
	September 30, 2020		December 31, 2019		September 30, 2021		December 31, 2020
		(unaudited)				(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	3,486	$	3,076	$	3,581	$	2,763
Contract receivables, net of allowance for doubtful accounts of $807 and $710
at September 30, 2020 and December 31, 2019, respectively		3,409		6,732
Contract receivables, net of allowance for doubtful accounts of $794 and $780
at September 30, 2021 and December 31, 2020, respectively						5,100		5,681
Unbilled work-in-progress		3,356		1,105		3,799		3,365
Prepaid and other current assets		1,849		1,594		1,820		1,828
Income taxes receivable		819		953		666		270
Total current assets		12,919		13,460		14,966		13,907
Property and equipment, net		531		482		530		532
Amortizable intangible assets, net		2,918		3,665		2,037		2,769
Operating leases — right-of-use assets		979		1,205
Operating leases — right-of-use assets, net						1,033		915
Long-term assets – other						251		—
Deferred income taxes, net		631		1,000		953		953
Total assets	$	17,978	$	19,812	$	19,770	$	19,076

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Term loans - current portion, net	$	428	$	1,577
Term loan - current portion					$	—	$	142
Accounts payable and accrued liabilities		4,042		3,827		4,067		4,305
Lease obligations — operating leases		291		321		330		294
Unearned revenue		3,321		3,971		4,647		3,713
Total current liabilities		8,082		9,696		9,044		8,454
Long-term liabilities:
Term loan, net of current portion, net		319		122
Term loan, net of current portion						—		319
Lease obligations - operating leases, net of current portion		680		876		696		613
Total liabilities		9,081		10,694		9,740		9,386

Commitments and contingencies (Note 10)		—		—		—		—

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; 12,374,329 shares issued and 12,195,440 shares outstanding as of September 30, 2020 and 12,342,723 shares issued and 12,163,834 shares outstanding as of December 31, 2019		12		12
Preferred stock, $0.001 par value; 2,000,000 shares authorized; 0 shares issued and outstanding						—		—
Common stock, $0.001 par value; 40,000,000 shares authorized; 12,436,604 shares issued and 12,257,715 shares outstanding as of September 30, 2021 and 12,374,798 shares issued and 12,195,909 shares outstanding as of December 31, 2020						12		12
Additional paid-in capital		99,714		99,555		100,018		99,776
Treasury stock, 178,889 shares as of September 30, 2020 and December 31, 2019, at cost		(1,253)		(1,253)
Treasury stock, 178,889 shares as of September 30, 2021 and December 31, 2020, ‎at cost						(1,253)		(1,253)
Accumulated other comprehensive loss		(10,489)		(10,053)		(10,359)		(10,345)
Accumulated deficit		(79,087)		(79,143)		(78,388)		(78,500)
Total stockholders' equity		8,897		9,118		10,030		9,690
Total liabilities and stockholders' equity	$	17,978	$	19,812	$	19,770	$	19,076

[



	For the Three Months				For the Nine Months				For the Three Months				For the Nine Months
	Ended September 30,				Ended September 30,				Ended September 30,				Ended September 30,
		2020		2019		2020		2019		2021		2020		2021		2020
REVENUE
License fees	$	83	$	185	$	387	$	1,152	$	28	$	83	$	214	$	387
Services		6,691		5,928		19,001		17,914		6,946		6,691		20,214		19,001
Total revenue		6,774		6,113		19,388		19,066		6,974		6,774		20,428		19,388

COSTS OF REVENUE AND OPERATING EXPENSES
Costs of revenue, excluding depreciation and amortization		2,132		2,144		6,456		6,249
Costs of revenue, excluding depreciation and ‎ amortization										2,081		2,132		6,506		6,456
Sales and marketing		1,511		1,815		4,516		5,574		1,325		1,511		4,081		4,516
General and administrative		1,352		979		3,875		3,985		1,240		1,352		4,080		3,875
Product development		1,094		1,183		3,168		3,676		1,348		1,094		3,936		3,168
Depreciation		58		61		158		150		182		58		308		158
Amortization		236		232		704		704		239		236		717		704
Goodwill impairment loss		—		—		—		6,687
Restructuring										—		—		61		—
Total costs of revenue and operating expenses		6,383		6,414		18,877		27,025		6,415		6,383		19,689		18,877

Income (loss) from operations		391		(301)		511		(7,959)
Income from operations										559		391		739		511

Other income (expense)
Other (expense) income
Interest income		1		1		4		10		3		1		7		4
Interest expense		—		(71)		(65)		(255)		(3)		—		(4)		(65)
Other (loss) income, net		(1)		13		18		1
Other (expense) income, net										—		(1)		287		18
Foreign currency exchange (loss) income		(107)		250		240		183		(190)		(107)		(402)		240
Other (expense) income, net		(107)		193		197		(61)		(190)		(107)		(112)		197

Income (loss) from operations before income taxes		284		(108)		708		(8,020)
Income from operations before income taxes										369		284		627		708
Income tax expense		148		109		652		296		294		148		515		652
Net income (loss)	$	136	$	(217)	$	56	$	(8,316)
Net income									$	75	$	136	$	112	$	56

Basic earnings (loss) per common share	$	0.01	$	(0.02)	$	0.00	$	(0.68)
Basic earnings per common share									$	0.01	$	0.01	$	0.01	$	0.00

Diluted earnings (loss) per common share	$	0.01	$	(0.02)	$	0.00	$	(0.68)
Diluted earnings per common share									$	0.01	$	0.01	$	0.01	$	0.00

Weighted average basic shares outstanding		12,195		12,163		12,185		12,154		12,258		12,195		12,240		12,185
Weighted average diluted shares outstanding		12,258		12,163		12,275		12,154		12,258		12,258		12,258		12,275

Nine Months Ended September 30, 2020

Accumulated

Additional

other

Total

Common stock

paid-in

Treasury

comprehensive

Accumulated

stockholders'

Shares

Amount

capital

stock

loss

deficit

equity
Balance at January 1, 2020
12,163,834

$
12

$
99,555

$
(1,253)

$
(10,053)

$
(79,143)

$
9,118
Restricted stock vested
31,606

—

—

—

—

—

—
Stock-based compensation
expense
—

—

159

—

—

—

159
Net income
—

—

—

—

—

56

56
Foreign currency translation
loss
—

—

—

—

(436)

—

(436)
Balance at September 30, 2020
12,195,440

$
12

$
99,714

$
(1,253)

$
(10,489)

$
(79,087)

$
8,897



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

��

Nine Months Ended September 30, 2019

Accumulated

Additional

other

Total

Common stock

paid-in

Treasury

comprehensive

Accumulated

stockholders'

Shares

Amount

capital

stock

loss

deficit

equity
Balance at January 1, 2019
12,126,708

$
12

$
99,224

$
(1,253)

$
(10,115)

$
(69,448)

$
18,420
Restricted stock vested
36,343

—

—

—

—

—

—
Stock-based compensation
expense
—

—

263

—

—

—

263
Net loss
—

—

—

—

—

(8,316)

(8,316)
Foreign currency translation
loss
—

—

—

—

(170)

—

(170)
Balance at September 30, 2019
12,163,051

$
12

$
99,487

$
(1,253)

$
(10,285)

$
(77,764)

$
10,197



Nine Months Ended September 30, 2020

									Accumulated
					Additional				other			Total
	Common stock				paid-in		Treasury		comprehensive		Accumulated	stockholders'
	Shares	Amount			capital		stock		loss		deficit	equity
Balance at January 1, 2020	12,163,834	$	12	$	99,555	$	(1,253)	$	(10,053)	$	(79,143)	$	9,118
Restricted stock vested	31,606		—		—		—		—		—		—
Stock-based compensation ‎ expense	—		—		159		—		—		—		159
Net income	—		—		—		—		—		56		56
Foreign currency translation loss	—		—		—		—		(436)		—		(436)
Balance at September 30, 2020	12,195,440	$	12	$	99,714	$	(1,253)	$	(10,489)	$	(79,087)	$	8,897

‎

Three Months Ended September 30, 2020

Accumulated

Additional

other

Total

Common stock

paid-in

Treasury

comprehensive

Accumulated

stockholders'

Shares

Amount

capital

stock

loss

deficit

equity
Balance at June 30, 2020
12,194,971

$
12

$
99,622

$
(1,253)

$
(10,675)

$
(79,223)

$
8,483
Restricted stock vested
469

—

—

—

—

—

—
Stock-based compensation
expense
—

—

92

—

—

—

92
Net income
—

—

—

—

—

136

136
Foreign currency translation
income
—

—

—

—

186

—

186
Balance at September 30, 2020
12,195,440

$
12

$
99,714

$
(1,253)

$
(10,489)

$
(79,087)

$
8,897



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

Three Months Ended September 30, 2019

Accumulated

Additional

other

Total

Common stock

paid-in

Treasury

comprehensive

Accumulated

stockholders'

Shares

Amount

capital

stock

loss

deficit

equity
Balance at June 30, 2019
12,162,270

$
12

$
99,417

$
(1,253)

$
(10,129)

$
(77,547)

$
10,500
Restricted stock vested
781

—

—

—

—

—

—
Stock-based compensation
expense
—

—

70

—

—

—

70
Net loss
—

—

—

—

—

(217)

(217)
Foreign currency translation
loss
—

—

—

—

(156)

—

(156)
Balance at September 30, 2019
12,163,051

$
12

$
99,487

$
(1,253)

$
(10,285)

$
(77,764)

$
10,197



Three Months Ended September 30, 2020

									Accumulated
					Additional				other			Total
	Common stock				paid-in		Treasury		comprehensive		Accumulated	stockholders'
	Shares	Amount			capital		stock		loss		deficit	equity
Balance at June 30, 2020	12,194,971	$	12	$	99,622	$	(1,253)	$	(10,675)	$	(79,223)	$	8,483
Restricted stock vested	469		—		—		—		—		—		—
Stock-based compensation ‎ expense	—		—		92		—		—		—		92
Net income	—		—		—		—		—		136		136
Foreign currency translation income	—		—		—		—		186		—		186
Balance at September 30, 2020	12,195,440	$	12	$	99,714	$	(1,253)	$	(10,489)	$	(79,087)	$	8,897



	For the Nine Months Ended September 30,				For the Nine Months Ended September 30,
		2020		2019		2021		2020
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	56	$	(8,316)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Net income					$	112	$	56
Adjustments to reconcile net income to net cash provided by ‎operating activities:
Depreciation		158		150		308		158
Amortization of intangible assets		704		704		717		704
Amortization of debt issuance costs		4		4		—		4
Amortization of operating leases — right of use assets		191		306		284		191
Stock-based compensation expense		159		263		242		159
Foreign currency transaction income, net		(98)		(183)
Bad debt (recoveries) expense, net		(11)		113
Provision for deferred income taxes		370		(49)
Goodwill impairment loss		—		6,687
Foreign currency transaction loss (income), net						148		(98)
Bad debt expense (recoveries)						14		(11)
(Benefit) provision for deferred income taxes						(5)		370
Gain on PPP Loan forgiveness						(319)		—
Change in operating assets and liabilities:
Contract receivables		3,177		1,936		462		3,177
Unbilled work-in-progress		(2,244)		149		(502)		(2,244)
Prepaid and other assets		(274)		(510)		(25)		(274)
Accounts payable and accrued liabilities		252		(537)		(153)		252
Income taxes receivable		95		(508)		(417)		95
Unearned revenue		(563)		677		1,015		(563)
Lease obligations — operating leases		(191)		(316)		(285)		(191)
Long-term assets – other						(256)		—
Net cash provided by operating activities		1,785		570		1,340		1,785

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment		(218)		(309)		(316)		(218)
Net cash used in investing activities		(218)		(309)		(316)		(218)

CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on notes payable		(1,182)		(2,684)		(143)		(1,182)
Proceeds from issuance of note		319		—
Proceeds from loan						—		319
Net cash used in financing activities		(863)		(2,684)		(143)		(863)

Effect of exchange rate changes on cash and cash equivalents		(294)		(58)		(63)		(294)

Net increase (decrease) in cash and cash equivalents		410		(2,481)
Net increase in cash and cash equivalents						818		410
Cash and cash equivalents at beginning of period		3,076		6,732		2,763		3,076
Cash and cash equivalents at end of period	$	3,486	$	4,251	$	3,581	$	3,486

Supplemental disclosure of cash and non-cash transactions:
Interest paid	$	63	$	246	$	4	$	63
Income taxes paid	$	173	$	159
Supplemental non-cash amounts of lease liabilities arising from obtaining right-of-use assets	$	41	$	1,609
Income taxes paid, net of refunds					$	788	$	177
Supplemental non-cash amounts of lease liabilities arising from obtaining right-of-use ‎ assets					$	370	$	41

Organization — Evolving Systems, Inc. ~~(“we,” “us,” “our,” the “Company,” “Evolving” and “Evolving Systems”~~(the “Company”) is a provider of real-time digital engagement solutions and services of software solutions and services to the wireless carrier and consumer financial services markets. We maintain long-standing relationships with many of the largest wireless companies worldwide. The Company’s portfolio includes market-leading 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 services.

Acquisitions of BLS Limited (“EVOL BLS”), four Lumata Holdings subsidiaries, Lumata France SAS, Lumata Spain S.L., Lumata UK Ltd and Lumata Deutschland GmbH (collectively, “Lumata Entities”) in 2017, along with the acquisition of RateIntegration d/b/a Sixth Sense Media (“SSM”) in 2015, expanded our footprint in the digital marketing space. Each of these acquisitions had their ~~partners.~~

Our software solution platforms enable carriers’ marketing departments to innovate, execute and manage highly personalized and contextually relevant, interactive campaigns that engage consumers in real time and enhance customer retention through deploying loyalty programs. ~~In 2019,~~own platform which we ~~introduced~~still maintain today. Through the extensive work of our product development team, we have launched the Evolution ~~this~~ platform supersedes our existing platforms and provides an upgrade path to our existing loyalty and customer value management “CVM” platforms. Evolution was built by combining, integrating, and improving uponfeaturing the best ~~components and features~~ of ~~our current~~these legacy platforms on cutting edge technology. Evolution is used to operate the most innovative large-scale loyalty programs, as well as ~~adding new enhancements.~~

~~Our~~providing unique mechanics enabling gamification, optimization and personalization across a variety of channels. It enables our clients to engage with their customers at all stage of their lifecycle, providing interactive dialogue and smart recommendations through all available traditional and digital channels. The platform seamlessly integrates within the 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~~provider’s IT infrastructure, either on-premise or 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 numbers as well as other communication identifiers (i.e. SIMs, MSISDNs IMSIs, ICCIDs, IPs). Our solutionsprivate cloud. It can be ~~deployed on premise~~operated or managed as a ~~Software-as-a-Service~~service depending on the market needs.

As a supplier of real-time digital engagement solutions and services, we drive growth in customer acquisition and activation, extend customer lifetime and increase customer value and revenue in the converging mobile, entertainment, financial and retail services eco-system. Our platforms, together with our team of experienced industry experts, help service providers increase their customer lifetime value (“~~SaaS”~~CLV”). over the course the customer lifecycle.

Evolving Systems provides software solutions and services throughout the world. The COVID-19 global outbreak has caused instability and volatility in multiple markets where our clients conduct business. We have leveraged our ability to provide support remotely resulting in limited effect on our ~~day to day~~day-to-day operations. The inability to travel has delayed interactions with our clients on projects and in the traditional modes of sales development. We continually work with existing and new clients exploring new ways of using our products and services to enhance their business. On-going travel restrictions has caused the business to interact with clients in new ways and reduced certain costs. The ~~financial covenants under our debt facilities (see Note 7) are related~~long-term effects on how we conduct business in the future is still undetermined but we continue to ~~cash balances and quarterly operational results which have been adversely affected by project delays related~~evolve to ~~customer interactions being postponed or our customers’ ability to make timely payments.~~ meet client needs.

We believe our current liquidity and funds from our ongoing operations will be sufficient to fund operations and meet the Company’s cash needs for ~~term loan payments through the full repayment of the loan on December 31, 2020, along with our~~future working capital and capital expenditure requirements for at least the next twelve months from the date of ~~filing~~issuance of these condensed consolidated financial statements. In making this assessment, we considered our ~~$3.5~~$3.6 million in cash and cash equivalents and our ~~$4.8~~$5.9 million in working capital at September 30, ~~2020,~~2021, along with our ability to ~~historically~~ generate positive cash flows from ~~operations.~~operations for the nine months ended September 30, 2021 and year ended December 31, 2020.

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 Article 8 of Regulation S-X and the related rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, certain information and note disclosures normally included in 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 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 financial statements. The results for the ~~three and~~ nine months ended September 30, ~~2020~~2021 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, ~~2019~~2020 included in our Annual Report on Form 10-K as filed with the SEC on March ~~30, 2020.~~17, 2021.

Use of Estimates — The preparation of condensed consolidated financial statements in conformity with ~~US GAAP~~accounting 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 statements, as well as the reported amounts of revenue and expenses during the reporting period. We made estimates with respect to revenue recognition for progress toward completion and direct profit or loss on contracts, allowance for doubtful accounts, ~~deferred taxes and~~ income tax valuation allowance, fair values of long-lived assets, valuation of intangible assets, useful lives for

iii. Services Revenue

We recognize revenue from fixed-price service contracts using the input method of accounting based on labor hours. These contracts generally include a single performance obligation. Under the input method, revenue is recognized on the basis of an entity’s efforts or inputs toward satisfying a performance obligation. We recognize revenue from professional services provided pursuant to

time-and-materials based contracts and training services as the services are performed, as that is when our performance obligation to our customers under such arrangements is fulfilled.

iv. Managed Services

We recognize revenue from our managed services contracts primarily over the service contract period generally as a single performance obligation. On occasion, our managed services contracts will contain a specified number of hours to work over the term of the ~~contract.~~contract or other services that would be separate performance obligations. Revenue for this type of managed service contract is recognized using the input method of accounting, as previously described.

Disaggregation of revenue

In the following table, revenue is disaggregated by primary geographical market, major products/service lines, and timing of revenue recognition (in thousands):


	For the Three Months Ended				For the Nine Months Ended				For the Three Months Ended				For the Nine Months Ended
	September 30,				September 30,				September 30,				September 30,
	2020		2019		2020		2019		2021		2020		2021		2020
Primary geographical markets
United Kingdom	$	1,398	$	1,042	$	3,691	$	3,758	$	1,691	$	1,398	$	4,217	$	3,691
Other		5,376		5,071		15,697		15,308		5,283		5,376		16,211		15,697
	$	6,774	$	6,113	$	19,388	$	19,066	$	6,974	$	6,774	$	20,428	$	19,388

Major products/service lines
License revenue	$	83	$	185	$	387	$	1,152	$	28	$	83	$	214	$	387
Customer support, including warranty support fees		1,944		2,261		6,029		6,841		1,993		1,944		5,921		6,029
Services		2,388		1,700		5,747		4,896		2,303		2,388		6,884		5,747
Managed services		2,359		1,967		7,225		6,177		2,650		2,359		7,409		7,225
Total services		6,691		5,928		19,001		17,914		6,946		6,691		20,214		19,001
	$	6,774	$	6,113	$	19,388	$	19,066	$	6,974	$	6,774	$	20,428	$	19,388

Timing of revenue recognition
Products transferred at a point in time	$	61	$	39	$	289	$	560	$	65	$	61	$	234	$	289
Products and services transferred over time		6,713		6,074		19,099		18,506		6,909		6,713		20,194		19,099
	$	6,774	$	6,113	$	19,388	$	19,066	$	6,974	$	6,774	$	20,428	$	19,388

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

Contract receivables are recorded at the invoiced amount and do not bear interest. Credit is extended based on the evaluation of a customer’s financial condition and collateral is not required. Unbilled work-in-progress is revenue which has been earned but not invoiced. The contract assets ~~(unbilled work-in-progress)~~ are transferred to the receivables when invoiced.

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

Basic earnings ~~(loss)~~ per share is computed by dividing ~~loss or~~ income 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. Diluted earnings ~~(loss)~~ per share is computed using the weighted average number of shares of common stock outstanding, plus all potentially dilutive common stock equivalents using the treasury stock method. Common stock equivalents consist of stock options and restricted stock.

The following is the reconciliation of the numerators and denominators of the basic and diluted earnings ~~(loss)~~ per share computations (in thousands except per share data):

The following is a summary of stock option activity under the plans for the nine months ended September 30, ~~2020:~~2021:



				Weighted-
				Average
		Weighted-		Remaining	Aggregate
	Number of	Average		Contractual	Intrinsic
	Shares	Exercise		Term	Value
	(in thousands)	Price		(Years)	(in thousands)
Options outstanding at January 1, 2021	343	$	5.82	5.62	$	—
Less options forfeited/cancelled	(56)		4.31
Options outstanding at September 30, 2021	287	$	6.11	4.62	$	—

Options exercisable at September 30, 2021	278	$	6.16	4.58	$	—

Weighted-

Average

Weighted-

Remaining

Aggregate

Number of

Average

Contractual

Intrinsic

Shares

Exercise

Term

Value

(in thousands)

Price

(Years)

(in thousands)
Options outstanding at January 1, 2020
438

$
5.69

6.51

$
—
Less options forfeited/cancelled
(87)

5.46

Less options expired
(3)

2.86

Options outstanding at September 30, 2020
348

$
5.77

5.90

$
—

Options exercisable at September 30, 2020
280

$
6.10

5.59

$
—

There were no 0 stock options granted during the nine months ended September 30, ~~2020~~2021 or ~~2019.~~2020. The total fair value of stock options and restricted stock vested ~~during~~in the nine months ended September 30, 2021 and 2020 ~~and 2019~~ was ~~$0.2~~ $0.4million and ~~$0.3~~ $0.2million, respectively.

NOTE 6 — CONCENTRATION OF CREDIT RISK

For the three months ended September 30, ~~2020, we did not have~~ ~~a significant customer (defined as contributing at least 10%). For the three months ended~~ ~~September 30, 2019, we had one~~ ~~significant customer that accounted for 10% of revenue from operations, this significant customer is a large telecommunications operator in Europe.~~

~~For the nine months ended September 30, 2020 and 2019 one~~2021 1 significant customer (defined as contributing at least 10%) accounted for 10% of revenue from operations. The significant customer is a large telecommunications operator in Europe. There were 0 significant customers for the three months ended September 30, 2020.

For the nine months ended September 30, 2021 and ~~11%~~2020 1 significant customer (defined as contributing at least 10%) accounted for 10% and 10% of revenue from operations, respectively. The significant customer is a large telecommunications operator in Europe.

As of ~~ended~~ September 30, ~~2020, we~~2021, 1 significant customer (defined as contributing at least 10%) accounted for 11% of contract receivables and unbilled work-in-progress. We did ~~not~~0t have a significant customer that accounted for approximately 10% of contract receivables and unbilled ~~work-in-progress. As~~work-in-progress as of December 31, ~~2019, one customer accounted for 12% of contract receivables and unbilled work-in-progress.~~2020.

NOTE 7 — LONG-TERM DEBT

~~East West Bank Term Loan Facilities~~

On August 16, 2017, we entered into a Term Loan Facility Agreement with East West Bank as lender in the amount of $4.7 million (the “Lumata Facility”). The Lumata Facility ~~requires~~required the Company to make monthly principal payments of approximately $0.1 million that commenced on July 31, 2018 and interest at the greater of (a) 3.5% or (b) the variable rate of interest that appears in the Wall Street Journal on a monthly measurement date plus in either case 1.5%. AsWe used the full amount of September 30, 2020, the U.S.A. Prime Rate was 3.25%. At September 30, 2020 the interest rate was 5.00%. In the event of a default, the interest rate increases by 5% per annum. Evolving Systems Inc. entered into the Lumata Facility asto fund the ~~parent guarantor; Evolving Systems BLS LTD and Evolving Systems Limited entered into~~acquisition of the Lumata ~~Facility as Original Guarantors (the “Original Guarantors”).~~companies. The Lumata Facility is secured by all of the assets of EVOL Holdings and the ~~original guarantors~~Original Guarantors in accordance with the terms of a Debenture entered into by ~~Evolving Systems~~EVOL Holdings and the Original Guarantors in favor of East West Bank. EVOL Holdings, ~~Evolving Systems~~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. Lumata France SAS and Lumata UK Ltd are also bound to adhere to the finance documents as additional obligors.

The Lumata Facility required the Company to pay an ~~arrangement fee~~Arrangement Fee (“Origination Fee”) of $23,650, payable in ~~four~~4 equal installments, with the first payment due on the date of the Lumata 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 Lumata 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.

On February 29, 2016, we entered into the Fifth Amendment to the Loan and Security Agreement with East West Bank which provided for a Term Loan (the “Term Loan”) for $6.0 million. The $6.0 million Term Loan bore interest at a floating rate equal

to the U.S. Prime Rate plus 1.0%. In the event of a default, the interest rate was to increase 5% per annum. The Term Loan was secured by substantially all of the assets of Evolving Systems, including a pledge, subject to certain limitations with respect to stock of foreign subsidiaries, of the stock of the existing and future direct subsidiaries of Evolving Systems. Interest accrued from the date the Term Loan was made at the aforementioned rate and was payable monthly. The Term Loan was to 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. The Term Loan required the Company to maintain a minimum current ratio, a specified ratio of Total Liabilities to EBITDA and a minimum fixed charge coverage ratio, as defined in the Term Loan. The Term Loan required us to pay two annual credit facility fees of $18,750 and legal fees equal to $1,000.

On September 24, 2019 the Company agreed in principle to the terms of a new amendment and on October 4, 2019, we entered into the First Amendment (“First Amendment”) to the Lumata Facility. The purpose of the First Amendment was to waive certain events of non-compliance with respect to covenants not achieved in prior periods and to amend future covenant requirements. The First Amendment also required Evolving Systems to make an advance payment of principal of ~~$666,666.66.~~$666,667. The remaining terms and conditions of the Lumata Facility and payment schedule remain unchanged. The Company also agreed to pay East West Bank’s legal fees in connection with the transaction. ~~The last payment was scheduled to be made January 31, 2021.~~

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

Financial covenants previously included in the credit facilities ~~had been~~were amended and replaced by a minimum consolidated cash balance of no less than the total bank debt outstanding and a minimum trailing three month consolidated EBITDA fixed dollar amount mutually agreed to by the Company and East West Bank in the amendments.

On July 1, 2020, we entered into the Amendment and Waiver Letter (“Second Amendment”) to the Lumata Facility. The purpose of the Second Amendment was to waive certain events of non-compliance with respect to covenants not achieved in prior periods and to amend future covenant requirements. The Second Amendment adjusted the loan amortization to be paid in full no later than December 31, 2020 and fixed the interest rate at 5% on the remaining principal. Monthly payments will be $0.1 million with the last payment scheduled to be made December 31, 2020.The Company also made an advance payment of $44,000 on June 1, 2020.

Financial covenants previously included in the amended credit facilities ~~have~~had been replaced by a monthly minimum consolidated cash balance of no less than $1.5 million and a fiscal quarter consolidated EBITDA fixed dollar amount mutually agreed to by the Company and East West Bank in the amendments. ~~Evolving Systems has transacted all loan payments as originally scheduled and was~~The Company also agreed to pay East West Bank’s legal fees in ~~compliance~~connection with the ~~new covenants as~~transaction. The Second Amendment adjusted the loan amortization accelerating the final payment date and fixed the interest rate at 5% on the remaining principal. The remaining terms and conditions of ~~September 30,~~the Lumata Facility unchanged. Monthly payments were $0.1 million, and the Company also made an advance payment of $44,000 on June 1, 2020. The last payment was transacted on January 11, 2021.

Paycheck Protection Program Loan

On April 15, 2020, the Company received loan proceeds in the amount of $318,900 under the Paycheck Protection Program (“PPP”). The PPP, established as part of the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), ~~provides~~provided 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~~were forgivable after a period of ~~eight~~8 to ~~twenty-four~~24 weeks as long as the borrower ~~uses~~used 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.

~~The unforgiven portion~~We have met the conditions of the PPP ~~loan is payable over two years at an interest rate~~Loan forgiveness program. As authorized by section 1106 of ~~1%, with a deferral of payments until~~ the CARES Act, United States Small Business ~~Association remits~~Administration (“SBA”) has forgiven the PPP loan on May 20, 2021. The forgiveness amount towas $318,900 in principal and $3,543 in Interest. We have recorded the ~~lender. However if~~forgiveness amount as other income in our unaudited statement of operations. We had used the ~~borrower does not apply for forgiveness the deferral shall be 10 months after the end of the~~ loan ~~forgiveness covered period. The Company intends to use the~~ proceeds for purposes consistent with the ~~PPP. While the~~PPP, including paying for Company currently believes that its use of the loan proceeds will meet the conditions for forgiveness of the loan, we cannot assure you that we will not take actions that could cause the Company to be ineligible for forgiveness of the loan, in whole or in part. Any such portion not forgiven can be prepaid in whole or part without penalty. We have recorded the PPP loan as a long term loan payable on our Condensed Consolidated Balance Sheet and will reduce the balance at the time loan is forgiven or we begin to make payments.wages.

NOTE 8 — INCOME TAXES

WeThe income tax provision for the fiscal year ending December 31, 2021 interim periods is determined using an estimate of the annual effective tax rate, adjusted for discrete items, primarily related to the effects of foreign currency exchange realized transaction gains or losses and foreign taxes withheld. At September 30, 2021 the Company is currently estimating an annual effective tax rate of approximately 11%.

For three months ended September 30, 2021, we recorded net income tax expense of $0.3 million and tax expense of $0.1 million for ~~each of~~ the three months ended September 30, ~~2020 and 2019, respectively. The net expense during~~2020. For the three months ended September 30, ~~2020 consisted~~2021, the Company recorded an annual effective tax rate accrual inclusive of ~~current income~~the impact of discrete items that resulted in a net tax expense effect of ~~$0.1~~approximately $0.3 million. ~~The current~~Our effective tax ~~expense consists of income tax primarily from our U.K.~~rate was 80% and ~~Indian based operations and foreign taxes withheld. The net expense during~~52% for the three months ended September 30, ~~2019 consisted~~2021 and 2020, respectively.

For the nine months ended September 30, 2021, the Company recorded an annual effective tax rate accrual inclusive of ~~current~~the impact of discrete items that resulted in a net income tax expense effect of approximately $0.5 million. The Company’s recorded effective income tax rate was 82% including effect of discrete items for the nine months ended September 30, 2021 compared to an effective tax rate of 92% for the nine months ended September 30, 2020. We recorded net income tax expense of ~~$0.1 million. The current tax expense consists of income tax primarily from our Indian based operations.~~

~~We recorded income tax expense of~~ $0.7 ~~million and $0.3~~ million for the nine months ended September 30, ~~2020 and 2019, respectively. The net expense during~~2020.

Each quarter, the ~~nine months ended September 30, 2020 consisted~~estimate of current income tax expense of $0.7 million. The current tax expense consists of income tax primarily from our U.K., Nigerian and Indian based operations and foreign taxes withheld. The net expense during the ~~nine months ended September 30, 2019 consisted of current income tax expense of $0.3 million. The current tax expense consists of income tax primarily from our Indian and Nigerian based operations.~~

~~Our~~annual effective tax rate ~~was 52%~~is updated, and ~~(101%) for~~if the ~~three months ended September 30, 2020 and 2019, respectively. The 2020~~estimated effective tax rate ~~relates~~changes, a cumulative adjustment is made. There is a potential for volatility of the effective tax rate due to ~~our net~~various factors.

The Company and its subsidiaries are subject to U.S. Federal income ~~coming from our U.K. and Indian based operations~~tax, as well as income tax of multiple state and foreign ~~withholding tax and net losses from our other operations for which we did not recognize a net deferred tax benefit.~~

Our effective tax rate was 92% and (4%) for the nine months ended September 30, 2020 and 2019, respectively. The 2020 effective tax rate relates to our net income coming from our U.K., Indian and Nigerian based operations as well as foreign withholding tax and net losses from our other operations for which we did not recognize a net deferred tax benefit.

jurisdictions. As of September 30, 2020 and December 31, 2019 we continued to maintain a valuation allowance on our domestic net deferred tax asset for foreign tax credit (“FTC”) carryforwards, certain state net operating loss (“NOLs”) carryforwards and research and development tax credits other than $0.5 million in FTC. We also have $0.3 million of foreign deferred tax assets, offset by foreign deferred tax liabilities of $0.2 million. Our deferred tax assets and liabilities as of September 30, 2020, and December 31, 2019, were comprised of2021, the ~~following (in thousands):~~

September 30, 2020

December 31, 2019
Deferred tax assets:

Foreign tax credits carryforwards
$
4,618

$
4,650
Net operating loss carryforwards - Federal

—

—
Net operating loss carryforwards — State

947

753
Net operating loss carryforwards — Foreign

6,052

5,911
Alternative minimum tax credits

—

385
Stock compensation

483

552
Depreciable assets

36

54
Accrued liabilities and reserves

91

127
Total deferred tax assets

12,227

12,432

Deferred tax liabilities:

Intangibles

(25)

(180)
Accrued liabilities and reserves

(165)

(170)
Total deferred tax liability

(190)

(350)

Net deferred tax assets, before valuation allowance

12,037

12,082
Valuation allowance

(11,406)

(11,082)
Net deferred tax asset
$
631

$
1,000

~~As of September 30, 2020 and December 31, 2019 we had no liability for unrecognized tax benefits.~~

We conduct business globally and, as a result, Evolving Systems or one or more of our subsidiaries file income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. In the normal course of business, we are subject to examination by taxing authorities throughout the world, namely the U.S., U.K., France, and India. Although carryovers can always be subject to review by taxing authorities, we are no longerCompany is subject to U.S. ~~federal, state and local, or non-U.S.~~Federal income tax examinations for the years ~~before 2014.~~

~~On March 27, 2020, President Trump signed into U.S. federal law~~2017 through 2019 and income tax examinations from various other jurisdictions for the ~~CARES Act, which is aimed at providing emergency assistance and health care for individuals, families, and businesses affected by~~years 2015 through 2020. In July 2021, the ~~COVID-19 pandemic and generally supporting~~Company was notified that the ~~U.S. economy. The CARES Act, among other things, includes provisions relating to refundable payroll~~French tax ~~credits, deferment~~authorities will be conducting a review of ~~employer side social security payments, net operating loss carryback periods, alternative minimum~~the tax credit refunds, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property. In particular, under the CARES Act, (i) for taxable years ~~beginning before 2021, net operating loss carryforwards and carrybacks may offset 100% of taxable income, (ii) NOLs arising in~~ended December 31, 2018, 2019, and 2020 ~~taxable years may be carried back~~on one of our French subsidiaries. At this time, we expect no change or no additional tax liability related to ~~each~~the outcome of the preceding five years to generate a refund and (iii) for taxable years beginning in 2019 and 2020, the base for interest deductibility is increased from 30% to 50% of EBITDA. We are planning on accelerating our alternative minimum tax credit refund.this review.

Transfer Pricing Adjustments, net

The Company’s tax positions include the Company’s intercompany transfer pricing policies and the associated taxable income and deductions arising from intercompany charges between subsidiaries within the consolidated group. During fiscal year

2018 and updated each year subsequently, the Company finalized ~~an Advance Pricing Arrangement (“APA”)~~a transfer pricing plan with Evolving Systems and its subsidiaries. This ~~APA~~transfer pricing plan determined the amount of income which is taxable in each respective jurisdiction. The Company applied this methodology in accordance with the ~~APA~~transfer pricing plan and the adjustments necessary to reflect the reduction in U.S. pre-tax income resulted in an increase in domestic income before income tax expense of ~~$1.2~~$1.1 million and ~~$3.4~~$3.3 million and a corresponding decrease in foreign income before income tax expense in the three and nine months ended September 30, ~~2020,~~2021, respectively.

NOTE 9 —GEOGRAPHICAL INFORMATION

We are headquartered in Englewood, a suburb of Denver, Colorado. We use customer locations as the basis for attributing revenue to individual countries. We provide products and services on a global basis through our ~~offices in North Carolina and our~~ U.K.-based subsidiaries. Additionally, personnel in Cluj ~~Romania,~~-Napoca, Romania; Grenoble, ~~France,~~France; and Bangalore and Kolkata, ~~India,~~India; provide software development services and support to our global operations. Financial information relating to ~~U.S.-based~~U.S. based companies and by international ~~geographical regions~~geographic region exceeding the threshold (defined as contributing at least 10%) of revenue from operations is as follows (in thousands):



		September 30, 2020		December 31, 2019		September 30, 2021		December 31, 2020
Long-lived assets, net
United States	$	1,464	$	2,063	$	831	$	1,352
United Kingdom		1,580		1,727		1,316		1,578
Other		1,384		1,562		1,453		1,286
	$	4,428	$	5,352	$	3,600	$	4,216

NOTE 10 — COMMITMENTS AND CONTINGENCIES

(a)Lease Commitments

Under ~~ASU 2016-02, Leases (“~~Topic ~~842”),~~842, operating lease expense is generally recognized evenly over the term of the lease. The Company has operating leases primarily consisting of facilities with remaining lease terms of one year to ~~seven~~nine years. We lease office and operating facilities under non-cancelable operating leases. Current facility leases include our offices in Englewood, Colorado, New York, New York, London, England, Bangalore and Kolkata India, Johannesburg, South Africa, Kuala Lumpur, Malaysia, ~~Grenoble,~~Échirolles, France, Cluj-Napoca, Romania and Madrid, ~~Spain~~.Spain. The Company entered into ~~one~~1 new nine year lease in ~~Kuala Lumpur, Malaysia~~Échirolles, France that contributed $0.3 million to our right-of-use asset/operating lease liability in the nine months ended September 30, 2020, this contributed less than $0.1 million to our right-of-use asset/operating lease liability. Our lease for the Kolkata facility provided us with the option to terminate the lease in August 2020. We did not exercise our termination option and have included costs through the July 2026 lease end date, since this was the plan from the onset there has been no change to the right of use assets.2021. Total rent expense consisted of operating lease expense of $0.1 million and short-term lease expense of less than $0.1 million for each of the three months ended September 30, ~~2020 versus operating lease expense of $0.1 million~~2021 and ~~short-term lease expense of less than $0.1 million for the three months ended September 30, 2019.~~2020. Total rent expense consisted of operating lease expense of $0.3 million and short-term lease expense of $0.1 million for the nine months ended September 30, 2021 versus operating lease of $0.3 million and short term lease expense of $0.2 million for the nine months ended September 30, ~~2020 versus operating lease expense of $0.4 million and short-term lease expense of $0.1 million for the nine months ended September 30, 2019.~~2020. There was no0 sublease rental income for the nine months ended September 30, ~~2020~~2021 and ~~2019.~~2020. We paid ~~$0.2~~$0.1 million and ~~$0.5~~$0.4 million against Lease obligations –— operating leases in each of the three and nine months ended September 30, ~~2020,~~2021, respectively, compared to ~~$0.1~~$0.2 million and ~~$0.4~~$0.5 million in the three and nine months ended September 30, ~~2019 respectively.~~2020.

Leases with an initial term of twelve months or less are not recorded on the condensed consolidated balance sheet. For lease agreements entered into or reassessed after the adoption of Topic 842, we combine the lease and non-lease components in determining the lease liabilities and right-of-use (“ROU”) assets.

Our lease agreements generally do not provide an implicit borrowing rate; therefore, an internal incremental borrowing rate is determined based on information available at lease commencement date for purposes of determining the present value of lease payments.

‎

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 no0 liabilities recorded for these agreements as of September 30, ~~2020~~2021 or December 31, ~~2019.~~2020.

We enter into standard indemnification terms with customers and suppliers, in the ordinary course of business, for third party claims arising under our contracts. In addition, as we may subcontract the development of deliverables under customer contracts, we could be required to indemnify customers for work performed by subcontractors. Depending upon the nature of the indemnification, the potential amount of future payments we could be required to make under these indemnification agreements may be unlimited. We may be able to recover damages from a subcontractor or other supplier if the indemnification results from the subcontractor’s or supplier’s failure to perform. To the extent we are unable to recover damages from a subcontractor or other supplier, we could be required to reimburse the indemnified party for the full amount. We have never incurred costs to defend lawsuits or settle claims relating to an indemnification. As a result, we believe the estimated fair value of these agreements is minimal. Accordingly, there were no0 liabilities recorded for these agreements as of September 30, ~~2020~~2021 or December 31, ~~2019.~~2020.

Our standard license agreements contain product warranties that the software will be free of material defects and will operate in accordance with the stated requirements for a limited period of time. The product warranty provisions require us to cure any defects through any reasonable means. We believe the estimated fair value of the product warranty provisions in the license agreements in place with our customers is minimal. Accordingly, there were no0 liabilities recorded for these product warranty provisions as of September 30, ~~2020~~2021 or December 31, ~~2019.~~2020.

Our software arrangements generally include a product indemnification provision whereby we will indemnify and defend a customer in actions brought against the customer for claims that our products infringe upon a copyright, trade secret, or valid patent of

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

SPECIAL NOTE ABOUT FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains forward-looking statements that have been made pursuant to the provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on current expectations, estimates, and projections about Evolving Systems’ industry, management’s beliefs, and certain assumptions made by management. Forward-looking statements include our expectations regarding product, services, and maintenance revenue, annual savings associated with the organizational changes effected in prior years, and short- and long-term cash needs. In some cases, words such as “anticipates,” “expects,” “intends,” “plans,” “believes,” “estimates,” variations of these words, and similar expressions are intended to identify forward-looking statements. 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, ~~2019,~~2020, as filed with the SEC on March ~~30, 2020,~~17, 2021, under “Item 1A. Risk Factors” as well as additional risks in our other filings with the SEC. The forward-looking statements are applicable only as of the date on which they are made, and we do not assume any obligation to update any forward-looking statements.

OVERVIEW

Evolving Systems Inc. is a ~~provider~~supplier of real-time digital engagement solutions and ~~services to the wireless carrier and consumer financial services markets.~~services. We ~~operate a managed services business model through which we maintain long-standing relationships with many of the largest wireless companies worldwide. We have acquired multiple companies~~drive growth in ~~the past few years to expand our offerings. The Company’s portfolio includes market-leading solutions and services for real-time analytics,~~ customer acquisition and activation, extend customer lifetime and increase customer value ~~management~~and revenue through analytics and loyalty ~~for~~programs in the ~~telecom~~converging mobile, entertainment, financial and retail services eco-system. Our platforms, together with our team of experienced industry ~~promoting partnerships into retail and financial services. The Company has moved from selling technology to offering business solutions. The~~experts, help service providers increase their customer lifetime value ~~proposition likewise has moved away from cost savings to a focus on revenue increases for~~(“CLV”) over the ~~carrier and our business model has moved from classic capital expenditure license and services to operating expense models based on managed services.~~course the customer lifecycle.

In 2019, we ~~introduced~~released Evolution, the new platform that supersedes and provides an upgrade path to the former loyalty and ~~CVM~~CLV platforms from both Evolving and its acquired companies — BLS, Lumata and SSM. Evolution was built by combining, integrating, and improving upon the best components and features of those previous platforms. We believe that Evolution provides a unique capability, and we expect to continue our focus on selling and promoting this significant new product. Our experienced team and the new technology provide actionable insights and relevant offers based on customer data, all of which greatly complements our software portfolio and 25 years of expertise in customer acquisition, activation and retention. Enhancements to our technology further expands our managed services platform for delivering on-tap strategic and tactical solutions.

RECENT DEVELOPMENTS

COVID-19 ~~and Liquidity Update~~

Evolving Systems provides software solutions and services throughout the world. The COVID-19 global outbreak has caused instability and volatility in multiple markets where our clients conduct business. We have leveraged our ability to provide support remotely resulting in limited effect on our day to day operations. The inability to travel has delayed interactions with our clients on projects and in the traditional modes of sales development. We continue to work with existing and new clients exploring new ways of using our products and services to enhance their business. On-going travel restrictions has caused the business to interact with clients in new ways and reduced certain costs. The ~~financial covenants under our debt facilities (see Note 7) are related~~long-term effects on how we conduct business in the future is still undetermined but the company continues to ~~cash balances and quarterly operational results which have been adversely affected by project delays related~~evolve to ~~customer interactions being postponed or our customers’ ability to make timely payments.~~ meet client needs.

We believe our current liquidity and funds from our ongoing operations will be sufficient to fund operations and meet the Company’s cash needs for ~~term loan payments through the repayment of the loan on December 31, 2020, along with our~~future working capital and capital expenditure requirements for at least the next twelve months from the date of ~~filing~~issuance of these condensed consolidated financial statements. In making this assessment, we considered our ~~$3.5~~$3.6 million in cash and cash equivalents and our ~~$4.8~~$5.9 million in working capital at September 30, ~~2020,~~2021, along with our ability to ~~historically~~ generate positive cash flows from ~~operations.~~operations for the nine months ended September 30, 2021 and year ended December 31, 2020.

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 forgiveness period.

Consolidated revenue was ~~$6.8~~$7.0 million and ~~$6.1~~$6.8 million for the three months ended September 30, ~~2020~~2021 and ~~2019,~~2020, respectively and ~~$19.4~~$20.4 million for the nine months ended September 30, ~~2020~~2021 compared to ~~$19.1~~$19.4 million for the same period in ~~2019.~~2020, respectively. The increases are primarily related to new projects and upgrades to existing and new clients partially offset by a reduction in work hours as projects near or come to ~~completion and a lower number of incremental licenses sold to one customer as compared to the prior year.~~completion.

~~EXCHANGE RATE FLUCTUATIONS~~
‎

We have operations in foreign countries where the local currency is used to prepare the condensed consolidated financial statements which are translated into our reporting currency, U.S. dollars. Changes in the exchange rates between these currencies and our reporting currency are partially responsible for some of the changes from period to period in our financial statement amounts. The majority of the changes in 2020 and 2019 are a result of the Euro and the British Pound Sterling strengthening on average versus the U.S. dollar. The chart below summarizes what the effects on our revenue and expenses would be on a constant currency basis. The constant currency basis assumes that the exchange rate was constant for the periods presented (in thousands):

For the Three Months

For the Nine Months

Ended September 30,

Ended September 30,

2020 vs. 2019

2020 vs. 2019
Changes in:

Revenue
$
171

$
(38)
Costs of revenue and operating expenses

351

74
Loss from operations
$
(180)

$
(112)

~~The net effect of our foreign currency translations for the three months ended September 30, 2020 was a $0.2 million increase in revenue~~ and an $0.4 million increase in operating expenses versus the three months ended September 30, 2019. The net effect of our foreign currency translations for the nine months ended September 30, 2020 was a less than $0.1 million decrease in revenue and a less than $0.1 million increase in operating expenses versus the nine months ended September 30, 2019.

RESULTS OF OPERATIONS

The following table presents the unaudited condensed consolidated statements of operations reflected as a percentage of total revenue:




	For the Three Months Ended September 30,		For the Nine Months Ended September 30,		For the Three Months Ended September 30,		For the Nine Months Ended September 30,
	2020	2019	2020	2019	2021	2020	2021	2020
REVENUE
License fees	1%	3%	2%	6%	—	1%	1%	2%
Services	99%	97%	98%	94%	100%	99%	99%	98%
Total revenue	100%	100%	100%	100%	100%	100%	100%	100%

COSTS OF REVENUE AND OPERATING EXPENSES
Costs of revenue, excluding depreciation and amortization	31%	35%	33%	33%	30%	31%	32%	33%
Sales and marketing	22%	30%	23%	29%	19%	22%	20%	23%
General and administrative	20%	16%	20%	21%	18%	20%	20%	20%
Product development	16%	19%	16%	19%	19%	16%	19%	16%
Depreciation	1%	1%	1%	1%	3%	1%	2%	1%
Amortization	3%	4%	4%	4%	3%	3%	4%	4%
Goodwill impairment loss	—	—	—	35%
Restructuring					—	—	—	—
Total costs of revenue and operating expenses	93%	105%	97%	142%	92%	93%	97%	97%

Income (loss) from operations	7%	(5%)	3%	(42%)
Income from operations					8%	7%	3%	3%

Other income (expense)
Other (expense) income
Interest income	—	—	—	—	—	—	—	—
Interest expense	—	(1%)	—	(1%)	—	—	—	—
Other (loss) income, net	—	—	—	—
Other (expense) income, net					—	—	1%	—
Foreign currency exchange (loss) income	(2%)	4%	1%	1%	(3%)	(2%)	(2%)	1%
Other (expense) income, net	(2%)	3%	1%	—	(3%)	(2%)	(1%)	1%

Income (loss) from operations before income taxes	5%	(2%)	4%	(42%)
Income from operations before income taxes					5%	5%	2%	4%

Income tax expense	2%	2%	3%	2%	4%	2%	3%	3%

Net income (loss)	3%	(4%)	1%	(44%)
Net income					1%	3%	(1%)	1%

~~Revenue~~

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 deferred and recognized over the warranty period.

License Fees

License fees revenue was less than $0.1 million and ~~$0.2~~$0.1 million for the three months ended September 30, ~~2020~~2021 and ~~2019,~~2020, respectively. The decrease ~~in revenue~~ of $0.1 million is ~~primarily related to lower number of incremental licenses sold~~attributable to one ~~customer during this three month period than the corresponding three month period~~time licensing fees from a client in the prior year not repeating this year.

License fees revenue was ~~$0.4~~$0.2 million and ~~$1.2~~$0.4 million for the nine months ended September 30, ~~2020~~2021 and ~~2019,~~2020, respectively. The decrease ~~in revenue~~ of ~~$0.8~~$0.2 million is ~~primarily related~~attributable to ~~lower number of incremental licenses sold to existing customers inclusive of~~ one ~~significant customer sale of $0.4 million during the corresponding nine month period~~time license fees from one client in the prior ~~year.~~year was offset by new one time license fee with a different client.

Services

Services revenue increased ~~$0.8~~$0.2 million, or ~~13%~~3%, to ~~$6.7~~$6.9 million for the three months ended September 30, ~~2020~~2021 from ~~$5.9~~$6.7 million for the three months ended September 30, ~~2019.~~2020. The increase is related to new client projects of $0.5 million, upgrades and new project revenues with existing clients of ~~$1.0~~$0.2 million, and increase in hours worked on existing clients of ~~$0.5~~$0.3 million, partially offset by decrease in hours as projects are completed or near completion of $0.6 million, and a reduction of orders from existing clients of ~~$0.7~~$0.2 million as compared to the corresponding three month period in the prior year.

Services revenue increased ~~$1.1~~$1.2 million, or 6%, to $20.2 million for the nine months ended September 30, 2021 from $19.0 million for the nine months ended September 30, ~~2020 from $17.9 million for the nine months ended September 30, 2019.~~2020. The increase is related to new client projects of $1.3 million, upgrades and new project revenues with existing clients of ~~$2.3~~$1.2 million, and increase in hours worked on existing clients of ~~$0.4~~$1.0 million, partially offset by decrease in hours as projects are completed or near completion of $1.5 million, a reduction of orders from existing clients of ~~$1.6~~$0.5 million, and client terminations of $0.3 million as compared to the corresponding nine month period in the prior year.

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 certain software features requested ~~in advance of their scheduled availability which~~for deployment by the customer and are funded by customers as part of a managed service offering. Costs of revenue, excluding depreciation and amortization ~~was $2.1~~were consistent at $2.1 million for ~~each of~~ the three months ended September 30, 2021 and 2020, ~~and 2019.~~respectively. Costs remained consistent as slight salary increases were offset by a reduction in other costs. As a percentage of revenue, costs of revenue, excluding depreciation and amortization, decreased 1% to ~~31% and 35%~~30% for the three months ended September 30, 2021 from 31% for the three months ended September 30, 2020, ~~and 2019, respectively,~~ as costs were approximately constant as revenue increased due to delivering higher margin work on ~~delivering~~ the new projects and upgrades.

Costs of revenue, excluding depreciation and amortization, ~~increased $0.3 million, or 3%,~~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 ~~$6.5~~certain software features requested for deployment by the customer and are funded by customers as part of a managed service offering. Costs of revenue, excluding depreciation and amortization were consistent at $6.5 million for the nine months ended September 30, 2021 and 2020, ~~from $6.2 million for the nine months ended September 30, 2019. The increase is related to~~respectively. Costs remained consistent as salary increases were offset by an increase in ~~project hour costs of $0.5 million as~~hours worked by delivery staff ~~was reassigned from~~on product development ~~to customer work, increase in staff costs of $0.1 million~~projects and ~~an increase $0.1 million in the employee time off accrual, partially offset by $0.4 million~~ a reduction in ~~third party contractor cost.~~travel and entertainment costs. As a percentage of revenue, costs of revenue, excluding depreciation and amortization, ~~was 33%~~decreased 1% to 32% for ~~each of~~the nine months ended September 30, 2021 from 33% for the nine months ended September 30, 2020, as costs were approximately constant as revenue increased due to delivering higher margin work on the new projects and ~~2019.~~upgrades.

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 decreased ~~$0.3~~$0.2 million, or ~~17%~~13%, to $1.3 million for the three months ended September 30, 2021 from $1.5 million for the three months ended September 30, ~~2020 from $1.8 million for the three months ended September 30, 2019.~~2020. The decrease is related to the reduction of $0.2 ~~million in lower travel and entertainment costs due to travel restrictions during the global pandemic and reduced marketing efforts, as well as reduction of $0.1~~ million in resource costs. As a percentage of total revenue, sales and marketing expenses

decreased 8%3% to ~~22%~~19% for the three months ended September 30, ~~2020~~2021 from ~~30%~~22% for the three months ended September 30, ~~2019, this~~2020. The decrease is primarily due to aforementioned lower expenses and the ~~aforementioned decreased expenses.~~increase in revenues.

$4.1million for the nine months ended September 30, ~~2020~~2021 from ~~$5.6~~$4.5 million for the nine months ended September 30, ~~2019.~~2020. The decrease is related to the reduction of ~~$0.5~~$0.3 million in resource costs as well as a reduction of $0.1 million in lower travel and entertainment ~~and marketing~~ costs due to travel restrictions during the global pandemic, a reduction of $0.3 million in incentive compensation costs that included revision to the incentive compensation structure, and also a reduction in resource costs assigned to sales and marketing activities of $0.3 million.pandemic. As a percentage of total revenue, sales and marketing expenses decreased 6%3% to ~~23%~~20% for the nine months ended September 30, 2021 from 23% for the nine months ended September 30, 2020, ~~from 29% for the nine months ended September 30, 2019,~~ this is primarily due toaforementioned lower expenses and the ~~aforementioned decreased expenses.~~increase in revenues.

General and Administrative

General and administrative expenses consist principally of employee-related costs for the following departments: finance, human resources, and certain executive management; facilities costs; and professional and legal fees. General and administrative expenses ~~increased $0.4~~decreased $0.2 million, or ~~38%,~~14% to ~~$1.4~~$1.2 million for the three months ended September 30, ~~2020~~2021 from ~~$1.0~~$1.4 million for the three months ended September 30, ~~2019.~~2020. The ~~increase is~~decrease of $0.2 million related to ~~$0.2~~a $0.1 million decrease in incentive compensation and a $0.1 million decrease in equity compensation. As a percentage of revenue, general and administrative expenses decreased 2% to 18% for the three months ended September 30, 2021 as compared to 20% for the three months ended September 30, 2020. The decrease is primarily due to the aforementioned lower expenses and the increase in ~~accounting~~revenues.

General and administrative expenses increased $0.2 million, or 5% to $4.1 million for the nine months ended September 30, 2021 from $3.9 million for the nine months ended September 30, 2020. Increase of $0.2 million related to increased professional fees ~~for~~of $0.1 million related to R&D tax credits along with local ~~audits~~statutory audit costs, shelf registration, and ~~filing of R&D credits,~~legal work, increase ~~of incentive~~in equity compensation of $0.1 million, staff cost increase of $0.1 million and ~~increases~~increase costs related to third party software of $0.1 million. Partially offset by a decrease in ~~various expenses that in total increased $0.1~~incentive compensation of $0.2 million. As a percentage of revenue, general and administrative expenses ~~increased 4% to~~remained consistent at 20% for the ~~three~~nine months ended September 30, 2021 and 2020, ~~as compared to 16% for the three months ended September 30, 2019.~~respectively. The increase in general and administrative expense is primarily due to the aforementioned higher expenses.

General and administrative expenses decreased $0.1 million, or 3%, to $3.9 million for the nine months ended September 30, 2020 from $4.0 million for the nine months ended September 30, 2019. The decrease was primarily attributable a reduction in accounting services of $0.2 million, primarily due to the elimination of fees incurred related to the transition of audit firms in the prior year partially offset by the higher fees for local audits and R&D credits and a reduction in equity compensation of $0.1 million. These reductions were partially offset by an increase in incentive compensation of $0.2 million. As a percentage of revenue, general and administrative expenses decreased 1% to 20% for the nine months ended September 30, 2020 as compared to 21% for the nine months ended September 30, 2019. The decrease in general and administrative expense is primarily due to the aforementioned lower expenses.

Product Development

Product development expenses consist primarily of employee-related costs and subcontractor expenses. Product development expenses ~~decreased $0.1~~increased $0.2 million, or 8%18%, to ~~$1.1~~$1.3 million for the three months ended September 30, ~~2020~~2021 from ~~$1.2~~$1.1 million for the three months ended September 30, ~~2019.~~2020. The ~~decrease~~increase is primarily related to the ~~decrease in travel and entertainment costs of $0.1 million due to a reduction in staff that traveled in the corresponding period of the prior year.~~additional resource costs. As a percentage of revenue, product development expenses ~~decreased 3%~~increased 3% to ~~16%~~19% for the three months ended September 30, ~~2020~~2021 from ~~19%~~16% for the three months ended September 30, ~~2019.~~2020. The ~~decrease~~increase in general and product development expense is primarily due to the aforementioned ~~lower~~higher expenses.

Product development expenses ~~decreased $0.5~~increased $0.7 million, or ~~14%~~22%, to ~~$3.2~~$3.9 million for the nine months ended September 30, ~~2020~~2021 from ~~$3.7~~$3.2 million for the nine months ended September 30, ~~2019.~~2020. The ~~decrease~~increase is primarily related to ~~a net decrease in~~the additional resource costs ~~of $0.3 million related to a staff reduction~~from additional resources and ~~a change to product development~~an increase in hours worked ~~by internal staff assigned to~~on product development projects ~~the reduction in travel costs of $0.1 million due to the staff departures, and change in the allocation of hardware and software maintenance costs reduced costs~~ by ~~$0.1 million.~~delivery staff. As a percentage of revenue, product development expenses ~~decreased 3%~~increased 3% to ~~16%~~19% for the nine months ended September 30, ~~2020~~2021 from ~~19%~~16% for the nine months ended September 30, ~~2019.~~2020. The ~~decrease~~increase in ~~general and~~ product development expense is primarily due to the aforementioned ~~lower~~higher expenses.

Depreciation

Depreciation expense consists of depreciation of long-lived property and equipment. Depreciation expense ~~was~~increased $0.1 million, or 100%, to $0.2 million for ~~each of~~ the three months ended September 30, ~~2020 and 2019.~~2021 from less than $0.1 million for the three months ended September 30, 2020. The increase is due to a change in the estimated life of amortized software. As a percentage of total revenue, depreciation expense increased 2% to 3% for ~~each of~~ the three months ended September 30, ~~2020 and 2019 was~~2021 from 1%. for the three months ended September 30, 2020.

Depreciation expense consists of depreciation of long-lived property and equipment. Depreciation expense ~~was $0.2~~increased $0.1 million, ~~for each of the nine months ended September 30, 2020 and 2019. As a percentage of total revenue, depreciation expense~~or 50%, to $0.3 million for the nine months ended September 30, ~~2020 and 2019 was~~2021 from $0.2 million for the nine months ended September 30, 2020. The increase is due to a change in the estimated life of amortized software. As a percentage of total revenue,

depreciation expense increased 1%. to 2% for the nine months ended September 30, 2021 from 1% for the nine months ended September 30, 2020.

Amortization

months ended September 30, 2021 and 2020, ~~and 2019.~~respectively. As a percentage of total revenue, amortization expense was ~~3% and 4%~~3% for each of three months ended September 30, 2021 and 2020, ~~and 2019,~~ respectively.

Amortization expense consists of amortization of identifiable intangibles related to our acquisitions of Evolving Systems Labs, Evolving Systems NC, EVOL BLS, and the Lumata Entities. Amortization expense was ~~$0.7~~$0.7 million for each of the nine months ended September 30, ~~2020~~2021 and ~~2019.~~2020. As a percentage of total revenue, amortization expense was 4%4% for each of nine months ended September 30, 2021 and 2020.

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. Restructuring expense was not incurred for the three months ended September 30, 2021. Restructuring expense for the nine months ended September 30, ~~2020~~2021 was less than $0.1 million. There was no restructuring expense for the three and ~~2019.~~nine months ended September 30, 2020. As a percentage of total revenue, restructuring expense was 0% for the nine months ended September 30, 2021.

Interest Expense

Interest expense includes the amortization of debt issuance costs and interest expense from our term loans. Interest expense for each of the three months ended September 30, ~~2020~~2021 and ~~2019~~2020 was less than $0.1 ~~million.~~million, respectively. As a percentage of revenue, interest expense was 0% for the three months ended September 30, 2021.

Interest expense for the nine months ended September 30, 2021 and 2020 was less than $0.1 million and $0.1 million, respectively. As a percentage of revenue, interest expense was less than ~~1% and 1% for the three months ended September 30, 2020 and 2019, respectively.~~

Interest expense includes the amortization of debt issuance costs and interest expense from our term loans. Interest expense for the nine months ended September 30, 2020 and 2019, was less than $0.1 million and $0.3 million, respectively, due to the loan payable reaching maturity at the end of the prior year. As a percentage of revenue, interest expense was less than 1% and 1%1% for each of the nine months ended September 30, 2021 and 2020, ~~and 2019,~~ respectively.

Foreign Currency Exchange (Loss) Income ~~(Loss)~~

Foreign currency exchange ~~income~~ (loss) ~~resulted from transactions denominated in a currency other than the functional currency of the respective subsidiary~~ ~~and~~ ~~decreased $0.4 million or 143% to ($0.1) mill~~io~~n loss for~~ ~~the three months ended~~ ~~September 30, 2020~~ ~~from a foreign currency gain of $0.3 million for the three months ended~~ ~~September 30, 2019. The decrease was a result of the re-measurement of certain non-functional currency denominated financial assets and liabilities of our foreign subsidiaries~~.

~~Foreign currency exchange~~ income resulted from transactions denominated in a currency other than the functional currency of the respective subsidiary and ~~increased~~ decreased less than ~~$0.1~~$0.1 million ~~or 31%~~ to $0.2 m~~illion~~million loss for the ~~nine~~three months ended September 30, ~~2020~~2021 from a foreign currency ~~gain~~exchange loss of ~~$0.2~~ $0.1 million for the ~~nine~~three months ended September 30, ~~2019~~2020. The ~~gains were generated primarily through~~decrease was a result of the ~~re-measurement~~remeasurement of certain non-functional currency denominated financial assets and liabilities of our foreign subsidiaries.

Foreign currency exchange (loss) income resulted from transactions denominated in a currency other than the functional currency of the respective subsidiary and decreased $0.6 million to a $0.4 million loss for the nine months ended September 30, 2021 from foreign currency income of $0.2 million for the nine months ended September 30, 2020. The decrease was a result of the remeasurement of certain non-functional currency denominated financial assets and liabilities of our foreign subsidiaries.

Interest Income and Total Other (Expense) Income, Net

~~For each~~There was interest income and other (expense) income of ~~the three and nine months ended September 30, 2020 and 2019, other income was~~ less than ~~$0.1 million.~~

~~Income Taxes~~

~~We recorded net income tax expense of~~ $0.1 million for each of the three months ended September 30, ~~2020~~2021 and ~~2019.~~2020.

Other income was $0.3 million for the nine months ended September 30, 2021 compared to other income of less than $0.1 million for the nine months ended September 30, 2020. The income recorded for the forgiveness of the Paycheck Protection Program Loan and foreign research and development credit was offset by expense due to the litigation settlement costs recorded as a liability in relation to the lawsuit filed by a former CEO of the Company. See Note 10 to the financial statements for additional information.

Income Taxes

We recorded net income tax expense of $0.3 million for three months ended September 30, 2021 and tax expense of $0.1 million for the three months ended September 30, 2020. For interim periods during fiscal year ending December 31, 2021, the expense

is determined using an estimate of the annual effective tax rate, adjusted for discrete items, primarily related to the effects of foreign currency exchange realized transaction gains or losses and foreign taxes withheld. For the three months ended September 30, 2021 the Company recorded an annual effective tax rate accrual inclusive of the impact of discrete items that resulted in a net tax expense effect of approximately $0.3 million. The net expense during the three months ended September 30, 2020 consisted of ~~current income tax expense of $0.1 million. The current tax expense consists of~~ income tax primarily from our U.K. subsidiary and Indian based operations as well as foreign taxes withheld. ~~The net expense during the three months ended September 30, 2019 consisted of current income tax expense of $0.1 million of income tax from our Indian based operations.~~ Our effective tax rate was ~~52%~~80% and ~~(101%)~~52% for the three months ended September 30, 2021 and 2020, ~~and 2019,~~ respectively. Our 2020 effective tax rate relates to our net income coming from our UK and India based subsidiaries’ operations as well as foreign withholding tax and net losses from our other subsidiaries’ operations for which we did not recognize a net deferred tax benefit.

We recorded net income tax expense of ~~$0.7~~ $0.5 million and ~~$0.3~~ net income tax expense $0.7 million for the nine months ended September 30, 2021 and 2020, respectively. For interim periods during fiscal year ending December 31, 2021, the expense is determined using an estimate of the annual effective tax rate, adjusted for discrete items, primarily related to the effects of foreign currency exchange realized transaction gains or losses and ~~2019, respectively.~~foreign taxes withheld. For the nine months ended September 30, 2021 the Company recorded an annual effective tax rate accrual inclusive of the impact of discrete items that resulted in a net tax expense effect of approximately $0.5 million. The net expense during the nine months ended September 30, 2020 consisted of ~~current income tax expense of $0.7 million. The current tax expense consists of~~ income tax primarily from our U.K., subsidiary, Nigerian and Indian ~~and Nigerian~~ based operations as well as foreign taxes withheld. The net expense during the nine months ended September 30, 2019 consisted of current income tax expense of $0.3 million. The current tax expense consists of income tax from our Indian and Nigerian based operations. Our effective tax rate was ~~92%~~82% and ~~(4%)~~92% for the nine months ended September 30, 2021 and 2020, ~~and 2019,~~ respectively. Our 2020 effective tax rate relates to our net income coming from our UK, Nigeria, and India based subsidiaries’ operations as well as foreign withholding tax and net losses from our other subsidiaries’ operations for which we did not recognize a net deferred tax benefit.

On March 27, 2020, President Trump signed into U.S. federal law the CARES Act, which is aimed at providing emergency assistance and health care for individuals, families, and businesses affected by the COVID-19 pandemic and generally supporting the U.S. economy. The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer side social security payments, NOL carryback periods, alternative minimum tax credit refunds, modifications to the net

~~interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property. We are planning on accelerating our alternative minimum tax credit refund.~~

As of September 30, 2020, and December 31, 2019 we continued to maintain a valuation allowance on our domestic net deferred tax asset for foreign tax credit (“FTC”) carryforwards, certain state NOL carryforwards and research and development tax credits other than $0.5 million in FTC. We also have $0.3 million of foreign deferred tax assets, offset by foreign deferred tax liabilities of $0.2 million. We assessed the realizability of our domestic deferred tax assets using all available evidence. In particular, we considered both historical results and projections of profitability for the reasonably foreseeable future periods. We are required to reassess our conclusions regarding the realization of our deferred tax assets at each financial reporting date. A future evaluation could result in a conclusion that all or a portion of the valuation allowance is no longer necessary which could have a material impact on our results of operations and financial position. See Note 8 to the financial statements for a summary of our deferred tax assets and liabilities.

FINANCIAL CONDITION

Our working capital position increased ~~$1.0~~by $0.4 million ~~or 29%,~~ to ~~$4.8~~ $5.9 million atas of September 30, ~~2020,~~2021 from ~~$3.8~~$5.5 million atas of December 31, 2019. The increase in working capital is primarily related to an increase in cash and cash equivalents and unbilled work in progress along with decrease in current portion of the term loan and unearned revenue, an alternative minimum tax refund expected in the current year which was previously recorded in our deferred tax assets, offset by a decrease in accounts receivable and an increase in accounts payable and accrued liabilities.2020.

CONTRACTUAL OBLIGATIONS

There have been no material changes to the contractual obligations as disclosed in our ~~2019~~2020 Annual Report on Form 10-K, except that we entered into an new amendment with East West Bank on July 1, 2020 to resolve the non-compliance related to our trailing three-month EBITDA which we had failed to meet the minimum required in the amendment to our loan agreement with East West Bank in previous quarters. We have $0.4 million in outstanding debt recorded as a current liability as the Lumata Facility is due to be retired in December 2020. We are current on our loan payment obligations and we have made all scheduled loan payments to date.10-K.

LIQUIDITY AND CAPITAL RESOURCES

We have historically financed operations through cash flows from operations and bank borrowings. At September 30, ~~2020,~~2021, our principal source of liquidity was ~~$3.5~~$3.6 million in cash and cash equivalents and ~~$3.4~~ $5.1 million in contract receivables, net of allowances. Our anticipated uses of cash in the future will be to ~~make term loan payments and~~ fund the growth of our business both organically and by expanding our customer base internationally. Other uses of cash will include product development, technology expansion, and capital expenditures.

Net cash provided inby operating activities for the nine months ended September 30, 2021, and 2020 ~~and 2019~~ was ~~$1.8~~$1.3 million and ~~$0.6~~$1.8 million, respectively. Cash provided by operating activities for the nine months ended September 30, 2021 was primarily due to the net income of $0.1 million (plus noncash charges of $1.4 million), increase in unearned revenue of $1.0 million and a decrease in contract receivable of $0.5 million, partially offset by the increase in unbilled work in progress of $0.5 million and income taxes receivable of $0.4 million and an increase in other assets long 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 a reduction in our lease obligations of $0.3 million.

Cash provided by operating activities for the nine months ended September 30, 2020 was primarily due to the net income inclusive of noncash charges of $1.2 million and a decrease in contract receivable of $3.2 million, partially offset by the increase in unbilled work-in-progress of $2.2 million and decrease in unearned revenue of $0.6 million.

Cash provided by operating activities for the nine months ended September 30, 2019 was primarily due to decreases of $2.1 million in accounts receivable and unbilled work-in-progress net of allowances and collection and an increase of $0.7 million to unearned revenues. This was partially offset by the net loss of $8.3 million (offset by noncash charges of $8.0 million), an increase in prepaid and other assets of $0.5 million, an increase in income tax receivable of $0.5 million, a decrease in current lease obligations of $0.3 million, and a decrease in accounts payables and accrued liabilities of $0.5 million.

Net cash used in investing activities during the nine months ended September 30, ~~2020~~2021 of ~~$0.2~~ $0.3 million was due to thepurchase of property and equipment. Net cash used in investing activities during the nine months ended September 30, ~~2019~~2020 of ~~$0.3~~ $0.2 million was due to the purchase of property and equipment.

Net cash used in financing activities was ~~$0.9~~ $0.1 million for the nine months ended September 30, 2021 was related to the final principal payments on our term loan. Net cash used in financing activities was $0.9 million for the nine months ended September 30, 2020 was related to principal payments on our term loan offset by the proceeds received with the ~~Paycheck~~Payroll Protection Program. ~~Net cash used in financing activities $2.7 million during the nine months ended September 30, 2019 was primarily cash used for principal payments on our term loan.~~

As of September 30, 2020, we have $0.4 million in outstanding principal obligations on term loan payable to East West Bank (“EWB”) that require us to maintain specified financial requirements that are defined in the loan agreements. Evolving Systems provides software solutions and services throughout the world. The recent COVID-19 global outbreak has caused instability and volatility in multiple markets where our clients conduct ~~business.~~business, or we have employees working. The pandemic has delayed certain projects or the closing of new orders as customer interactions have been altered or postponed. At this time, we have seen only limited disruptions to our ability to continue delivery to our clients. ~~The~~

In January 2021, we made our last principal and interest payment on the term loan payable to East West Bank (“EWB”) that required us to maintain specified financial ~~covenants under our debt facilities~~requirements that are ~~related to cash balances and quarterly operational results which have been adversely affected by project delays or~~defined in the closing of new deals related to customer interactions being postponed. The outbreak may also have affected our customers’ ability to make timely payments. As of September 30, 2020, we were compliant with our financial covenants, current on our loan ~~payment obligations, and made all scheduled loan payments to date.~~

agreements. We believe that our current cash and cash equivalents, together with anticipated cash flow from operations will be sufficient to meet ~~our term loan payments, along with~~ our working capital and capital expenditure requirements for at least the next twelve 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, ~~2020~~2021 of ~~$3.5~~ $3.6 million;

Our working capital balance at September 30, ~~2020~~2021 of ~~$4.8~~ $5.9 million; and

Our ability to ~~historically~~ generate positive cash flows from operations of ~~$1.8~~ $1.3 million for the nine months ended September 30, ~~2020,~~2021, and ~~$1.1~~$1.4 million and ~~$2.6~~$1.1 million for the full years ended December 31, 2020 and 2019, ~~and 2018,~~ respectively.

We are exposed to foreign currency rate risks which impact the carrying amount of our foreign subsidiaries and our consolidated equity, as well as our consolidated cash position due to translation adjustments. For the nine months ended September 30, ~~2020~~2021 and ~~2019,~~2020, the effect of exchange rate changes resulted in an decrease of ~~$0.3~~ $0.1 million and ~~decreases in cash~~a decrease of ~~less than $0.1~~ $0.3 million, respectively. We do not currently hedge our foreign currency exposure, but we monitor rate changes and may hedge our exposures if we see significant negative trends in exchange rates.

OFF-BALANCE SHEET ARRANGEMENTS

We have no off-balance sheet arrangements that have a material current effect or that are reasonably likely to have a material future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not required for smaller reporting companies.

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 September 30, ~~2020.~~2021.

In designing and evaluating our disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood

of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

During the three months ended September 30, ~~2020,~~2021, there were no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) or in other factors that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II — OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Information 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, ~~2019. There~~2020. From time to time, we are involved in various legal matters arising in the normal course of business. 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 ~~no material changes~~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 ~~legal proceedings previously disclosed~~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 ~~Annual Report on Form 10-K, which are incorporated by reference herein.~~Company. Our insurance carrier has agreed to contribute $0.3 million toward the settlement. Settlement was paid in full in July 2021.

ITEM 1A. RISK FACTORS

Not required under Regulation S-K for smaller reporting companies

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable

ITEM 5. OTHER INFORMATION

Not applicable

ITEM 6. EXHIBITS


Exhibit No.		Description of Document
2.1		Asset Purchase Agreement, dated as of April 21, 2011, by and between Evolving Systems, Inc. and NeuStar, Inc., as filed as Exhibit 2.1 to the Registrant’s Form 8-K filed on April 21, 2011 and incorporated herein by reference.
2.2		Agreement and Plan of Merger by and among Evolving Systems, Inc., Topaz Merger Sub, Inc., Telespree Communications and Gill Cogan as the exclusive representative of the Effective Time Shareholders and Change in Control Payment Recipients, as filed as Exhibit 2.1 to the Registrant’s Form 8-K filed on October 25, 2013 and incorporated herein by reference.
2.3		Merger Agreement dated as of September 30, 2015, by and among Evolving Systems, Inc., Evolving Systems NC, Inc., a wholly owned subsidiary of Evolving Systems, RateIntegration, Inc. and a representative of the stockholders and change in control payment recipients of RateIntegration, Inc., as filed as Exhibit 2.1 to the Registrant’s Form 8-K filed September 30, 2015 and incorporated herein by reference.
~~3.1~~ 2.4		Evolving Systems, Inc., and Evolving Systems Holdings Ltd., ETI-NET Inc., Investissements Riv Europe Ltee, a Quebec corporation and Said Hini, as filed as Exhibit 2.1 to the Registrant’s Form 8-K filed October 18, 2021 and incorporated herein by reference.
2.5		Software Purchase Agreement, dated as of October 15, 2021, by and among Evolving Systems, Inc., Evolving Systems NC, Inc., and ETI-NET Inc., as filed as Exhibit 2.2 to the Registrant’s Form 8-K filed October 18, 2021 and incorporated herein by reference.
2.6		Software Purchase Agreement, dated as of October 15, 2021, by and among Evolving Systems, Inc., Evolving Systems Limited, and ETI-NET Inc. as filed as Exhibit 2.3 to the Registrant’s Form 8-K filed October 18, 2021 and incorporated herein by reference.
3.1		Restated Certificate of Incorporation, as filed as an exhibit to the Registrant’s registration statement on Form S-1 filed January 9, 1998 and incorporated herein by reference.
3.2		Certificate of Designation for the Series B Convertible Preferred Stock, as filed as Exhibit 3.1 to the Registrant’s Form 8-K filed November 10, 2004 and incorporated herein by reference.

3.3		Certificate of Amendment to Certificate of Designation of Series B Convertible Preferred Stock filed as Exhibit 3.1(c) to the Registrant’s Form 8-K filed November 17, 2005 and incorporated herein by reference.
3.4		Certificate of Amendment to Certificate of Designation of Series B Convertible Preferred Stock filed as Exhibit 3.01 to the Registrant’s Form 8-K filed May 4, 2007 and incorporated herein by reference.
3.5		Certificate of Amendment to the Restated Certificate of Incorporation of Evolving Systems, Inc., as filed as Exhibit 3.1 to the Registrant’s Form 8-K filed on July 21, 2009 and incorporated herein by reference.
3.6		Certificate of Amendment to Amended and Restated Certificate of Incorporation of Evolving Systems, Inc. as filed as Exhibit 3(i) to the Registrant’s Form 8-K filed on June 16, 2011 and incorporated herein by reference.
3.7		Amended and Restated Bylaws of Evolving Systems, Inc., as filed as Exhibit 3(ii) to the Registrant’s Form 8-K filed on July 31, 2014 and incorporated herein by reference.
10.1		Amendment and Waiver Letter to Term Loan Facility Agreement entered into by and among Evolving Systems, Inc. as Parent Guarantor, Evolving Systems Holdings Limited, as Original Borrower, Evolving Systems Limited and Evolving Systems BLS Limited, as further Original Guarantors, Evolving Systems Lumata Limited, and East West Bank as Lender, as filed as Exhibit 10.1 to the Registrant’s Form 8-K filed on July 7, 2020 and incorporated herein by reference.
31.1	*	Certification of Chief Executive Officer and Executive Chairman pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
31.2	*	Certification of Principal Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) of the Securities Exchange Act, as amended.
32.1	**	Certification of Principal Executive Officer and Principal Financial Officer pursuant to Rules 13a-14(b) or 15d-14(b) of the Securities Exchange Act, as amended, and 18 U.S.C. Section 1350.
101.INS*32.2	**	~~XBRL Instance Document.~~Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002(furnished herewith).
101.SCH*101.INS	*	101 XBRL Instance Document.
101.SCH	*	101 XBRL Taxonomy Extension Schema Document.
101.CAL*101.CAL	*	101 XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF*101.DEF	*	101 XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB*101.LAB	*	101 XBRL Taxonomy Extension Label Linkbase Document.
101.PRE*101.PRE	*	101 XBRL Taxonomy Extension Presentation Linkbase Document.
104		Cover Page Interactive Data File, formatted in Inline XBRL and contained in Exhibit 101

*Filed herewith.

**Furnished herewith.

SIGNATURE

~~SIGNATURE~~

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


Date: November ~~12, 2020~~10, 2021		/s/ Mark P. Szynkowski
		Mark P. Szynkowski
		Senior Vice President of Finance and Secretary (Principal Financial and Accounting Officer)


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

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


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.001 per share	EVOL	The Nasdaq Capital Market


Large Accelerated Filer ☐o		Accelerated Filer ☐o

Non-accelerated Filer ☒x		Smaller Reporting Company ☒x

Emerging Growth Company☐o


PART I — FINANCIAL INFORMATION
Item 1	Financial Statements (Unaudited)	3
	Condensed Consolidated Balance Sheets	3
	Condensed Consolidated Statements of Operations	4
	Condensed Consolidated Statements of Comprehensive Income ~~(Loss)~~(Loss)	5
	Condensed Consolidated Statements of Changes in Stockholders’ Equity	6
	Condensed Consolidated Statements of Cash Flows	8
	Notes to Unaudited Condensed Consolidated Financial Statements	9
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23 22
Item 3	Quantitative and Qualitative Disclosures About Market Risk	30
~~Item 4~~	~~Controls and Procedures~~	30
		28
Item 4	Controls and Procedures	28

PART II — OTHER INFORMATION
Item 1	Legal Proceedings	32
~~Item 1A~~	~~Risk Factors~~	32
~~Item 6~~	~~Exhibits~~	32
		29
Item 1A	~~Signatures~~Risk Factors	29
Item 6	33 Exhibits	29

Signatures		31



	September 30, 2020								September 30, 2021
		Gross Amount			Accumulated Amortization			Net Carrying Amount		Gross Amount			Accumulated Amortization			Net Carrying Amount
Purchased software	$	2,882		$	(1,786)		$	1,096	$	2,920		$	(2,189)		$	731
Trademarks and tradenames		304			(262)			42		309			(288)			21
Non-competition		39			(39)			—		40			(40)			—
Customer relationships		4,312			(2,532)			1,780		4,376			(3,091)			1,285
	$	7,537	(1)	$	(4,619)	(1)	$	2,918	$	7,645	⁽¹⁾	$	(5,608)	⁽¹⁾	$	2,037

							��

Nine Months Ended September 30, 2019

									Accumulated
					Additional				other			Total
	Common stock				paid-in		Treasury		comprehensive		Accumulated	stockholders'
	Shares	Amount			capital		stock		loss		deficit	equity
Balance at January 1, 2019	12,126,708	$	12	$	99,224	$	(1,253)	$	(10,115)	$	(69,448)	$	18,420
Restricted stock vested	36,343		—		—		—		—		—		—
Stock-based compensation expense	—		—		263		—		—		—		263
Net loss	—		—		—		—		—		(8,316)		(8,316)
Foreign currency translation loss	—		—		—		—		(170)		—		(170)
Balance at September 30, 2019	12,163,051	$	12	$	99,487	$	(1,253)	$	(10,285)	$	(77,764)	$	10,197



Three Months Ended September 30, 2019

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



For the Twelve Months ended September 30,
2020	$	939
2021		857
For the Twelve Months Ended September 30,				Amount
2022		414	$	869
2023		191		424
2024		87		200
2025				92
2026				92
Thereafter		430		360
	$	2,918	$	2,037



	Restricted
	Stock
	Number of
	Shares
	(in thousands)
Unvested restricted stock at January 1, ~~2020~~2021	~~159~~ 63
Less restricted stock vested	~~(31)~~ (62)
~~Less restricted stock forfeited/expired~~	~~(65)~~
Unvested restricted stock at September 30, ~~2020~~2021	63 1



		September 30, 2020		December 31, 2019
Deferred tax assets:
Foreign tax credits carryforwards	$	4,618	$	4,650
Net operating loss carryforwards - Federal		—		—
Net operating loss carryforwards — State		947		753
Net operating loss carryforwards — Foreign		6,052		5,911
Alternative minimum tax credits		—		385
Stock compensation		483		552
Depreciable assets		36		54
Accrued liabilities and reserves		91		127
Total deferred tax assets		12,227		12,432

Deferred tax liabilities:
Intangibles		(25)		(180)
Accrued liabilities and reserves		(165)		(170)
Total deferred tax liability		(190)		(350)

Net deferred tax assets, before valuation allowance		12,037		12,082
Valuation allowance		(11,406)		(11,082)
Net deferred tax asset	$	631	$	1,000



		As of
		September 30, ~~2020~~2021
Operating leases - right of use assets	$	~~979~~
		1,033

Operating lease current	$	~~291~~ 330
Lease obligations — operating leases, net of current portion		~~680~~
~~Total lease liability~~	$	~~971~~
		696
Total lease liability	$	1,026

Weighted average remaining lease term (in years)		~~3.8~~ 5.2
Weighted average discount rate		~~6.49%~~ 6.10%



		For the year ending		For the year ending
		December 31,		December 31,
2020 - Remaining	$	89
2021		327
2021 - Remaining			$	93
2022		302		351
2023		168		218
2024		71		121
2025				121
Thereafter		112		252
Total future minimum lease payments		1,069		1,156
Present value adjustment		98		130
Total	$	971	$	1,026