10-Q 1 evol-20200630x10q.htm 10-Q 20200630 Q2





UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549






FORM 10-Q



Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934



For the quarterly period ended June  30, 2020



OR



Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934



For the transition period from               to               



Commission File Number: 001-34261



EVOLVING SYSTEMS, INC.

(Exact name of registrant as specified in its charter)





 

 

Delaware

 

84-1010843 

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)



 

 

9800 Pyramid Court,  Suite 400

Englewood,  Colorado 

 

80112 

(Address of principal executive offices)

 

(Zip Code)



(303)  802-1000

(Registrant’s telephone number, including area code)



Securities registered pursuant to Section 12(b) of the Act.





 

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, par value $0.001 per share

EVOL

The Nasdaq Capital Market



Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  No 



Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes  No 



Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definition of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.





 

 

Large Accelerated Filer

 

Accelerated Filer



 

 

Non-accelerated Filer 

 

Smaller Reporting Company 



 

 

 Emerging Growth Company 

 

 



If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act 



Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  No 



As of August 10, 2020, there were  12,194,971 shares outstanding of Registrant’s Common Stock (par value $0.001 per share).





 

 


 

EVOLVING SYSTEMS, INC.





 

 

 

PART I — FINANCIAL INFORMATION

Item 1

Financial Statements (Unaudited)

 



Condensed Consolidated Balance Sheets

 



Condensed Consolidated Statements of Operations

 



Condensed Consolidated Statements of Comprehensive Loss

 



Condensed Consolidated Statements of Changes in Stockholders’ Equity

 



Condensed Consolidated Statements of Cash Flows

 



Notes to Unaudited Condensed Consolidated Financial Statements

 

Item 2

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

23 

Item 3

Quantitative and Qualitative Disclosures About Market Risk

 

30 

Item 4

Controls and Procedures

 

30 



 

 

 

PART II — OTHER INFORMATION

Item 1

Legal Proceedings

 

32 

Item 1A

Risk Factors

 

32 

Item 6

Exhibits

 

32 



 

 

 

Signatures

 

 

33 





 

2


 

 

PART I — FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

EVOLVING SYSTEMS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and par value data)

 



 



 

 

 

 

 



June 30, 2020

 

December 31, 2019



 

(unaudited)

 

 

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

$

4,271 

 

$

3,076 

Contract receivables, net of allowance for doubtful accounts of $821 and $710

 

 

 

 

 

at June 30, 2020 and December 31, 2019, respectively

 

4,062 

 

 

6,732 

Unbilled work-in-progress

 

2,875 

 

 

1,105 

Prepaid and other current assets

 

2,121 

 

 

1,594 

Income taxes receivable

 

714 

 

 

953 

Total current assets

 

14,043 

 

 

13,460 

Property and equipment, net

 

541 

 

 

482 

Amortizable intangible assets, net

 

3,090 

 

 

3,665 

Operating leases — right-of-use assets

 

987 

 

 

1,205 

Deferred income taxes, net

 

631 

 

 

1,000 

Total assets

$

19,292 

 

$

19,812 



 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Term loans - current portion, net

$

850 

 

$

1,577 

Accounts payable and accrued liabilities

 

4,542 

 

 

3,827 

Lease obligations — operating leases

 

276 

 

 

321 

Unearned revenue

 

4,120 

 

 

3,971 

Total current liabilities

 

9,788 

 

 

9,696 

Long-term liabilities:

 

 

 

 

 

Term loan, net of current portion, net

 

319 

 

 

122 

Lease obligations - operating leases, net of current portion

 

702 

 

 

876 

Total liabilities

 

10,809 

 

 

10,694 



 

 

 

 

 

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; 12,373,860 shares

      issued and 12,194,971 shares outstanding as of June 30, 2020 and 12,342,723 

      shares issued and 12,163,834 shares outstanding as of December 31, 2019

 

12 

 

 

12 

Additional paid-in capital

 

99,622 

 

 

99,555 

Treasury Stock, 178,889 shares as of June 30, 2020 and December 31, 2019,

    at cost

 

(1,253)

 

 

(1,253)

Accumulated other comprehensive loss

 

(10,675)

 

 

(10,053)

Accumulated deficit

 

(79,223)

 

 

(79,143)

Total stockholders' equity

 

8,483 

 

 

9,118 

Total liabilities and stockholders' equity

$

19,292 

 

$

19,812 



 

 

 

 

 

















 

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

 

3


 

 

EVOLVING SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)

 



[

 







 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 



For the Three Months

 

For the Six Months



Ended June 30,

 

Ended June 30,



 

2020

 

 

2019

 

 

2020

 

 

2019

REVENUE

 

 

 

 

 

 

 

 

 

 

 

License fees

$

97 

 

$

253 

 

$

304 

 

$

967 

Services

 

6,232 

 

 

6,003 

 

 

12,310 

 

 

11,986 

Total revenue

 

6,329 

 

 

6,256 

 

 

12,614 

 

 

12,953 



 

 

 

 

 

 

 

 

 

 

 

COSTS OF REVENUE AND OPERATING EXPENSES

 

 

 

 

 

 

 

 

 

 

 

Costs of revenue, excluding depreciation and
    amortization

 

2,188 

 

 

2,160 

 

 

4,324 

 

 

4,105 

Sales and marketing

 

1,444 

 

 

1,693 

 

 

3,005 

 

 

3,759 

General and administrative

 

1,109 

 

 

1,206 

 

 

2,523 

 

 

3,006 

Product development

 

1,011 

 

 

1,204 

 

 

2,074 

 

 

2,493 

Depreciation

 

50 

 

 

64 

 

 

100 

 

 

89 

Amortization

 

233 

 

 

235 

 

 

468 

 

 

472 

Goodwill impairment loss

 

 

 

6,687 

 

 

 

 

6,687 

Total costs of revenue and operating expenses

 

6,035 

 

 

13,249 

 

 

12,494 

 

 

20,611 



 

 

 

 

 

 

 

 

 

 

 

Income (loss) from operations

 

294 

 

 

(6,993)

 

 

120 

 

 

(7,658)



 

 

 

 

 

 

 

 

 

 

 

Other income (expense)

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

 

 

 

 

 

Interest expense

 

(18)

 

 

(91)

 

 

(65)

 

 

(184)

Other income (loss), net

 

16 

 

 

 

 

19 

 

 

(12)

Foreign currency exchange income (loss)

 

(36)

 

 

194 

 

 

347 

 

 

(67)

Other income (expense), net

 

(37)

 

 

107 

 

 

304 

 

 

(254)



 

 

 

 

 

 

 

 

 

 

 

Income (loss) from operations before income taxes

 

257 

 

 

(6,886)

 

 

424 

 

 

(7,912)

Income tax expense

 

305 

 

 

96 

 

 

504 

 

 

187 

Net loss

$

(48)

 

$

(6,982)

 

$

(80)

 

$

(8,099)



 

 

 

 

 

 

 

 

 

 

 

Basic loss per common share

$

(0.00)

 

$

(0.57)

 

$

(0.01)

 

$

(0.67)



 

 

 

 

 

 

 

 

 

 

 

Diluted loss per common share

$

(0.00)

 

$

(0.57)

 

$

(0.01)

 

$

(0.67)



 

 

 

 

 

 

 

 

 

 

 

Weighted average basic shares outstanding

 

12,179 

 

 

12,162 

 

 

12,179 

 

 

12,150 

Weighted average diluted shares outstanding

 

12,179 

 

 

12,162 

 

 

12,179 

 

 

12,150 









 

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

 

4


 

 

EVOLVING SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(in thousands)

(unaudited)

 







 



 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 



For the Three Months Ended

 

For the Six Months Ended



June 30,

 

June 30,



 

2020

 

 

2019

 

 

2020

 

 

2019

Net Loss

$

(48)

 

$

(6,982)

 

$

(80)

 

$

(8,099)



 

 

 

 

 

 

 

 

 

 

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation loss

 

(99)

 

 

(341)

 

 

(622)

 

 

(14)

Comprehensive loss

$

(147)

 

$

(7,323)

 

$

(702)

 

$

(8,113)





















 

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

 

5


 

 

EVOLVING SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(in thousands, except share data)

(unaudited)

 







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 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

31,137 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation
  expense

 

 

 

 

67 

 

 

 

 

 

 

 

 

67 

Net loss

 

 

 

 

 

 

 

 

 

 

(80)

 

 

(80)

Foreign currency translation
  loss

 

 

 

 

 

 

 

 

(622)

 

 

 

 

(622)

Balance at June 30, 2020

12,194,971 

 

$

12 

 

$

99,622 

 

$

(1,253)

 

$

(10,675)

 

$

(79,223)

 

$

8,483 







 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 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

35,562 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation
  expense

 

 

 

 

193 

 

 

 

 

 

 

 

 

193 

Net loss

 

 

 

 

 

 

 

 

 

 

(8,099)

 

 

(8,099)

Foreign currency translation

  loss

 

 

 

 

 

 

 

 

(14)

 

 

 

 

(14)

Balance at June 30, 2019

12,162,270 

 

$

12 

 

$

99,417 

 

$

(1,253)

 

$

(10,129)

 

$

(77,547)

 

$

10,500 

 

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

 

6


 

 

EVOLVING SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(in thousands, except share data)

(unaudited)





 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 2020



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 



 

 

 

 

 

 

Additional

 

 

 

 

 

other

 

 

 

 

 

Total



Common stock

 

 

paid-in

 

 

Treasury

 

 

comprehensive

 

 

Accumulated

 

 

stockholders'



Shares

 

Amount

 

 

capital

 

 

stock

 

 

loss

 

 

deficit

 

 

equity 

Balance at March 31, 2020

12,194,502 

 

$

12 

 

$

99,613 

 

$

(1,253)

 

$

(10,576)

 

$

(79,175)

 

$

8,621 

Restricted stock vested

469 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation

  expense

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

 

 

 

 

 

 

 

 

 

(48)

 

 

(48)

Foreign currency translation
  loss

 

 

 

 

 

 

 

 

(99)

 

 

 

 

(99)

Balance at June 30, 2020

12,194,971 

 

$

12 

 

$

99,622 

 

$

(1,253)

 

$

(10,675)

 

$

(79,223)

 

$

8,483 









 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 2019



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 



 

 

 

 

 

 

Additional

 

 

 

 

 

other

 

 

 

 

Total



Common stock

 

 

paid-in

 

 

Treasury

 

 

comprehensive

 

 

Accumulated

 

stockholders'



Shares

 

Amount

 

 

capital

 

 

stock

 

 

loss

 

 

deficit

 

equity 

Balance at March 31, 2019

12,161,489 

 

$

12 

 

$

99,354 

 

$

(1,253)

 

$

(9,788)

 

$

(70,565)

 

$

17,760 

Restricted stock vested

781 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation

  expense

 

 

 

 

63 

 

 

 

 

 

 

 

 

63 

Net loss

 

 

 

 

 

 

 

 

 

 

(6,982)

 

 

(6,982)

Foreign currency translation
  loss

 

 

 

 

 

 

 

 

(341)

 

 

 

 

(341)

Balance at June 30, 2019

12,162,270 

 

$

12 

 

$

99,417 

 

$

(1,253)

 

$

(10,129)

 

$

(77,547)

 

$

10,500 







 

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

 

7


 

 

EVOLVING SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

 







 

 

 

 

 



 

 

 

 

 



For the Six Months Ended June 30,



 

2020

 

 

2019

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

Net loss

$

(80)

 

$

(8,099)

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

 

 

 

 

 

Depreciation

 

100 

 

 

89 

Amortization of intangible assets

 

468 

 

 

472 

Amortization of debt issuance costs

 

 

 

12 

Amortization of operating leases — right of use assets

 

154 

 

 

193 

Stock-based compensation expense

 

67 

 

 

193 

Foreign currency transaction (income) loss, net

 

(347)

 

 

67 

Bad debt (recoveries) expense, net

 

(11)

 

 

139 

Provision for deferred income taxes

 

366 

 

 

(24)

Goodwill impairment loss

 

 

 

6,687 

Change in operating assets and liabilities:

 

 

 

 

 

Contract receivables

 

2,338 

 

 

(769)

Unbilled work-in-progress

 

(1,868)

 

 

352 

Prepaid and other assets

 

(605)

 

 

(491)

Accounts payable and accrued liabilities

 

899 

 

 

386 

Income taxes receivable

 

152 

 

 

(233)

Unearned revenue

 

397 

 

 

1,768 

Lease obligations — operating leases

 

(154)

 

 

(190)

Net cash provided by operating activities

 

1,879 

 

 

552 



 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

Purchases of property and equipment

 

(188)

 

 

(273)

Net cash used in investing activities

 

(188)

 

 

(273)



 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

Principal payments on notes payable

 

(526)

 

 

(1,669)

Proceeds from issuance of note

 

319 

 

 

Net cash used in financing activities

 

(207)

 

 

(1,669)



 

 

 

 

 

Effect of exchange rate changes on cash and cash equivalents

 

(289)

 

 

(32)



 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

1,195 

 

 

(1,422)

Cash and cash equivalents at beginning of period

 

3,076 

 

 

6,732 

Cash and cash equivalents at end of period

$

4,271 

 

$

5,310 



 

 

 

 

 

Supplemental disclosure of cash and non-cash transactions:

 

 

 

 

 

Interest paid

$

51 

 

$

160 

Income taxes paid

$

101 

 

$

39 

Supplemental non-cash amounts of lease liabilities arising from obtaining right-of-use
  assets

$

 

$

1,609 





















 

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

 

8


 

 

 

Notes to Unaudited Condensed Consolidated Financial Statements

 



NOTE 1 — ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES



Organization — Evolving Systems, Inc. (“we,” “us,” “our,” the “Company, “Evolving” and “Evolving Systems”) is a provider of real-time digital engagement 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 and 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, we introduced 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 upon the best components and features of our current platforms as well as adding new enhancements.



Our service activation solution, Tertio® (“TSA”) is used to activate bundles of voice, video and data services for wireless, wireline and cable network operators; our SIM card activation solution, Dynamic SIM Allocation TM (“DSA”) is used to dynamically allocate and assign resources to Mobile Network Operators (“MNOs”) devices that rely on SIM cards; our Mobile Data Enablement TM (“MDE”) solution provides a data consumption and policy management solution for wireless carriers and Mobile Virtual Network Operators (“MVNOs”) that monitor the usage and consumption of data services; our Total Number Management™ (“TNM”) product is a scalable and fully automated database solution that enables operators to reliably and efficiently manage their telephone numbers as well as other communication identifiers (i.e. SIMs, MSISDNs IMSIs, ICCIDs, IPs). Our solutions can be deployed on premise or as a Software-as-a-Service (“SaaS”). 



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. The financial covenants under our debt facilities (see Note 7) are related to cash balances and quarterly operational results which have been adversely affected by project delays related to customer interactions being postponed or our customers’ ability to make timely payments. We have agreed with East West Bank (“EWB”) to a waiver to non-compliance with respect to covenants not achieved in prior periods and to amend future covenant requirements. Also the amendment expedited the repayment of the note to be completed by December 31, 2020. 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 future term loan payments, working capital and capital expenditure requirements for at least the next twelve months from the date of filing of these condensed consolidated financial statements. In making this assessment, we considered our $4.3 million in cash and cash equivalents and our $4.3 million in working capital at June 30, 2020, along with our ability to historically generate positive cash flows from operations.



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 unaudited condensed consolidated financial statements included in this document have been prepared on the same basis as the annual consolidated financial statements, and in our opinion reflect all adjustments, which include normal recurring adjustments necessary for a fair presentation in accordance with US GAAP and SEC regulations for interim financial statements. The results for the three and six months ended June 30, 2020 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 included in our Annual Report on Form 10-K as filed with the SEC on March 30, 2020.



Use of Estimates — The preparation of condensed consolidated financial statements in conformity with 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 property, equipment and intangible assets, capitalization of internal software development costs and fair value of stock-based compensation amounts. Actual results could differ from these estimates.



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Foreign Currency — Our reporting currency is the U.S. dollar. The functional currency of our foreign operations, generally, is the respective local currency for each foreign subsidiary. Assets and liabilities of foreign operations denominated in local currencies are translated at the spot rate in effect at the applicable reporting date. Our condensed consolidated statements of operations are translated at the weighted average rate of exchange during the applicable period. The resulting unrealized cumulative translation adjustment is recorded as a component of accumulated other comprehensive loss in stockholders’ equity. Realized and unrealized transaction gains and losses generated by transactions denominated in a currency different from the functional currency of the applicable entity are recorded in other income (expense) in the period in which they occur.



Principles of Consolidation — The unaudited condensed consolidated financial statements include the accounts of Evolving Systems, Inc. and subsidiaries, all of which are wholly-owned. All significant intercompany transactions and balances have been eliminated in consolidation.



Revenue Recognition —  The majority of our license fees and services revenue is generated from fixed-price contracts, this provides for licenses to our software products and services that customize such software to meet our customers’ needs. In most instances, customization services are determined to be essential to the functionality of the delivered software. Under Financial Accounting Standards Board (“FASB”) Topic 606, Revenue from Contacts with Customers (“ASC 606”), revenue is recognized when our customer obtains control of promised goods or services in an amount that reflects the consideration we expect to receive in exchange for those goods or services. We measure revenue based on consideration specified in a contract with a customer and exclude any sales incentives. Furthermore, we recognize revenue when we satisfy a performance obligation by transferring control over the service to our customer.



A performance obligation is a promise in a contract to transfer a distinct service to the customer. The transaction price of a contract is allocated to each distinct performance obligation and recognized as revenue when or as the customer receives the benefit of the performance obligation. Losses on fixed-price projects are recorded when identified. Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction, that are collected by us from a customer, are excluded from revenue.



Nature of goods and services



The following is a description of our products and services from which we generate revenue, as well as the nature, timing of satisfaction of performance obligations, and significant payment terms for each:



i. License Revenue



License fees represent the fees we receive from the licensing of our software products. In most instances, customization services are determined to be essential to the functionality of the delivered software. The license along with the customization services are transferred to our customers over time. In arrangements where the services are not essential to the functionality of the delivered software, we recognize license revenue when the license agreement has been approved and the software has been delivered. We can identify each party’s rights, payment terms, and commercial substance of the content. Where applicable, we identify multiple performance obligations and record as revenue as the performance obligations are fulfilled based on their estimated allocated standalone selling price. The selection of the method to measure progress towards completion requires judgment and is based on the extent of progress towards completion of the performance obligation. We recognize revenue using the input method of accounting based on labor hours.



ii. Customer Support Revenue



Customer support services includes annual support fees, recurring maintenance fees, and minor product upgrades generally as a single performance obligation. The Company also offers a warranty support fee which represents a separate performance obligation that is provided for up to a year with initial license purchase. The Company allocates the contract transaction price related to warranty support fees based on pricing consistent with what we would offer to other market participants. Upon the conclusion of the warranty period, the customer can choose to continue to receive support and maintenance services via our customer support offerings. We recognize revenue from our support ratably over the service contract period.



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

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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. 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 June 30,

 

For the Six Months Ended June 30,



 

2020

 

 

2019

 

2020

 

2019

Primary geographical markets

 

 

 

 

 

 

 

 

 

 

 

United Kingdom

$

1,103 

 

$

1,344 

 

$

2,293 

 

$

2,716 

Other

 

5,226 

 

 

4,912 

 

 

10,321 

 

 

10,237 



$

6,329 

 

$

6,256 

 

$

12,614 

 

$

12,953 



 

 

 

 

 

 

 

 

 

 

 

Major products/service lines

 

 

 

 

 

 

 

 

 

 

 

Licensing fees

$

97 

 

$

253 

 

$

304 

 

$

967 

Customer support, including warranty support fees

 

1,952 

 

 

2,348 

 

 

4,085 

 

 

4,580 

Services

 

1,792 

 

 

1,615 

 

 

3,359 

 

 

3,196 

Managed services

 

2,488 

 

 

2,040 

 

 

4,866 

 

 

4,210 

Total services

 

6,232 

 

 

6,003 

 

 

12,310 

 

 

11,986 



$

6,329 

 

$

6,256 

 

$

12,614 

 

$

12,953 



 

 

 

 

 

 

 

 

 

 

 

Timing of revenue recognition

 

 

 

 

 

 

 

 

 

 

 

Products transferred at a point in time

$

93 

 

$

34 

 

$

228 

 

$

521 

Products and services transferred over time

 

6,236 

 

 

6,222 

 

 

12,386 

 

 

12,432 



$

6,329 

 

$

6,256 

 

$

12,614 

 

$

12,953 



Contract balances



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







 

 

 

 

 



June 30, 2020

 

December 31, 2019

Assets

 

 

 

 

 

Contract receivables, net

$

4,062 

 

$

6,732 

Unbilled work-in-progress, net

$

2,875 

 

$

1,105 

Liabilities

 

 

 

 

 

Unearned revenue

$

4,120 

 

$

3,971 



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.



Management expects that incremental commission fees paid to employees and intermediaries as a result of obtaining contracts are recoverable and therefore the Company capitalized them as contract costs in the amount of $0.2 million at each of June  30, 2020 and December 31, 2019.



Capitalized commission fees are amortized based on the transfer of services to which the assets relate which may range from two to three years, and are included in sales and marketing. In each of the three month periods ended June  30, 2020 and 2019, the amount of amortization was less than  $0.1 million and there was no impairment loss in relation to the costs capitalized. In the six

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month periods ended June 30, 2020 and 2019, the amount of amortization was $0.2 million and less than $0.1 million, respectively, and there was no impairment loss in relation to the costs capitalized. Applying the practical expedient in ASC 606 paragraph 340-40-25-4, the Company recognizes the incremental costs of obtaining contracts as an expense when incurred if the amortization period of the assets that the Company otherwise would have recognized is one year or less. These costs are included in sales and marketing.



The contract liabilities primarily relate to unearned revenue. Amounts billed in advance of performance obligations being satisfied are recognized as unearned revenue.



For the three months ended June  30, 2020 and 2019, we recognized revenue of $2.1 million and $1.7 million, respectively, which was included in the corresponding contract liability balance at the beginning of the period. For the six months ended June 30, 2020 and 2019, we recognized revenue of $2.9 million and $2.3 million, respectively, which was included in the corresponding contract liability balance at the beginning of the period.



Transaction price allocated to the remaining performance obligations



Remaining performance obligations represent the transaction price of firm orders for which work has not been completed as of the period end date and excludes unexercised contract options and potential orders under ordering-type contracts (e.g., indefinite-delivery, indefinite-quantity). As of June  30, 2020, the aggregate amount of the transaction price allocated to remaining performance obligations with lives greater than one-year totals $11.5 million. The Company expects approximately 56% of remaining performance obligations to be recognized into revenue within the next twelve months, with the remaining 36% in 1-2 years and 8% in 3-4 years.



We apply the practical expedient in paragraph ASC 606-10-50-14 and do not disclose information about remaining performance obligations that have original expected durations of one-year or less. We apply the transition practical expedient in paragraph ASC 606-10-65-1(f)(3) and do not disclose the amount of the transaction price allocated to the remaining performance obligations and an explanation of when we expect to recognize that amount as revenue.



Stock-based Compensation — We account for stock-based compensation by applying a fair-value-based measurement method to account for stock-based payment transactions with employees, non-employees and directors. We record compensation costs associated with the vesting of unvested options on a straight-line basis over the vesting period. Stock-based compensation is a non-cash expense because we settle these obligations by issuing shares of our common stock instead of settling such obligations with cash payments. We use the Black-Scholes model to estimate the fair value of each option grant on the date of grant. This model requires the use of estimates for expected term of the options and expected volatility of the price of our common stock. We recognize forfeitures as they occur rather than estimating them at the time of the grant.



Income Taxes — We record deferred tax assets and liabilities for the estimated future tax effects of temporary differences between the tax bases of assets and liabilities and amounts reported in the accompanying condensed consolidated balance sheets, as well as operating losses and tax credit carryforwards. We measure deferred tax assets and liabilities using enacted tax rates expected to be applied to taxable income in the years in which those temporary differences are expected to be recovered or settled. We reduce deferred tax assets by a valuation allowance if, based on available evidence, it is more likely than not that these benefits will not be realized.



We use a recognition threshold and a measurement attribute for financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more likely than not to be sustained upon examination by taxing authorities.



Segment Information —  We define operating segments as components of our enterprise for which separate financial information is reviewed regularly by the chief operating decision-makers to evaluate performance and to make operating decisions. We have identified our Chief Executive Officer and Senior Vice President of Finance as our chief operating decision-makers. These chief operating decision makers review revenues by segment and review overall results of operations.



We currently operate our business as one operating segment which includes two revenue types: license fees revenue and services revenue (as shown on the condensed consolidated statements of operations). License fees revenue represents the fees received from the license of software products. Services revenue includes services directly related to the delivery of the licensed products, such as fees for custom development, integration services, SaaS services, managed services, annual support fees, recurring maintenance fees, fees for maintenance upgrades and warranty services. Warranty services that are similar to software maintenance services are typically bundled with a license sale.



Recently Adopted Accounting Pronouncements —  In June 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments – Credit Losses (Topic 326) — Measurement of Credit Losses on Financial Instruments (ASU 2016-

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13). ASU 2016-13 requires entities to establish an allowance for credit losses for most financial assets. Prior US GAAP was based on an incurred loss methodology for recognizing credit losses on financial assets measured at amortized cost and available-for sale debt securities. The update is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted for fiscal years beginning after December 31, 2018. The amendments in this ASU did not have a material impact on our condensed consolidated financial statements.



In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (ASC 820) — Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”). ASU 2018-13 removes certain disclosures, modifies certain disclosures and adds additional disclosures. ASU 2018-13 is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2019. Early adoption is permitted. The amendments in this ASU did not have a material impact on our condensed consolidated financial statements. 



Recent Accounting PronouncementsIn December 2019, the FASB issued ASU 2019-12, Income Taxes (ASC 740) — Simplifying the Accounting for Income Taxes (“ASU 2019-12). ASU 2019-12 which modifies ASC 740 to simplify the accounting for income taxes. The ASU removes certain exceptions for recognizing deferred taxes for investments, performing intra-period allocation and calculating income taxes in interim periods. The ASU also adds guidance to reduce complexity in certain areas, including recognizing deferred taxes for tax goodwill and allocating taxes to members of a consolidated group. ASU 2019-12 is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2020. We have not yet completed the full assessment of the impact on our condensed consolidated financial statements or related disclosures.



In March 2020, the FASB issued ASU 2020-03, Codification Improvements to Financial Instruments  Issue 4: Cross-Reference to Line of-Credit or Revolving-Debt Arrangements Guidance in Subtopic 470-50. Stakeholders requested that paragraphs 470-50-40-17 through 40-18, which describe the accounting for fees between debtor and creditor and third-party costs directly related to exchanges or modifications of debt instruments, reference paragraph 470-50-40-21 for line-of-credit or revolving-debt arrangements. We have not yet completed the full assessment of the impact on our condensed consolidated financial statements or related disclosures.



Management has evaluated other recently issued accounting pronouncements and does not believe that any of these pronouncements will have a significant impact on our condensed consolidated financial statements and related disclosures.







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NOTE 2 — INTANGIBLE ASSETS



We amortize identifiable intangible assets on a straight-line basis over their estimated useful lives. As of June  30, 2020 and December 31, 2019, identifiable intangibles were as follows (in thousands):







 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 



June 30, 2020



 

Gross Amount

 

 

Accumulated Amortization

 

 

Net Carrying Amount

Purchased software

$

2,849 

 

$

(1,677)

 

$

1,172 

Trademarks and tradenames

 

298 

 

 

(253)

 

 

45 

Non-competition

 

39 

 

 

(39)

 

 

Customer relationships

 

4,257 

 

 

(2,384)

 

 

1,873 



$

7,443 

(1)

$

(4,353)

(1)

$

3,090 







 

 

 

 

 

 

 

 



December 31, 2019



 

Gross Amount

 

 

Accumulated Amortization

 

 

Net Carrying Amount

Purchased software

$

2,903 

 

$

(1,508)

 

$

1,395 

Trademarks and tradenames

 

307 

 

 

(247)

 

 

60 

Non-competition

 

39 

 

 

(39)

 

 

Customer relationships

 

4,346 

 

 

(2,136)

 

 

2,210 



$

7,595 

(1)

$

(3,930)

(1)

$

3,665 





(1)

Includes foreign currency translation adjustment of less than $0.1 million.



Amortization expense of identifiable intangible assets was $0.3 million for the three months ended June  30, 2020 and 2019 and $0.5 million for each of the six months ended June 30, 2020 and 2019.  Expected future amortization expense related to identifiable intangibles based on our carrying amount as of June  30, 2020 for the following five years is as follows (in thousands):









 

 



 

 

For the Twelve Months ended June 30,

 

 

2020

$

928 

2021

 

873 

2022

 

509 

2023

 

248 

2024

 

99 

Thereafter

 

433 



$

3,090 

 



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NOTE 3 — BALANCE SHEET COMPONENTS



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









 

 

 

 

 



 

 

 

 

 



June 30, 2020

 

December 31, 2019

Accounts payable and accrued liabilities:

 

 

 

 

 

Accounts payable 

$

1,037 

 

$

889 

Accrued compensation and related expenses

 

1,978 

 

 

1,755 

Accrued liabilities

 

1,527 

 

 

1,183 



$

4,542 

 

$

3,827 

 



NOTE 4 — LOSS PER SHARE



Basic 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 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 loss per share computations (in thousands except per share data):







 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 



For the Three Months Ended June 30,

 

For the Six Months Ended June 30,



 

2020

 

 

2019

 

 

2020

 

 

2019

Basic loss per common share:

 

 

 

 

 

 

 

 

 

 

 

Net loss

$

(48)

 

$

(6,982)

 

$

(80)

 

$

(8,099)

Basic weighted average shares outstanding

 

12,179 

 

 

12,162 

 

 

12,179 

 

 

12,150 

Basic loss per common share:

$

(0.00)

 

$

(0.57)

 

$

(0.01)

 

$

(0.67)



 

 

 

 

 

 

 

 

 

 

 

Diluted loss per common share:

 

 

 

 

 

 

 

 

 

 

 

Net loss

$

(48)

 

$

(6,982)

 

$

(80)

 

$

(8,099)

Weighted average shares outstanding

 

12,179 

 

 

12,162 

 

 

12,179 

 

 

12,150 

Effect of dilutive securities - options and restricted stock

 

 

 

 

 

 

 

Diluted weighted average shares outstanding

 

12,179 

 

 

12,162 

 

 

12,179 

 

 

12,150 

Diluted loss per common share:

$

(0.00)

 

$

(0.57)

 

$

(0.01)

 

$

(0.67)



Weighted average options to purchase approximately 0.4 million shares, and 0.6 million shares of common stock equivalents

were excluded from the computation of diluted weighted average shares outstanding for the three and six months ended June  30, 2020, and 2019, respectively, because the effect would have been anti-dilutive since their exercise prices were greater than the average market value of our common stock for the period.

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NOTE 5 — STOCK-BASED COMPENSATION



We recognized less than $0.1 million of compensation expense in the condensed consolidated statements of operations, with respect to our stock-based compensation plans for the three months ended June  30, 2020 and 2019, and less than $0.1 million and $0.2 million for the six months ended June 30, 2020 and 2019, respectively.



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