months from the fiscal years. We adopted this ASU during the second quarter 2017. The key effectsclosing date (less any portion of the adoption on our financial statements include thatescrow used to make indemnification payments to the statementPurchasers). The Company received cash proceeds 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.
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$36.0 million and Seller are both companies incorporated under the laws of England and Wales. Undermay receive up to an additional $2.5 million in consideration pursuant to the terms of an escrow agreement entered into in connection with the AssetEquity Purchase Agreement dated as of May 5, 2017 (the “Purchase Agreement”),and included in the Seller will sell substantially all of its assetscash 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)cash equivalents 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.
our condensed consolidated balance sheets.
The Purchase Agreement contains a two year “no solicitation” provision which restrictsAgreements contain customary representations and warranties of each of the Seller’s abilityparties. The Purchase Agreements contain indemnification rights in favor of the Company following closing for (i) breaches of any of the representations or warranties by the Purchasers including, but not limited to, compete with EVOL BLS with respectbreaches related to organization, authorization, and governmental authorization, and (ii) breaches of the covenants or agreements of the Purchasers in the Purchase Agreements. In addition, the Purchase Agreements contain indemnification rights in favor of the Purchasers following closing for (i) breaches of certain fundamental representations and warranties by the Company, including breaches related to organization, authorization, capitalization, title to purchased assets, and finders’ fees, (ii) breaches of any of the representations and warranties by the Company, and (iii) breaches of the covenants or agreements of the Company in the Purchase Agreements.
Accordingly, the operating results of its operations in the entities and related business operations sold for September 30, 2021 presented have been reclassified in the condensed consolidated statements of operations as “income from discontinued operations.” Interest expense that is specifically identifiable to debt related to the BLS business or to solicit BLS customers or BLS employees serving in an executive, managerial, sales or technical role.
We accounted for this business combination by applying the acquisition method,entities sold qualifies as discontinued operations and accordingly, the purchase price wasis allocated to the assets and liabilities assumed based upon their fair values at the acquisition date. The excess of the purchase price over the net assets and liabilities, approximately $0.1 million, was recorded as goodwill. The results of EVOL BLS’sinterest expense from discontinued operations have been included in the Company’s condensed consolidated financial statements sincestatements. Additionally, the acquisition date. The amortization of the intangible assets is deductible for tax purposes.
Total purchase price is summarized as follows (in thousands):
|
| July 3, 2017 |
| |
Cash Consideration |
|
|
| |
Total Cash Consideration |
| $ | 1,558 |
|
|
|
|
| |
Earnout |
| 380 |
| |
Total purchase price |
| $ | 1,938 |
|
The following table summarizes the preliminary estimated fair valuescarrying amounts of the assets and liabilities assumed atfor 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 assetsentities sold 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 changesDecember 31, 2021 presented have been reclassified in the recognized amountscondensed consolidated balance sheets.
13
The following table presents the acquisition of EVOL BLS.
Intangible assets related to the EVOL BLS’s acquisition as of September 30, 2017 (in thousands):
|
| September 30, 2017 |
| |||||||||||||||
|
| Gross |
| Effects of |
| Net |
| Accumulated |
| Net |
| Weighted- |
| |||||
Purchased software |
| $ | 83 |
| $ | 3 |
| $ | 86 |
| $ | 4 |
| $ | 82 |
| 5 yrs |
|
Trademarks and tradenames |
| 6 |
| 1 |
| 7 |
| 3 |
| 4 |
| 0.5 yrs |
| |||||
Non-competition |
| 4 |
| — |
| 4 |
| 1 |
| 3 |
| 2 yrs |
| |||||
Customer relationships |
| 112 |
| 3 |
| 115 |
| 4 |
| 111 |
| 7 yrs |
| |||||
|
| $ | 205 |
| $ | 7 |
| $ | 212 |
| $ | 12 |
| $ | 200 |
| 5.88 yrs |
|
On September 4, 2017, Evolving Systems Holdings Limited (“EVOL Holdings”), a wholly owned subsidiary of Evolving Systems, Inc., completed the acquisition under a Share Purchase Agreement (the “Purchase Agreement”) with Lumata Holdings Limited (“Lumata Holdings” or “Seller”) and Francisco Partners III (Cayman) L.P, as Guarantor (the “Acquisition”). EVOL Holdings acquired all of the issued and outstanding shares of four (4) Lumata Holdings subsidiaries, Lumata France SAS, Lumata Spain S.L., Lumata UK Ltd and Lumata Deutschland GmbH (collectively, “Lumata Entities”) in exchange for a cash payment totaling €4.0 million ($4.8 million), subject to certain adjustments. The Seller and certain members of the Seller’s management entered into Management Warranty Deeds to secure Lumata Holdings’ representations and warranties under the Purchase Agreement and, to the extent the amounts provided under the Management Warranty Deeds are not sufficient to satisfy post-closing claims, EVOL Holdings may seek recovery from the Guarantor in an amount not to exceed €400,000 ($476,000). EVOL Holdings and Seller are both companies incorporated under the laws of England and Wales.
We accounted for this business combination by applying the acquisition method, and accordingly, the purchase price was allocated to the assets and liabilities assumed based upon their fair values at the acquisition date. The excess of the purchase price over the net assets and liabilities, approximately $2.7 million, was recorded as goodwill. The Company is in the process of finalizing the purchase allocation, thus the provisional measures of deferred income taxes, intangibles and goodwill are subject to change. The Company expects the purchase price allocation will be finalized in 2018. Thefinancial 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):discontinued operations:
|
| September 4, 2017 |
| |
Cash Consideration |
|
|
| |
Total Cash Consideration |
| $ | 4,766 |
|
|
|
|
| |
Total purchase price |
| $ | 4,766 |
|
| | | | | | |
|
| For the Three | | For the Nine | ||
| | Months Ended | | Months Ended | ||
| | September 30, | | September 30, | ||
|
| 2021 |
| 2021 | ||
Revenue | | $ | 6,974 | | $ | 20,428 |
Costs of revenue | | | (2,081) | |
| (6,506) |
Sales and marketing | | | (1,325) | |
| (4,081) |
General and administrative | | | (603) | |
| (1,785) |
Product development | | | (1,348) | |
| (3,936) |
Depreciation | | | (181) | |
| (306) |
Amortization | | | (239) | |
| (717) |
Restructuring | | | — | |
| (61) |
Interest expense | | | (1) | |
| (4) |
Interest income | | | 3 | |
| 7 |
Other income | | | — | |
| 288 |
Foreign currency exchange loss | | | (190) | |
| (402) |
Income tax expense | | | (279) | |
| (492) |
Net income from discontinued operations | | $ | 730 | | $ | 2,433 |
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 relatedCash flow information relating to the acquired intangible assets was recorded during the period ended September 30, 2017.
The $3.1 million of goodwill recognized is attributed to expected synergies and the assembled workforce and residual goodwill of the Lumata Entities. As of the date of this report there were no changes in the recognized amounts of goodwill resulting from the acquisition of the Lumata Entities.
Intangible assets related to the Lumata Entities’ acquisition as of September 4, 2017 (in thousands):
|
| September 30, 2017 |
| |||||||||||||||
|
| Gross |
| Effects of |
| Net |
| Accumulated |
| Net |
| Weighted- |
| |||||
Purchased software |
| $ | 672 |
| $ | 23 |
| $ | 695 |
| $ | 8 |
| $ | 687 |
| 7 yrs |
|
Trademarks and tradenames |
| 111 |
| 4 |
| 115 |
| 2 |
| 113 |
| 5 yrs |
| |||||
Non-competition |
| 2 |
| — |
| 2 |
| — |
| 2 |
| 1.5 yrs |
| |||||
Customer relationships |
| 1,150 |
| 40 |
| 1,190 |
| 8 |
| 1,182 |
| 13 yrs |
| |||||
|
| $ | 1,935 |
| $ | 67 |
| $ | 2,002 |
| $ | 18 |
| $ | 1,984 |
| 10.45 yrs |
|
NOTE 3 — GOODWILL AND INTANGIBLE ASSETS
Changes in the carrying amount of goodwill by reporting unit were as follows (in thousands):
|
| Total |
| |
|
| Goodwill |
| |
Balance at December 31, 2016 |
| $ | 20,599 |
|
Goodwill acquired during the year |
| 3,204 |
| |
Effects of changes in foreign |
|
|
| |
currency exchange rates (1) |
| 1,153 |
| |
Balance at September 30, 2017 |
| $ | 24,956 |
|
(1) Represents the impact of foreign currency translation for instances when goodwill is recorded in foreign entities whose functional currency is also their local currency. Goodwill balances are translated into U.S. dollars using exchange rates in effect at period end. Adjustments related to foreign currency translation are included in other comprehensive income.
We performed our annual goodwill impairment test as of July 31, 2017, at which time we had $21.5 million of goodwill. The fair value of the reporting unit was estimated using both market and income based approaches. Specifically, we incorporated observed market multiple data from selected guideline public companies and values arrived at through the application of discounted cash flow analyses, which in turn were based upon our financial projections as of the valuation date. We believe that a market participant would weigh both possibilities without a bias to one or the other. Consequently, we gave equal consideration to both. This analysis requires significant judgments, including estimation of future cash flows, which is dependent on internal forecasts, estimation of the long-term rate of growth for our business, estimation of the useful life over which cash flows will occur, and determination of our weighted average cost of capital. Changes in these estimates and assumptions could materially affect the determination of fair value and goodwill impairment for each reporting unit. If the carrying value of a reporting unit were to exceed its fair value, we would then compare the fair value of the reporting unit’s goodwill to its carrying amount, and any excess of the carrying amount over the fair value would be charged todiscontinued operations as an impairment loss. If the projected future performance of our segment as estimated in the income valuation approach is adjusted downward or is lower than expected in the future, we could be required to record a goodwill impairment charge. As a result of the first step of the 2017 goodwill impairment analysis, the fair value of each reporting unit exceeded its carrying value. Therefore the second step was not necessary. 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 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.
We amortized 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. As of September 30, 2017 and December 31, 2016, identifiable intangibles were as follows (in thousands):
|
| September 30, 2017 |
| December 31, 2016 |
| ||||||||||||||||||||||
|
| Gross |
| Effects |
| Net |
| Accumulated |
| Net |
| Gross |
| Accumulated |
| Net |
| Weighted-Average |
| ||||||||
Purchased software |
| $ | 2,873 |
| $ | 27 |
| $ | 2,900 |
| $ | 647 |
| $ | 2,253 |
| $ | 2,118 |
| $ | 436 |
| $ | 1,682 |
| 7.7 yrs |
|
Trademarks and tradenames |
| 302 |
| 4 |
| 306 |
| 177 |
| 129 |
| 185 |
| 116 |
| 69 |
| 3.7 yrs |
| ||||||||
Non-competition |
| 39 |
| — |
| 39 |
| 34 |
| 5 |
| 33 |
| 21 |
| 12 |
| 2.0 yrs |
| ||||||||
Customer relationships |
| 4,286 |
| 44 |
| 4,330 |
| 920 |
| 3,410 |
| 3,024 |
| 587 |
| 2,437 |
| 8.7 yrs |
| ||||||||
|
| $ | 7,500 |
| $ | 75 |
| $ | 7,575 |
| $ | 1,778 |
| $ | 5,797 |
| $ | 5,360 |
| $ | 1,160 |
| $ | 4,200 |
| 8.1 yrs |
|
Amortization expense of identifiable intangible assets was $0.2 million for the three months and $0.6 million for the nine months ended September 30, 20172021 is as follows:
| | | |
|
| For the Nine | |
| | Months Ended | |
| | September 30, | |
|
| 2021 | |
Operating cash flow data: |
|
|
|
Depreciation |
| $ | 306 |
Amortization of intangible assets |
| $ | 717 |
Amortization of operating leases — right of use assets |
| $ | 284 |
Provision for deferred income taxes |
| $ | (5) |
Investing cash flow data: |
|
|
|
Purchases of property and equipment |
| $ | (316) |
NOTE 3 — BALANCE SHEET COMPONENTS
The components of accounts payable and 2016, respectively. Expected future amortization expense related to identifiable intangibles based on our carrying amount as of September 30, 2017 wasaccrued liabilities are as follows (in thousands):
Twelve months ending September 30, |
|
|
| |
2018 |
| $ | 960 |
|
2019 |
| 944 |
| |
2020 |
| 940 |
| |
2021 |
| 940 |
| |
2022 |
| 859 |
| |
Thereafter |
| 1,154 |
| |
|
| $ | 5,797 |
|
| | | | | | |
|
| September 30, |
| December 31, | ||
|
| 2022 |
| 2021 | ||
Accounts payable and accrued liabilities: |
| |
|
| |
|
Accounts payable | | $ | 154 | | $ | 83 |
Accrued compensation and related expenses | |
| 20 | |
| 538 |
Accrued liabilities | |
| 529 | |
| 631 |
| | $ | 703 | | $ | 1,252 |
14
NOTE 4 — EARNINGS (LOSS) PER COMMON SHARE
We compute basicBasic earnings (loss) per share (“EPS”)is computed by dividing net income or loss available to common stockholders by the weighted average number of shares of common stock outstanding during the period, including common stock issuable under participating securities. We compute diluted EPSDiluted earnings (loss) per share is computed using the weighted average number of shares of common stock outstanding, including participating securities, plus all potentially dilutive common stock equivalents.equivalents using the treasury stock method. 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 denominatornumerators and denominators of the basic and diluted EPSearnings (loss) per share computations (in thousands except per share data):
|
| For the Three Months Ended |
| For the Nine Months Ended |
| ||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 |
| ||||
Basic income per share: |
|
|
|
|
|
|
|
|
| ||||
Net income available to common stockholders |
| $ | 759 |
| $ | 941 |
| $ | 2,834 |
| $ | 2,148 |
|
Basic weighted average shares outstanding |
| 11,940 |
| 11,873 |
| 11,932 |
| 11,824 |
| ||||
Basic income per share: |
| $ | 0.06 |
| $ | 0.08 |
| $ | 0.24 |
| $ | 0.18 |
|
|
|
|
|
|
|
|
|
|
| ||||
Diluted income per share: |
|
|
|
|
|
|
|
|
| ||||
Net income available to common stockholders |
| $ | 759 |
| $ | 941 |
| $ | 2,834 |
| $ | 2,148 |
|
Weighted average shares outstanding |
| 11,940 |
| 11,873 |
| 11,932 |
| 11,824 |
| ||||
Effect of dilutive securities - options and restricted stock |
| 52 |
| 106 |
| 43 |
| 143 |
| ||||
Diluted weighted average shares outstanding |
| 11,992 |
| 11,979 |
| 11,975 |
| 11,967 |
| ||||
Diluted income per share: |
| $ | 0.06 |
| $ | 0.08 |
| $ | 0.24 |
| $ | 0.18 |
|
| | | | | | | | | | | | |
|
| For the Three Months Ended September 30, | | For the Nine Months Ended September 30, | ||||||||
|
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||
Basic earnings (loss) per common share: |
| | | | | | | |
|
| |
|
Net loss from continuing operations | | $ | (560) | | $ | (655) | | $ | (3,262) | | $ | (2,321) |
Net income from discontinued operations | |
| — | |
| 730 | |
| 49 | | | 2,433 |
Basic weighted average shares outstanding | |
| 10,803 | |
| 12,258 | |
| 11,801 | | | 12,240 |
Basic loss per common share from continuing operations | | $ | (0.05) | | $ | (0.05) | | $ | (0.28) | | $ | (0.19) |
Basic earnings per common share from discontinued operations | | $ | — | | $ | 0.06 | | $ | — | | $ | 0.20 |
| | | | | | | | | | | | |
Diluted earnings (loss) per common share: | |
| | |
| | |
| | |
| |
Net loss from continuing operations | | $ | (560) | | $ | (655) | | $ | (3,262) | | $ | (2,321) |
Net income from discontinued operations | | | — | | | 730 | | | 49 | | | 2,433 |
Weighted average shares outstanding | |
| 10,803 | |
| 12,258 | |
| 11,801 | | | 12,240 |
Effect of dilutive securities | |
| — | |
| — | |
| — | | | 18 |
Diluted weighted average shares outstanding | |
| 10,803 | |
| 12,258 | |
| 11,801 | | | 12,258 |
Diluted loss per common share from continuing operations | | $ | (0.05) | | $ | (0.05) | | $ | (0.28) | | $ | (0.19) |
Diluted earnings per common share from discontinued operations | | $ | — | | $ | 0.06 | | $ | — | | $ | 0.20 |
For the three months ended September 30, 2017 and 2016, 0.4 million and 0.5Weighted average options to purchase approximately 0.1 million shares respectively,and 0.3 million shares 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 nine months ended September 30, 2017 and 2016, 0.4 million and 0.5 million shares, respectively, of common stock were excluded from the dilutive stock calculation because their exercise prices were greater than the average fair value of our common stock for the period.
For the three and nine months ended September 30, 2017, 0.6 million shares of unvested restricted stock were excluded from basic earnings per share but a portion of the 0.6 million shares were included in dilutive earnings per share. No shares of restricted stock were excluded from basic or dilutive earnings per shareequivalents for the three and nine months ended September 30, 2016.2022 and 2021, respectively, were excluded from the computation of diluted weighted average shares outstanding because the effect would have been anti-dilutive since their exercise prices were greater than the average market value of our common stock for the period. Earnings per share calculations use basic weighted average shares outstanding, when in a net loss position.
15
NOTE 5 — SHARE-BASEDINVESTMENTS
Fixed-Maturity, Debt and Equity Securities Investments
On June 13, 2022, the Company entered into a line of credit to loan a counterparty 1,000,000 United States Dollar Coin (“USDC”) for a 30 day period. USDC is fully backed by the United States Dollar (“USD”) and is not subject to market fluctuations, and the Company upon maturity converted the USDC to USD immediately. The loan had interest at a rate of 4.0% per annum and had a term of one month. There was no principal balance of the loan outstanding as of September 30, 2022.
On June 14, 2022, the Company entered into a note purchase agreement with a counterparty for $1,575,000 in conjunction with CCUR Holdings, Inc. The note bears interest at a rate of 15.0% per annum and has a term of one year, when payment in full of the outstanding principal balance becomes due. The loan is collateralized by the counterparty’s and its subsidiaries’ assets including cash and intellectual property. If no event of default is outstanding and the counterparty has made all accrued interest payments, the counterparty may extend the term by two additional six-month extension periods. The entire principal balance of the loan was outstanding as of September 30, 2022.
The difference between amortized cost or cost and estimated fair value and gross unrealized gains and losses, by major investment category, consisted of the following as of September 30, 2022. There were no investments as of December 31, 2021.
| | | | | | | | | | | | |
|
| | |
| Unrealized |
| Unrealized |
| | | ||
|
| Cost |
| Gains |
| Losses |
| Fair Value | ||||
Equity securities |
| |
|
| |
|
| |
|
| |
|
Common stock and common stock options | | $ | 7,733 | | $ | 90 | | $ | (1,792) | | $ | 6,031 |
Total equity securities | | $ | 7,733 | | $ | 90 | | $ | (1,792) | | $ | 6,031 |
| | | | | | | | | | | | |
|
| | |
| Unrealized |
| Unrealized |
| | | ||
| | Amortized Cost | | Gains | | Losses | | Fair Value | ||||
Debt securities | | | | | | | | | | | | |
Available for sale | | $ | 1,575 | | $ | — | | $ | — | | $ | 1,575 |
Total debt securities | | $ | 1,575 | | $ | — | | $ | — | | $ | 1,575 |
| | | | | | | | | | | | |
| | | | | Unrealized | | Unrealized | | | | ||
|
| Amortized Cost |
| Gains |
| Losses |
| Fair Value | ||||
Fixed-maturity securities |
| |
|
| |
|
| |
|
| |
|
Corporate bonds | | $ | 7,498 | | $ | — | | $ | (3,153) | | $ | 4,345 |
Total fixed-maturity securities | | $ | 7,498 | | $ | — | | $ | (3,153) | | $ | 4,345 |
The Company sold equity securities investments for proceeds of $1.2 million, and $3.2 million for the three and nine months ended September 30, 2022, respectively, resulting in realized gains on investments, net of $0.1 million and $0.5 million, respectively. The Company also had unrealized losses on equity securities, net of $0.1 million and $1.7 million for the three and nine months ended September 30, 2022, respectively.
As of September 30, 2022, the Company did not consider any of the fixed-maturity securities to be other-than-temporarily impaired. The Company does not intend to sell, nor believe it is more likely than not that the Company will be required to sell, any of the securities in an unrealized loss position. When evaluating investments for other-than-temporary impairment, the Company reviews factors such as the length of time and extent to which fair value has been below its cost basis, the financial condition of the issuer, the ability and intent to hold the security to maturity and whether it is more likely than not that the Company will be required to sell the investment before recovery of the amortized cost basis.
16
Maturities of Debt Securities and Fixed-Maturity Securities Available-for-Sale
The amortized cost and fair values of debt securities and fixed-maturity securities available for sale as of September 30, 2022 are shown by contractual maturity in the table below. Actual maturities can differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
| | | | | | |
|
| Amortized Cost |
| Fair Value | ||
Due within one year through three years | | $ | 1,575 | | $ | 1,575 |
Due after three years through five years | |
| 7,498 | |
| 4,345 |
Due after five years through ten years | |
| — | |
| — |
Total debt securities and fixed-maturity securities | | $ | 9,073 | | $ | 5,920 |
Cost Method Investment
In May 2022, the Company purchased a minority equity interest through a private placement in the amount of $1.0 million in BH3 Slate, LLC (“BH3”). As of September 30, 2022, the Company holds a 3.75% ownership interest. Distributions of available cash made by BH3 will first be made to us equal to our interest until the Internal Rate of Return is 8%, second to the manager until their Internal Rate of Return is 5%, and thereafter with 75% going to member and 25% to the manager. There were no indicators of impairment during the three and nine months ended September 30, 2022.
NOTE 6 — 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 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 million and less than $0.1 million of compensation expense within general and administrative expense in the condensed consolidated statements of operations, with respect to our stock-based compensation plans for the three months ended September 30, 20172022 and 2016 and $0.52021, respectively. We recognized $0.4 million and $0.2 million for the nine months ended September 30, 20172022 and 2016 respectively2021, respectively.
The following table summarizes stock-based compensation expenses recorded in the consolidated statement of operations (in thousands):
|
| For the Three Months Ended |
| For the Nine Months Ended |
| ||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 |
| ||||
Cost of revenue, excluding depreciation and amortization |
| $ | 4 |
| $ | 8 |
| $ | 15 |
| $ | 32 |
|
Sales and marketing |
| 5 |
| 7 |
| 9 |
| 20 |
| ||||
General and administrative |
| 199 |
| 20 |
| 414 |
| 90 |
| ||||
Product development |
| 14 |
| 17 |
| 48 |
| 56 |
| ||||
Total share based compensation |
| $ | 222 |
| $ | 52 |
| $ | 486 |
| $ | 198 |
|
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, 2017,2022 and December 31, 2021, no shares were available for grant under the 2007 Stock Plan, as amended. At September 30, 20172022 and December 31, 2016, 0.82021, 0.03 million options and 0.7no restricted shares, and 0.1 million options and no 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, 2017,2022 and December 31, 2021, there were approximately 0.30.4 million and 0.6 million shares available for grant under the 2016 Stock Plan.Plan, respectively. At September 30, 20172022 0.1 million options and 0.1 million restricted shares were outstanding. At December 31, 2016, 0.32021, 0.1 million options and 0no 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.Plan. The fair market value of restricted shares for share-basedstock-based compensation expensingexpense is equal to the closing price of our common stock on the date of grant. Stock-based compensation expense includes $0.2 million and $8,000The restricted shares for the three months ended September 30, 2017 and 2016, respectively, and $0.4 million and $23,000 for the nine month ended September 30, 2017 and 2016, respectively, of expense related to restricted stock grants. Of the restrictions on the stock awards granted duringvest in three tranches: 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 grantfirst tranche vests immediately; and the balance will be released quarterlysecond and third tranches vest over a three year period.
the following two years for senior management and the board of directors.
The following is a summary of restricted stock option activity under the plans for the three and nine months ended September 30, 2017:2022:
| | | |
|
| Restricted | |
| | Number of | |
|
| ||
(in thousands) | |||
|
|
| — |
| |
| |
|
|
| |
Less restricted stock vested |
|
|
|
|
|
| |
Unvested restricted stock at September 30, 2022 |
| 50 |
The fair value17
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, 2017:2022:
|
|
|
|
|
| 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 | | | |
| | Number of | | Weighted- | | Remaining | | Aggregate | ||
| | Shares | | Average | | Contractual | | Intrinsic Value | ||
|
| (in thousands) |
| Exercise Price |
| Term (Years) |
| (in thousands) | ||
Options outstanding at January 1, 2022 |
| 287 | | $ | 6.11 |
| 4.10 |
| $ | — |
Less options forfeited/cancelled |
| (205) | |
| 4.11 |
| — |
| | — |
Less options expired |
| — | |
| — |
| — |
| | — |
Options outstanding at September 30, 2022 |
| 82 | | $ | 5.71 |
| 4.10 | | $ | — |
| | | | | | | | | | |
Options exercisable at September 30, 2022 |
| 82 | | $ | 5.71 |
| 4.10 | | | — |
There were 50,000225,000 restricted shares granted and 40,000 stock options granted during the three months ended September 30, 2017 and 2016, respectively. There were 50,000 and 118,000no stock options granted during the nine months ended September 30, 20172022, and 2016, respectively. The weighted-average grant-date fair value ofno restricted stock awards or options granted were $1.92 and $1.16 during the three months ended September 30, 2017 and 2016, respectively. As of September 30, 2017, there were approximately $2.5 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 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 stock options vested during the nine months ended September 30, 2017 and 20162021. The total fair value of restricted shares granted during the nine months ended September 30, 2022 was $0.4 million. No restricted shares were granted during the nine months ended September 30, 2021.
NOTE 7 — INCOME TAXES
The income tax provision for the fiscal year ending December 31, 2022 interim periods is determined using an estimate of the annual effective tax rate, adjusted for discrete items, primarily related to unrealized gains. At September 30, 2022 the Company is currently estimating an annual effective tax rate of approximately 0.63%, resulting in a net tax benefit from continuing operations of less than $0.1 million and $0.2for the nine months ended September 30, 2022. The Company recorded a tax expense of less than $0.1 million respectively.
The deferredfrom continuing operations for the nine months ended September 30, 2021. For the nine months ended September 30, 2022, the Company recorded a less than $0.1 million income tax benefitsbenefit from stock optiondiscontinued operations and recorded $0.5 million in tax expense relatedfrom discontinued operations for the nine months ended September 30, 2021.
For the three months ended September 30, 2022, we recorded $0.1 million in net tax expense from continuing operations due to Evolving Systems U.K. totaled approximately $3,000adjustment of annual effective tax rate. For the three months ended September 30, 2021, we recorded less than $0.1 million in net tax expense from continuing operations. The Company recorded $0.3 million in net tax expense from discontinued operations for the three months ended September 30, 20172021.
The Inflation Reduction Act (“IRA”) was enacted into law on August 16, 2022. Included in the IRA was a provision to implement a 15% corporate alternative minimum tax on corporations whose average annual adjusted financial statement income during the most recently completed three-year period exceeds $1.0 billion and 2016. a 1% excise tax on share repurchases. This is effective for tax year beginning after December 31, 2022. We are in the process of evaluating the provisions of the IRA, but we do not currently believe the IRA will have material impact on our reported results, cash flows or financial position when it becomes effective.
Each quarter, the estimate of the annual effective tax rate is updated, and if the estimated effective tax rate changes, a cumulative adjustment is made. There is a potential for volatility of the effective tax rate due to various factors.
The deferredCompany and its subsidiaries are subject to U.S. Federal income tax, benefits from stock option expense relatedas well as income tax of multiple state jurisdictions. As of September 30, 2022, the Company is subject to Evolving Systems U.K totaled approximately $7,000 and $10,000U.S. Federal income tax examinations for the nine months ended September 30, 2017years 2018 through 2020 and 2016, respectively.
Cash receivedincome tax examinations from stock option exercisesvarious other jurisdictions for the three months ended September 30, 2017years 2016 through 2020.
18
NOTE 8 — COMMITMENTS AND CONTINGENCIES
(a)Lease Commitments
Under ASC 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 less than one year. We lease office and 2016 was $3,000 and $9,000, respectively. Cash received from stock option exercisesoperating facilities under non-cancelable operating leases. Current facility leases include our offices in Englewood, Colorado. Total rent expense consisted of short-term lease expense of less than $0.1 million 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 issued2022 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 and2021, respectively. There was 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 availablesublease rental income 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, 20172022 and 2016, respectively, associated2021.
Leases with grants under the ESPP which includes the fair valuean initial term of the look-back feature of each grant as well as the 15% discounttwelve months or less are not recorded 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.
condensed consolidated balance sheet. 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, one significant customer (defined as contributing at least 10%) accounted for 12% of revenue from operations. The significant customer for the three months ended September 30, 2017 is a large telecommunications operator in Europe. For the three months ended September 30, 2016, one significant customer accounted for 13% of revenue from operations. The significant customer for the three months ended September 30, 2016 is a large telecommunications operator in Africa. For the nine months ended September 30, 2017 one significant customer accounted for 13% of revenue from operations. This customer is a large telecommunications operator in Europe. For the nine months ended September 30, 2016, no significant customers accounted for 10% of revenue from operations.
As of September 30, 2017 and December 31, 2016, no significant customers accounted for 10% of contract receivables and unbilled work-in-progress.
NOTE 7 — LONG-TERM DEBT
On February 29, 2016, we entered into the Fifth Amendment to the Loan and Security Agreement with East West Bank which provides for a Term Loan (the “Term Loan”) for $6.0 million. The $6.0 million loan bears interest at a floating rate equal to the U.S.A. Prime Rate plus 1.0%. As of September 30, 2017, the U.S.A. Prime Rate was 4.25%. The Term Loan is secured by substantially all of the assets of Evolving Systems, Inc., including a pledge, subject to certain limitations with respect to stock of foreign subsidiaries, of the stock of the existing and future direct subsidiaries of Evolving Systems, Inc. Interest shall accrue from the date the Term Loan is made at the aforementioned rate and shall be payable monthly. The Term Loan shall be repaid in 36 equal monthly installments of principal, plus accrued but unpaid interest, commencing on January 1, 2017 and continuing on the first day of each month thereafter through and including January 1, 2020. On the Term Loan maturity date, the outstanding principal amount of the Term Loan and all accrued and unpaid interest thereon shall be immediately due and payable. The Term Loan, once repaid, maydid 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 covenantshave leases 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 (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 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, the U.S.A. Prime Rate was 4.25%. 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 all of the assets of EVOL Holdings and the Original Guarantors in accordance with thehad 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 4 equal installments, with the first payment due on the date of the Loan Facility and the remaining three payments on the first, second and third anniversary thereof. The Company also agreed to pay East West Bank’s legal fees in connection with the transaction. The Company may prepay the Loan Facility at any time, in a minimum amount of $250,000 and increments of $50,000, subject to a prepayment fee of 2% of the amount prepaid, on any prepayment made before the second anniversary date of the Agreement. The unpaid balance of the Loan Facility is due on August 16, 2021.
The Loan Facility includes financial covenants as well as negative covenants that place restrictions on EVOL Holdings, 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.
As of September 30, 2017, we were in compliance with the covenants and had a $9.4 million balance under the Term Loan and Loan Facility net of approximately $14,000 of debt issuance costs.
NOTE 8 — INCOME TAXES
We recorded net income tax expense of $0.2 million and $0.4 million for the threegreater than 12 months ended September 30, 2017 and 2016, respectively. The net expense during the three months ended September 30, 2017 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 from our U.S., U.K. and India 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 months ended September 30, 2017 consisted of current income tax expense of $1.2 million and a deferred tax benefit of ($0.3) million. The current tax expense consists of income tax from our U.S., U.K., France and India based operations. The deferred tax benefit was primarily related to the increase of certain net deferred tax assets and amortization of stock options and the intangible assets related to the acquisition of Evolving Systems NC, Inc. The net expense during the nine months ended
September 30, 2016 consisted of current income tax expense of $0.9 million and a deferred tax benefit of ($19,000). The current tax expense consists primarily of income tax from our U.K. and India based operations. The deferred tax benefit was primarily related to the amortization of intangible assets related to the acquisition of Evolving Systems NC, Inc. in September 2015 offset by undistributed U.K. foreign earnings.
Our effective tax rate was 19% and 31% for the three months ended September 30, 2017 and 2016, respectively. The decrease in our effective tax rate relates to a higher proportion of our income being generated in the U.K., for which the statutory corporate tax rate is lower and the acquisition of subsidiaries with lower effective tax rates.
Our effective tax rate was 24% and 30% for the nine months ended September 30, 2017 and 2016 respectively. The decrease in our effective tax rates relates to a higher proportion of our income being generated in the U.K., for which the statutory corporate tax rate is lower and the acquisition of subsidiaries with lower effective tax rates.
As of September 30, 2017 and December 31, 2016 we continued to maintain a valuation allowance on portions of our domestic net deferred tax asset. Such assets primarily consist of Foreign Tax Credit (“FTC”), state Net Operating Loss (“NOL”) carryforwards, research and development tax credits and Alternative Minimum Tax (“AMT”) credits. Our deferred tax assets and liabilities as of September 30, 20172022 and December 31, 2016, were comprised of the following (in thousands):2021.
|
| 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.
As of September 30, 2017 and December 31, 2016 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 the normal course of business, we are subject to examination by taxing authorities up until, two years in the U.K. and four years in India, following the end of the accounting period. As of the date of this report, none of our income tax returns are under examination.
NOTE 9 — STOCKHOLDERS’ EQUITY(b)
Certain Anti-Takeover Provisions/Agreements with Stockholders
Our restated certificate of incorporation allows the board of directors to issue up to 2,000,000 shares of preferred stock and to determine the price, rights, preferences and privileges of those shares without any further vote or action by our stockholders. The rights of the holders of our common stock will be subject to, and may be adversely affected by, the rights of the holders of any preferred stock that may be issued in the future. Issuance of preferred stock, while providing desired flexibility in connection with possible acquisitions and other corporate purposes could make it more difficult for a third party to acquire a majority of our outstanding voting stock. As of September 30, 2017 and December 31, 2016, no shares of preferred stock were outstanding.
In addition, we are subject to the anti-takeover provisions of Section 203 of Delaware General Corporation Law which prohibit us from engaging in a “business combination” with an “interested stockholder” for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in the prescribed manner. The application of Section 203 may have the effect of delaying or preventing changes in control of our management, which could adversely affect the market price of our common stock by discouraging or preventing takeover attempts that might result in the payment of a premium price to our stockholders.
NOTE 10 —GEOGRAPHICAL INFORMATION
We are headquartered in Englewood, a suburb of Denver, Colorado. We use customer locations as the basis for attributing revenues to individual countries. We provide products and services on a global basis through our headquarters, our London-based Evolving Systems U.K. subsidiary and our North Carolina based Evolving Systems NC, Inc. subsidiary. Additionally, personnel in Bangalore and Kolkata, India provide software development and support services to our global operations. Financial information relating to operations by geographic region 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 |
| ||
Long-lived assets, net |
|
|
|
|
| ||
United States |
| $ | 11,476 |
| $ | 12,347 |
|
United Kingdom |
| 17,753 |
| 12,680 |
| ||
Other |
| 1,859 |
| 318 |
| ||
|
| $ | 31,088 |
| $ | 25,345 |
|
NOTE 11 — COMMITMENTS AND CONTINGENCIES
(a) 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, 20172022 or December 31, 2016.
2021.
We enter into standard indemnification terms with customers and suppliers,outside consultants, 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, 20172022 or December 31, 2016.2021.
Our standard license agreements contain product warranties thatManagement Agreement with CIDM II LLC
On January 21, 2022, the softwareCompany entered into a Management Agreement (the “Management Agreement”) with CIDM II LLC (the “Manager”). Pursuant to the Management Agreement, the Manager will, be freesubject to the Company’s Board of material defectsDirectors (“Board”) and the Investment Committee of the Board, (i) provide the Company with advisory services with respect to the management and allocation of investments in equity and debt securities (“Assets”) of the Company and its subsidiaries and (ii) exercise discretionary management authority over the Company’s trading portfolio of publicly traded securities.
The Manager will operate in accordance withreceive compensation for performance under the stated requirements forManagement Agreement consisting of a limited periodmanagement fee of time. The product warranty provisions require us to cure any defects through any reasonable means. We believe2% of the estimated fair market value of the product warranty provisionsAssets and a performance fee in respect of each performance period shall be equal to 20% of the license agreementsappreciation of end-of-year net asset value. The management fee and performance fee may be paid through the issuance of stock appreciation rights of the Company’s common stock or in place with our customerscash payment to the Manager. The Manager is minimal. Accordingly, there were no liabilities recorded for these product warranty provisions asalso entitled to payment or reimbursement of September 30, 2017 or December 31, 2016.
Our software arrangements generally include a product indemnification provision whereby we will indemnifycertain administrative costs and defend a customerexpenses incurred 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 or December 31, 2016.
In connection with our acquisitionthe management of Telespreethe Assets, such as custodial fees, brokerage commissions and similar fees and expenses. The related expense is included in general and administrative expenses on October 24, 2013, we agreed to make a cash paymentthe unaudited consolidated statements of operations of $0.5 million onwhich is approximately 0.3 million stock appreciation rights. The Manager shall be responsible for all of its operating expenses. The Management Agreement may be terminated by either party upon thirty days written notice. No stock appreciation rights have been exercised in 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 onnine months ended 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.2022.
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.
(b) (c)Litigation
From time to time, we are involved in various legal matters arising in the normal course of business. We do not expect the outcome of such proceedings, either individually or in the aggregate, to have a material effect on our financial position, cash flows or results of operations.
19
On October 15, 2019, the Company’s former Chief Executive Officer filed a lawsuit in the Superior Court of New Jersey against us. That suit sought $3.5 million for claims of libel, harm of lost employment opportunities, severance payments, and benefits that he would have been entitled to receive had he been terminated without cause. The Company engaged legal counsel through its insurance carrier. The Company decided that it was prudent to avoid further legal fees and disruption to the business caused by an on-going litigation claim. Therefore, to resolve amicably and discontinue disputes regarding all claims arising from the lawsuit and with the denial of every allegation of wrongdoing, in June 2021, a settlement and mutual general release was agreed to that included payment of $0.6 million by the Company. Our insurance carrier has agreed to contribute $0.3 million toward the settlement. Settlement was paid in full in July 2021 and is included in other (expense) income, net, on the unaudited condensed consolidated statement of operations for the nine months ended September 30, 2021.
NOTE 12 — RESTRUCTURING(d)Paycheck Protection Program Loan
On April 15, 2020, the Company received loan proceeds in the amount of $0.3 million under the Paycheck Protection Program (“PPP”). The PPP, established as part of the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), provides for loans to qualifying businesses for amounts up to 2.5 times of the average monthly payroll expenses of the qualifying business. The loans and accrued interest are forgivable after a period of eight to twenty-four weeks as long as the borrower uses the loan proceeds for eligible purposes, including payroll, benefits, rent and utilities, and maintains its payroll levels. The amount of loan forgiveness will be reduced if the borrower terminates employees or reduces salaries during the eight-week period. We have met the conditions of the PPP Loan forgiveness program. As authorized by section 1106 of the CARES Act, United States Small Business Administration (“SBA”) forgave the full amount of PPP loan on May 20, 2021. We recorded the forgiveness amount as other income. We had used the loan proceeds for purposes consistent with the PPP, including paying for Company wages.
During(e)Potential Claim on Escrow Account
The Company has been served notice by the third quarter of 2017, we undertookPurchasers making a reduction in workforce involvingclaim for indemnification under the termination of employees resulting in an expense of $0.1 million primarilyEquity Purchase Agreement related to severancea failure to file returns, make required remittances, and pay taxes to the Irish Revenue Service with respect to an employee for pre-closing periods. The Company has recorded a liability in the affected employees. The reduction in workforce wasamount of $0.2 million related to the consolidationsemployer burden which had not been remitted. The Purchasers have claimed additional taxes and fees in a range of duplicative functions and alignment$0.7 million to $1.5 million based on their calculations. The Company has objected to the release of staff with ongoing business activity as a result of the acquisition of EVOL BLS in the third quarter of 2017. During the third quarter of 2016, we undertook a reduction in workforce involving the termination of employees resulting in an expense adjustment of $3,000 for the three months ending September 30, 2016, primarily related to severance for the affected employees. The reduction in workforce wasany funds related to the consolidations of duplicative functionsclaim until the final amount can be properly calculated and alignment of staff with ongoing business activity as a result ofagreed upon by the acquisition of Evolving Systems NC, Inc.parties. The Company intends to defend this matter rigorously and any additional amounts in the third quarterclaim are not estimable or determinable at this time.
20
For the nine months ending September 30, 2017 and 2016 we had $0.1 million and $1.0 million of restructuring expense, respectively. During the first quarter of 2016, we undertook a reduction in workforce involving the termination of employees resulting in an expense of $0.9 million primarily related to severance for the affected employees. The reduction in workforce was related to the consolidations of duplicative functions and alignment of staff with ongoing business activity as a result of the acquisition of Evolving Systems NC, Inc. in the third quarter of 2015.
There was no restructuring liability as of September 30, 2017 and December 31, 2016.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SPECIAL NOTE ABOUT FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains forward-looking statements that have been made pursuant to the provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on current expectations, estimates, and projections about Evolving Systems’Symbolic Logic’s 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. In addition, statements about the potential effects of the COVID-19 pandemic on the Company’s businesses, results of operations and financial condition may constitute 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, 20162021, as filed with the SEC on April 11, 2022, under “Item 1A. Risk Factors” as well as additional risks described in this Form 10-Q. Unless required by law,our other filings with the SEC. The forward-looking statements are applicable only as of the date on which they are made, and we undertake nodo not assume any obligation to update publicly any forward-looking statements, whetherstatements.
OVERVIEW
On December 31, 2021, the Company closed on the terms of the Equity Purchase Agreement (the “Equity Purchase Agreement”) and two Software Purchase Agreements (the “Software Purchase Agreements” and, together with the Equity Purchase Agreement and the other transaction documents described therein, the “Purchase Agreements”) dated as of October 15, 2021, with subsidiaries and affiliates of PartnerOne Capital, Inc. (the “Purchasers”). The Purchase Agreements provided for the sale and transfer of substantially all of the Company’s operating subsidiaries and all of its assets that provided real-time digital engagement solutions and services in the areas of real-time analytics, customer acquisition and activation, customer value management and loyalty for the telecom industry to the Purchasers for an aggregate purchase price of $40 million (subject to adjustment as set forth in the Equity Purchase Agreement). The Purchase Agreements included customary terms and conditions, including an adjustment to the purchase price based on the Company’s cash and cash equivalents on hand as of the closing date and provisions that require the Company to indemnify the Purchasers for certain losses that it incurs as a result of new information, future events,a breach by the Company of its representations and warranties in the Purchase Agreements and certain other matters. The Company received cash proceeds of $36.0 million and may receive up to an additional $2.5 million in consideration pursuant to the terms of an escrow agreement entered into in connection with the Equity Purchase Agreement.
Simultaneously with the approval by the board of directors of the Company to execute the Purchase Agreements, the board formed a subcommittee of the board (the “Investment Committee”) to evaluate options to maximize the value of the Company’s assets, which, following the closing of the transactions contemplated under the Purchase Agreements, will consist primarily of cash and cash equivalents. The board of directors has authorized the Investment Committee to retain such counsel, experts, consultants or otherwise. However, readers should carefully reviewother professionals as the risk factors set forth in other reports or documents we fileInvestment Committee shall deem appropriate from time to time withto aid the Securities and Exchange Commission, particularlyInvestment Committee in the Quarterly Reports on Form 10-Q and any Current Reports on Form 8-K.performance of its duties.
OVERVIEW
We are a providerFollowing the sale of softwareits assets in real-time digital engagement solutions and services in December 2021, the Company has decided to evaluate new areas of business which included two initial areas of product focus. The two areas of focus are in the wireless, wireline and cable markets. We maintain long-standing relationships with manyapplication of the largest wireless, wireline and cable companies worldwide. Our customers rely on us to develop, deploy, enhance 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 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 numbersself-learning algorithms as well as other communication identifiers (i.e. SIMs, MSISDNs, IMSIs, ICCIDs, IPs). Our portfoliothe symbolic tagging and organizing of managed services for ‘engagement & retention’ accelerates deploymentphysical objects. Additionally, the Company maintains an extensive background in mergers and maximizes impactacquisitions (“M&A”) activity. The Company plans to use cash assets, and network of marketing objectives suchrelationships to acquire businesses and/or assets, 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.well as consider strategic partnerships.
RECENT DEVELOPMENTS
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 fluctuatereported a net loss from period to period as a resultcontinuing operations 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 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 our operations once the integration of the business is completed by year-end 2017.
Consolidated revenue was $7.5$0.6 million and $6.1$0.7 million for the three months ended September 30, 20172022 and 2016,2021, respectively and $19.6$3.3 million and $18.7$2.3 millionfor 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 is due to the acquisitions of EVOL BLS and the Lumata Entities.
We have operations in foreign countries where the local currency is used to prepare the financial statements which are translated into our reporting currency, U.S. 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 chart below summarizes how our revenue and expenses would change had they been reported on a constant currency basis. The constant currency basis assumes that the exchange rate was constant for the periods presented (in thousands).
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| For the Three Months Ended |
| For the Nine Months Ended |
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| 2017 vs. 2016 |
| 2017 vs. 2016 |
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Changes in: |
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Revenue |
| $ | 9 |
| $ | (417 | ) |
Costs of revenue and operating expenses |
| 55 |
| (342 | ) | ||
Operating loss |
| $ | (46 | ) | $ | (75 | ) |
RESULTS OF OPERATIONS
The following table presents the unaudited consolidated statements of operations reflected as a percentage of total revenue.
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| For the Three Months Ended September |
| For the Nine Months Ended September |
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| 2017 |
| 2016 |
| 2017 |
| 2016 |
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REVENUE |
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License fees |
| 14 | % | 14 | % | 11 | % | 12 | % |
Services |
| 86 | % | 86 | % | 89 | % | 88 | % |
Total revenue |
| 100 | % | 100 | % | 100 | % | 100 | % |
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COSTS OF REVENUE AND OPERATING EXPENSES |
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Costs of revenue, excluding depreciation and amortization |
| 34 | % | 21 | % | 29 | % | 21 | % |
Sales and marketing |
| 19 | % | 20 | % | 18 | % | 20 | % |
General and administrative |
| 20 | % | 16 | % | 18 | % | 15 | % |
Product development |
| 5 | % | 11 | % | 7 | % | 13 | % |
Depreciation |
| 1 | % | 1 | % | 1 | % | 1 | % |
Amortization |
| 3 | % | 3 | % | 3 | % | 3 | % |
Restructuring |
| 2 | % | 0 | % | 1 | % | 5 | % |
Total costs of revenue and operating expenses |
| 84 | % | 72 | % | 77 | % | 78 | % |
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Income from operations |
| 16 | % | 28 | % | 23 | % | 22 | % |
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Other income (expense) |
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Interest income |
| 0 | % | 0 | % | 0 | % | 0 | % |
Interest expense |
| (1 | )% | (2 | )% | (1 | )% | (1 | )% |
Foreign currency exchange gain (loss) |
| (3 | )% | (4 | )% | (3 | )% | (4 | )% |
Other income (expense), net |
| (4 | )% | (6 | )% | (4 | )% | (5 | )% |
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Income from operations before income taxes |
| 12 | % | 22 | % | 19 | % | 17 | % |
Income tax expense |
| 2 | % | 7 | % | 5 | % | 5 | % |
Net income |
| 10 | % | 15 | % | 14 | % | 12 | % |
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, 20172022 and 2016 was $19.62021, respectively.
21
COVID-19
The COVID-19 global outbreak caused instability and volatility in multiple markets throughout the world. We have leveraged our ability to work remotely resulting in limited effect on our day-to-day operations.
NAME CHANGE
On April 12, 2022, Evolving Systems, Inc. filed with the Secretary of State of Delaware Certificate of Amendment to amend its Certificate of Incorporation to change the Company’s name from “Evolving Systems, Inc.” to “Symbolic Logic, Inc.” effective as of April 12, 2022. The Company also amended and restated its Bylaws to change all Company references from “Evolving Systems, Inc.” to “Symbolic Logic, Inc.” No other amendments were made to the Certificate of Incorporation or Bylaws.
NASDAQ
On December 9, 2021, we received a letter from the Nasdaq Capital Market (“NASDAQ”) regarding the Equity Purchase Agreement and the two Software Purchase Agreements entered into by the Company pursuant to which we sold all of our assets. The staff requested certain information from the Company regarding its on-going business. We provided a response to the staff on January 7, 2022. We received a follow up request from the NASDAQ for additional information and we provided a response to the staff on February 15, 2022.
On April 13, 2022, Symbolic Logic Inc. f/k/a Evolving Systems, Inc. notified the NASDAQ of its intention to voluntarily withdraw its common stock, par value $0.001 per share (the “Common Stock”), from listing on Nasdaq. The Company filed a Form 25 with the Securities and Exchange Commission on Monday, April 25, 2022, relating to delisting the Common Stock under Section 12(b) of the Securities Exchange Act of 1934, as amended, to be effective ten days thereafter. After delisting, the Common Stock may be quoted on the OTC Pink Open Market.
TENDER OFFERING
On May 23, 2022, the Company announced a modified Dutch auction tender offer to purchase with cash up to $9.6 million of shares of its common stock which expired on June 23, 2022. Based on the final count by the depository for the tender offer, a total of 1,501,192 shares of common stock were validly tendered and not validly withdrawn at or below the price of $1.55 per share. The Company accepted all of these shares of common stock for purchase at the purchase price of $1.55 per share, for a total cost of $2.3 million, excluding fees and expenses. The total of 1,501,192 shares of common stock accepted for purchase represents approximately 12.2 % of the Company’s total shares of common stock outstanding.
TREASURY STOCK
During the month of September 2022, the company through a direct purchase and an open market purchase, which were not related to the tender offering conducted in May, acquired an additional 263,000 shares at a purchase price of $1.55 per share, for a total cost of $0.4 million. These shares are currently being held as treasury stock.
DEPARTURE OF OFFICER
On August 26, 2022, Matthew Stecker resigned as the Company’s Chief Executive Officer. In connection with the resignation, the Company and Mr. Stecker entered into an agreement that including a release of all claims and certain obligations under his employment agreement and Mr. Stecker received a payment of $0.35 million and $18.7accelerated vesting of his 0.1 million respectively. License fee revenue decreased primarily due to lower FUAs feesshares of unvested restricted stock awards. On the same day, the Company appointed Mr. Igor Volshteyn as its Chief Executive Officer.
22
SUSPENSION OF REPORTING OBLIGATIONS
On October 21, 2022, the Company’s board of directors determined that “going dark” it is in the current period offset by license fee revenuebest interests of the Company and its stockholders as a result of the substantial cost savings from the acquisitionelimination of Evolving Systems BLS LTDaccounting and other expense related to maintaining its status as a public reporting company, as well as the Lumata Entities. Services revenue increased duringability of management to focus on core business activities, among other things. The company therefore plans to affect a suspension of its reporting obligation under the period primarily dueSecurities Exchange Act of 1934, as amended, and expects to file a Form 15 with the Securities and Exchange Commission in early January 2023.
GOING CONCERN
We believe our current liquidity from the acquisitionPurchase Agreements will be sufficient to fund operations and meet the Company’s cash needs for future working capital and capital expenditure requirements for at least the next twelve months from the date of Evolving Systems BLS LTDissuance of these condensed consolidated financial statements. In making this assessment, we considered our $16.8 million in cash and cash equivalents and our $27.8 million in working capital at September 30, 2022.
RESULTS OF OPERATIONS
The following table presents our condensed consolidated statements of operations in comparative format:
| | | | | | | | | | | | |
|
| For the Three Months Ended September 30, |
| |||||||||
|
| 2022 |
| 2021 |
| Change |
| % |
| |||
| | (in thousands, except percentages) |
| |||||||||
Revenue | | $ | — | | $ | — | | $ | — |
| 0.00 | % |
| | | | | | | | | | | | |
OPERATING EXPENSES | |
|
| |
|
| |
|
|
|
| |
General and administrative | |
| 1,097 | |
| 637 | |
| 460 |
| 72.21 | % |
Depreciation | |
| 1 | |
| 1 | |
| — |
| 0.00 | % |
Total operating expenses | |
| 1,098 | |
| 638 | |
| 460 |
| 72.10 | % |
| | | | | | | | | | | | |
Loss from operations | |
| (1,098) | |
| (638) | |
| (460) |
| 72.10 | % |
| | | | | | | | | | | | |
Other income (expense) | |
| | |
| | |
| |
| | |
Interest income | |
| 517 | |
| — | |
| 517 |
| 100.00 | % |
Interest expense | |
| — | |
| (2) | |
| 2 |
| 100.00 | % |
Other income (expense), net | |
| 93 | |
| — | |
| 93 |
| 100.00 | % |
Realized gain on investments, net | | | 127 | | | — | | | 127 | | 100.00 | % |
Unrealized loss on investments, net | |
| (144) | |
| — | |
| (144) |
| (100.00) | % |
Other income (expense), net | |
| 593 | |
| (2) | |
| 595 |
| (29,750.00) | % |
| | | | | | | | | | | | |
Loss from continuing operations before income taxes | |
| (505) | |
| (640) | |
| 135 |
| (21.09) | % |
Income tax expense | |
| 55 | |
| 15 | |
| 40 |
| 266.67 | % |
Net loss from continuing operations | |
| (560) | |
| (655) | |
| 95 |
| (14.50) | % |
Income from discontinued operations before income taxes | |
| — | |
| 1,009 | |
| (1,009) |
| (100.00) | % |
Income tax expense from discontinued operations | |
| — | |
| 279 | |
| (279) |
| (100.00) | % |
Net income from discontinued operations | |
| — | |
| 730 | |
| (730) |
| (100.00) | % |
Net (loss) income | | $ | (560) | | $ | 75 | | $ | (635) |
| (846.67) | % |
23
| | | | | | | | | | | | |
|
| For the Nine Months Ended September 30, |
| |||||||||
|
| 2022 |
| 2021 |
| Change |
| % |
| |||
| | (in thousands, except percentages) |
| |||||||||
Revenue | | $ | — | | $ | — | | $ | — |
| | % |
| | | | | | | | | | | | |
OPERATING EXPENSES | |
| | |
| | |
| |
| | |
General and administrative | |
| 3,185 | |
| 2,295 | |
| 890 |
| 38.78 | % |
Depreciation | |
| 2 | |
| 2 | |
| — |
| 0.00 | % |
Total operating expenses | |
| 3,187 | |
| 2,297 | |
| 890 |
| 38.75 | % |
| | | | | | | | | | | | |
Loss from operations | |
| (3,187) | |
| (2,297) | |
| (890) |
| 38.75 | % |
| | | | | | | | | | | | |
Other income (expense) | |
| | |
| | |
| |
| | |
Interest income | |
| 1,096 | |
| 2 | |
| 1,094 |
| 54,700.00 | % |
Interest expense | |
| (2) | |
| (2) | |
| — |
| 0.00 | % |
Other income (expense), net | |
| 2 | |
| (1) | |
| 3 |
| 300.00 | % |
Realized gain on investments, net | |
| 521 | |
| — | |
| 521 |
| 100.00 | % |
Unrealized loss on investments, net | |
| (1,702) | |
| — | |
| (1,702) |
| (100.00) | % |
Other (expense), net | |
| (85) | |
| (1) | |
| (84) |
| 8,400.00 | % |
| | | | | | | | | | | | |
Loss from continuing operations before income taxes | |
| (3,272) | |
| (2,298) | |
| (974) |
| 42.38 | % |
Income tax (benefit) expense | |
| (10) | |
| 23 | |
| (33) |
| (143.48) | % |
Net loss from continuing operations | |
| (3,262) | |
| (2,321) | |
| (941) |
| 40.54 | % |
Income from discontinued operations before income taxes | |
| — | |
| 2,925 | |
| (2,925) |
| (100.00) | % |
Income tax (benefit) expense from discontinued operations | |
| (49) | |
| 492 | |
| (541) |
| (109.96) | % |
Net income from discontinued operations | |
| 49 | |
| 2,433 | |
| (2,384) |
| (97.99) | % |
Net (loss) income | | $ | (3,213) | | $ | 112 | | $ | (3,325) |
| (2,968.75) | % |
Expenses from Continuing Operations
General and Administrative
General and administrative expenses consist principally of employee-related costs for the Lumata Entities.
License Fees
License fees revenuefollowing departments: finance, human resources, and certain executive management; facilities costs; and professional and legal fees. General and administrative expenses increased $0.2$0.5 million, or 26%,83% to $1.1 million for the three months ended September 30, 20172022 from $0.9$0.6 million for the three months ended September 30, 2016. The2021. There was an increase is due primarilyof $0.4 million of employee costs and $0.1 million of equity compensation costs related to the acquisitionseparation of Evolving Systems BLS LTDour Chief Executive Officer. There was also an increase of $0.2 million of professional fees in bookkeeping and preparation of SEC reports, and fees to our third-party asset manager. These costs were partially offset by lower prepaid license fee revenue from FUAs.
License fees revenue decreaseda $0.2 million decrease of salaries and benefits related to employee departures.
General and administrative expenses increased $0.9 million, or 7%,39% to $2.1$3.2 million for the nine months ended September 30, 20172022 from $2.3 million for the nine months ended September 30, 2016. The decrease in revenue is due to lower prepaid license fee revenue from FUAs during the first quarter in 2017 and the migration2021. There was an increase of business to a managed services model offset by license fees from the acquisition of Evolving Systems BLS LTD.
Services
Services revenue increased $1.2 million, or 23%, to $6.5 million for the three months ended September 30, 2017 from $5.3 million for the three months ended September 30, 2016. The increase is due to the acquisitions of EVOL BLS and the Lumata Entities.
Services revenue increased $1.1 million, or 7%, to $17.5 million for the nine months ended September 30, 2017 from $16.4 million for the nine months ended September 30, 2016. The increase in revenue is due to the acquisitions of EVOL BLS and the Lumata Entities.
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 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 million, or 104%, to $2.6 million for the three months ended September 30, 2017 from $1.3 million for the three months ended September 30, 2016. The increase in costs of revenue is primarily attributable to the cost of revenue from the acquisitions of EVOL BLS and the Lumata Entities. As a percentage of revenue, costs of revenue, excluding depreciation and amortization, increased to 34% for the three months ended September 30, 2017 from 21% for the three months ended September 30, 2016. The increase as a percentage of revenue is primarily due to the aforementioned higher costs.
Costs of revenue, excluding depreciation and amortization, increased $1.7 million, or 43%, to $5.7 million for the nine months ended September 30, 2017 from $4.0 million for the nine months ended September 30, 2016. The increase in costs is primarily attributable to the cost of revenue from the acquisitions of EVOL BLS and the Lumata Entities. As a percentage of license fees and services revenue, costs of license fees and services, excluding depreciation and amortization, increased to 29% for the nine months ended September 30, 2017 from 21% for the nine months ended September 30, 2016. The increase in costs as a percentage of revenue is primarily due to the aforementioned higher costs during the period.
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 million, or 16%, to $1.4
million for the three months ended September 30, 2017 from $1.2 million for the three months ended September 30, 2016. The increase in expenses is attributable to the sales and marketing expenses from the acquisition of Evolving Systems BLS LTD. As a percentage of total revenue, sales and marketing expenses decreased to 19% for the three months ended September 30, 2017 from 20% for the three months ended September 30, 2016. The decrease in sales and marketing expenses as a percentage of revenue is primarily due to the increase in revenue during the period.
Sales and marketing expenses decreased $0.3 million, or 8%, to $3.5 million for the nine months ended September 30, 2017 from $3.8 million for the nine months ended September 30, 2016. The decrease in costs is primarily attributable to lower employee expenses, travel expense and marketing expenses offset by the sales and marketing expenses from the acquisition of EVOL BLS. As a percentage of total revenue, sales and marketing expenses decreased to 18% for the nine months ended September 30, 2017 from 20% for the nine months ended September 30, 2016. The decrease in sales and marketing expenses as a percentage of revenue is primarily due to the aforementioned decrease in expenses and increased revenue during the period.
General and Administrative
General and administrative expenses consist principally of employee related costs and professional fees for the following departments: facilities, finance, legal, human resources, and certain executive management. General and administrative expenses increased $0.6 million, or 64%, to $1.6 million for the three months ended September 30, 2017 from $1.0 million for the three months ended September 30, 2016. The increase in costs is primarily attributable to professional fees related asset acquisition of the Lumata Entities, higher stock incentive compensation expense due to restricted stock grants and the general and administrative expenses from the acquisitions of EVOL BLS and the Lumata Entities. As a percentage of revenue, general and administrative expenses increased to 21% for the three months ended September 30, 2017 from 16% for the three months ended September 30, 2016. The increase in general and administrative expenses as a percentage of revenue is primarily due to the aforementioned increase in expenses.
General and administrative expenses increased $0.8 million or 28%, to $3.6 million from $2.8 million for the nine months ended September 30, 2017 and 2016, respectively. The increase in costs is primarily related to higherof professional fees related to the recent acquisitions, higher stock incentiveuse of third-party services in bookkeeping and preparation of SEC reports, and fees to our third party asset manager, an increase of $0.4 million of employee costs and $0.1 million of equity compensation expense due to restricted stock grants and the general and administrative expenses from the acquisitions of EVOL BLS and the Lumata Entities. As a percentage of total revenue, general and administrative expenses increased to 18% for the nine months ended September 30, 2017 from 15% for the nine months ended September 30, 2016. The increase in general and administrative expenses as a percentage of revenue is primarily duecosts related to the aforementioned increaseseparation of our Chief Executive Officer, and $0.1 million in expenses.
Product Development
Product development expenses consist primarilycontractor fees and other various costs. These costs were partially offset by a $0.5 million decrease of employee related costssalaries 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 projectsbenefits related to managed services which are charged to cost of revenue offset by the product and development expenses from the acquisitions of EVOL BLS and the Lumata Entities. As a percentage of revenue, product development expenses decreased to 5% for the three months ended September 30, 2017 from 11% for the three months ended and 2016. The decrease as a percentage of revenue is primarily due to the aforementioned decrease of expenses during the period.employee departures.
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.
Depreciation
Depreciation expense consists of depreciation of long-lived property and equipment. Depreciation expense remained constant at less than $0.1 million for the three and nine months ended September 30, 2022 and 2021.
24
Non-Operating Income and Expenses
Interest Expense
Interest expense remained constant at less than $0.1 million in interest expense for the three and nine months ended September 30, 2022 and 2021.
Interest Income and Total Other Income (Expense), net
There was $0.1interest income and other income of $0.5 million for the three months ended September 30, 20172022. There was no interest and 2016. As a percentage of total revenue, depreciation expenseother income for the three months ended September 30, 20172021. The increase was the result of interest income related to corporate bonds and 2016 remained at 1%.dividend income from securities held by the Company.
Depreciation expenseFor the nine months ended September 30, 2022, there was $0.2interest income and other income of $1.1 million. There was less than $0.1 million in interest income or other income for the nine months ended September 30, 20172021. The increase was a result of interest earned and 2016. Asdividend income on investments entered into during 2022, partially offset by $0.2 million in expense related to a percentage of total revenue, depreciation expense forpotential claim by the nine months ended September 30, 2017 and 2016 remained at 1%.
AmortizationPurchaser on the escrow account.
Realized Gain on Investments, net
Amortization expenseRealized gain on investments, net consists of amortization of identifiable intangible assets acquired through our acquisition of Evolving Systems Labs, Inc., Evolving Systems NC, Inc, Evolving Systems BLS LTDavailable for sale and the Lumata Entities. Amortization expense was $0.2equity securities. Realized gain on investments, net increased $0.1 million, or 100% for the three months ended September 30, 2017 and 2016. As a percentage of total revenue, amortization expense remained at 3% for the three months ended September 30, 2017 and 2016.
Amortization expense was $0.6 million for the nine months ended September 30, 2017 and 2016. As a percentage of total revenue, amortization expense remained at 3% for the nine months ended September 30, 2017 and 2016.
Restructuring
Restructuring expense includes the costs associated with a reduction in workforce due to the consolidation of duplicative functions and alignment of staff with ongoing business activity as a result of the acquisition of Evolving Systems NC, Inc. in the third quarter of 2015 and Evolving Systems BLS LTD in third quarter of 2017. Restructuring expense was $0.1 million and $3,000 for the three months ended September 30, 2017 and 2016, respectively. As a percentage of revenue, restructuring expense was 2% and 0% for the three months ended September 30, 2017 and 2016.
Restructuring was $0.1 million and $1.0 million for the nine months ended September 30, 2017 and 2016, respectively. As a percentage of revenue, restructuring expense was 1% and 5% for the nine months ended September 30, 2017 and 2016, respectively.
Interest Income
Interest income includes interest income earned on cash and cash equivalents. Interest income was $1,000 for the three months ended September 30, 2017 and 2016, respectively.
Interest income was $2,000 and $4,000 for the nine months ended September 30, 2017 and 2016, respectively.
Interest Expense
Interest expense includes the amortization of debt issuance costs from our debt facility, interest expense from our term loan and interest expense from our capital lease obligations. Interest expense was $0.1 million for the three months ended September 30, 2017 and 2016. As a percent of revenue, interest expense was 1% for the three months ended September 30, 2017 and 2016.
Interest expense was $0.2 million and $0.3 million for the nine months ended September 30, 2017 and 2016, respectively. The decrease of $0.1 million is primarily due to the Fifth Amendment to the loan and security agreement with East West Bank which provided for a Term Loan of $6.0 million. The agreement required us to use the term loan’s proceeds and $4.0 million from our cash balances to pay off and terminate the Revolving Facilities totaling $10.0 million. The result of the $4.0 million payment in February 2016 from our cash reserves and reducing the $10 million revolving facility to $6.0 million lowered the interest expense in the current period. As a percent of revenue, interest expense was 1% for the nine months ended September 30, 2017 and 2016.
Foreign Currency Exchange Loss
Foreign currency transaction losses resulted from transactions denominated in a currency other than the functional currency of the respective subsidiary and was $0.2 million and $0.3 million for the three months ended September 30, 2017 and 2016, respectively, and $0.6 million2022, and $0.5 million for the nine months ended September 30, 20172022. The increase was a result of investments sold by the Company during the three and 2016, respectively. The losses were generated primarily through the re-measurement of certain non-functional currency denominated financial assets and liabilities of our Evolving Systems U.K., BLS, the Lumata Entities and India subsidiaries.nine months ended September 30, 2022.
Unrealized Loss on Investments, net
Other Comprehensive Gain (Loss)
Other comprehensiveUnrealized loss refers to revenue, expenses, gains, and losses that under GAAP are recorded as an element of shareholders’ equity but are excluded fromon investments, 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 $0.3increased $0.1 million, duringor 100% for 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 Sterling2022 and the related translation of our U.K. subsidiary’s assets and liabilities to the United States Dollar for consolidation purposes.
For the nine months ended September 30, 2017 other comprehensive gain was $1.5 million compared to a comprehensive loss of ($2.8)$1.7 million for the nine months ended September 30, 2016. The gain for2022. Our unrealized gains and losses on investments each period are a function of changes in the forfair value of the nine months ended September 30, 2017 was dueinvestments that we hold as of the current reporting period balance sheet date relative to British Pound Sterling strengtheningthe preceding balance sheet date. Our unrealized losses during the current period andwere attributable to decreases in the related translationfair value of our U.K. subsidiary’s assets and liabilities to the United States Dollar for consolidation purposes. The loss generatedinvestment holdings 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.period.
Income Taxes
We recorded net income tax expense from continuing operations of $0.2$0.1 million and $0.4net income tax expense from continuing operations and less than $0.1 million for the three months ended September 30, 20172022 and 2016,2021 respectively. The net expense during the three months ended September 30, 2017 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 from our U.S., U.K. and India 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 also recorded net income tax benefit from continuing operations of less than $0.1 million and net income tax expense of $0.9from continuing operations and less than $0.1 million for the nine months ended September 30, 20172022 and 2016. The net expense during the nine months ended September 30, 2017 consisted of current income tax expense of $1.2 million2021, respectively.
We use a recognition threshold and a deferred tax benefit of ($0.3) million. The current tax expense consists of income tax from our U.S., U.K., France and India based operations. The deferred tax benefit was primarily related to the increase of certain net deferred tax assets and amortization of stock options and the intangible assets related to the acquisition of Evolving Systems NC, Inc. The net expense during the nine months ended September 30, 2016 consisted of current income tax expense of $0.9 million and a deferred tax benefit of ($19,000). The current tax expense consists primarily of income tax from our U.K. and India based operations. The deferred tax benefit was primarily related to the amortization of intangible assets related to the acquisition of Evolving Systems NC, Inc. in September 2015 offset by undistributed U.K. foreign earnings.
Our effective tax rate was 19% and 31%measurement attribute for the three months ended September 30, 2017financial statement recognition and 2016, respectively. The decreasemeasurement of tax positions taken or expected to be taken in our effectivea tax rate relatesreturn. For those benefits to be recognized, a higher proportion of our income being generated in the U.K., for which the statutory corporate tax rate is lower and the acquisition of subsidiaries with lower effective tax rates.
Our effective tax rate was 24% and 30% for the nine months ended September 30, 2017 and 2016 respectively. The decrease in our effective tax rates relatesposition must be more-likely-than-not to a higher proportion of our income being generates in the U.K., for which the statutory corporate tax rate is lower and the acquisition of subsidiaries with lower effective tax rates.
be sustained upon examination by taxing authorities. As of September 30, 20172022, and 2021, we had no liability for unrecognized tax benefits. We do not believe there will be any material changes to our unrecognized tax positions over the next twelve months.
Discontinued Operations
On December 31, 2016 we continued to maintain a valuation allowance2021, the Company closed on the terms for the sale and transfer of substantially all of the Company’s operating subsidiaries and all of its assets. The financial results of discontinued operations primarily reflect the results of our domestic net deferred tax asset. Such assets primarily consistforeign operating subsidiaries conducting business as provider of FTC, state Net Operating Loss (“NOL”) carryforwards, researchreal-time digital engagement solutions and development tax creditsservices of software solutions and Alternative Minimum Tax (“AMT”) credits. See Note 7services to the wireless carriers throughout the world. This included the Company’s portfolio of solutions and services for real-time analytics, customer acquisition and activation, customer value management and loyalty for the telecom industry promoting partnerships into retail and financial statements for a summaryservices.
25
FINANCIAL CONDITION
Our working capital position increased $2.1decreased by $9.9 million or 26%, to $10.1$27.8 million as of September 30, 20172022 from $8.0$37.7 million as of December 31, 2016.2021. The increasedecrease in working capital is related to increases in contract receivables, unbilled work-in-progress and prepaid and other current assets primarily as a resultthe loss from continuing operations, unrealized losses on purchase of the acquisitions of EVOL BLSinvestments, and the Lumata Entities.completed tender offering and purchasing of treasury stock.
CONTRACTUAL OBLIGATIONS
There have been no material changes to the contractual obligations as disclosed in our 2016 Annual Report on Form 10-K.
LIQUIDITY AND CAPITAL RESOURCES
We have historically financed operations through cash flows from operations and equity transactions.bank borrowings. On December 31, 2021, the Company closed on the terms of the Purchase Agreements. Following the sale of its assets in December 2021, the Company has been researching two initial areas of product focus; each are in research-oriented pre-release mode. The two areas of focus are in the application of self-learning algorithms as well as the symbolic tagging and organizing of physical objects. At September 30, 2017,2022, our principal source of liquidity was $7.6$16.8 million in cash and cash equivalents and $10.8 million in contract receivables, net of allowances.equivalents. Our anticipated uses of cash in the future will be to fund the expansion of our business through both organic growthproduct development, as well as possible acquisition activities, the expansion of our customer base internationally and debt service payments on the Term Loan.activities. Other uses of cash may include quarterly dividends,investments, capital expenditures, and technology expansion.
Net cash used in operating activities for the nine months ended September 30, 2022 was $1.9 million due to net loss of $3.2 million plus an increase in prepaid and other assets of $0.4 million related primarily to accrued interest, and a decrease in income taxes payable of $0.1 million, partially offset by noncash charges of $1.5 million, an increase in accounts payable and accrued liabilities of $0.1 million and increase of escrow liability of $0.2 million. Net cash provided by operating activities for the nine months ended September 30, 2017 and 20162021 was $2.6$1.3 million due to the net income of less than $0.1 million, noncash charges of $1.4 million, increase in unearned revenue of $1.0 million and $5.5a decrease in contract receivable of $0.5 million, respectively. Cash providedpartially offset by operating activities for the nine months ended September 30, 2017 was primarily due to netincrease in unbilled work in progress of $0.5 million and income coupled with collectiontaxes receivable of contract receivables, invoicing of unbilled work-in-progress, prepaid$0.4 million and an increase in other assets paymentlong term of $0.3 million related to the foreign tax credit to be collected in a future period as well as a decrease in accounts payable and accrued liabilities of $0.2 million and increased unearned revenue.
a reduction in our lease obligations of $0.3 million
Net cash used in investing activities during the nine months ended September 30, 2017 was $6.0 million due to the acquisition of EVOL BLS and the Lumata Entities, net of cash received, which were completed in the third quarter 2017. Cash used in investing activities for the nine months ended September 30, 20162022 of $17.9 million was $24,000 forprimarily due to the purchase of property and equipment.
investments of $21.5 million, transaction fees related to prior period disposition of $0.6 million, offset by proceeds on sale of investments of $4.2 million. Net cash provided by (used in) financingused in investing activities for the nine months ended September 30, 2017 and 20162021 was $3.2$0.3 million and ($6.6) million, respectively. The cash provided by financing activities for the nine months ended September 30, 2017 was primarily relateddue to the proceeds from the Loan Facility entered into August 2017 to acquire the Lumata Entities offset by the principal payments on our term loanpurchase of property and the payment for second year debt issuance costs. Theequipment.
Net cash used in financing activities for the nine months ended September 30, 20162022 of $2.9 million was due to the retirement of common stock and purchase of treasury stock. Net cash used in financing activities was $0.1 million for the nine months ended September 30, 2021 and was primarily duerelated to convertingthe final principal payments on 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 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, 2022 of $16.8 million; and |
● | Our working capital balance at September 30, 2022 of $27.8 million |
· Our cash and cash equivalents balance at September 30, 2017 of $7.6 million;
· Our working capital balance of $10.1 million;
· Our demonstrated ability to generate positive cash flows from operations;
· Our planned capital expenditures of less than $0.5 million during 2017; and
· The repayment of our long-term debt facility of which the first principal payment began in January 2017.
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 and 2016, the effect of exchange rate changes resulted in a $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
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
Not required for smaller reporting companies.
26
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.
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
Evaluation of Disclosure 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.
September 30, 2022.
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.
Changes in Internal Control Over Financial Reporting
During the three months ended September 30, 2017,2022, there were no changes in our internal controlscontrol over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) or in other factors that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II —- OTHER INFORMATION
WeInformation regarding reportable legal proceedings is contained in Part I, Item 3, “Legal Proceedings,” in our Annual Report on Form 10-K for the year ended December 31, 2021. There have been no material changes to the legal proceedings previously disclosed in the Annual Report on Form 10-K, which are incorporated by reference herein. From time to time, we are involved in various legal matters arising in the normal course of business. Losses, including estimated costs to defend, are recorded for these matters to the extent they were probable of loss and the amount of loss could be reasonably estimated.
ITEM 1A. RISK FACTORS
Not required under Regulation S-K for smaller reporting companies.
There have been no material changes in the risk factors previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016, filed with the SEC on March 28, 2017.
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 under “Item 1A. Risk Factors.”
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Issuer Purchases of Equity Securities
The following table provides information with respect to purchases of common stock made by the Company during the third quarter 2022:
| | | | | | | | | | |
|
| |
| | |
| Total number of |
| Approximate dollar | |
| | | | | | | shares purchased as | | value of shares that | |
| | Total number of | | | | | part of publicly | | may yet be purchased | |
| | shares purchased | | Average price | | announced plans (in | | under the plan (in | ||
|
| (in thousands) |
| paid per share |
| thousands) |
| thousands) | ||
July 1, 2022 to July 31, 2022 | | — | | $ | — | | — | | $ | — |
August 1, 2022 to August 31, 2022 | | — | | | — | | — | | | — |
September 1, 2022 to September 30, 2022* |
| 263 |
| | 1.55 |
| — |
| | — |
Total |
| 263 | | $ | 1.55 |
| — | | $ | — |
*On September 2 and September 21, 2022, the Company completed direct purchases of their stock to be held as of September 30, 2022 as treasury stock at a price of $1.55 per share.
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
None
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
None
ITEM 5. OTHER INFORMATION
Not applicable.
28
None
(a) Exhibits
| | |
Exhibit No. |
| Description of Document |
2.1 | | |
2.2 | | |
2.3 | | |
2.4 | | |
2.5 | | |
2.6 | | |
2.7 | | |
3.1 | | |
3.2 | | |
3.3 | | |
3.4 | | |
3.5 | | |
3.6 | | |
3.7 | | |
3.8 | | |
10.1 | | |
10.2 | | |
10.3 | | |
31.1* | | |
|
|
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32.1** | | |
|
| |
|
|
|
| | 101 |
101.CAL* | | 101 XBRL Taxonomy Extension Calculation Linkbase Document. |
101.DEF* | | 101 XBRL Taxonomy Extension Definition Linkbase Document. |
101.LAB* | | 101 XBRL Taxonomy Extension Label Linkbase Document. |
101.PRE* | | 101 XBRL Taxonomy Extension Presentation Linkbase Document. |
104 | | Cover Page Interactive Data File, formatted in Inline XBRL |
* | Filed herewith. |
** | Furnished herewith. |
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Pursuant to the requirements of Section 13 or 15(d) 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.
SYMBOLIC LOGIC, INC.
| /s/ | ||||
|
| ||||
|
| ||||
| Igor Volshteyn | | (Principal | | |
31