20201231 10K FY
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
☒ Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For fiscal year ended December 31, 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)
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Delaware
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84-1010843
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(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification No.)
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9800 Pyramid Court, Suite 400
Englewood, Colorado
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80112
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(Address of principal executive offices)
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(Zip Code)
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(303) 802-1000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act.
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Title of each class
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Trading Symbol(s)
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Name of each exchange on which registered
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Common Stock, par value $0.001 per share
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EVOL
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Nasdaq Capital Market
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Securities registered under Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ☐ No ☒
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 and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer ☐
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Accelerated filer ☐
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Non-accelerated filer ☒
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Smaller reporting company ☒
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Emerging growth company ☐
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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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The aggregate market value of the Common Stock held by non-affiliates of the registrant, based upon the last sale price of the Common Stock reported on the Nasdaq Capital Market, was $6,038,957 as of June 30, 2020.
The number of shares of Common Stock outstanding was 12,258,184 as of March 15, 2021.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III (Items 10, 11, 12, 13 and 14) is incorporated by reference to portions of the registrant’s definitive proxy statement for the 2021 Annual Meeting of Stockholders, which will be filed with the Securities and Exchange Commission within 120 days after the close of the 2020 year. Except as expressly incorporated by reference, the Proxy Statement shall not be deemed to be a part of this report on Form 10-K.
EVOLVING SYSTEMS, INC.
Annual Report on Form 10-K
For the year ended December 31, 2020
Table of Contents
FORWARD-LOOKING STATEMENTS
Except for the historical information contained in this document, this report contains forward-looking statements that have been made pursuant to the provisions of the Private Securities Litigation Reform Act of 1995, including estimates, projections, statements relating to our business plans, objectives and expected operating results and assumptions. These forward-looking statements generally are identified by the words “believes,” “goals,” “projects,” “expects,” “anticipates,” “estimates,” “intends,” “strategy,” or “plan,” and variations of these words and similar expressions. Forward-looking statements are based on current expectations, estimates, projections and assumptions regarding product, services, and customer support revenue; the expectations associated with our business, our subsidiaries’ operations and our short- and long-term cash needs and are subject to risks and uncertainties which may cause our actual results to differ materially from those discussed here. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the sections entitled “Business,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Risk Factors.” Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date they are made. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.
PART I
ITEM 1. BUSINESS
INTRODUCTION
Evolving Systems provides real-time digital engagement solutions and services to approximately 100 customers in over 60 countries worldwide. Our portfolio features 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.
We have transitioned from traditional software technology licensing, focused on cost savings, to selling business solutions focused on revenue growth and efficiency gains for the carrier. Our business model provides business solutions through customized software and managed services, thus creating recurring revenue relationships and providing opportunity to continually engage with our clients.
We offer real-time, interactive digital engagement solutions and services that drive increases in customer lifetime value for our enterprise clients as follows:
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Acquisition and Activation Solutions that increase new subscriber enrollments through multiple channels and dealer networks, electronically authenticate customer identity and activate complex bundles of traditional telecom services (voice, messaging and data) and value-added network services; |
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Network Services that improve operational efficiency by not only providing complete control of subscriber identification modules (“SIMs”) and their associated resources, but also streamlining and automating the entire SIM ordering and distribution process; |
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Retention and Loyalty Solutions that extend the duration of customer contracts by engaging them with the brand, interacting and rewarding them with personalized offers through loyalty and partner programs; and |
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Analytics and Customer Value Management Solutions that analyze consumer behavior in real-time and enable marketing departments to innovate, create and manage highly-personalized and contextually-relevant interactive campaigns that engage consumers with event-triggered offers that result in higher take-rates and increased customer revenue. |
The combination of these offerings increases customer activations and activity, extends their lifecycle and increases customer spend resulting in increased customer lifetime value.
COMPANY BACKGROUND
Evolving Systems was founded in 1985 to provide software and services to the U.S. telecommunications industry. During our early years we focused on providing solutions that supported number management and number porting. In November 2004, we expanded our product set and geographical reach with the acquisition of Tertio Telecoms Ltd. (“Evolving Systems U.K.”), a supplier of Operations Support Systems (“OSS”) software solutions for service activation and mediation to communication carriers throughout Europe, the Middle East, Africa and Asia. With this acquisition we not only expanded our markets beyond North America, we also added service activation and mediation solutions to our product portfolio. The acquisition significantly expanded our product and service capabilities, allowing us to address a larger portion of our customers’ OSS application needs with a balanced mix of products
as well as services. We focused primarily on the wireless markets in the areas of subscriber activation, SIM card management and activation, self–service mobile applications, data enablement solutions, connected device activation and management of services. Through continued investment in developing the next generation of these products, we maintain our status in these markets and strengthen our client relationships.
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 own platform which we still maintain today. Through the extensive work of our product development team, we have launched the Evolution platform featuring the best of these legacy platforms on cutting edge technology. Evolution is used to operate the most innovative large-scale loyalty programs, as well as 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 provider’s IT infrastructure, either on-premise or on a private cloud. It can be operated or managed as a 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 (“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 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 long-term effects on how we conduct business in the future is still undetermined but we continue to evolve to meet client needs.
INDUSTRY DYNAMICS
The market for digital engagement to increase customer lifetime value is growing. Several key factors are driving carrier demand for next generation solutions, supporting growth for specific products within the sector:
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Growing adoption of the digital channel and changing consumer sentiment, accelerated by the Covid-19 pandemic, has led to growing demand for digital services enabled by telecommunication carriers, not only for end consumers, but also brands, who want to reach specific consumer audiences; |
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Carriers are seeking to further monetize their customer relationships and associated demographic, behavioral, location and contextual information to up-sell their network services and open new channels for optimized and personalized third-party service revenues; |
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Rapid adoption of smart phones and network-attached devices has resulted in increased usage of mobile data; |
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On-going network investment in 5G and Internet of Things (“IoT”) networks is driving increased demand for digital engagement solutions; |
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Carriers are experiencing pricing pressure driven by relatively flat subscriber growth, network upgrade costs, subscriber churn and increased competition from traditional and new market entrants such as Over-the-Top (“OTT”) services both in the developed and emerging markets; and |
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Adoption of the Enterprise Mobility and Machine to Machine (“M2M”) requirements are driving further demand. |
Today, carriers are compelled to offer a growing array of services to deliver personalized and differentiated user experiences, reduce subscriber churn and maintain or grow market share. These value-added services have to be delivered to the market in ever shorter windows as competitive pressure has increased the velocity at which carriers deliver new products and services. To achieve these objectives, operators are increasingly reliant on flexible service enablement solutions that offer a myriad of options for their subscribers.
As network migrations to 5G, IoT and M2M accelerate, the SIM card and embedded SIM (eSIM) have emerged as vital links in the end-to-end value chain. Evolving Systems’ full life cycle management of SIMs and eSIMs from ordering, dynamically activating and managing the SIM card is becoming an important component in the service provider’s infrastructure, both to reduce operating costs associated with the provisioning of SIM cards, as well as to improve the end-user experience. We are a pioneer and
leader in this market and believe we are well-positioned to maintain our leadership role in this growth segment. To date our Subscriber Activation solution has activated over 700 million SIM cards, providing enhanced functionality and significant operator savings.
In a market where consumers perceive their telecom services as a commodity, maintaining or growing customer value and retaining valuable customers is a persistent challenge. Customers are demanding ever greater incentives for their loyalty, attracted by disruptive OTT alternatives and competitive offers on data, airtime, and short message service (“SMS”). This can lead to a spiral of price-driven value destruction unless a truly differentiated approach is used to stand out from the crowd and deliver superior value.
The digital revolution offers unparalleled opportunities to generate new revenue streams, create highly relevant and differentiated offerings, and deliver more engaging customer experiences to the growing universe of connected consumers. But a digital environment requires a whole new way of interacting with consumers in real-time, via multiple channels such as apps, web, email, as well as traditional SMS, in a highly contextual manner. Having a deep understanding of customer preferences and behavior is critical in this digital environment full of demanding customers.
Mobile service is ubiquitous and mobile operators are the digital enablers between consumers and brands, the trusted processors of customer data, uniquely able to bridge the digital and physical world through their technology infrastructure. The mobile industry is going through a transition period. Traditional voice and messaging revenues are in decline due to several factors including the OTT players. Mobile data demand is growing. Service providers are focused on building upon their brand and their “last mile” connectivity to more actively engage their customers and to increase the customer wallet-share through digital and non-digital partnerships.
We help service providers navigate through the digital marketing jungle of fragmented technologies, converging communication channels and managing the data overload through our portfolio of digital engagement solutions. We combine big ideas and a deep understanding of mobile customer behavior with powerful software capabilities and expertise to create digital engagement and loyalty experiences that stand out from the crowd.
We sit at the intersection of technology and marketing. Our solutions leverage mechanics such as digital vouchering, digital badges and in-app engagement to drive a two-sided business model, where we generate value from third party brands as well as retail customers. It is a continuous circle where customers increase spending and extend tenure in return for perceived high value rewards and experiences, which brands provide in order to access a highly targeted mobile customer base.
Connecting brands and consumers, via a digital platform, positions the mobile operator at the center of commerce, content and communication flows in the connected world. Using our solutions, mobile operators have access to accurate data on customer preferences, behaviour and spending. While it is critical to ensure customer opt-in for data use, industry research confirms that consumers will allow a trusted mobile operator to use their information in return for highly relevant and attractive incentives.
DIGITAL ENGAGEMENT SOLUTIONS PORTFOLIO
Acquisition and Activation
Our Subscriber Acquisition and Activation solutions support carriers in adding new subscribers to their network, beginning with the sales and contract process through the allocation of network and service resources and the activation of services to the mobile device.
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Smart Dealer provides SIM retailers with a tool set that enables them to sell SIM cards efficiently and effectively. With Smart Dealer, the operator is able to communicate and guide dealers towards using the latest promotions, enabling instant reactions to competitor activities. Smart Dealer captures subscriber details for “Know Your Customer” prepaid registration, including biometric data, using standard, low cost devices. |
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Dynamic SIM AllocationTM is a SIM/eSIM activation solution which is integrated into the carrier’s signaling network, enabling new SIM cards or eSIMs that have not been pre-provisioned to be detected on first use in consumer and IoT markets. This triggers an efficient, dynamic provisioning process and eliminates the need for pre-provisioning, thus lowering the operator’s costs of subscriber acquisition and eSIM bootstrapping. The SIM/eSIM activation occurs only when a SIM/eSIM card is first used. During the activation process, the solution enables an on-device interaction with the end-user, delivering a differentiated user-experience, reducing customer churn and boosting revenue for the carrier. |
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Tertio® Service Activation is used by carriers to activate a new subscriber or to add a new service to an existing subscriber. Our solution provides a flexible operating environment for carriers to manage their voice, data, and content service needs for both their traditional and broadband IP networks. It provides a point of flexibility in the carrier’s OSS/ Business Support System (“BSS”) architecture, allowing fast introduction of new network technologies and easing the
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burden of integration with existing devices and systems. Service providers who use our Tertio solution can better plan, manage and execute the introduction of new services. |
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Number Inventory and Management is a scalable and fully automated solution that enables operators to reliably and efficiently manage their telephone numbers (i.e. eSIMs and eSIM profiles, SIMs, MSISDNs, IMSIs, Integrated Circuit Card Identifiers (“ICCIDs”) as well as other communication identifiers such as Uniform Resource Locators (“URLs”) and email addresses. Our solution focuses on the automation of all number resource management processes, allowing operators to adhere to regulatory requirements and effectively manage the lifecycle of telephone numbers, as well as benefit from time savings and reduced costs. |
Customer Analytics and Value Management
Our Customer Analytics and Value Management solutions empower marketing departments to create and deploy highly personalized, location and contextually relevant, interactive customer engagement campaigns. Evolution, launched in 2019, is the next-generation customer engagement software platform from Evolving Systems that is designed specifically to power enterprise-grade loyalty rewards and personalized customer value management (“CVM”) offer and campaign programs using a variety of real-time gamified digital engagement strategies & tactics for telecommunications operators. It can be delivered as a software-as-a-service (“SaaS”) model, cloud-hosted solution or on client premises depending on the requirements of the carrier.
With a modern user interface, Evolution provides CVM, Loyalty and Marketing professionals with the features needed to rapidly configure, schedule, launch, automate execution of, as well as measure the results of, a portfolio of micro-targeted campaign workflows amidst a continuously updating real-time customer profile. Evolution has been optimally architected using latest available open-source technologies for high performance and scalability. It is based on a flexible deployment framework such that it can be integrated into any Business Support Systems environment. It can be set-up to ingest customer data from multiple sources and in a variety of formats, to provision a variety of fulfilment actions using an application programming interface (“API”) or file-based provisioning methods, and it can be connected to multiple available, push & pull, communication and digital display channels.
Compared with many other cross-channel marketing campaign management systems, our solution more accurately targets marketing messages and campaigns that drive incremental revenue more quickly.
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The Profiling Engine supports static as well as ongoing dynamic profiling of subscribers. It fully supports any real-time or micro segmentation requirements as needed by the business. The Profiling Engine is a rules-driven flexible aggregator of subscriber baseline and usage data. It has been designed to handle any data model, including any data representation that may be available within the carrier’s legacy billing and Customer Relationship Management (“CRM”) environment. |
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The Campaign Engine is used to configure and deliver marketing campaigns and offers to subscribers. It includes a business-friendly dashboard that enables rapid configuration, testing and launching of new business campaigns. Through the dashboard the business user can target specific subscribers, define offers and rewards, and create personalized messages per campaign, interaction and subscriber. The dashboard provides a real-time view on each campaign’s effectiveness and impact. |
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Campaign Workflow & Journey Manager provides predefined templates for specific types of real-time digital marketing tactics, including marketing for data bundles, digital services such as music, video, movies, gaming, entertainment, and mobile money as well as non-digital services including retail offers. The Journey Manager enables visual creation of customer Journeys that marry together programs, campaigns and offers into a variety of business processes such as when and how a customer enters a campaign, registers for a program, or moves through a variety of outbound or inbound campaigns with automated decisioning along a multi-step path initiated by behavioral triggers. |
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Real-time Prediction & Machine Learning Module enables churn, usage and revenue predictions based on historical customer data ingested and stored in the platform, enhanced with third party data where available. The predictions and scoring use tailor-made models built using a combination of specialized software such as SAS/R or SPSS, or by using cloud native machine learning function relying on classifiers, Naïve Bayes models and a set of other Machine Learning (“ML”) algorithms with self-learning functions. These scoring models for stored for each customer segment and each sub-profile in the platform. |
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Social Media Integration enables carriers to expand their engagement with subscribers beyond simple network usage and direct channels and can support social marketing campaigns that leverage the subscribers as a part of the marketing network. |
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App Promotion engages subscribers when they are first configuring new services or when they are upgrading to mobile devices with new capabilities. It enables carriers to promote the use of their own mobile applications for subscriber care, and also those of third-party app publishers, opening possibilities for new revenue streams. |
Customer Retention and Loyalty
Our Customer Retention and Loyalty solutions help reduce churn, extend the customer lifecycle and generate more revenue from existing subscribers by using the latest innovative programs. Strong subscriber loyalty is created by rewarding subscribers via programs that offer additional carrier services or the services and products of participating partners.
Our hybrid approach of platform and services that enable customer monetisation and retention with a single platform has been highly effective in securing upgrades and new customers. A key reason for this success is our track record of building innovative and highly differentiated Loyalty & Digital Engagement programs for our clients. Some of the examples of digital engagement concepts we have created include the first digital badges concept in the telecom sector with Orange, the largest and most successful film vouchering programs with Orange, & Everything Everywhere, innovative Recharge & Instant Win mechanics in prepaid markets, and two of the most successful loyalty programs in the tough African market. Over the past 12 months, we have made strong in-roads in the Asia-Pacific Region, having launched a unique coalition loyalty program and multiple gamified engagement initiatives. These concepts were designed with specific mechanics that work within the local market in conjunction with brand partners. They are successful solutions which endure, because of key ingredients such as simple customer journeys, perceived high value rewards and innovative engagement mechanics in conjunction with strategic brand partnerships.
The key modules include:
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Loyalty Points and Programs are used to reward mobile subscribers for use of the carrier’s services. Credit is earned in the forms of status points and bonus points. Gamification can be used to encourage the collection of rewards by subscribers and comparison with others in their social group. Loyalty credit is then exchanged for services or discounts from the carrier, or for digital and physical goods from third party businesses and retail partners. |
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Coupon, Voucher and Badges Management covers the whole lifecycle of coupons, vouchers and badges as a medium for delivering rewards. The solution manages the interface with partners, the delivery of coupons to subscribers, redemption for digital or physical goods, and settlement between carrier and partner. |
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Product and Supplier Catalogue used to create new third party merchant partner profiles, their products, and voucher/coupon codes that are made available for redemption in promotion offer or loyalty programs. |
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Digital Engagement Engine includes several solution components: |
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Proprietary framework for engagement concept design and partner selection; |
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Flexible business rules to define tiers to earn, burn or transfer credits; |
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Multi-variable definition to calculate loyalty, including spend, tenure, social advocacy, brand engagement and digital maturity; |
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Intelligent predictive analytics engine and segmentation capability; |
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Channel agnostic redemption capability with standard partner APIs to connect into point of sale retail systems and other redemption networks; and, |
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Tier 1 carrier grade data capture and configurable provisioning engine. |
Marketing Advisory Services
Evolving Systems has a team of global marketing consultants with an average of 10+ years of experience in customer value management, digital marketing and loyalty, who are responsible for conceptualizing, designing and optimizing our customer engagements. A key differentiator in the market, our team has a deep understanding of marketing concepts can be deployed in conjunction with our proprietary technology. Our team of consultants and analysts use a data-driven approach to deliver measurable results across our programs. We use a five-stage proprietary framework to assist our clients’ marketing departments in growing their customer base and engaging and retaining their valuable customers:
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Engage: We design engagement plans that map against specific segments based on ‘propensity to participate’ and lifetime value indicators; |
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Interact: We design the push and real-time trigger-based interactions with customers to attract them into the program and keep them engaged; |
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Reward: We define a broad range of trigger events and a variety of engagement mechanics (points, badges, instant wins and vouchers); |
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Redeem: We work with partners to stitch together a redemption network online and offline, so customers have highly relevant, branded rewards (a key source of differentiation and program longevity) from which to choose; and |
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Optimise/Learn: We use program data, overlay program results from our global customer base, and apply an iterative process to reach the right customers with meaningful incentives. |
MANAGED SERVICES (EXPERT IT SERVICES)
We deliver our managed services both on-site at a carrier’s facilities or remotely. Services range from operational support of our software solutions, technical services to expand those solutions with new modules and functionality to support new business value, marketing and customer engagement consultancy that directly drives marketing campaigns for our customers and helps them achieve their business objectives. The managed services teams also offer their expertise and experience to create the maximum financial impact to the carrier from using our solutions.
Our experienced IT services team provides expert consulting services for the customization, integration and deployment of our solutions. Our services cover all aspects of the project lifecycle, including system architecture, design, software development and customization, system integration, testing, live deployment and production support, program and project level management, post-implementation maintenance and domain and product expertise.
Our teams work closely with customers and integration partners and have established long-term relationships with operators in the Americas, Europe, the Middle East, Africa and Asia-Pacific regions.
PRODUCT DEVELOPMENT
We develop most of our products and services internally in our innovation labs in France, Romania and India. Internal development allows us to maintain competitive advantages that come from product differentiation and closer technical control over our products and services. It also allows us to decide which modifications and enhancements are most important and when they should be implemented. Generally, we also create product documentation internally. We conduct research to identify specific industry and client business needs as well as market requirements and we use that information to determine our investment in product development. We evaluate the market for new products, and we leverage our existing product capabilities with enhancements of existing products. We build investment plans for our principal product areas and we make other investments in tools and product extensions to accelerate the development, implementation and integration process for customer solutions.
We also continue to invest in our Evolution platform. The Evolution platform provides a powerful environment to configure and operate rich customer lifecycle journeys from acquisition to retention through a variety of engagement models, offer and loyalty programs. Primarily designed to address integrated mobile digital engagement needs it can accommodate any type of customer and any type of use case.
The Evolution platform has been the main research and development focus over the past year and will continue as we invest in improving the analytics and predictive capabilities of the platform, expand the scope of the digital engagement mechanics with a broad set of APIs to easily integrate with partner ecosystems of our carrier customers and continue enhancing performance. The product roadmap represents a number of areas highlighted by our clients as well as trends in the market which point towards digital engagement and loyalty as a focus for carriers, as they expand their digital services offerings, identify and retain key customers, and become an enabler for enterprises who want to access their customers.
SALES AND MARKETING
Our sales force is based around the globe and structured to focus on specific geographical territories around the world including the Americas, Europe, Middle East, Africa, the Commonwealth of Independent States (comprised of Russia and other former Soviet Republics), South Asia and Asia Pacific. Our sales activities cover direct sales to enterprise customers as well as sales through partners and resellers. Partners include Ericsson, Gemalto and Idemia who include our products as part of their wider solution offerings and systems integrators such as IBM, Amdocs and Atos, who license our technology to customers as part of their delivery engagements. The resellers include regional or country specific companies that manage our customer relationships in countries where English is not the primary language.
Our solutions and our customers’ infrastructures are complex and require a high degree of consultative selling which often results in a long sales cycle in excess of twelve months. In addition, our business relies on incremental revenue from existing customers, which requires regular interaction with customers to discuss enhancements to our existing solutions as well as the introduction of new features and functionality. The sales team is also responsible for making proactive proposals to prospects, as well as managing and delivering responses to competitive tenders. This complex, highly interactive approach, typically results in a long sales cycle, requiring us to invest a considerable amount of time developing business opportunities without guaranteed sales.
Our marketing organization supports our sales activities by identifying markets for our products and establishing an awareness of our offerings in those markets through a combination of direct marketing, web marketing, and when possible
participation in shows, conferences, and industry bodies. The marketing organization is responsible for maintaining our web site and creating electronic and print-based sales collateral to support our sales activities and lead generation.
COMPETITION
The market for telecommunications OSS products and mobile analytics and advertising is highly competitive and subject to rapid technological change, changing industry standards, regulatory developments and consolidation. We face increasing demand for improved product performance, enhanced functionality, rapid integration capabilities, all in the context of continuing pricing pressure. Our existing and potential competitors include many large domestic and international companies that often have substantially greater financial, technological, marketing, distribution and other resources, larger installed customer bases and longer-standing relationships with telecommunications customers. The market for telecommunications OSS software and services is extremely large and we currently hold only a small portion of total market share. Nonetheless, we believe our work in subscriber acquisition and activation and digital engagement customer value management, retention and loyalty has resulted in our achieving a measurable and reasonable market share in those areas.
Our principal competitors for subscriber acquisition and activation are vendors such as Nokia, Amdocs and Huawei, as well as billing vendors and other vendors such as Ericsson, 6D, HP and a few other smaller regional competitors. Competitors for digital engagement customer value management, retention and loyalty, include specialist vendors such as Pontis (acquired by Amdocs), CRM software from vendors such as Amdocs Limited, Analytics software from vendors like SAS and a few independent software companies like FlyTxt and Pelatro.
For all of our products, our ability to compete successfully depends on a wide range of factors. First and foremost is our ability to deliver both marketing services and expert services based on our solutions platform, which offers a cost-effective way for our customers to benefit from our many years of experience and product investment. We deliver value by offering competitively priced quality solutions, tailored specifically to our customers’ network and IT infra-structure. After a customer implements our products, we often receive subsequent orders for enhancements to add functionality or increase capacity. Complex solutions tailored to customers’ needs are expensive and time consuming to replace, thus providing us with an incumbent advantage. Furthermore, many of our customer relationships span five years or more. We believe all of these factors give us a competitive advantage and can be a barrier to entry for potential competitors.
SIGNIFICANT CUSTOMERS
For the year ended December 31, 2020, we did not have a significant customer (defined as contributing at least 10%). For the year ended December 31, 2019, one significant customer accounted for 11% of revenue from operations. This customer is a large telecommunications operator in Europe.
INTELLECTUAL PROPERTY
We rely on a combination of patents, copyright, trademark and trade secret laws, as well as confidentiality agreements and licensing arrangements, to establish and protect our proprietary rights. We have 9 patents in the U.S. on elements of our Dynamic SIM Allocation TM (“DSA”) and mobile broadband enablement products and patents pending in other countries on elements of our DSA and other products.
EMPLOYEES
As of December 31, 2020, we employed 277 people including 11 in the United States, 111 in the United Kingdom and European Union, 150 in India and 5 in South Africa. Of our worldwide staff, 78% are involved in product delivery, development, support and professional services, 8% in sales and marketing, and 14% in general administration. The number and mix of our staff has remained stable, however changes may occur in the coming year related to changes in the business and our market strategies. We also engage with multiple contractors in various countries to allow us to service our global clients.
ITEM 1A. RISK FACTORS
You should carefully consider the following risk factors, as well as the other information in this report, before deciding whether to purchase, hold or sell shares of our common stock. The occurrence of any of the following risks could harm our business, financial condition, results of operations and/or growth prospects or cause our actual results to differ materially from those contained in forward-looking statements we have made in this report and those we may make from time to time. You should consider all of the factors described in this section as well as those discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes when evaluating our business. If any of the following risks actually occurs, our business, financial condition, results of operations and future growth prospects would likely be materially and adversely affected. In these circumstances, the market price of our common stock would likely decline, and you may lose all or part of your investments. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may impair our business operations.
Risks Related to Our Business and Industry
We operate a global business that exposes us to currency, economic, regulatory and tax risks.
Our revenue comes primarily from sales outside the U.S. and our growth strategy is largely focused on emerging markets. Our success delivering solutions and competing in international markets is subject to our ability to manage various risks and difficulties, including, but not limited to:
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our ability to effectively staff, provide technical support and manage operations in multiple countries; |
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fluctuations in currency exchange rates; |
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timely collection of accounts receivable from customers and resellers located outside of the U.S.; |
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our ability to repatriate cash from foreign locations and manage potential adverse tax consequences in connection with repatriating funds; |
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trade restrictions, political instability, disruptions in financial markets, and deterioration of economic conditions; |
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compliance with the U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act and other anti-bribery laws and regulations; |
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variations and changes in laws applicable to our operations in different jurisdictions, including enforceability of intellectual property and contract rights; and, |
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compliance with export regulations, tariffs and other regulatory barriers. |
Approximately 46% of our revenue is transacted in currencies other than the U.S. dollar (e.g. British Pound Sterling, Swiss Franc and Euro). As a result, when the U.S. dollar strengthens, our revenue, when converted to U.S. dollars, is reduced. At the same time, approximately 68% of our operating expenses are incurred overseas. The strengthening dollar, conversely, lowers expenses outside of the U.S. Although this has provided some defense against currency fluctuations for our bottom-line results, we may not be able to maintain this ratio of revenue to expense in the future. In addition, we may not be able to repatriate cash without incurring substantial risks involving floating currency exchange rates, or to recover or apply withholding taxes remitted to foreign governments.
There is additionally considerable uncertainty about the economic and regulatory effects of the United Kingdom’s exit from the European Union (commonly referred to as “Brexit”), as discussed further in “Our performance may be adversely affected by economic and political conditions in the United Kingdom where we do business” below. The UK is one of our largest markets in Europe, but we also presently provide services to UK customers from EU countries and services to customers in EU countries from the UK. Brexit may result in greater regulatory complexity surrounding the services we provide to our UK or EU customers and financial results could be negatively impacted.
Any of the foregoing factors may have a material adverse impact on our business, financial condition and results of operations. We conduct business globally and, as a result, Evolving Systems, Inc. or one or more of our subsidiaries file income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. Throughout the world, in the normal course of business, we are subject to examination by taxing authorities up until, two years in the U.K. and Europe and four years in India, following the end of the accounting period. As of the date of this report, two of our income tax returns in India are under review for a hearing for potential refunds and we do not expect the results of the examination will have a material effect on our financial statements.
We face intense competition for our products and services, which may lead to lower revenue or operating margins.
Our competitors range in size from diversified global companies with significant research and development resources to small, specialized firms. Many of the areas in which we compete evolve rapidly with changing and disruptive technologies, shifting user needs, and frequent introductions of new products and services. Our ability to remain competitive depends on our success in making innovative products, devices, and services that appeal to businesses and their customers.
Our revenue, earnings and profitability are affected by the length of our sales cycle, and a longer sales cycle could adversely affect our results of operations and financial condition.
Our business is impacted by the length of our sales cycles. Our customers have relatively complex businesses and the purchase of large communications solutions used for enterprise-wide, mission-critical purposes, involve significant capital expenditures and lengthy implementation plans. Prospective customers often take a long period of time to evaluate our products and services and require us to spend substantial time, effort and money educating them about our solutions. The purchase of the types of products and services we offer typically also requires coordination and agreement across many departments within a customer’s organization. This process often results in a lengthy sales cycle, typically ranging between three and twelve months. Mergers and acquisitions of large communications companies, as well as the formation of new alliances, have also resulted in purchasing delays. Further lengthening of our sales cycle could hinder growth in our revenue and result in increased cost of sales, thereby reducing our profitability.
We depend on a limited number of significant customers for a substantial portion of our revenue, and the loss of one or more of these customers, or a delay in a large order, could adversely affect our business.
We earn a significant portion of our revenue from a small number of customers in the communications industry. The loss of any significant customer, delays in delivery or acceptance of any of our products by a customer, delays in performing services for a customer, or delays in collection of customer receivables could harm our business and operating results to a greater degree than other companies with a broader customer base.
Customers’ budgetary constraints and internal acceptance reviews may cause potential clients to delay or forego a purchase, making it difficult for us to forecast the timing and size of our contracts. In addition, our sales opportunities in any given quarter and year typically include a few high value opportunities. The delay or failure to close one or more large orders could have a material adverse effect on our results of operations and financial condition and cause our results to vary significantly from quarter to quarter and year to year.
Our managed services offerings and our cloud strategy, or Software as a Service (“SaaS”), may not be successful.
We offer some of our products as a managed service or a SaaS implementation and we intend to offer more of our solutions in this manner in the future. Even as we transition more of our business software-as-a-service business model and managed services, the license-based proprietary software model generates a substantial portion of our software revenue. While we believe the demand for managed services and cloud-based solutions is strong, there are no guarantees that we will be able to compete effectively, generate significant revenues or maintain profitability. Whether we are successful in providing our solutions as managed services or solutions as cloud solutions depends on our execution in a number of areas, including continuing to innovate and bring to market compelling managed services and cloud-based offerings and ensuring that our services meet the reliability expectations of our customers and maintain the security of customer data. Our managed and cloud-based services strategies also may fail to achieve success if other companies offering managed services and cloud-based solutions experience data loss, security breaches or service reliability issues that cause consumers to become less willing to accept managed services and cloud-based solutions in general.
Our products are complex and have a lengthy implementation process; unanticipated difficulties or delays in obtaining customer acceptance could result in higher costs and delayed payments.
Implementing our solutions can be a relatively complex and lengthy process since we typically customize these solutions for each customer’s unique environment. Often our customers also require rapid deployment of our software solutions, resulting in pressure on us to meet demanding delivery and implementation schedules. Inability to meet these demanding schedules, or quality issues resulting from accelerated delivery schedules, may result in customer dissatisfaction and/or damage our reputation, which could materially harm our business.
The majority of our existing contracts provide for acceptance testing by the customer, which can be a lengthy process. Unanticipated difficulties or delays in the customer acceptance process could result in higher costs, delayed payments, and deferral of revenue recognition. In addition, if our software contains defects or we otherwise fail to satisfy acceptance criteria within prescribed
times, the customer may be entitled to liquidated damages, to cancel its contract and receive a refund of all or a portion of amounts paid or to seek other monetary damages. These could exceed related contract revenue and result in a future charge to earnings. Any failure or delay in achieving final acceptance of our software and services could harm our business, financial condition, results of operations and cash flows.
The success of our business depends on continued growth in the wireless services industry and demand for connected devices, and other usage of mobile data.
Our primary market, wireless telecommunications, is fairly mature and saturated, which may result in lower budgets and margins for our solutions and services. The future success of our business depends upon continued new subscriber growth, consumer adoption of new types of connected devices like IoT and consequently mobile operator demand for next generation software solutions and services. If there is a slowdown in subscriber growth in the wireless services industry or the demand for connected devices and usage of mobile data were to stabilize or decline, our business and results of operations may be adversely affected.
The success of our business also depends on our ability to renew our support and managed services offerings. The quality of our support and managed services offerings is important to our customers. If we fail to meet our service level obligations under our agreements, we could incur penalties and could lose customers.
Providing a high level of support for our solutions is critical to our business. Our customers expect us to resolve issues relating to the use of our solutions and if we are unable to meet or exceed the expectations of our customers, we could experience loss of customers and difficulty attracting new customers. In addition, we have service level agreements with many of our customers under which we guarantee specified levels of service availability and service credits for failing to achieve our agreed service levels, which could result in higher than expected costs, decreased revenues and decreased operating margins. Any of the above results would likely have a material adverse impact on our business, revenue, results of operations, financial condition and reputation.
The markets for our service activation and number management products are mature and the markets for our next generation loyalty and customer lifecycle management software and services are evolving. The industry in which we compete is subject to rapid technological change and if we do not adapt to rapid technological change, we could lose customers or market share.
Our industry is characterized by rapid technological change, evolving industry standards, changes in carrier requirements and preferences and frequent new service offerings. The introduction of products that incorporate new technologies and the emergence of new industry standards can make existing products obsolete and unmarketable. To compete successfully, we must continue to design, develop and sell new products and enhancements to existing products that provide higher levels of performance and reliability, take advantage of technological advancements and changes in industry standards and respond to new customer requirements. Developing new products and services is complex and time-consuming and investment in new technologies is speculative. It can require long development and testing periods. Significant delays in new releases or significant problems in creating new products or services could adversely affect our revenue. If customers do not perceive our latest offerings as providing significant new functionality or other value, they may reduce their purchases of new offerings or upgrades, unfavorably affecting revenue. We may not achieve significant revenue from new products and services for several years, if at all. New products and services may not be profitable, and even if they are profitable, operating margins for some new products and businesses will not be as high as the margins we have experienced historically.
Consolidation in the communications industry may impact our financial performance.
The global communications industry has experienced and continues to experience significant consolidation. These consolidations have caused us to lose customers and may result in fewer potential customers. In addition, combining companies often re-evaluate their solutions and their capital expenditures, choosing to consolidate with one solution; there is no guarantee our solution will be selected in this process. As our customers become larger, they generally have longer sales cycles and stronger purchasing power, which can result in delays in securing contracts and pressure to reduce our prices. All of these factors can have a negative impact on our financial performance, particularly in any fiscal quarter.
Many of our products and services are sold on a fixed-price basis. If we incur budget overruns this may reduce our profitability.
A large portion of our revenue currently is, and historically has been, derived from fixed-price contracts and we expect this will continue. These contracts specify certain obligations and deliverables we must meet regardless of the actual costs we incur. Projects done on a fixed-price basis are subject to budget overruns. On occasion, we have experienced budget overruns, resulting in
lower than anticipated margins. We may incur similar budget overruns in the future, including overruns that result in losses on these contracts. If we incur budget overruns, our margins may be harmed, thereby affecting our overall profitability.
The communications industry is highly competitive and if our products do not satisfy customer demand for performance or price, our customers could purchase products and services from our competitors.
Our primary markets are intensely competitive, and we face continuous demand to release new products, new features and product enhancements, to improve product performance and to reduce prices. Our competitors include many large domestic and international companies who have substantially greater resources, larger installed customer bases and longer-standing relationships with customers. In addition, some companies who would not typically compete with us, such as network equipment manufacturers, offer next generation solutions that address some of the benefits provided by our solutions.
Our customers are not precluded from competing with us and also may offer competitive products or services. Many telecommunications companies have large internal development organizations, which develop software solutions and provide services similar to the products and services we provide.
We believe that our ability to compete successfully depends on numerous factors, including the quality and price of our products and services compared to those of our competitors, the emergence of new industry standards and technical innovations and our ability to respond to those changes. Some of these factors are within our control, and others are not. A variety of potential actions by our competitors, including price reductions or increased marketing and promotion, accelerated introduction of new or enhanced products, or cooperative relationships among competitors and their strategic partners, could negatively impact the sale of our products and services. We may have to reduce the prices we charge for our products and services, resulting in lower revenue and operating margins. We may not be able to compete successfully or to properly identify and address the demands of new markets. This is particularly true in new markets where standards are not yet established. Our failure to adapt to emerging market demands, respond to regulatory and technological changes or compete successfully with existing and new competitors would materially harm our business, financial condition, results of operations and cash flows.
Our solutions are complex and may have errors that are not detected until deployment. Resolving warranty and product liability claims could be expensive and could negatively affect our reputation and profitability.
The provisions of our agreements with customers are designed to limit our exposure to potential liability for damages arising out of the use of, or defects in, our products. We cannot guarantee that these limitations will be effective. Although we carry errors and omissions insurance, to the extent that any successful product liability claim is not covered by our errors and omissions insurance or exceeds the coverage under our policy, we may be required to incur legal fees and pay for a claim. This could be expensive, particularly since our software solutions may be used in critical business applications. On occasion, we also engage subcontractors to provide deliverables under customer contracts; we could be required to indemnify customers for work performed by our subcontractors. We may not be able to recover these damages from a subcontractor. Defending against a product liability claim, regardless of its merits, could be expensive and require the time and attention of key management personnel, either of which could materially harm our business, financial condition and results of operations. In addition, our business reputation could be harmed by product liability claims, regardless of their merit or the eventual outcome of these claims.
We have completed a number of acquisitions in support of our strategy based on recurring managed services. Acquisitions present many risks and we cannot guarantee that we will realize the financial and strategic goals that were contemplated at the time of a transaction.
We have in prior years entered into acquisitions that we believe have accelerated and will continue to accelerate our pivot to the customer acquisition and customer value management domains. We expect to continue making acquisitions or entering into strategic alliances as part of our long-term business strategy. We cannot be sure that these transactions will ultimately enhance our products or strengthen our competitive position. These transactions involve significant challenges and risks: they may not advance our business strategy, we may not get a satisfactory return on our investment, we may have difficulty integrating operations, new technologies, products and employees, and they may distract management and employees from our other businesses. The success of these transactions will depend in part on our ability to leverage them to enhance our existing products and services or develop compelling new ones. It may take longer than expected to realize the full benefits from these transactions, such as increased revenue, enhanced efficiencies, or increased market share, or the benefits may ultimately be smaller than we expected.
Furthermore, we may fail to identify or assess the magnitude of certain liabilities, shortcomings or other circumstances prior to acquiring a company or technology, which could result in regulatory exposure, unfavorable accounting treatment, unexpected increases in taxes due, a loss of anticipated tax benefits or other adverse effects on our business, operating results or financial condition. In addition, future acquisitions could result in dilutive issuances of equity securities, impact employee stock options, reduce
our cash available for operations and increase our debt. All of these factors associated with acquisitions could result in unexpected litigation from employees and stockholders. The occurrence of any of these risks could have a material adverse effect on our business, results of operations, financial condition or cash flows, particularly in the case of a large acquisition or several concurrent acquisitions.
If our software products contain serious errors or defects, then we may lose revenue and market acceptance and may incur costs to defend or settle claims.
Complex software developments such as ours often contain errors or defects, particularly when first introduced or when new versions or enhancements are released. Despite internal testing and testing by our customers, our current and future products may contain serious defects, which could result in lost revenue, lost customers, slower growth or a delay in market acceptance.
Since our customers use our products for critical business applications, such as online video, errors, defects or other performance problems could result in damage to our customers. They could seek significant compensation from us for the losses they suffer. Although our customer agreements typically contain provisions designed to limit our exposure to claims, existing or future laws or unfavorable judicial decisions could negate these limitations. Even if not successful, a claim brought against us would likely be time-consuming and costly and could seriously damage our reputation in the marketplace, making it harder for us to sell our products.
Risks Related to Intellectual Property
Our measures to protect our intellectual property may not be adequate.
Our success and ability to compete are dependent to a significant degree on our proprietary technology. Protecting our global intellectual property rights is difficult. We rely on a combination of patent, copyright, trademark and trade secret laws, as well as confidentiality agreements and licensing arrangements, to establish and protect our proprietary rights. We have 9 patents in the U.S. on elements of our DSA and mobile broadband enablement products and patents pending in other countries on elements of our DSA and Intelligent M2M Controller™ (“IMC”) products. In addition, we have registered or filed for registration of certain of our trademarks. Our patent portfolio is relatively small and given the cost of obtaining additional patent protection, we may choose not to patent certain inventions that later become important. There is also the possibility that our means of protecting our proprietary rights may not be adequate; a third party may copy or otherwise obtain and use our products or technology without authorization or may develop similar technology independently or design around our patents. In addition, the laws of some foreign countries may not adequately protect our proprietary rights.
Source code, the detailed program commands for our software programs, is critical to our business. While we take steps to limit access to our source code and to protect it as a trade secret, we may not be able to protect our source code from copying if there is an unauthorized disclosure. Trade secret protection for that source code could be jeopardized, making it easier for third parties to develop competing products.
If our intellectual property protection proves inadequate, we may lose our competitive advantage and our future financial results may suffer.
Third parties may claim we are infringing their intellectual property rights, or that we have not complied with their license requirements and we may incur significant expenses in resolving these claims.
It is possible that our business activities may infringe upon the proprietary rights of others, or that other parties may assert infringement claims against us. Those claims may involve patent holding companies or other adverse patent owners who have no relevant product revenue of their own, and against whom our own patents may provide little or no deterrence. We could incur substantial costs in defending against any infringement claim and we could be required to develop non-infringing technology, obtain licenses, or cease selling the applications that contain the infringing intellectual property. Adverse publicity related to any intellectual property litigation also could harm the sale of our products and damage our competitive position.
Certain software we develop, or use, may include so called “open source” software made available under a license which may impose obligations on us in the event we distribute derivative works based on the open source software. Certain licenses impose obligations that could require us to make source code for a derivative work available to the public or license the derivative work under a particular type of open source software license, rather than the license terms we customarily use to protect our software.
There is little or no legal precedent for interpreting the terms of certain of these open source licenses, including the terms addressing the extent to which software incorporating open source software may be considered a derivative work subject to these licenses. We believe we have complied with our obligations under the various applicable open source licenses. However, if the owner
of any open source software were to successfully establish that we had not complied with the terms of an open source license for a particular product that includes such open source software, we may be forced to release the source code for that derivative work to the public or cease distribution of that work.
Confidentiality agreements with employees and others may not adequately prevent disclosure of trade secrets and other proprietary information.
We have devoted substantial resources to the development of our technology, business operations and business plans. In order to protect our trade secrets and proprietary information, we rely in significant part on confidentiality agreements with our employees, licensees, independent contractors, advisers and customers. These agreements may not be effective to prevent disclosure of confidential information, including trade secrets, and may not provide an adequate remedy in the event of unauthorized disclosure of confidential information. In addition, others may independently discover trade secrets and proprietary information, and in such cases we would not be able to assert trade secret rights against such parties. To the extent that our employees and others with whom we do business use intellectual property owned by others in their work for us, disputes may arise as to the rights in related or resulting know-how and inventions. Laws regarding trade secret rights in certain markets in which we operate may afford little or no protection to our trade secrets. The loss of trade secret protection could make it easier for third parties to compete with our products by copying functionality. In addition, any changes in, or unexpected interpretations of, the trade secret and other intellectual property laws in any country in which we operate may compromise our ability to enforce our trade secret and intellectual property rights. Costly and time-consuming litigation could be necessary to enforce and determine the scope of our proprietary rights, and failure to obtain or maintain trade secret protection could adversely affect our competitive business position.
Because of the expense and uncertainty of litigation, we may not be in a position to enforce our intellectual property rights against third parties.
Because of the expense and uncertainty of litigation, we may conclude that even if a third party is infringing our issued patents, any patents that may be issued as a result of our pending or future patent applications or other intellectual property rights, the risk-adjusted cost of bringing and enforcing such a claim or action may be too high or not in the best interest of our company or our stockholders. In such cases, we may decide that the more prudent course of action is to simply monitor the situation or initiate or seek some other non-litigious action or solution.
We may not be able to protect our intellectual property rights throughout the world.
Filing, prosecuting and defending all current and future patents in all countries throughout the world would be prohibitively expensive, and our intellectual property rights in some countries outside the United States can be less extensive than those in the United States. In addition, the laws of some foreign countries do not protect intellectual property rights to the same extent as federal and state laws in the United States. Consequently, we may not be able to prevent third parties from practicing our inventions in all countries outside the United States, or from selling or importing products made using our inventions in and into the United States or other jurisdictions. Competitors may use our technologies in jurisdictions where we have not obtained patent protection to develop their own products and, further, may export otherwise infringing products to territories where we have patent protection but enforcement is not as strong as that in the United States. These products may compete with our products, and our patents or other intellectual property rights may not be effective or sufficient to prevent them from competing.
The legal systems of many foreign countries do not favor the enforcement of patents and other intellectual property protection, which could make it difficult for us to stop the infringement of our patents or marketing of competing products in violation of our proprietary rights. For example, some foreign countries have compulsory licensing laws under which a patent owner must grant licenses to third parties. In addition, some countries limit the enforceability of patents against third parties, including government agencies or government contractors. In these countries, patents may provide limited or no benefit. Proceedings to enforce our patent rights in foreign jurisdictions could result in substantial costs and divert our efforts and attention from other aspects of our business, could put our patents at risk of being invalidated or interpreted narrowly and our patent applications at risk of not issuing and could provoke third parties to assert claims against us. We may not prevail in any lawsuits that we initiate, and the damages or other remedies awarded, if any, may not be commercially meaningful. Accordingly, our efforts to enforce our intellectual property rights around the world may be inadequate to obtain a significant commercial advantage from the intellectual property that we develop or license.
We may rely on trade secret and proprietary know-how which can be difficult to trace and enforce and, if we are unable to protect the confidentiality of our trade secrets, our business and competitive position would be harmed.
In addition to seeking patents for some of our technology and products, we may also rely on trade secrets, including unpatented know-how, technology and other proprietary information, to maintain our competitive position with respect to our research programs and products. Elements of our products, including processes for their preparation and manufacture, may involve proprietary
know-how, information, or technology that is not covered by patents, and thus for these aspects we may consider trade secrets and know-how to be our primary intellectual property. Any disclosure, either intentional or unintentional, by our employees, the employees of third parties with whom we share our facilities or third party consultants and vendors that we engage to perform research or manufacturing activities, or misappropriation by third parties (such as through a cybersecurity breach) of our trade secrets or proprietary information could enable competitors to duplicate or surpass our technological achievements, thus eroding our competitive position in our market.
Trade secrets and know-how can be difficult to protect. We require our employees to enter into written employment agreements containing provisions of confidentiality and obligations to assign to us any inventions generated in the course of their employment. We further seek to protect our potential trade secrets, proprietary know-how, and information in part, by entering into non-disclosure and confidentiality agreements with parties who are given access to them, such as our corporate collaborators, outside collaborators, contract manufacturers, consultants, advisors and other third parties. With our consultants, contractors, and outside collaborators, these agreements typically include invention assignment obligations. However, we cannot be certain that such agreements have been entered into with all relevant parties, and we cannot be certain that our trade secrets and other confidential proprietary information will not be disclosed or that competitors will not otherwise gain access to our trade secrets or independently develop substantially equivalent information and techniques. Moreover, despite these efforts, any of these parties may breach the agreements and disclose our proprietary information, including our trade secrets, and we may not be able to obtain adequate remedies for such breaches. Monitoring unauthorized uses and disclosures is difficult, and we do not know whether the steps we have taken to protect our proprietary technologies will be effective. Unauthorized parties may also attempt to copy or reverse engineer certain aspects of our products that we consider proprietary. Enforcing a claim that a party illegally disclosed or misappropriated a trade secret is difficult, expensive and time-consuming, and the outcome is unpredictable. In addition, some courts inside and outside the United States are less willing or unwilling to protect trade secrets.
Trade secrets may be independently developed by others in a manner that could prevent legal recourse by us. Trade secrets will over time be disseminated within the industry through independent development, the publication of journal articles and the movement of personnel skilled in the art from company to company or academic to industry positions. Though our agreements with third parties typically restrict the ability of our advisors, employees, collaborators, licensors, suppliers, third-party contractors and consultants to publish data potentially relating to our trade secrets, our agreements may contain certain limited publication rights. Because from time to time we expect to rely on third parties in the development, manufacture, and distribution of our products and provision of our services, we must, at times, share trade secrets with them. Despite employing the contractual and other security precautions described above, the need to share trade secrets increases the risk that such trade secrets become known by our competitors, are inadvertently incorporated into the technology of others, or are disclosed or used in violation of these agreements. If any of our trade secrets were to be lawfully obtained or independently developed by a competitor or other third party, we would have no right to prevent them from using that technology or information to compete with us. If any of our trade secrets were to be disclosed to or independently developed by a competitor or other third party, our competitive position would be harmed.
Risks Related to Information Technology and our Computer Systems
Cyberattacks and security vulnerabilities could lead to reduced revenue, increased costs, liability claims, or harm to our competitive position.
The security of our products and services is important in our customers’ decisions to purchase or use our products or services. Increased sophistication and activities of perpetrators of cyberattacks have resulted in an increase in information security risks in recent years. Hackers develop and deploy viruses, worms, and other malicious software programs that attack products and services and gain access to networks and data centers. A substantial portion of our software development and customer support is provided from our India facility, which may be subject to increased risk of cyberattacks, power loss, telecommunications failure, terrorist attacks and similar events. If we were to experience difficulties maintaining existing systems or implementing new systems, we could incur significant losses due to disruptions in our operations. Additionally, these systems contain valuable proprietary and confidential information and may contain personal data of our customers’ subscribers. A security breach could result in disruptions of our internal systems and business applications, impairment of our ability to provide services to our customers, product development delays, harm to our competitive position from the compromise of confidential business information, or subject us to liability under laws that protect personal data. Although we believe that we have robust information security procedures and other safeguards in place, many of our services do not have fully redundant systems or a formal business continuity or disaster recovery plan, and we may not have adequate business interruption insurance to compensate us for losses that occur from a system outage. As cyber threats continue to evolve, we may be required to expend additional resources to continue to enhance our information security measures and/or to investigate and remediate any information security vulnerabilities. Any of these consequences would adversely affect our revenue and margins.
System security risks, data protection breaches, cyberattacks and systems integration issues could disrupt our internal operations or IT services provided to customers, and any such disruption could reduce our revenue, increase our expenses, damage our reputation and adversely affect our stock price.
As a technology services business, we are exposed to attacks from criminals, nation state actors and activist hackers (collectively, “malicious parties”) who may be able to circumvent or bypass our cyber security measures and misappropriate, maliciously alter or destroy our confidential information or that of third parties, create system disruptions or cause shutdowns. Malicious parties also may be able to develop and deploy viruses, worms, ransomware and other malicious software programs that attack our products or otherwise exploit any security vulnerabilities of our products. Threats to our own IT infrastructure can also affect our customers. Customers using our cloud-based services rely on the security of our infrastructure, including hardware and other elements provided by third parties, to ensure the reliability of our services and the protection of their data. Sophisticated hardware and operating system software and applications that we procure from third parties may contain defects in design or manufacture, including flaws that could unexpectedly interfere with the operation of the system. The costs to us to eliminate or alleviate cyber or other security problems, including bugs, viruses, worms, malicious software programs and other security vulnerabilities, could be significant and could reduce our operating margins. Our efforts to address these problems may not be successful and could result in interruptions, delays, cessation of service and loss of existing or potential customers that may impede our sales, manufacturing, distribution or other critical functions.
We manage and store various proprietary information and sensitive or confidential data relating to our business. In addition, our business may process, store and transmit data relevant to our clients, including commercially sensitive and personally identifiable information, including the personal information of European citizens covered by the GDPR. Breaches of our cyber or physical security measures or the accidental loss, inadvertent disclosure or unapproved dissemination of proprietary information or sensitive or confidential data about us, our clients or their customers, including the potential loss or disclosure of such information or data, could expose us, our customer or the individuals affected to a risk of loss or misuse of this information, result in litigation and potential liability for us, damage our brand and reputation or otherwise harm our business. We also could lose existing or potential customers or incur significant expenses in connection with our customers’ system failures or any actual or perceived security vulnerabilities in our products and services. In addition, the cost and operational consequences of implementing further data protection measures could be significant.
Portions of our IT infrastructure also may experience interruptions, delays or cessations of service or produce errors in connection with systems integration or migration work that takes place from time to time. We may not be successful in implementing new systems and transitioning data, which could cause business disruptions and be more expensive, time-consuming, disruptive and resource intensive. Such disruptions could adversely impact our ability to fulfill orders and respond to customer requests and interrupt other processes. Delayed sales, lower margins or lost customers resulting from these disruptions could reduce our revenue, increase our expenses, damage our reputation and adversely affect our stock price.
Unauthorized disclosure of data, unauthorized access to our service and misuse of our service could adversely affect our business.
Any security breaches, unauthorized access, unauthorized usage, virus or similar breach or disruption could result in loss of confidential information, personal data and customer content, damage to our reputation, early termination of our contracts, litigation, regulatory investigations, increased costs or other liabilities. If our security measures, or those of our partners or service providers, are breached as a result of third-party action, employee error, malfeasance or otherwise and, as a result, someone obtains unauthorized access to confidential information, personal data or customer content, our reputation will be damaged, our business may suffer or we could incur significant liability. If the measures we have put in place to limit or restrict access to and use of functionality, usage entitlements and support for customers or prospective customers are breached, circumvented or ineffective as a result of third-party action, employee error, malfeasance or otherwise and, as a result, someone obtains unauthorized access to and use of functionality, usage entitlements and support, our business may suffer or we could incur significant liability and/or costs.
Techniques used to obtain unauthorized access or use or to sabotage systems change frequently and generally are not recognized until launched against a target. As a result, we may be unable to anticipate these techniques or to implement adequate preventative measures. If an actual or perceived security breach occurs, the market perception of our security measures could be harmed and we could lose sales and customers. Any significant violations of data privacy or unauthorized disclosure of information could result in the loss of business, litigation and regulatory investigations and penalties that could damage our reputation and adversely impact our results of operations and financial condition. Moreover, if a security breach occurs with respect to another software as a service, or SaaS, provider, our customers and potential customers may lose trust in the security of the SaaS business model generally, which could adversely impact our ability to retain existing customers or attract new ones.
We use a data center and cloud computing services facilities to deliver our services. Any disruption of service at these facilities could harm our business.
We manage our services and serve some of our customers from a data center facility and cloud computing services facilities, such as AWS. While we control the actual computer and storage systems upon which our software runs, and deploy them to the data center facilities, we do not control the operation or availability of these facilities.
The owners of these facilities have no obligation to renew their agreements with us on commercially reasonable terms, or at all. If we are unable to renew these agreements on commercially reasonable terms, we may be required to transfer to new facilities, and we may incur significant costs and possible service interruption in connection with doing so.
Any changes in third-party service levels at these facilities or any errors, defects, disruptions or other performance problems at or related to these facilities that affect our services could harm our reputation and may damage our customers’ businesses. Interruptions in our services might reduce our revenue, cause us to issue credits to customers, subject us to potential liability, and cause customers to terminate their subscriptions or harm our renewal rates.
These facilities are vulnerable to damage or service interruption resulting from human error, intentional bad acts, security breaches, earthquakes, hurricanes, floods, fires, war, terrorist attacks, power losses, hardware failures, systems failures, telecommunications failures and similar events. The occurrence of a natural disaster or an act of terrorism, or vandalism or other misconduct, or a decision to close the facilities without adequate notice or other unanticipated problems could result in lengthy interruptions in our services.
Risks Related to Employees
We are a relatively small company with a limited number of products and staff. Sales fluctuations and employee turnover may adversely affect our business.
We are a relatively small company. Consequently, compared to larger companies, sales fluctuations have a greater impact on our revenue and profitability on a quarter-to-quarter and year-to-year basis and a delayed contract could cause our operating results to vary significantly from quarter to quarter and year-to-year. In addition, as a small company we have limited staff and are heavily reliant on certain key personnel to operate our business. If a key employee were to leave the company, it could have a material impact on our business and results of operations as we might not have sufficient depth in our staffing to fill the role that was previously being performed. A delay in filling the vacated position could put a strain on existing personnel or result in a failure to satisfy our contractual obligations or to effectively implement our internal controls, and materially harm our business.
Our business depends largely on our ability to attract and retain talented employees.
Attracting and retaining talented employees is key to our success. The market for skilled workers in our industry is very competitive. We may not be able to retain personnel or to hire additional personnel on a timely basis, if at all. Because of the complexity of our software solutions, a significant time lag exists between the hiring date of technical and sales personnel and the time when they become fully productive. We have at times experienced high employee turnover and difficulty in recruiting and retaining technical personnel. Our failure to retain personnel or to hire qualified personnel on a timely basis could adversely affect our business by impacting our ability to develop new products, to complete our projects and secure new contracts.
Our periodic workforce restructurings can be disruptive.
We have in the past restructured our workforce in response to management changes, acquisitions, product changes, performance issues or other considerations. These types of restructurings have resulted in increased restructuring costs and temporary reduced productivity while our staff adjusted to new roles and responsibilities. We may choose to implement additional restructuring in the future. There is no certainty that we will achieve the expected cost savings or other benefits of these restructurings or do so within the expected timeframe. As a result, our business revenues and other results of operations could be negatively affected.
We are highly dependent on the services of our key personnel.
We are highly dependent on the services of our key personnel, Matthew Stecker, who serves as our Chief Executive Officer and Mark Szynkowski, Vice President of Finance and Principal Accounting Officer. Although we have entered into agreements with them regarding their employment, they are not for a specific term and each of them may terminate their employment with us at any time, though we are not aware of any present intention of any of these individuals to leave us.
Risks Related to Political and Regulatory
Our performance may be adversely affected by economic and political conditions in the United Kingdom where we do business.
Our performance has been in the past and may continue in the future to be impacted by economic and political conditions in the United Kingdom where we do business and have operations. Economic and financial uncertainties in our international markets, including uncertainties surrounding the United Kingdom's withdrawal from the European Union (commonly referred to as “Brexit”) and changes to major international trade arrangements, could negatively impact our operations and sales. The UK is one of our largest markets in Europe, but we also presently provide services to UK customers from EU countries and services to customers in EU countries from the UK. Brexit may result in greater regulatory complexity surrounding the services we provide to our UK or EU customers and financial results could be negatively impacted.
Compliance with changing European privacy laws could require us to incur significant costs and failure to comply could give rise to liabilities. Disclosure and misuse of personal data could result in liability and harm our reputation.
During the course of providing our products and services we may collect names, addresses, telephone numbers and other personally identifiable information, or “PII”. This may subject us to complex regulatory requirements related to data collection and risks of improper use or disclosure. In addition, we have offices and clients in the EU where new more stringent regulations, known as the General Data Protection Regulation or “GDPR,” took effect in May 2018. The GDPR imposes significant new obligations and compliance with these obligations depends in part on how particular regulators apply and interpret them. If we fail to comply with the GDPR, or if regulators assert we have failed to comply with the GDPR, it may lead to regulatory enforcement actions, which can result in monetary penalties of up to 4% of worldwide revenue, private lawsuits, or reputational damage.
We strive to limit the amount of PII we collect and/or store and we have implemented steps designed to protect against unauthorized access to such information but because of the inherent risks and complexities involved in protecting this information, particularly if we store such information in a cloud implementation Despite our efforts to improve our security controls, it is possible our security controls over personal data, our training of employees and vendors on data security, and other practices we follow may not prevent the improper disclosure of customer or user data we store and manage. In addition, third party vendors that we engage to perform services for us may unintentionally release PII or otherwise fail to comply with applicable laws and regulations. We may also experience hesitancy, reluctance or refusal by European or multi-national customers to continue to use our services due to the potential risk exposure that these customers might face as a result of the current data protection obligations imposed on them by certain data protection authorities. These customers may require us to accept increased liability, decide not to do business with us or may require that their personal data remains in certain locations. We will incur additional costs if we are required to implement special operational processes and store data in jurisdictions not of our choosing. Any failure by us to comply with laws and regulations regulating privacy, data security, or consumer protection could result in damage claims from our customers, lost or restricted business, actions or fines brought against us or levied by governmental entities or others and could adversely affect our business and harm our reputation.
If we are unable to properly supervise our software development staff in India, or if political or other uncertainties interfere, we may be unable to satisfactorily perform our customer contracts.
In 2004, we formed Evolving Systems India, a wholly owned subsidiary of Evolving Systems, Inc. and as a result of our 2015 acquisition of SSM, we acquired two additional Indian subsidiaries which have now been merged into Evolving Systems India. We have experienced a high level of turnover with our Indian development staff as a result of strong competition for technology-based personnel in India. In addition, salary levels in India are steadily increasing, reducing the competitive advantages associated with offshore labor. If we are unable to effectively manage our India-based development staff and/or we continue to experience high levels of staff turnover, we may fail to provide quality software in a timely fashion. Furthermore, political changes and uncertainties in India could negatively impact the business climate there. As a result, we may be unable to satisfactorily perform under our contracts and our business, financial condition and results of operations could be materially harmed.
Changes or challenges to the regulations of the communication industry could hurt the market for our products and services.
Our customers may require, or we may find it necessary or advisable, to modify our products or services to address actual or anticipated changes in regulations affecting our customers. This could increase our costs, delay adoption of our products and increase our sales cycle, which could materially harm our business, financial condition, results of operations, and cash flows. We are also subject to numerous regulatory requirements of foreign jurisdictions, which are often complex and changing. Any failure to comply with such regulations could, likewise, materially harm our business, financial condition, results of operations and cash flows.
Disruptions from terrorist activities, geopolitical conditions or military actions may disrupt our business.
The continued threat of terrorism and acts of war may cause significant disruption to commerce throughout the world. Abrupt political changes and armed conflict pose a risk of economic disruption in affected countries, which may increase our operating costs and add uncertainty to the timing and budget for technology investment decisions by our customers. Our business and results of operations could be materially and adversely affected to the extent that such disruptions result in delays or cancellations of customer orders, delays in collecting cash, a general decrease in corporate spending on information technology, or our inability to effectively market, manufacture or ship our products. We are unable to predict whether war, political unrest and the threat of terrorism will result in any long-term commercial disruptions or if such activities will have any long-term material adverse effect on our business, results of operations, financial condition or cash flows.
Our international operations subject us to potential liability under anti-corruption laws and regulations.
Our international business operations are subject to the Foreign Corrupt Practices Act (“FCPA”), which generally prohibits U.S. companies and their intermediaries from paying or offering anything of value to foreign government officials for the purpose of obtaining or keeping business, or otherwise receiving discretionary favorable treatment of any kind. To the extent we do business through Evolving Systems UK, we are also subject to the U.K. Bribery Act of 2010. In addition, many countries in which we do business have their own anti-bribery rules and regulations. Under these regulations, we may be held liable for actions taken by our local partners and agents, even if such parties act without our knowledge. Any determination that we have violated the FCPA or the Bribery Act of 2010 (whether directly or through acts of others, intentionally or through inadvertence) or other anti-bribery legislation could result in sanctions that could have a material adverse effect on our business. While we have procedures and controls in place to monitor compliance, situations outside of our control may arise that could put us in violation of anti-bribery legislation inadvertently and thus negatively impact our business.
In order to operate internationally and comply with local government regulations and customer requirements, we maintain bank accounts at non-U.S. banks located in Asian and African countries and in local currencies. Certain countries such as India and Nigeria require that we pay withholding taxes should we transfer our cash from a non-U.S. bank account to our U.S. bank accounts.
As of December 31, 2020, of our $2.8 million cash balance, $0.3 million is on deposit in the U.S., the U.S. dollar equivalents of $1.3 million is on deposit in the U.K. and Europe, $0.8 million is on deposit in India, $0.4 million is on deposit in Nigeria and less than $0.1 million is on deposit in South Africa. Should we choose to transfer cash out of our bank accounts in India and Nigeria, we may be required to pay the local tax authorities a withholding tax ranging from 10% to 20% of the amount transferred. Local regulations may take longer to execute than transfers from our U.S., U.K. and European bank accounts and the withholding tax we pay may not be refundable. The longer execution times and the withholding taxes means we may be subject to delays in executing our operations and our available cash is reduced by the withholding taxes.
We are subject to certain U.S. and certain foreign anti-corruption, anti-money laundering, export control, sanctions, and other trade laws and regulations. We can face serious consequences for violations.
U.S. and foreign anti-corruption, anti-money laundering, export control, sanctions, and other trade laws and regulations, or collectively Trade Laws, prohibit, among other things, companies and their employees, agents, legal counsel, accountants, consultants, contractors, and other partners from authorizing, promising, offering, providing, soliciting, or receiving, directly or indirectly, corrupt or improper payments or anything else of value to or from recipients in the public or private sector. Violations of Trade Laws can result in substantial criminal fines and civil penalties, imprisonment, the loss of trade privileges, debarment, tax reassessments, breach of contract and fraud litigation, reputational harm, and other consequences. We have direct or indirect interactions with officials and employees of government agencies or government-affiliated organizations. We also expect our non-U.S. activities to increase over time. We expect to rely on third parties for research and/or to obtain necessary permits, licenses, patent registrations, and other approvals. We can be held liable for the corrupt or other illegal activities of our personnel, agents, or partners, even if we do not explicitly authorize or have prior knowledge of such activities. Any violations of the laws and regulations described above may result in substantial civil and criminal fines and penalties, imprisonment, the loss of export or import privileges, debarment, tax reassessments, breach of contract and fraud litigation, reputational harm and other consequences.
Risks Related to Accounting Policy
The input method of accounting used for most of our projects can result in overstated or understated profits or losses.
Our services and managed services revenue under fixed-price services contracts is accounted for using the input method of accounting. Under this method, we recognize revenue and profits for each fixed-price service project-based efforts or inputs toward
satisfying a performance obligation, which is a promise in a contract to transfer a distinct service to the customer. The input method requires us to estimate the total transaction price allocated based on each distinct performance obligation of a contract. Our failure to accurately estimate these often-subjective factors could result in overstated or understated revenue, profits or losses.
Impairments of the carrying value of other indefinite-lived intangible assets may negatively affect our consolidated operating results in the future.
Fair value determinations require considerable judgment and are sensitive to changes in underlying assumptions, estimates and market factors. Estimating the fair value of our business and indefinite-lived intangible assets requires us to make assumptions and estimates regarding our future plans, as well as industry and economic conditions. These assumptions and estimates include projected revenues and income growth rates, terminal growth rates, competitive and consumer trends, market-based discount rates, and other market factors. If current expectations of future growth rates are not met or market factors outside of our control, such as discount rates, change significantly, then value of intangible assets might become impaired. As intangible assets associated with recently acquired businesses are recorded on the balance sheet at their estimated acquisition date fair values, those amounts are more susceptible to an impairment risk if business operating results or macroeconomic conditions deteriorate. Additionally, recently impaired intangible assets can also be more susceptible to future impairment as they are recorded on the balance sheet at their recently estimated fair values. Impairment of the carrying value of other indefinite-lived intangible assets in the future could negatively affect our operating results or net worth.
Changes in, or interpretations of, accounting principles or tax rules and regulations, could adversely affect our results of operations.
We prepare our consolidated financial statements in conformity with U.S. generally accepted accounting principles (“US GAAP”). It is possible that future requirements could change our current application of US GAAP, resulting in a material adverse impact on our financial positions or results of operations. In addition, our future effective tax rates could be unfavorably affected by changes in tax laws or the interpretation of tax laws or by changes in the valuation of our deferred tax assets and liabilities. We regularly assess our implementation of applicable accounting principles and the adequacy of our provision for income taxes, but we are a relatively small company and our business is complex; the final determination of any tax authority, upon examination of our income tax returns, could have an adverse effect on our operating results and financial position.
Risks Related to Ownership of our Common Stock
Because our quarterly and annual operating results are difficult to predict and may fluctuate, the market price for our stock may be volatile.
Our operating results have fluctuated significantly in the past and may continue to fluctuate significantly in the future from quarter-to-quarter and year-to-year. These quarterly and annual fluctuations may result from a number of factors, including:
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the size of new contracts, rate of progress under our contracts and when we are able to recognize the related revenue; |
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foreign exchange fluctuations; |
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budgeting cycles of our customers; |
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changes in the terms and rates related to the renewal of support agreements; |
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the mix of products and services sold; |
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the timing of delivery of software and hardware by third parties; |
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level and timing of operating expenses and capital investments; |
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impairment in the value of our long-lived assets; |
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changes in our strategy; and, |
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general economic conditions. |
As a result, quarter-to-quarter and year-to-year comparisons of operating results are not necessarily meaningful, nor do they indicate what our future performance will be. Furthermore, we base our operating expenses and capital investment budgets on expected sales and revenue and many of our expenses, such as lease expenses, expenses associated with our debt and personnel costs, are relatively fixed in the short term. Variations in the rate and timing of conversion of our sales prospects into actual revenue could cause us to plan or budget inaccurately and we may be unable to adjust spending quickly enough to compensate for an unexpected shortfall in revenue. Any significant shortfall in anticipated levels of demand for our products and services could adversely affect our business, financial condition, results of operations and cash flows and the market price of our common stock.
Our stock price could become more volatile and your investment could lose value.
All of the factors discussed in this section, as well as general economic and market conditions unrelated to the performance of our company or industry, could affect our stock price. The global stock markets have experienced, and may continue to experience, significant volatility as a result of the COVID-19 pandemic, and the price of our common stock has been volatile since the onset of the pandemic. The COVID-19 pandemic and the significant uncertainties it has caused for the global economy, business activity, and business confidence have had, and are likely to continue to have, a significant effect on the market price of securities generally, including our securities. A significant drop in our stock price could also expose us to the risk of securities class actions lawsuits, which could result in substantial costs and divert management’s attention and resources, which could adversely affect our business.
Sales of large blocks of our stock may result in the reduction in the market price of our stock and make it more difficult to raise funds in the future.
If our stockholders sell substantial amounts of our common stock in the public market, the market price of our common stock could fall. The perception among investors that such sales will occur could also produce this effect. We currently have several stockholders who own large percentages of our stock. To the extent we continue to have one or more stockholders who own a large percentage of our stock and those stockholders chose to liquidate their holdings, it may have a dramatic impact on the market price of our stock. These factors also could make it more difficult to raise funds through future offerings of common stock.
Certain provisions of our charter documents, employment arrangements and Delaware law may discourage, delay or prevent an acquisition of us, even if an acquisition would be beneficial to our stockholders, and may prevent attempts by our stockholders to replace or remove our current management.
Provisions of our amended and restated certificate of incorporation and bylaws, as well as provisions of Delaware law, could make it difficult for a third party to acquire us, even if doing so would benefit our stockholders. In addition, these provisions, which make it more difficult for stockholders to replace members of our board of directors, may frustrate or prevent attempts by our stockholders to replace or remove our current management because our board of directors is responsible for appointing the members of our management team. These provisions include the following:
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our stockholders cannot take action by written consent; |
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we have advance notice requirements for nominations for election to the Board of Directors or for proposing matters that can be acted upon at stockholder meetings; |
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our stockholders can only remove directors without cause by supermajority vote; and |
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our stockholders can only amend our bylaws or certain Board of Directors-related provisions of our amended and restated certificate of incorporation by a supermajority vote. |
In addition, we are subject to the anti-takeover provisions of Section 203 of Delaware General Corporation Law, which prohibit us from engaging in a “business combination” with an “interested stockholder” for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in the prescribed manner. The application of Section 203 and certain provisions of our restated certificate of incorporation may have the effect of delaying or preventing changes in control of our management, which could adversely affect the market price of our common stock by discouraging or preventing takeover attempts that might result in the payment of a premium price to our stockholders.
Certain of our named executive officers have entered into agreements with us that contain a change in control provision. These agreements generally provide for acceleration on vesting of stock awards. The acceleration of vesting of stock awards upon a change in control may be viewed as an anti-takeover measure and may have the effect of discouraging a merger proposal, tender offer or other attempt to gain control of us.
Our Stock Incentive Plans provide for acceleration of vesting of stock awards under certain changes in control. As noted above, the acceleration on vesting of stock awards upon a change in control may be viewed as an anti-takeover measure.
All of the above factors could adversely affect the market price of our common stock by discouraging or preventing takeover attempts that might result in the payment of a premium price to our stockholders.
We suspended our dividends in 2016 and we may not pay dividends in the future.
In June 2016, our Board of Directors suspended our quarterly dividends. Any decision to pay dividends in the future and the amount of any dividend we may declare will depend on general business conditions, the impact of such payment on our financial
condition and other factors our Board of Directors may consider to be relevant. If we elect to pay future dividends, this could reduce our cash reserves to levels that may be inadequate to fund expansions to our business plan or unanticipated contingent liabilities.
The concentration of our stock ownership will likely limit your ability to influence corporate matters, including the ability to influence the outcome of director elections and other matters requiring stockholder approval.
Our executive officers, directors and the holders of more than 5% of our outstanding common stock, in the aggregate, beneficially own a significant percentage of our common stock. As a result, these stockholders, acting together, will have significant influence over all matters that require approval by our stockholders, including the election of directors and approval of significant corporate transactions. Corporate actions might be taken even if other stockholders oppose them. This concentration of ownership might also have the effect of delaying or preventing a change of control of our company that other stockholders may view as beneficial.
General Risk Factors
A pandemic, epidemic, or outbreak of infectious disease such as the current coronavirus (COVID-19) pandemic could have an adverse effect on our business, operating results or financial condition.
Our business could be adversely impacted by the effects of a pandemic, epidemic, or outbreak of an infectious disease, such as the recent and ongoing COVID-19 outbreak in various parts of the world in which we operate, which has been declared a global pandemic by the World Health Organization. This outbreak could adversely impact our operations, the operations of our customers and the global economy. Disruptions to our business include restrictions on our ability to travel and distribute our products, suspension or government-mandated shutdown of operations by us or our customers, or the delay of projects in impacted areas. Travel restrictions or operational problems where we or our customers operate may cause a reduction in the demand for our services. Given the uncertainty around the extent and timing of the potential future spread or mitigation of the COVID-19 Pandemic and around the imposition or relaxation of protective measures, we cannot reasonably estimate the impact on our future results of operations, cash flows or financial condition.
The COVID-19 Pandemic may have an adverse effect on our business.
The ongoing COVID-19 pandemic crisis has caused several instances where meetings and other interactions relevant to our business progress have been postponed or delayed. Our customers are wireless carriers who have, in many instances, limited the accessibility of their campuses to external personnel. In addition, government-mandated stay-at-home orders issued in many of the jurisdictions where we or our customers do business, prevent us from conducting in-person meetings with customers while those orders are in effect. At the time of this filing, this sporadic lack of access has resulted in only slight delays that are not quantitatively detrimental to operating results. The duration and extent of the impact from the COVID-19 pandemic depends on future developments that cannot be accurately predicted at this time, such as the severity and transmission rate of the virus, the extent and effectiveness of containment actions, the disruption caused by such actions, and the impact of these and other factors on our employees, customers, partners and vendors. If we are not able to respond to and manage the impact of such events effectively, our business will be harmed.
We face risks associated with doing business through local partners.
In some countries, because of local customs and regulations or for language reasons, we do business through local partners who resell our products and services, with or without value-added services. This can cause delays in closing contracts because of the increased complexity of having another party involved in negotiations. In addition, where the local partner provides additional software, hardware and/or services to the end-user, our products and services may only be a small portion of the total solution. As a result, conditions surrounding acceptance and payments owed to us may be impacted by factors that are out of our control. Resellers may also delay paying us even when they have been paid by the end-user. We have in the past experienced delays in closing contracts through partners and collecting from resellers and this situation may arise again in the future, negatively impacting our cash flows. Doing business through local partners may also increase our risks under anti-bribery regulations, as discussed above in “Our international operations subject us to potential liability under anti-corruption laws and regulations” below.
As a result of operating as a smaller public company, our management is required to devote a substantial amount of time to comply with regulatory matters; our relatively small staff can make compliance challenging.
Because our common stock is publicly traded, we are subject to certain rules and regulations of federal, state and financial market exchange entities charged with the protection of investors and the oversight of companies whose securities are publicly traded. These entities, including the Public Company Accounting Oversight Board, the SEC and NASDAQ, have issued requirements and regulations and continue to adopt additional regulations and requirements in response to laws enacted by Congress. Establishment of
effective internal controls is further complicated because we are a relatively small company with global operations, and multiple locations and IT systems. Our management and other personnel have and will continue to devote a substantial amount of time to these compliance initiatives.
Requirements associated with being a public company will increase our costs significantly, as well as divert significant company resources and management attention.
We are subject to the reporting requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act, or the other rules and regulations of the SEC, or any securities exchange relating to public companies. The Sarbanes-Oxley Act of 2002, as amended, or Sarbanes-Oxley, as well as rules subsequently adopted by the SEC, and The Nasdaq Capital Market to implement provisions of Sarbanes-Oxley, impose significant requirements on public companies, including requiring establishment and maintenance of effective disclosure and financial controls and changes in corporate governance practices. Further, pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, the SEC has adopted additional rules and regulations in these areas, such as mandatory “say on pay” voting requirements. Stockholder activism, the current political environment and the current high level of government intervention and regulatory reform may lead to substantial new regulations and disclosure obligations, which may lead to additional compliance costs and impact the manner in which we operate our business in ways we cannot currently anticipate. Compliance with the various reporting and other requirements applicable to public companies requires considerable time and attention of management. We cannot assure you that we will satisfy our obligations as a public company on a timely basis.
We expect the rules and regulations applicable to public companies to substantially increase our legal and financial compliance costs and to make some activities more time-consuming and costly. If these requirements divert the attention of our management and personnel from other business concerns, they could have a material adverse effect on our business, financial condition and results of operations. The increased costs will decrease our net income or increase our net loss and may require us to reduce costs in other areas of our business or increase the prices of our products or services. In addition, as a public company, it may be more difficult or more costly for us to obtain certain types of insurance, including directors’ and officers’ liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. The impact of these events could also make it more difficult for us to attract and retain qualified personnel to serve on our board of directors, our board committees or as executive officers.
If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, our stock price and trading volume could decline.
The trading market for our common stock will depend in part on the research and reports that securities or industry analysts publish about us or our business. If one or more of the analysts who cover us downgrade our common stock or publish inaccurate or unfavorable research about our business, our common stock price would likely decline. If one or more of these analysts cease coverage of us or fail to publish reports on us regularly, demand for our common stock could decrease, which might cause our common stock price and trading volume to decline.
Our disclosure controls and procedures may not prevent or detect all errors or acts of fraud.
We are subject to the periodic reporting requirements of the Exchange Act. We designed our disclosure controls and procedures to reasonably assure that information we must disclose in reports we file or submit under the Exchange Act is accumulated and communicated to management, and recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC.
We believe that any disclosure controls and procedures or internal controls and procedures, no matter how well-conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.
These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. For example, our directors or executive officers could inadvertently fail to disclose a new relationship or arrangement causing us to fail to make any related party transaction disclosures. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by an unauthorized override of the controls. Accordingly, because of the inherent limitations in our control system, misstatements due to error or fraud may occur and not be detected. In addition, we do not have a risk management program or processes or procedures for identifying and addressing risks to our business in other areas.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
TEM 2. PROPERTIES
As of December 31, 2020, we leased office facilities around the world totaling approximately 32,000 square feet, including approximately 400 square feet for our corporate headquarters in Englewood, Colorado. We believe that our facilities are adequate for our current and near-term needs, and that we will be able to locate additional facilities as needed.
We lease office space at various locations which are shown below.
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Square
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Lease
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Location
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Footage
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Expiration
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Englewood, Colorado
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400
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05/31/21
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New York, New York
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391
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01/31/21
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London, England
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376
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09/30/21
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Bangalore, India
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12,429
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08/18/23
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Kolkata, India
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5,638
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07/31/26
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Johannesburg, South Africa
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130
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09/30/21
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Kuala Lumpur, Malaysia
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1,042
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07/31/23
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Grenoble, France
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3,767
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03/21/21
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Cluj-Napoca, Romania
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7,793
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12/31/22
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Madrid, Spain
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215
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We believe that our facilities are adequate for our current and near-term needs, and that we will be able to locate additional facilities as needed.
ITEM 3. LEGAL PROCEEDINGS
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 Supreme Court of New Jersey against us. He is seeking $3.5 million for incentive compensation he claims he earned during his tenure as Evolving’s CEO, severance payments and benefits that he would have been contractually entitled to receive had he been terminated without cause, as well as additional damages in relation to his termination. The Company has engaged legal counsel through its insurance carrier and has begun discovery. The Company intends to defend this matter rigorously and the ultimate outcome is not estimable or determinable at this time, although substantially all of the relief sought would be covered by insurance, if successful.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5.MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information for Common Stock
Our common stock is traded on the Nasdaq Capital Market under the symbol “EVOL.”
Holders of Record
As of March 15, 2021, there were approximately 85 holders of record of our common stock. Because many of our shares of common stock are held by brokers and other institutions on behalf of stockholders, we are unable to estimate the total number of stockholders represented by these record holders.
Dividend Policy
We have not recently declared or paid any cash dividends on our capital stock. We intend to retain any future earnings and do not expect to pay any dividends in the foreseeable future. Any future determination to declare cash dividends will be made at the discretion of our board of directors, subject to applicable laws, and will depend on a number of factors, including our financial condition, results of operations, capital requirements, contractual restrictions, general business conditions and other factors that our board of directors may deem relevant.
Recent Sales of Unregistered Securities
None.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
We did not purchase any of our registered securities during the period covered by this Annual Report.
ITEM 6. SELECTED FINANCIAL DATA
Not applicable.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This Management’s Discussion and Analysis of Financial Condition and Results of Operations 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 customer support revenue; our expectations associated with Evolving Systems India, Evolving Systems U.K., Evolving Systems NC Evolving Systems BLS LTD, Lumata UK LTD, Lumata France SAS, Lumata Deutschland GmbH, and Lumata Spain SL and short- and long-term cash needs. In some cases, words such as “anticipates”, “expects”, “intends”, “plans”, “believes” or “estimates” and variations of these words and similar expressions are intended to identify forward-looking statements. The following discussion should be read in conjunction with, and is qualified in its entirety by, the consolidated financial statements and the notes thereto included elsewhere in this Annual Report on Form 10-K. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth in this section and in “Item 1A - Risk Factors.”
OVERVIEW
Evolving Systems Inc. is 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 through analytics and loyalty programs 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 (“CLV”) over the course the customer lifecycle.
In 2019, we released Evolution, the new platform that supersedes and provides an upgrade path to the former loyalty and CVM platforms from both Evolving and its acquired companies — BLS, Lumata and SSM. Evolution was built by combining, integrating, and improving upon the best components and features of those previous platforms. We believe that Evolution provides a unique capability, and we expect to continue 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.
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 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 long-term effects on how we conduct business in the future is still undetermined but the company continues to evolve to meet client needs.
RECENT DEVELOPMENTS
We reported a net income of $0.6 million and a net loss of $9.7 million for the years ended December 31, 2020 and 2019, respectively.
We have operations in foreign countries where the local currency is used to prepare the consolidated financial statements which are translated into our reporting currency, U.S. dollars. Changes in the exchange rates between these currencies and our reporting currency are partially responsible for some of the changes from period to period in our financial statement amounts. The majority of the changes in 2020 and 2019 are a result of the U.S. dollar strengthening on average versus the British Pound Sterling. The chart below summarizes what the effects on our revenue and expenses would be on a constant currency basis. The constant currency basis assumes that the exchange rate was constant for the periods presented (in thousands):
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|
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For the Years
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|
|
Ended December 31,
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|
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2020 vs. 2019
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Changes in:
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|
|
|
Revenue
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$
|
186
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|
Costs of revenue and operating expenses
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|
156
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|
Income from operations
|
$
|
30
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The net effect of our foreign currency exchange rate changes for the year ended December 31, 2020 was a $0.2 million increase in revenue and a $0.2 million increase in operating expenses versus the year ended December 31, 2019 was due to a stronger US dollar on average during the year 2020.
RESULTS OF OPERATIONS
The following table presents our consolidated statements of operations in comparative format:
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|
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|
|
|
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For the Years Ended December 31,
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|
|
2020
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|
|
2019
|
|
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Change
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% Change
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|
|
(in thousands, except percentages)
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|
REVENUE
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|
|
|
|
|
|
|
|
|
|
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License fees
|
$
|
745
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|
$
|
1,245
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|
$
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(500)
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|
(40%)
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Services
|
|
25,607
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|
|
24,505
|
|
|
1,102
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|
4%
|
|
Total revenue
|
|
26,352
|
|
|
25,750
|
|
|
602
|
|
2%
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|
|
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|
|
|
|
|
|
|
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|
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COSTS OF REVENUE AND OPERATING EXPENSES
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Costs of revenue, excluding depreciation and amortization
|
|
8,837
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|
|
8,685
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|
|
152
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|
2%
|
|
Sales and marketing
|
|
6,000
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|
|
7,459
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(1,459)
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(20%)
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General and administrative
|
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5,052
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5,091
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(39)
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(1%)
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Product development
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|
4,327
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4,594
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(267)
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|
(6%)
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Depreciation
|
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216
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|
|
190
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|
|
26
|
|
14%
|
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Amortization
|
|
940
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|
|
938
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|
|
2
|
|
—
|
|
Goodwill impairment loss
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|
—
|
|
|
6,687
|
|
|
(6,687)
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|
(100%)
|
|
Total costs of revenue and operating expenses
|
|
25,372
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|
|
33,644
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|
(8,272)
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(25%)
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|
|
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|
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Income (loss) from operations
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|
980
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|
|
(7,894)
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|
|
8,874
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|
112%
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|
|
|
|
|
|
|
|
|
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|
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Other income (expense)
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|
|
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|
|
|
|
|
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|
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Interest income
|
|
5
|
|
|
15
|
|
|
(10)
|
|
(67%)
|
|
Interest expense
|
|
(70)
|
|
|
(314)
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|
|
244
|
|
78%
|
|
Other income
|
|
186
|
|
|
56
|
|
|
130
|
|
232%
|
|
Foreign currency exchange income (loss)
|
|
370
|
|
|
(455)
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|
|
825
|
|
181%
|
|
Other income (expense), net
|
|
491
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|
|
(698)
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|
|
1,189
|
|
170%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations before income taxes
|
|
1,471
|
|
|
(8,592)
|
|
|
10,063
|
|
117%
|
|
Income tax expense
|
|
828
|
|
|
1,103
|
|
|
(275)
|
|
(25%)
|
|
Net income (loss)
|
$
|
643
|
|
$
|
(9,695)
|
|
$
|
10,338
|
|
107%
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents our consolidated statements of operations reflected as a percentage of total revenue:
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|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
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|
|
2020
|
|
2019
|
|
REVENUE
|
|
|
|
|
License fees
|
3%
|
|
5%
|
|
Services
|
97%
|
|
95%
|
|
Total revenue
|
100%
|
|
100%
|
|
|
|
|
|
|
COSTS OF REVENUE AND OPERATING EXPENSES
|
|
|
|
|
Costs of revenue, excluding depreciation and amortization
|
34%
|
|
34%
|
|
Sales and marketing
|
23%
|
|
29%
|
|
General and administrative
|
19%
|
|
20%
|
|
Product development
|
16%
|
|
18%
|
|
Depreciation
|
1%
|
|
1%
|
|
Amortization
|
4%
|
|
4%
|
|
Goodwill impairment loss
|
—
|
|
26%
|
|
Total costs of revenue and operating expenses
|
97%
|
|
132%
|
|
|
|
|
|
|
Income (loss) from operations
|
3%
|
|
(32%)
|
|
|
|
|
|
|
Other income (expense)
|
|
|
|
|
Interest income
|
—
|
|
—
|
|
Interest expense
|
—
|
|
(1%)
|
|
Other income
|
1%
|
|
—
|
|
Foreign currency exchange income (loss)
|
1%
|
|
(2%)
|
|
Other income (expense), net
|
2%
|
|
(3%)
|
|
|
|
|
|
|
Income (loss) from operations before income taxes
|
5%
|
|
(35%)
|
|
|
|
|
|
|
Income tax expense
|
3%
|
|
4%
|
|
|
|
|
|
|
Net income (loss)
|
2%
|
|
(39%)
|
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 decreased 40%, or $0.5 million to $0.7 million for the year ended December 31, 2020 compared to $1.2 million for the year ended December 31, 2019. This change is primarily related to lower number of incremental licenses sold to a customer in the current year and the Company’s continued transition to a managed service model with more reliable recurring revenue.
Services
Services revenue increased 4%, or $1.1 million, to $25.6 million for the year ended December 31, 2020 from $24.5 million for the year ended December 31, 2019. The increase is related to upgrades and new project revenues of $2.8 million and increase in hours worked on existing clients of $1.0 million partially offset by a reduction of orders from existing clients of $2.7 million.
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 for deployment by the customer and are funded by customers as part of a managed service offering. Costs of revenue, excluding depreciation and amortization increased by $0.1 million, or 2%, to $8.8 million for the year ended December 31, 2020 from $8.7 million for the year ended December 31, 2019. The increase was primarily related to increase in internal staff costs of $1.1 million as we increased delivery staff and work performed on internal projects, partially offset by a decrease in third party consultant costs of $ 0.6 million as these were converted to internal staff or terminated. Also, a decrease in travel costs of $0.4 million due to travel restrictions caused by the global pandemic. As a percentage of revenue, cost of revenue, excluding depreciation and amortization was 34% for each of the years ended December 31, 2020 and 2019.
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 20%, or $1.5 million, to $6.0 million for the year ended December 31, 2020 from $7.5 million for the year ended December 31, 2019. The decrease is related to the reduction of $0.6 million in lower travel and entertainment costs, a reduction of $0.4 million in incentive compensation costs that included revision to the incentive compensation structure, a reduction in resource costs assigned to sales and marketing activities of $0.3 million and $0.2 million reduction in marketing efforts due to travel restrictions during the global pandemic. As a percentage of total revenue, sales and marketing expenses for the year ended December 31, 2020 decreased to 23% from 29% for the year ended December 31, 2019. The decrease in sales and marketing expenses as a percentage of revenue is primarily due to the aforementioned reduction in costs as proportioned to the lower 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 remained consistent with the prior year at $5.1 million for the years ended December 31, 2020 and December 31, 2019, a decrease of 1% or less than $0.1 million. As a percentage of total revenue, general and administrative expenses decreased to 19% for the year ended December 31, 2020 from 20% for the year ended December 31, 2019. The decrease in general and administrative expenses as a percentage of revenue is primarily due to the aforementioned lower costs.
Product Development
Product development expenses consist primarily of labor-related costs. Product development expenses decreased 6%, or $0.3 million, to $4.3 million for the year ended December 31, 2020 from $4.6 million for the year ended December 31, 2019. The decrease is related to a net decrease in resource costs of $0.1 million related to a staff reduction offset by product development hours worked by internal staff assigned to 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. As a percentage of total revenue, product development expenses decreased to 16% for the year ended December 31, 2020 from 18% for the year ended December 31, 2019. The decrease in product development expenses as a percentage of revenue is primarily due to the aforementioned reduced costs.
Depreciation
Depreciation expense consists of depreciation of long-lived property and equipment. Depreciation expense was $0.2 million for each of the years ended December 31, 2020 and 2019. As a percentage of revenue, depreciation expense was 1% for each of the years ended December 31, 2020 and 2019.
Amortization
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 remained stable at $0.9 million for the years ended December 31, 2020 and 2019. As a percentage of revenue, amortization expense was 4% for each of the years ended December 31, 2020 and 2019.
Goodwill Impairment Loss
No goodwill impairment was recorded for the year ended December 31, 2020. A goodwill impairment loss was recorded as a result of goodwill impairment analysis conducted since our market capitalization declined to a level that was less than the net book value of our stockholders’ equity. Based on the results of that analysis, the Company recorded a $6.7 million write-off of the remaining goodwill in the fiscal year ended December 31, 2019.
Interest Expense
Interest expense includes the amortization of debt issuance costs and interest expense from our term loans. Interest expense for the year ended December 31, 2020 decreased 78%, or $0.2 million, to less than $0.1 million as compared to $0.3 million for the year ended December 31, 2019. The decrease was due to the one loan payable reaching maturity at the end of the prior year and the second loan reaching maturity at the end of the current year. The decrease in interest expense as a percentage of revenue is primarily due to the aforementioned lower costs.
Other Income
For the year ended December 31, 2020, we had $0.2 million in other income, net, primarily related to research and development grants in the UK. This was an increase of $0.1 million in other income from year ended December 31, 2019 which consisted of mostly of the net proceeds from settlement of insurance claim after legal fees regarding coverage on the dispute settled with a former SSM contractor. Foreign currency exchange income resulting from transactions denominated in a currency other than the functional currency of the respective subsidiary increased 181%, or $0.8 million, to $0.4 million in income for the year ended December 31, 2020 compared to a $0.5 million loss for the year ended December 31, 2019 that was generated primarily through the re-measurement of certain non-functional currency denominated financial assets and liabilities of our foreign subsidiaries.
Income Tax Expense
We recorded net income tax expense of $0.8 million and $1.1 million for the years ended December 31, 2020 and 2019, respectively. The net expense for the year ended December 31, 2020 consisted of current tax expense of $0.9 million related to $0.2 million in the US, $0.3 million income tax expense incurred by our Indian based operations, $0.2 million income tax expense from one UK subsidiary, and $0.8 million of foreign taxes paid for with holdings of local taxes that could not be used as a tax credit offset by Research and Development credits from our U.K. based operations of $0.3 million. Also offset by the AMT refund of $0.4 million. Deferred tax benefit of $0.1 million related to US tax Company’s utilization of foreign tax credits and $0.3 million deferred tax benefit from losses incurred by our other UK and European subsidiaries, partially offset by tax refund of AMT credits of $0.4 million. The net expense during the year ended December 31, 2019 consisted of current tax expense of $0.8 million primarily related to $0.3 million income tax expense incurred by our Indian based operations and $1.3 million of foreign taxes paid for with holdings of local taxes that could not be used as a tax credit offset by Research and Development credits from our U.K. based operations of $0.5 million.
We use a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities. As of December 31, 2020, and 2019, we had no liability for unrecognized tax benefits. We do not believe there will be any material changes to our unrecognized tax positions over the next twelve months.
FINANCIAL CONDITION
Our working capital position increased 45%, or $1.7 million to $5.5 million at December 31, 2020 from $3.8 million at December 31, 2019. The increase in working capital is related to the increase in unbilled work in progress and the reduction in the short term portion of term loan, partially offset by the collection of customer accounts receivable of tax refunds as well as an increase to accounts payable and accrued liabilities.
LIQUIDITY AND CAPITAL RESOURCES
We have historically financed operations through cash flows from operations as well as debt and equity transactions. At December 31, 2020, our principal sources of liquidity were $2.8 million in cash and cash equivalents and $5.7 million in contract receivables, net of allowances. We provide 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. At this time, we have seen only limited disruptions to our ability to continue delivery to our clients. Our anticipated uses of cash in the future will be to fund the expansion of
our business through both organic growth as well as possible acquisition activities, the expansion of our customer base internationally, and term loan payments. Other uses of cash may include capital expenditures and technology expansion.
During 2017, in connection with the acquisition of the Lumata entities, we entered into a Term Loan Facility Agreement with East West Bank as lender in the amount of $4.7 million (the “Lumata Facility”). We used the full amount of the Lumata Facility to fund the acquisition of the Lumata companies. The Lumata Facility is secured by all of the assets of EVOL Holdings and the Original Guarantors in accordance with the terms of a Debenture entered into by EVOL Holdings and the Original Guarantors in favor of East West Bank. EVOL Holdings, EVOL Inc. and the Original Guarantors also entered into a Subordination Deed whereby each of the parties agreed to subordinate all loans by and among each other to East West Bank. Lumata France SAS and Lumata UK Ltd are also bound to adhere to the finance documents as additional obligors.
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. 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.
On July 1, 2020, we entered into the Amendment and Waiver Letter (“Second Amendment”) to the Lumata Facility. The purpose of the Second Amendment is to waive certain events of non-compliance with respect to covenants not achieved in prior periods and to amend future covenant requirements. The Second Amendment adjusted the loan amortization to be paid in full on December 31, 2020 and fixed the interest rate at 5% on the remaining principal. The Company also made an advance payment of $44,000 on June 1, 2020. The last payment of principal and interest was made January 11, 2021.
On February 29, 2016, we retired our previous revolving credit facility and we entered into a term loan agreement with East West Bank (“Term Loan”) for $6.0 million. The Term Loan bore interest at a floating rate equal to the U.S. Prime Rate plus 1.0% and was secured by substantially all of the Company’s assets, including a pledge, subject to certain limitations with respect to stock of foreign subsidiaries, of the stock of the existing and future direct subsidiaries of the Company. Interest accrued and was payable monthly. We were required to repay the Term Loan in 36 equal monthly installments, commencing on January 1, 2017. We were required to use the $6 million Term Loan proceeds, plus $4.0 million from our cash reserves, to pay off the Revolving Facility. The Term Loan was scheduled to mature on January 1, 2020.
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.
Both the Lumata Facility and the Term Loan (collectively, “Loans”) included negative covenants that place restrictions on the Company’s ability to, among other things: incur additional indebtedness; create liens or other encumbrances on assets; make loans, enter into letters of credit, guarantees, investments and acquisitions; sell or otherwise dispose of assets; cause or permit a change of control; merge or consolidate with another entity; make negative pledges; enter into affiliate transactions; make cash distributions to our stockholders in excess of specified limits; and change the nature of our business materially. Financial covenants previously included in the credit facilities were ultimately replaced by a minimum consolidated cash balance of no less than the $1.5 million and a quarterly consolidated EBITDA fixed dollar amount mutually agreed to by the Company and East West bank in the amendments.
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 for loans to qualifying businesses for amounts up to 2.5 times of the average monthly payroll expenses of the qualifying business. The loans and accrued interest are forgivable after a period of eight to twenty-four weeks as long as the borrower uses the loan proceeds for eligible purposes, including payroll, benefits, rent and utilities, and maintains its payroll levels. The amount of loan forgiveness will be reduced if the borrower terminates employees or reduces salaries during the eight-week period.
Net cash provided by operating activities for the years ended December 31, 2020 and 2019 was $1.4 million and $1.1 million, respectively. Cash provided by operating activities for the year ended December 31, 2020 was primarily due to the net income inclusive of noncash charges of $2.1 million, a decrease in contract receivable of $1.3 million, and a decrease of $0.7 million income
tax receivable as refunds were collected. These were partially offset by the increase in unbilled work-in-progress of $2.1 million, a $0.2 million increase in prepaid and other assets, and decrease in unearned revenue of $0.4 million.
The cash provided by operating activities for the year ended December 31, 2019 was primarily due to a net loss of $9.7 million offset by non-cash goodwill impairment loss of $6.7 million, amortization and depreciation expense of $1.1 million, an unrealized foreign currency gain of $0.5 million, $0.4 million related to the amortization of operating leases - right of use assets and stock compensation of $0.3 million along with the decrease in unbilled revenue of $1.8 million, a decrease in accounts receivable of $0.9 million and offset by an increase in prepaid and other current assets of $0.2 million and a decrease in accounts payable and accrued liabilities of $0.7 million.
Net cash used in investing activities was $0.3 million and $0.4 million for the years ended December 31, 2020 and 2019, respectively. Cash used in investing activities for the years ended December 31, 2020 and 2019, was due to the purchase of computer equipment and software, respectively.
Net cash used in financing activities was $1.1 million and $4.2 million for the years ended December 31, 2020 and 2019, respectively. The cash used in 2020 financing activities was for principal payments on our Loans offset by the proceeds received with the Paycheck Protection Program. The cash used in 2019 financing activities was for principal payments on our Loans.
We believe that our current cash and cash equivalents, together with anticipated cash flow from operations will be sufficient to meet our working capital, debt extinguishment and capital expenditure requirements for at least the next twelve months as of the date this Form 10-K is filed. In making this assessment, we considered the following:
Our cash and cash equivalents balance at December 31, 2020 of $2.8 million;
Our working capital balance of $5.5 million; and
Our ability to historically generate positive operating cash flows.
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 years ended December 31, 2020 and 2019, the effect of exchange rate changes resulted in a $0.4 million decrease and a $0.1 million decrease to consolidated cash, respectively. We do not currently hedge our foreign currency exposure, but we closely monitor the rate changes and may hedge our exposures in the future.
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, revenue or expenses, results of operations, liquidity, capital expenditures, or capital resources.
CRITICAL ACCOUNTING POLICIES
Our significant accounting policies are disclosed in Note 1 of our Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K. The following discussion addresses our most critical accounting policies, which are those that are both important to the portrayal of our financial condition and results of operations and that require significant judgment or use of complex estimates.
Use of Estimates
The preparation of 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 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, income tax valuation allowance, fair values of long-lived assets, valuation of intangible assets and goodwill, useful lives for property, equipment and intangible assets, business combinations, capitalization of internal software development costs and fair value of stock-based compensation amounts. Actual results could differ from these estimates.
Foreign Currency
Our functional currency is the U.S. dollar. The functional currency of our foreign operations, generally, is the respective local currency for each foreign subsidiary. Assets and liabilities of foreign operations denominated in local currencies are translated at the spot rate in effect at the applicable reporting date. Our 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 (loss) in the period in which they occur.
Intangible Assets
Amortizable intangible assets consist primarily of purchased software and licenses, customer relationships, trademarks and tradenames, non-competition and purchased software acquired in conjunction with our purchase of Telespree Communications (“Evolving Systems Labs”), Evolving Systems NC, Inc., EVOL BLS and the Lumata Entities. These assets are amortized using the straight-line method over their estimated lives. We assess the impairment of identifiable intangibles if events or changes in circumstances indicate that the carrying value of the asset group may not be recoverable.
If we determine that the carrying value of intangibles and/or long-lived assets may not be recoverable, we compare the estimated undiscounted cash flows expected to result from the use of the asset group and its eventual disposition to the asset group’s carrying amount. If an amortizable intangible or long-lived asset is not deemed to be recoverable, we recognize an impairment loss representing the excess of the asset group’s carrying value over its estimated fair value.
Fair Value Measurements
Fair value is the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is estimated by applying the following hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement:
Level 1 — Quoted prices in active markets for identical assets or liabilities.
Level 2 — Observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 — Inputs that are generally unobservable and typically reflect management’s estimate of assumptions that market participants would use in pricing the asset or liability.
Revenue Recognition
The majority of our license fees and services revenue is generated from fixed-price contracts and 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 including 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 generally as a single performance obligation. 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 revenue 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 or other services that would be separate performance obligations. Revenue for this type of managed service performance obligation is recognized using the input method of accounting, as previously described.
Contract Balances
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 are transferred to the receivables when invoiced.
The contract liabilities primarily relate to unearned revenue. Amounts billed in advance of performance obligations being satisfied are booked as unearned revenue.
Transaction Price Allocated to the Remaining Performance Obligations
Remaining performance obligations represent the transaction price of firm orders for which work has not been performed 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 December 31, 2020, the aggregate amount of the transaction price allocated to remaining performance obligations with lives greater than one-year totals $17.9 million. The Company expects approximately 62% of remaining performance obligations to be recognized into revenue within the next twelve months, with the remaining 38% recognized thereafter.
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. Additionally, applying the practical expedient in paragraph ASC 340-40-25-4, the Company recognizes the incremental costs of obtaining contracts (i.e., commissions) as an expense when incurred if the amortization period of the assets that the Company otherwise would have recognized is one-year or less.
Allowance for Doubtful Accounts
We make judgments related to our ability to collect outstanding accounts receivable and unbilled work-in-progress. We provide allowances for receivables when their collection becomes doubtful by recording an expense. We determine the allowance based on our assessment of the realization of receivables using historical information and current economic trends, including assessing the probability of collection from customers. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments owed to us, an increase in the allowance for doubtful accounts would be required. We evaluate the adequacy of the allowance regularly and make adjustments accordingly. Adjustments to the allowance for doubtful accounts could materially affect our results of operations.
Leases
A lease is defined as a contract, or part of a contract, that conveys the right to control the use of identified property, plant or equipment for a period of time in exchange for consideration. On January 1, 2019, the Company adopted ASU No. 2016-02, “Leases (Topic 842)” and all subsequent ASUs that modified Leases (Topic 842). For the Company, Leases (Topic 842) primarily affected the accounting treatment for operating lease agreements in which the Company is the lessee.
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 consolidated balance sheets, as well as operating losses and tax credit carry-forwards. We measure deferred tax assets and liabilities using enacted tax rates expected to be applied to taxable income in the years in which those temporary differences are expected to be recovered or settled. We reduce deferred tax assets by a valuation allowance if, based on available evidence, it is more likely than not that these benefits will not be realized.
We use a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more likely than not to be sustained upon examination by taxing authorities.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of
Evolving Systems, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Evolving Systems, Inc. (the “Company”) as of December 31, 2020 and 2019, the related consolidated statements of operations, comprehensive income (loss), changes in stockholders’ equity and cash flows for each of the two years in the period ended December 31, 2020, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Revenue Recognition:
As discussed in Note 1 to the consolidated financial statements, the Company recognizes revenue when the 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. The Company’s product and service offerings are customized to meet specific customer needs. The Company offers customers the ability to acquire software products, either on premise or through cloud-based hosted arrangements, and services. There is significant judgment exercised by the Company in determining revenue recognition which includes:
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·
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Determination of whether products and services are considered distinct performance obligations that should be accounted for separately versus together, such as software licenses and related services that are sold with cloud-based or managed services. |
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·
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The pattern of delivery (i.e., timing of when revenue is recognized) for each distinct performance obligation. |
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·
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Identification and treatment of contract terms that may impact the timing and amount of revenue recognized (e.g., variable consideration, contract modifications, combining contracts). |
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·
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Determination of stand-alone selling prices for each distinct performance obligation and for products and services. |
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·
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Estimating the extent of progress towards project completion of the performance obligation (e.g. estimate of hours to complete) |
Given these factors and due to the volume of transactions, the related audit effort in evaluating management's judgments in determining revenue recognition for these customer agreements was extensive and required a high degree of auditor judgment.
Our principal audit procedures related to the Company's revenue recognition for customer agreements included the following:
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·
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We evaluated management's significant accounting policies related to these customer agreements for reasonableness. |
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·
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We selected a sample of customer agreements and performed the following procedures: |
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o
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Obtained and read contract source documents for each selection. |
|
o
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Tested management's identification and treatment of contract terms. |
|
o
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Assessed the terms in the customer agreement and evaluated the appropriateness of management's application of their accounting policies, along with their use of estimates, in the determination of revenue recognition conclusions. |
|
o
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We evaluated the reasonableness of management’s determination of the performance obligations included in the contract, and the selected method of measuring of progress for over time recognition. |
|
o
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We evaluated the reasonableness of management's conclusions of stand-alone selling prices for products and services. |
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o
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For those performance obligations that use an input measure of progress based upon labor hours, we tested a selection of actual labor hours incurred and evaluated management’s estimates of remaining hours to complete the performance obligation. Further, we compared management’s previous estimates to actual results. For those performance obligations that were completed in the period, we validated the completion through applicable supporting documentation. |
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o
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We tested the mathematical accuracy of management's calculations of revenue and the associated timing of revenue recognized in the financial statements. |
Income Taxes:
As discussed in Note 5 to the consolidated financial statements, the Company recognizes current and deferred income taxes in the United States and foreign jurisdictions. The Company has implemented transfer pricing plans that significantly impact the amount of taxes incurred in certain jurisdictions. The Company’s deferred tax assets arise primarily due to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases, as well as, net operating losses, foreign tax credits, and other carryforwards. The Company records a valuation allowance on the deferred tax assets not expected to be recoverable. In assessing the recoverability of the deferred tax assets, the Company considers both historical and forecasted taxable income and expected timing of when temporary differences will reverse.
We identified the accounting for income taxes as a critical audit matter due to the audit effort relating to the following:
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·
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The subjectivity involved in evaluating the recoverability of the deferred tax assets. |
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·
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The extent of specialized skill and knowledge and consultation outside of the engagement team required to assess the appropriateness of the transfer pricing plans. |
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·
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Complexity in the application of relevant tax regulations |
Our principal audit procedures related to the Company's accounting for income taxes included the following:
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·
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We evaluated management's significant accounting policies related to accounting for income taxes for reasonableness. |
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·
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We evaluated management's significant methods to estimate forecasts in certain jurisdictions for reasonableness to demonstrate the ability to realize the deferred tax assets. We also compared the Company’s previous forecasts to actual results. |
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·
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We involved our firm’s U.S. tax professionals, with specialized skills and knowledge, and engaged a component auditor firm in the United Kingdom, with specialized skills and knowledge, who assisted in assessing the Company’s application of the relevant tax regulations. |
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·
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We involved subject-matter-experts within the firm, who assisted in assessing the conclusions reached in the Company’s transfer pricing studies and plans. |
/s/ Marcum llp
Marcum llp
We have served as the Company’s auditor since 2019.
Philadelphia, Pennsylvania
March 17, 2021
EVOLVING SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
December 31, 2019
|
|
ASSETS
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
2,763
|
|
$
|
3,076
|
|
Contract receivables, net of allowance for doubtful accounts of $780 and $710
|
|
|
|
|
|
|
at December 31, 2020 and 2019, respectively
|
|
5,681
|
|
|
6,732
|
|
Unbilled work-in-progress
|
|
3,365
|
|
|
1,105
|
|
Prepaid and other current assets
|
|
1,828
|
|
|
1,594
|
|
Income taxes receivable
|
|
270
|
|
|
953
|
|
Total current assets
|
|
13,907
|
|
|
13,460
|
|
Property and equipment, net
|
|
532
|
|
|
482
|
|
Amortizable intangible assets, net
|
|
2,769
|
|
|
3,665
|
|
Operating leases - right of use assets, net
|
|
915
|
|
|
1,205
|
|
Deferred income taxes
|
|
953
|
|
|
1,000
|
|
Total assets
|
$
|
19,076
|
|
$
|
19,812
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
Term loans - current portion
|
$
|
142
|
|
$
|
1,577
|
|
Accounts payable and accrued liabilities
|
|
4,305
|
|
|
3,827
|
|
Lease obligations — operating leases
|
|
294
|
|
|
321
|
|
Unearned revenue
|
|
3,713
|
|
|
3,971
|
|
Total current liabilities
|
|
8,454
|
|
|
9,696
|
|
Long-term liabilities:
|
|
|
|
|
|
|
Term loans, net of current portion
|
|
319
|
|
|
122
|
|
Lease obligations - operating leases, net of current portion
|
|
613
|
|
|
876
|
|
Total liabilities
|
|
9,386
|
|
|
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 as of December 31, 2020 and 2019, respectively
|
|
—
|
|
|
—
|
|
Common stock, $0.001 par value; 40,000,000 shares authorized;
|
|
|
|
|
|
|
12,374,798 shares issued and 12,195,909 outstanding as of December 31, 2020 and
|
|
|
|
|
|
|
12,342,723 shares issued and 12,163,834 outstanding as of December 31, 2019
|
|
12
|
|
|
12
|
|
Additional paid-in capital
|
|
99,776
|
|
|
99,555
|
|
Treasury stock, 178,889 shares as of December 31, 2020 and 2019, at cost
|
|
(1,253)
|
|
|
(1,253)
|
|
Accumulated other comprehensive loss
|
|
(10,345)
|
|
|
(10,053)
|
|
Accumulated deficit
|
|
(78,500)
|
|
|
(79,143)
|
|
Total stockholders' equity
|
|
9,690
|
|
|
9,118
|
|
Total liabilities and stockholders' equity
|
$
|
19,076
|
|
$
|
19,812
|
The accompanying notes are an integral part of these consolidated financial statements.
EVOLVING SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
REVENUE
|
|
|
|
|
|
|
License fees
|
$
|
745
|
|
$
|
1,245
|
|
Services
|
|
25,607
|
|
|
24,505
|
|
Total revenue
|
|
26,352
|
|
|
25,750
|
|
|
|
|
|
|
|
|
COSTS OF REVENUE AND OPERATING EXPENSES
|
|
|
|
|
|
|
Costs of revenue, excluding depreciation and amortization
|
|
8,837
|
|
|
8,685
|
|
Sales and marketing
|
|
6,000
|
|
|
7,459
|
|
General and administrative
|
|
5,052
|
|
|
5,091
|
|
Product development
|
|
4,327
|
|
|
4,594
|
|
Depreciation
|
|
216
|
|
|
190
|
|
Amortization
|
|
940
|
|
|
938
|
|
Goodwill impairment loss
|
|
–
|
|
|
6,687
|
|
Total costs of revenue and operating expenses
|
|
25,372
|
|
|
33,644
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
980
|
|
|
(7,894)
|
|
|
|
|
|
|
|
|
Other income (expense)
|
|
|
|
|
|
|
Interest income
|
|
5
|
|
|
15
|
|
Interest expense
|
|
(70)
|
|
|
(314)
|
|
Other income
|
|
186
|
|
|
56
|
|
Foreign currency exchange income (loss)
|
|
370
|
|
|
(455)
|
|
Other income (expense), net
|
|
491
|
|
|
(698)
|
|
|
|
|
|
|
|
|
Income (loss) from operations before income taxes
|
|
1,471
|
|
|
(8,592)
|
|
Income tax expense
|
|
828
|
|
|
1,103
|
|
Net income (loss)
|
$
|
643
|
|
$
|
(9,695)
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per common share
|
$
|
0.05
|
|
$
|
(0.80)
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per common share
|
$
|
0.05
|
|
$
|
(0.80)
|
|
|
|
|
|
|
|
|
Weighted average basic shares outstanding
|
|
12,187
|
|
|
12,157
|
|
Weighted average diluted shares outstanding
|
|
12,271
|
|
|
12,157
|
|
|
|
|
|
|
|
v
The accompanying notes are an integral part of these consolidated financial statements.
EVOLVING SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Net income (loss)
|
$
|
643
|
|
$
|
(9,695)
|
|
|
|
|
|
|
|
|
Other comprehensive (loss) income
|
|
|
|
|
|
|
Foreign currency translation (loss) income
|
|
(292)
|
|
|
62
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
$
|
351
|
|
$
|
(9,633)
|
The accompanying notes are an integral part of these consolidated financial statements.
EVOLVING SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
37,126
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Stock-based compensation expense
|
—
|
|
|
—
|
|
|
331
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
331
|
|
Net loss
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(9,695)
|
|
|
(9,695)
|
|
Foreign currency translation income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
62
|
|
|
—
|
|
|
62
|
|
Balance at December 31, 2019
|
12,163,834
|
|
$
|
12
|
|
$
|
99,555
|
|
$
|
(1,253)
|
|
$
|
(10,053)
|
|
$
|
(79,143)
|
|
$
|
9,118
|
|
Restricted stock vested
|
32,075
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Stock-based compensation expense
|
—
|
|
|
—
|
|
|
221
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
221
|
|
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
643
|
|
|
643
|
|
Foreign currency translation loss
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(292)
|
|
|
—
|
|
|
(292)
|
|
Balance at December 31, 2020
|
12,195,909
|
|
$
|
12
|
|
$
|
99,776
|
|
$
|
(1,253)
|
|
$
|
(10,345)
|
|
$
|
(78,500)
|
|
$
|
9,690
|
The accompanying notes are an integral part of these consolidated financial statements.
EVOLVING SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2020
|
|
|
2019
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
Net income (loss)
|
$
|
643
|
|
$
|
(9,695)
|
|
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
|
|
|
|
|
|
|
Depreciation
|
|
216
|
|
|
190
|
|
Amortization of intangible assets
|
|
940
|
|
|
938
|
|
Amortization of debt issuance costs
|
|
6
|
|
|
6
|
|
Amortization of operating leases — right of use assets
|
|
272
|
|
|
414
|
|
Stock-based compensation expense
|
|
221
|
|
|
331
|
|
Foreign currency transaction (income) loss, net
|
|
(77)
|
|
|
455
|
|
Bad debt expense, net of recoveries
|
|
(92)
|
|
|
100
|
|
Provision for deferred income taxes
|
|
(56)
|
|
|
330
|
|
Goodwill impairment loss
|
|
—
|
|
|
6,687
|
|
Change in operating assets and liabilities:
|
|
|
|
|
|
|
Contract receivables
|
|
1,286
|
|
|
858
|
|
Unbilled work-in-progress
|
|
(2,095)
|
|
|
1,839
|
|
Prepaid and other assets
|
|
(195)
|
|
|
(231)
|
|
Accounts payable and accrued liabilities
|
|
337
|
|
|
(700)
|
|
Income taxes receivable
|
|
683
|
|
|
12
|
|
Unearned revenue
|
|
(391)
|
|
|
(49)
|
|
Lease obligations — operating leases
|
|
(270)
|
|
|
(406)
|
|
Net cash provided by operating activities
|
|
1,428
|
|
|
1,079
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
(268)
|
|
|
(383)
|
|
Proceeds on sale of property and equipment
|
|
2
|
|
|
—
|
|
Net cash used in investing activities
|
|
(266)
|
|
|
(383)
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
Principal payments on notes payable
|
|
(1,370)
|
|
|
(4,243)
|
|
Proceeds from loan
|
|
319
|
|
|
—
|
|
Net cash used in financing activities
|
|
(1,051)
|
|
|
(4,243)
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
(424)
|
|
|
(109)
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents
|
|
(313)
|
|
|
(3,656)
|
|
Cash and cash equivalents at beginning of period
|
|
3,076
|
|
|
6,732
|
|
Cash and cash equivalents at end of period
|
$
|
2,763
|
|
$
|
3,076
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash and non-cash transactions:
|
|
|
|
|
|
|
Interest paid
|
$
|
66
|
|
$
|
327
|
|
Income taxes paid, net of refunds
|
$
|
(269)
|
|
$
|
995
|
|
Supplemental non-cash amounts of lease liabilities arising from obtaining right of use assets
|
$
|
41
|
|
$
|
1,609
|
The accompanying notes are an integral part of these consolidated financial statements.
EVOLVING SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 — ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization — Evolving Systems, Inc. (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 own platform which we still maintain today. Through the extensive work of our product development team, we have launched the Evolution platform featuring the best of these legacy platforms on cutting edge technology. Evolution is used to operate the most innovative large-scale loyalty programs, as well as 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 provider’s IT infrastructure, either on-premise or on a private cloud. It can be operated or managed as a 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 (“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 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 long-term effects on how we conduct business in the future is still undetermined but we continue to evolve to 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 future term loan payments, working capital and capital expenditure requirements for at least the next twelve months from the date of issuance of these consolidated financial statements. In making this assessment, we considered our $2.8 million in cash and cash equivalents and our $5.5 million in working capital at December 31, 2020, along with our ability to generate positive cash flows from operations for the years ended December 31, 2020 and 2019.
Use of Estimates — The preparation of consolidated financial statements in conformity with 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 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, income tax valuation allowance, fair values of long-lived assets, valuation of intangible assets and goodwill, useful lives for property, equipment and intangible assets, business combinations, capitalization of internal software development costs and fair value of stock-based compensation amounts. Actual results could differ from these estimates.
Foreign Currency — Our functional currency is the U.S. dollar. The functional currency of our foreign operations, generally, is the respective local currency for each foreign subsidiary. Assets and liabilities of foreign operations denominated in local currencies are translated at the spot rate in effect at the applicable reporting date. Our 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 (loss) in the period in which they occur.
Principles of Consolidation — The consolidated financial statements include the accounts of Evolving Systems, Inc. and subsidiaries, all of which are wholly owned. All significant intercompany transactions and balances have been eliminated in consolidation.
Goodwill — Goodwill is the excess of acquisition cost of an acquired entity over the fair value of the identifiable net assets acquired. Goodwill is not amortized but tested for impairment annually or whenever indicators of impairment exist. These indicators may include an other than temporary decline in our market capitalization that is calculated as our common stock’s market price multiplied by the number of shares of common stock outstanding, a significant change in the business climate, legal factors, operating performance indicators, competition, sale or disposition of a significant portion of the business or other factors. Application of the goodwill impairment test requires judgment, including the identification of reporting units, assignment of assets and liabilities to reporting units, assignment of goodwill to the reporting unit, and determination of the fair value of the reporting unit. The Company adopted ASU 2017-04, Intangibles – Goodwill and Other (Topic 350), Simplifying the Test for Goodwill Impairment, which simplifies the subsequent measurement of goodwill by eliminating the second step from the quantitative goodwill impairment test. Under this guidance, annual or interim goodwill impairment testing will be performed by comparing the fair value of a reporting unit with its carrying amount. An impairment charge will then be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value, not to exceed the carrying value of goodwill.
Intangible Assets — Amortizable intangible assets consist primarily of purchased software and licenses, customer relationships, trademarks and tradenames, non-competition and purchased software acquired in conjunction with our purchase of Telespree Communications (“Evolving Systems Labs”), Evolving Systems NC, Inc., EVOL BLS and the Lumata Entities. These assets are amortized using the straight-line method over their estimated lives.
We assess the impairment of identifiable intangibles if events or changes in circumstances indicate that the carrying value of the asset group may not be recoverable.
If we determine that the carrying value of intangibles and/or long-lived assets may not be recoverable, we compare the estimated undiscounted cash flows expected to result from the use of the asset group and its eventual disposition to the asset group’s carrying amount. If an amortizable intangible or long-lived asset is not deemed to be recoverable, we recognize an impairment loss representing the excess of the asset group’s carrying value over its estimated fair value.
Fair Value Measurements — Fair value is the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is estimated by applying the following hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement:
Level 1 — Quoted prices in active markets for identical assets or liabilities.
Level 2 — Observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 — Inputs that are generally unobservable and typically reflect management’s estimate of assumptions that market participants would use in pricing the asset or liability.
Cash and Cash Equivalents — All highly liquid investments with maturities of three months or less at the date of purchase are classified as cash equivalents.
Revenue Recognition — 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 warranty support fees represent 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 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 or other services that would be separate performance obligations. Revenue for this type of managed service performance obligation 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 Years Ended December 31,
|
|
|
2020
|
|
2019
|
|
|
Primary geographical markets
|
|
|
|
|
|
|
|
United Kingdom
|
$
|
5,212
|
|
$
|
5,039
|
|
|
Other
|
|
21,140
|
|
|
20,711
|
|
|
|
$
|
26,352
|
|
$
|
25,750
|
|
|
|
|
|
|
|
|
|
|
Major products/service lines
|
|
|
|
|
|
|
|
Licensing fees
|
$
|
745
|
|
$
|
1,245
|
|
|
Customer support, including warranty support fees
|
|
7,896
|
|
|
9,070
|
|
|
Services
|
|
8,241
|
|
|
7,211
|
|
|
Managed services
|
|
9,470
|
|
|
8,224
|
|
|
Total services
|
|
25,607
|
|
|
24,505
|
|
|
|
$
|
26,352
|
|
$
|
25,750
|
|
|
|
|
|
|
|
|
|
|
Timing of revenue recognition
|
|
|
|
|
|
|
|
Products transferred at a point in time
|
$
|
439
|
|
$
|
480
|
|
|
Products and services transferred over time
|
|
25,913
|
|
|
25,270
|
|
|
|
$
|
26,352
|
|
$
|
25,750
|
|
Contract balances
The following table provides information about receivables, assets, and liabilities from contracts with customers (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
December 31, 2019
|
|
Assets
|
|
|
|
|
|
|
Contract receivables, net
|
$
|
5,681
|
|
$
|
6,732
|
|
Unbilled work-in-progress, net
|
$
|
3,365
|
|
$
|
1,105
|
|
Liabilities
|
|
|
|
|
|
|
Unearned revenue
|
$
|
3,713
|
|
$
|
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 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 December 31, 2020 and $0.2 million at 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. During the years ended December 31, 2020 and 2019, the amount of amortization was $0.2 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 years ended December 31, 2020 and 2019, we recognized revenue of $3.4 million and $3.7 million, respectively, that was included in the corresponding contract liability balance at the beginning of the period.
Transaction price allocated to the remaining performance obligations
Remaining performance obligations represent the transaction price of firm orders for which work has not been performed 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 December 31, 2020, the aggregate amount of the transaction price allocated to remaining performance obligations with lives greater than one-year totaled $17.9 million. The Company expects approximately 62% of remaining performance obligations to be recognized into revenue within the next twelve months, with the remaining 38% recognized thereafter.
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.
Allowance for Doubtful Accounts — We make judgments related to our ability to collect outstanding accounts receivable and unbilled work-in-progress. We provide allowances for receivables when their collection becomes doubtful by recording an expense. We determine the allowance based on our assessment of the realization of receivables using historical information and current economic trends, including assessing the probability of collection from customers. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments owed to us, an increase in the allowance for doubtful accounts would be required. We evaluate the adequacy of the allowance regularly and make adjustments accordingly. Adjustments to the allowance for doubtful accounts could materially affect our results of operations.
The following table reflects the activity in the allowance for doubtful accounts (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effects of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Write-Offs
|
|
Foreign
|
|
|
|
|
|
|
|
|
Balance at
|
|
Bad Debt
|
|
Charged
|
|
Currency
|
|
Balance at
|
|
Fiscal
|
|
|
|
Beginning
|
|
Expense/
|
|
to
|
|
Exchange
|
|
End of
|
|
Year
|
|
Description
|
|
of Period
|
|
(Recovery)
|
|
Allowance
|
|
Rates
|
|
Period
|
|
2020
|
|
Allowance for doubtful accounts
|
|
$
|
710
|
|
$
|
96
|
|
$
|
(11)
|
|
$
|
(15)
|
|
$
|
780
|
|
2019
|
|
Allowance for doubtful accounts
|
|
$
|
771
|
|
$
|
(76)
|
|
$
|
19
|
|
$
|
(4)
|
|
$
|
710
|
The following table reflects the activity in the allowance for unbilled work-in-progress (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unbilled
|
|
|
|
|
Effects of
|
|
|
|
|
|
|
|
|
|
|
|
Work-in-
|
|
Write-Offs
|
|
Foreign
|
|
|
|
|
|
|
|
|
Balance at
|
|
Progress
|
|
Charged
|
|
Currency
|
|
Balance at
|
|
Fiscal
|
|
|
|
Beginning
|
|
Allowance/
|
|
to
|
|
Exchange
|
|
End of
|
|
Year
|
|
Description
|
|
of Period
|
|
(Recovery)
|
|
Allowance
|
|
Rates
|
|
Period
|
|
2020
|
|
Allowance for unbilled work-in-progress
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
2019
|
|
Allowance for unbilled work-in-progress
|
|
$
|
552
|
|
$
|
106
|
|
$
|
(643)
|
|
$
|
(15)
|
|
$
|
—
|
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.
Comprehensive Income (Loss) — Comprehensive loss consists of two components, net income (loss) and other comprehensive income (loss). Other comprehensive income (loss) refers to revenue, expenses, gains, and losses that under US GAAP are recorded as an element of stockholders’ equity but are excluded from net income (loss). Other comprehensive income (loss) consists of foreign currency translation adjustments from those subsidiaries not using the U.S. dollar as their functional currency.
Concentration of Credit Risk — Financial instruments that potentially subject us to concentrations of credit risk consist primarily of contract receivables and unbilled work-in-progress. We perform on-going evaluations of customers’ financial condition and, generally, require no collateral from customers.
A portion of our revenue is from a limited number of customers, all in the telecommunications industry.
For the year ended December 31, 2020, we did not have a significant customer (defined as contributing at least 10%). For the year ended December 31, 2019, one significant customer accounted for 11% of revenue from operations. This customer is a large telecommunications operator in Europe.
As of December 31, 2020, no customers accounted for 10% of contract receivables and unbilled work-in-progress. As of December 31, 2019, one customer accounted 12% of contract receivables and unbilled work-in-progress, respectively.
We are subject to concentration of credit risk with respect to our cash and cash equivalents, which we attempt to minimize by maintaining our cash and cash equivalents with institutions of sound financial quality. At times, cash balances may exceed limits federally insured by the Federal Deposit Insurance Corporation (“FDIC”).
Our cash and cash equivalents not under any FDIC program were $2.3 million and $2.7 million as of December 31, 2020 and 2019, respectively.
Sales, Use and Other Value Added Tax — Applicable revenue-based state, use and other value added 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.
Advertising and Promotion Costs — Advertising and promotion costs are expensed as incurred. Advertising costs totaled approximately $0.2 million and $0.3 million for the years ended December 31, 2020 and 2019, respectively.
Capitalization of Internal Software Development Costs — We expend amounts on product development, particularly for new products and/or for enhancements of existing products. For internal development of software products that are to be licensed by us, we expense the cost of developing software prior to establishing technological feasibility and those costs are capitalized once technological feasibility has been established. Capitalization ceases upon general release of the software. The determination of whether internal software development costs are subject to capitalization is, by its nature, highly subjective and involves significant judgments. This decision could significantly affect earnings during the development period. Further, once capitalized, the software costs are generally amortized on a straight-line basis over the estimated economic life of the product. The determination of the expected useful life of a product is highly judgmental. Finally, capitalized software costs must be assessed for impairment if facts and circumstances warrant such a review. We did not capitalize any internal software development costs during the years ended December 31, 2020 and 2019. In addition, we did not have any capitalized internal software development costs included in our December 31, 2020 and 2019 Consolidated Balance Sheets. We believe that during these periods no material internal software development costs were required to be capitalized. Our conclusion is primarily based on the fact that the feature−rich, pre−integrated, and highly−scalable nature of our products requires that our development efforts include complex design, coding and testing methodologies, which include next generation software languages and development tools. Development projects of this nature carry a high degree of development risk. Substantially all of our internal software development efforts are of this nature, and therefore, we believe the period between achieving technological feasibility and the general release of the software to operations is so short that any costs incurred during this period are not material.
Property and Equipment and Long-Lived Assets — Property and equipment are stated at cost or estimated fair value if acquired in an acquisition, less accumulated depreciation, and are depreciated over their estimated useful lives, or the lease term, if shorter, using the straight-line method. Leasehold improvements are stated at cost, less accumulated amortization, and are amortized over the shorter of the lease term or estimated useful life of the asset. Maintenance and repair costs are expensed as incurred.
We review our long-lived assets, such as property and equipment and purchased intangible assets subject to amortization, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. We evaluate the recoverability of an asset group by comparing its carrying amount to the estimated undiscounted future cash flows expected to be generated by the asset group. If the carrying amount of an asset group exceeds its estimated future cash flows, we recognize an impairment charge as the amount by which the carrying amount of the asset group exceeds the estimated fair value of the asset group.
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 consolidated balance sheets, as well as operating losses and tax credit carry-forwards. We measure deferred tax assets and liabilities using enacted tax rates expected to be applied to taxable income in the years in which those temporary differences are expected to be recovered or settled. We reduce deferred tax assets by a valuation allowance if, based on available evidence, it is more likely than not that these benefits will not be realized.
We use a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more likely than not to be sustained upon examination by taxing authorities.
Segment Information — We define operating segments as components of our enterprise for which separate financial information is reviewed regularly by the chief operating decision-makers to evaluate performance and to make operating decisions. We have identified our Chief Executive Officer and Senior Vice President of Finance as our chief operating decision-makers. 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 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 service, managed services, annual support fees, recurring maintenance fees, fees for maintenance upgrades and warranty services. Warranty services that are similar to software maintenance services are typically bundled with a license sale.
Recently Adopted Accounting Pronouncements — In February 2016, the FASB established Topic 842, Leases, by issuing Accounting Standards Update (“ASU”) 2016-02, which requires lessees to recognize leases on-balance sheet and disclose key information about leasing arrangements. Topic 842 was subsequently amended by ASU 2018-01, Land Easement Practical Expedient
for Transition to Topic 842; ASU 2018-10, Codification Improvements to Topic 842, Leases; and ASU 2018-11, Targeted Improvements. The new standard establishes a right-of-use model (ROU) that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months. Leases are classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the condensed consolidated statements of operations.
We adopted the new standard on January 1, 2019, its effective date. We used the optional transition method approach with the effective date as the date of initial application.
The new standard provides several optional practical expedients in transition. We elected the ‘package of practical expedients’, which permits us not to reassess under the new standard our prior conclusions about lease identification, lease classification and initial direct costs.
The new standard also provides practical expedients for an entity’s ongoing accounting. We currently have elected the short-term lease recognition exemption for all leases that qualify. This means, for those leases that qualify, we will not recognize ROU assets or lease liabilities, and this includes not recognizing ROU assets or lease liabilities for existing short-term leases of those assets in transition. We also have elected the practical expedient to not separate lease and non-lease components for all our leases and will not reassess whether initial direct costs qualify for capitalization (see Note 10).
The adoption of the standard resulted in the recognition of additional ROU assets and lease liabilities of approximately $1.6 million as of January 1, 2019, that did not change previously reported net loss and did not result in a cumulative effect adjustment to accumulated deficit and did not impact cash flows.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326) — Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). 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 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 consolidated financial statements.
Recent Accounting Pronouncements — In December 2019, the FASB issued ASU 2019-12, Income Taxes (ASC 740) — Simplifying the Accounting for Income Taxes. 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 intraperiod 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 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 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 consolidated financial statements and related disclosures.
NOTE 2 — INTANGIBLE ASSETS AND GOODWILL
We amortized identifiable intangible assets on a straight-line basis over their estimated useful lives. As of December 31, 2020, and 2019, identifiable intangibles were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
|
|
Gross Amount
|
|
|
Accumulated Amortization
|
|
|
Net Carrying Amount
|
|
Weighted-Average Amortization Period
|
|
Purchased software
|
$
|
2,932
|
|
$
|
(1,907)
|
|
$
|
1,025
|
|
4.7 yrs.
|
|
Trademarks and tradenames
|
|
311
|
|
|
(272)
|
|
|
39
|
|
0.7 yrs.
|
|
Non-competition
|
|
40
|
|
|
(40)
|
|
|
–
|
|
0.0 yrs.
|
|
Customer relationships
|
|
4,396
|
|
|
(2,691)
|
|
|
1,705
|
|
5.7 yrs.
|
|
|
$
|
7,679
|
(1)
|
$
|
(4,910)
|
(1)
|
$
|
2,769
|
|
3.8 yrs.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019
|
|
|
|
Gross Amount
|
|
|
Accumulated Amortization
|
|
|
Net Carrying Amount
|
|
Weighted-Average Amortization Period
|
|
Purchased software
|
$
|
2,903
|
|
$
|
(1,508)
|
|
$
|
1,395
|
|
5.7 yrs.
|
|
Trademarks and tradenames
|
|
307
|
|
|
(247)
|
|
|
60
|
|
1.7 yrs.
|
|
Non-competition
|
|
39
|
|
|
(39)
|
|
|
–
|
|
0.0 yrs.
|
|
Customer relationships
|
|
4,346
|
|
|
(2,136)
|
|
|
2,210
|
|
6.7 yrs.
|
|
|
$
|
7,595
|
(1)
|
$
|
(3,930)
|
(1)
|
$
|
3,665
|
|
4.8 yrs.
|
(1) Includes functional currency adjustment of less than $0.1 million.
Amortization expense of identifiable intangible assets was $0.9 million for each of the years ended December 31, 2020 and 2019, respectively. Expected future amortization expense related to identifiable intangibles based on our carrying amount as of December 31, 2020 are as follows (in thousands):
|
|
|
|
|
Year ending December 31,
|
|
|
|
2021
|
$
|
941
|
|
2022
|
|
754
|
|
2023
|
|
375
|
|
2024
|
|
172
|
|
2025
|
|
93
|
|
Thereafter
|
|
434
|
|
|
$
|
2,769
|
Due to a sustained decline in the market capitalization of our common stock during the second quarter of 2019, we performed an interim goodwill impairment test. Management considered that, along with other possible factors affecting the assessment of the Company’s reporting unit for the purposes of performing a goodwill impairment assessment, including management assumptions about expected future revenue forecasts and discount rates, changes in the overall economy, trends in the stock price, estimated control premium, other operating conditions, and the effect of changes in estimates and assumptions that could materially affect the determination of fair value and goodwill. As a result of the significant decline in the current market capitalization despite any of the other positive factors contemplated and relatively little change in our ongoing business operations, the outcome of this goodwill impairment test resulted in a charge for the impairment of goodwill of $6.7 million recorded in the consolidated financial statements for the year ended December 31, 2019.
Changes in the carrying amount of goodwill by reporting unit were as follows (in thousands):
|
|
|
|
|
|
Total
|
|
|
Goodwill
|
|
Balance at January 1, 2019
|
$
|
6,738
|
|
Goodwill impairment loss
|
|
(6,687)
|
|
Effects of changes in foreign currency exchange rates (1)
|
|
(51)
|
|
Balance at December 31, 2019
|
$
|
–
|
|
Goodwill impairment loss
|
|
–
|
|
Balance at December 31, 2020
|
$
|
–
|
(1) Represents the impact of foreign currency translation for instances when goodwill is recorded in foreign entities whose functional currency is also their local currency. Goodwill balances are translated into U.S. dollars using exchange rates in effect at period end. Adjustments related to foreign currency translation are included in other comprehensive income (loss).
NOTE 3 — BALANCE SHEET COMPONENTS
The components of accounts payable and accrued liabilities are as follows (in thousands):
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
December 31, 2019
|
|
Accounts payable and accrued liabilities:
|
|
|
|
|
|
|
Accounts payable
|
$
|
878
|
|
$
|
889
|
|
Accrued compensation and related expenses
|
|
2,180
|
|
|
1,755
|
|
Accrued liabilities
|
|
1,247
|
|
|
1,183
|
|
|
$
|
4,305
|
|
$
|
3,827
|
NOTE 4 — LONG-TERM DEBT
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 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%. As of December 31, 2019, the U.S.A. Prime Rate was 4.75%. At December 31, 2019 the interest rate was 6.25%. We used the full amount of the Lumata Facility to fund the acquisition of the Lumata companies. The Lumata Facility is secured by all of the assets of EVOL Holdings and the Original Guarantors in accordance with the terms of a Debenture entered into by EVOL Holdings and the Original Guarantors in favor of East West Bank. EVOL Holdings, EVOL Inc. and the Original Guarantors also entered into a Subordination Deed whereby each of the parties agreed to subordinate all loans by and among each other to East West Bank. 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 (“Origination Fee”) of $23,650, payable in four 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. 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.
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 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. Financial covenants previously included in the amended credit facilities 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. The Company also agreed to pay East West Bank’s legal fees in connection with the 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 the Lumata Facility unchanged. Monthly payments were $0.1 million, and the last payment was transacted on January 11, 2021.The Company also made an advance payment of $44,000 on June 1, 2020.
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 for loans to qualifying businesses for amounts up to 2.5 times of the average monthly payroll expenses of the qualifying business. The loans and accrued interest are forgivable after a period of eight to twenty-four weeks as long as the borrower uses the loan proceeds for eligible purposes, including payroll, benefits, rent and utilities, and maintains its payroll levels. The amount of loan forgiveness will be reduced if the borrower terminates employees or reduces salaries during the eight-week period.
The unforgiven portion of the PPP loan is payable over two years at an interest rate of 1%, with a deferral of payments until the Small Business Association remits the loan forgiveness amount to the lender, however if the borrower does not apply for forgiveness the deferral shall be 10 months after the end of the loan forgiveness covered period. The Company used the proceeds for purposes consistent with the PPP, Company wages. While the 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 Consolidated Balance Sheets and will reduce the balance at the time loan is forgiven or we begin to make payments. This loan is due in one payment of principal of any unforgiven amount up to the full amount of $0.3 million, and accrued interest at maturity date in April of 2022.
NOTE 5 − INCOME TAXES
We recorded net income tax expense of $0.8 million and $1.1 million for the years ended December 31, 2020 and 2019, respectively. The net expense for the year ended December 31, 2020 consisted of current tax expense of $0.9 million related to $0.2 million in the US, $0.3 million income tax expense incurred by our Indian based operations, $0.2 million income tax expense from one UK subsidiary, and $0.8 million of foreign taxes paid for with holdings of local taxes that could not be used as a tax credit offset by Research and Development credits from our U.K. based operations of $0.3 million. Also offset by the AMT refund of $0.4 million. Deferred tax benefit of $0.1 million related to US Company’s utilization of foreign tax credits and $0.3 million deferred tax benefit from losses incurred by our other UK and European subsidiaries, partially offset by tax refund of AMT credits of $0.4 million. The net benefit during the year ended December 31, 2019 consisted of current tax expense of $0.8 million related to $0.3 million income tax expense incurred by our Indian based operations and $1.3 million of foreign taxes paid for with holdings of local taxes that could not be used as a tax credit due to the current year losses offset by Research and Development credits from our U.K. based operations of $0.5 million. Also offset by the AMT refund of $0.4 million. Deferred tax expense of $0.4 million related to US tax refund of AMT credits.
On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) was enacted in response to COVID-19 pandemic. The CARES Act made various tax law changes, including among other things (i) increased the limitation under IRC Section 163(j) for 2019 and 2020 to permit additional expensing of interest (ii) enacted technical corrections so that qualified improvement property can be immediately expensed under IRC Section 168(k) and net operating losses arising in tax years beginning in 2017 and ending in 2018 can be carried back two years and carried forward twenty years without a taxable income limitation as opposed to carried forward indefinitely, and (iii) made modifications to the federal net operating loss rules including permitting federal net operating losses incurred in 2018, 2019, and 2020 to be carried back to the five preceding taxable years. The CARES Act did not have a material impact on the results reported for the year ended December 31, 2020.
Global Intangible Low-taxed Income
We recognize the tax on global intangible low-taxed income (“GILTI”) as a period cost in the period the tax is incurred. Under this policy, we have not provided deferred taxes related to temporary differences that upon their reversal will affect the amount of income subject to GILTI in the period. The GILTI inclusion was $0.3 million for the year ended December 31, 2020. There was no GILTI inclusion for the year ended December 31, 2019.
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 update each year subsequently, the Company finalized a transfer pricing plan with Evolving Systems and its subsidiaries. This transfer pricing plan determined the amount of income which is taxable in each respective jurisdiction. The Company applied this methodology in accordance with the transfer pricing plan and the adjustments necessary to reflect the increase in U.S. pre-tax income resulted in an increase in domestic income before income tax expense of $4.6 million and $4.3 million and a corresponding decrease in foreign income before income tax expense for the ended December 31, 2020 and 2019, respectively.
The pre-tax income (loss) on which the provision for income taxes was computed is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2020
|
|
2019
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
$
|
574
|
|
$
|
(290)
|
|
Foreign
|
|
|
897
|
|
|
(8,302)
|
|
Total
|
|
$
|
1,471
|
|
$
|
(8,592)
|
The expense (benefit) from continuing operations for income taxes consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(162)
|
|
$
|
(365)
|
|
Foreign
|
|
|
1,039
|
|
|
1,110
|
|
State
|
|
|
7
|
|
|
28
|
|
Total Current
|
|
|
884
|
|
|
773
|
|
Deferred:
|
|
|
|
|
|
|
|
Federal
|
|
|
197
|
|
|
385
|
|
Foreign
|
|
|
(253)
|
|
|
(55)
|
|
Total Deferred
|
|
|
(56)
|
|
|
330
|
|
Total
|
|
$
|
828
|
|
$
|
1,103
|
As of December 31, 2020, and 2019 we had no Federal NOL carryforwards remaining. As of December 31, 2020, we had state NOLs of approximately $25.8 million. The state NOL carryforwards expire at various times beginning in 2021 and ending in 2037. As of December 31, 2020, and 2019, we had foreign NOLs representing deferred tax assets of $6.8 million and $5.9 million, respectively. The certain foreign NOL carryforwards expire at various times beginning in 2021 and ending in 2037, while others will carryforward indefinitely.
In our U.S. Federal income tax returns we historically deducted income taxes paid to various countries. Our income tax calculations have historically been under the regular and AMT regulations found in U.S. tax laws. The U.S. tax system contains rules to alleviate the burden of double taxation on income generated in foreign countries and subject to tax in such countries. The U.S. allows for either a deduction or credit of such foreign taxes against U.S. taxable income (“Foreign Tax Credit” or “FTC”). An election to either claim a deduction or FTC on such foreign income taxes can be made each tax year, independent from elections made in other years. An FTC reduces a company’s actual U.S. income tax on a dollar-for-dollar basis, while a deduction reduces only the company’s income subject to tax. As the election to claim the FTC or deduction is made on an annual basis, we intend to compare benefits to either claim a deduction or FTC on an annual basis. We had approximately $4.7 million of FTC deferred tax assets to carryforward into 2021 and subsequent years. As of December 31, 2020, our FTC deferred tax asset balance was approximately $0.5 million, net of its valuation allowance.
Deferred tax assets and liabilities reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of our deferred tax assets and liabilities are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
|
December 31, 2019
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
Foreign tax credits carryforwards
|
|
$
|
4,671
|
|
$
|
4,650
|
|
Net operating loss carryforwards - Foreign
|
|
|
6,767
|
|
|
5,911
|
|
Net operating loss carryforwards - State
|
|
|
942
|
|
|
753
|
|
AMT credits
|
|
|
—
|
|
|
385
|
|
Stock compensation
|
|
|
290
|
|
|
552
|
|
Depreciable assets
|
|
|
73
|
|
|
54
|
|
Accrued liabilities and reserves
|
|
|
161
|
|
|
127
|
|
Total deferred tax assets
|
|
|
12,904
|
|
|
12,432
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
Intangibles
|
|
|
(51)
|
|
|
(180)
|
|
Accrued liabilities and reserves
|
|
|
(166)
|
|
|
(170)
|
|
Total deferred tax liability
|
|
|
(217)
|
|
|
(350)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets, before valuation allowance
|
|
|
12,687
|
|
|
12,082
|
|
Valuation allowance
|
|
|
(11,734)
|
|
|
(11,082)
|
|
Net deferred tax asset
|
|
$
|
953
|
|
$
|
1,000
|
In conjunction with the acquisition of Evolving Systems Labs in October 2013, we recorded certain identifiable intangible assets. We established a deferred tax asset of $0.1 million at the acquisition date for the expected difference between what would be expensed for financial reporting purposes and what would be deductible for income tax purposes. In September 2015, we established a deferred tax liability of $1.8 million as a result of the acquisition of Evolving Systems NC. In September 2017, we established a deferred tax liability of $0.4 million as a result of the acquisition of the Lumata Entities. There was a net deferred tax liability of $0.2 million as of December 31, 2020 and 2019, respectively. This net deferred tax liability will be recognized as the identifiable intangibles are amortized.
We maintain a valuation allowance on the domestic net deferred tax assets other than $0.5 million in FTC, and $0.6 million of foreign net deferred tax assets, offset by deferred tax liabilities of $0.2 million. We have determined it is more likely than not that we will not realize our domestic net deferred tax assets. Such assets primarily consist of certain net state operating loss carryforwards, Foreign Tax Credits and, other foreign deferred tax assets. 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.
The expense for income taxes differs from the amount computed by applying the U.S. federal income tax rate of 21% for the years ended December 31, 2020 and 2019, respectively, to loss before income tax expense as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
2020
|
|
2019
|
|
|
|
|
|
|
|
|
U.S. federal income tax expense at statutory rates
|
$
|
309
|
|
$
|
(1,804)
|
|
State income tax expense, net of federal impact
|
|
7
|
|
|
28
|
|
Foreign rate differential
|
|
(39)
|
|
|
244
|
|
Federal Refund
|
|
—
|
|
|
(26)
|
|
Change in valuation allowance
|
|
505
|
|
|
468
|
|
Research and development credits
|
|
(322)
|
|
|
(537)
|
|
Foreign taxes withholdings
|
|
762
|
|
|
1,216
|
|
Goodwill impairment loss
|
|
—
|
|
|
1,404
|
|
Permanent differences and other, net
|
|
(394)
|
|
|
110
|
|
Total tax expense
|
$
|
828
|
|
$
|
1,103
|
The Company recognizes the tax benefit from an uncertain tax position when it determines that it is more likely than not that the position would be sustained upon examination by taxing authorities.
As of December 31, 2020, and 2019, we had no liability for unrecognized tax benefits this evaluation includes our tax positions including current and previous transfer pricing plans. We do not believe there will be any material changes to our unrecognized tax positions over the next twelve months. Interest and penalties related to income tax liabilities are included as a component of income tax expense in the accompanying statements of operations.
We had no material net excess tax benefits from employee stock plan awards for the years ended December 31, 2020 and 2019, which would be reflected as income tax expense or benefit in the statement of operations.
We conduct business globally and, as a result, Evolving Systems Inc. or one or more of our subsidiaries file income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. In the normal course of business, we are subject to examination by taxing authorities throughout the world, namely the U.K., France, and India. Although carryovers can always be subject to review by taxing authorities, we are no longer subject to U.S. federal, state and local, or non-U.S. income tax examinations for years before 2015.
NOTE 6 − STOCKHOLDERS’ EQUITY
Common Stock Dividends
There were no accrued dividends as of December 31, 2020 and 2019.
Any determination to declare a future quarterly dividend, as well as the amount of any cash dividend which may be declared, will be based on our financial position, earnings, earnings outlook and other relevant factors at that time, including applicable limits under our term loan facility or any other credit facility then in effect.
Treasury Stock
As of December 31, 2020, and 2019, we held 178,889 shares of our common stock that we purchased prior to the expiration of our stock purchase program on December 31, 2014.
Certain Anti-Takeover Provisions/Agreements with Stockholders
Our restated certificate of incorporation allows the board of directors to issue up to 2,000,000 shares of preferred stock and to determine the price, rights, preferences and privileges of those shares without any further vote or action by our stockholders. The rights of the holders of our common stock will be subject to, and may be adversely affected by, the rights of the holders of any
preferred stock that may be issued in the future. Issuance of preferred stock, while providing desired flexibility in connection with possible acquisitions and other corporate purposes could make it more difficult for a third party to acquire a majority of our outstanding voting stock. As of December 31, 2020, and 2019, no shares of preferred stock were outstanding.
In addition, we are subject to the anti-takeover provisions of Section 203 of Delaware General Corporation Law which prohibit us from engaging in a “business combination” with an “interested stockholder” for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in the prescribed manner. The application of Section 203 may have the effect of delaying or preventing changes in control of our management, which could adversely affect the market price of our common stock by discouraging or preventing takeover attempts that might result in the payment of a premium price to our stockholders.
NOTE 7 — 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 and directors, and record compensation cost for all stock awards granted after January 1, 2006 and awards modified, repurchased, or cancelled after that date, using the modified prospective method. We record compensation costs associated with the vesting of unvested options on a straight-line basis over the vesting period. We recognized $0.2 and $0.3 million for the years ended December 31, 2020 and 2019, respectively, of compensation expense in the consolidated statements of operations, with respect to our stock-based compensation plans.
The following table summarizes stock-based compensation expenses recorded in the statement of operations (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
2020
|
|
2019
|
|
Cost of revenue, excluding depreciation and amortization
|
$
|
47
|
|
$
|
42
|
|
Sales and marketing
|
|
24
|
|
|
23
|
|
General and administrative
|
|
155
|
|
|
239
|
|
Product development
|
|
(5)
|
|
|
27
|
|
Total share-based compensation
|
$
|
221
|
|
$
|
331
|
Stock Incentive Plans
In June 2007, our stockholders approved the 2007 Stock Incentive Plan (the “2007 Stock Plan”) with a maximum of 1.0 million shares reserved for issuance. In June 2010, our stockholders approved an amendment to the 2007 Stock Plan which increased the maximum shares that may be awarded under the plan to 1.25 million. In June 2013, our stockholders approved an amendment to the 2007 Stock Plan which increased the maximum shares that may be awarded under the plan to 1.5 million. In June 2015, our stockholders approved an amendment to the 2007 Stock Plan which increased the maximum shares that may be awarded under the plan to 2.0 million. Awards permitted under the 2007 Stock Plan included: Stock Options, Stock Appreciation Rights, Restricted Stock, Restricted Stock Units, Performance Awards and Other Stock-Based Awards. Awards issued under the 2007 Stock Plan are at the discretion of the Board of Directors. As applicable, awards were granted with an exercise price equal to the closing price of our common stock on the date of grant, generally vested over four years for employees and one year for directors and, with respect to stock option grants, expired no more than ten years from the date of grant. At December 31, 2020 and 2019, there were no shares available for grant under the 2007 Stock Plan. At December 31, 2020 and 2019, 0.2 million and 0.3 million options and restricted shares were issued and outstanding under the 2007 Stock Plan, respectively.
In June 2016, our stockholders approved the 2016 Stock Incentive Plan (the “2016 Stock Plan”) with a maximum of 0.25 million shares reserved for issuance. In June 2018, our stockholders approved an amendment to the 2016 Stock Plan which increased the maximum shares that may be awarded under the plan to 0.85 million Awards permitted under the 2016 Stock Plan include: Stock Options, Stock Appreciation Rights, Restricted Stock, Restricted Stock Units, Performance Awards and Other Stock-Based Awards. Awards issued under the 2016 Stock Plan are at the discretion of the Board of Directors. As applicable, awards are granted with an exercise price equal to the closing price of our common stock on the date of grant, generally vest over four years for employees and three years for an initial grant and one year for subsequent grants for directors and expire no more than ten years from the date of grant. At December 31, 2020 and 2019, 0.2 million and 0.3 million options and restricted shares were issued and outstanding under the 2016 Stock Plan, respectively. At December 31, 2020 and 2019, there were approximately 0.5 million and 0.4 million shares available for grant under the 2016 Stock Plan, respectively.
|
|
|
|
|
|
|
|
|
|
Restricted
|
|
|
|
Stock
|
|
|
|
Number of
|
|
|
|
Shares
|
|
|
|
(in thousands)
|
|
|
Unvested restricted stock at January 1, 2019
|
349
|
|
|
Less restricted stock vested
|
(37)
|
|
|
Less restricted stock forfeited/expired
|
(153)
|
|
|
Unvested restricted stock at December 31, 2019
|
159
|
|
|
Less restricted stock vested
|
(32)
|
|
|
Less restricted stock forfeited/expired
|
(64)
|
|
|
Unvested restricted stock at December 31, 2020
|
63
|
|
|
|
|
|
No grants were made during the year ending December 31, 2020 and 2019. During the years ended December 31, 2020 and 2019, approximately 0.03 million and 0.04 million shares of restricted stock vested, respectively. There were forfeitures of approximately 0.06 million shares and approximately 0.15 million shares of restricted stock during the years ended December 31, 2020 and 2019, respectively.
The fair market value of restricted shares for stock-based compensation expense is equal to the closing price of our common stock on the date of grant. The restrictions on the stock award are released generally over four years for senior management and over one year for board members. Stock-based compensation expense includes $0.2 million for each of the years ended December 31, 2020 and 2019, respectively for restricted stock.
Of the restrictions on the stock awards granted during the periods ended March 31, 2017 and June 30, 2017, 20% was released in January 2018, and 10% annually beginning on the one-year anniversary of their offering thereafter for four years. The remaining 40% will be released evenly over four years beginning in 2018 contingent upon the attainment of annual performance goals established by our Board of Directors. Of the restrictions on the stock awards granted during the third quarter, the fourth quarter and the period ended December 31, 2017, respectively, one-fourth will be released on the one-year anniversary of the date of the grant and the balance will be released quarterly over a three-year period. For the years ended December 31, 2020 and 2019, we did not attain the annual performance goals.
The following is a summary of stock option activity under the stock option plans for the years ended December 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
Weighted-
|
|
Remaining
|
|
|
Aggregate
|
|
|
Number of
|
|
|
Average
|
|
Contractual
|
|
|
Intrinsic
|
|
|
Shares
|
|
|
Exercise
|
|
Term
|
|
|
Value
|
|
|
(in thousands)
|
|
|
Price
|
|
(Years)
|
|
|
(in thousands)
|
|
Options outstanding at January 1, 2019
|
591
|
|
$
|
5.75
|
|
7.39
|
|
$
|
–
|
|
Less options forfeited/cancelled
|
(138)
|
|
|
5.61
|
|
|
|
|
|
|
Less options expired
|
(15)
|
|
|
8.94
|
|
|
|
|
|
|
Options outstanding at December 31, 2019
|
438
|
|
$
|
5.69
|
|
6.51
|
|
$
|
–
|
|
Less options forfeited/cancelled
|
(92)
|
|
|
5.29
|
|
|
|
|
|
|
Less options expired
|
(3)
|
|
|
2.86
|
|
|
|
|
|
|
Options outstanding at December 31, 2020
|
343
|
|
$
|
5.82
|
|
5.62
|
|
$
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at December 31, 2020
|
293
|
|
$
|
6.04
|
|
5.40
|
|
$
|
–
|
The following is a summary of stock options outstanding under the plans as of December 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options Outstanding
|
|
|
Stock Options Exercisable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Avg.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
|
|
|
|
|
|
|
|
Range of
|
|
|
|
|
|
Contractual Life
|
|
|
Weighted Avg.
|
|
|
|
|
|
Weighted Avg.
|
|
Exercise Prices
|
|
|
Number of Shares
|
|
|
(years)
|
|
|
Exercise Price
|
|
|
Number of Shares
|
|
|
Exercise Price
|
|
$
|
2.25
|
|
$
|
4.31
|
|
|
12,857
|
|
|
3.61
|
|
$
|
3.39
|
|
|
12,857
|
|
$
|
3.39
|
|
$
|
4.32
|
|
$
|
4.55
|
|
|
150,000
|
|
|
6.84
|
|
$
|
4.50
|
|
|
112,500
|
|
$
|
4.50
|
|
$
|
4.56
|
|
$
|
4.94
|
|
|
50,000
|
|
|
6.92
|
|
$
|
4.60
|
|
|
37,500
|
|
$
|
4.60
|
|
$
|
4.95
|
|
$
|
8.41
|
|
|
60,551
|
|
|
4.09
|
|
$
|
6.08
|
|
|
60,551
|
|
$
|
6.08
|
|
$
|
8.42
|
|
$
|
10.90
|
|
|
69,600
|
|
|
3.75
|
|
$
|
9.75
|
|
|
69,600
|
|
$
|
9.75
|
As of December 31, 2020, there were approximately $0.3 million of total unrecognized compensation costs related to unvested stock options and restricted stock. These costs are expected to be recognized over a weighted average period of 0.5 years.
There were no exercises for the years ended December 31, 2020, and 2019. The total fair value of stock awards vested was $0.3 million during the years ended December 31, 2020 and 2019, respectively.
There was no cash received from stock option exercises for the years ended December 31, 2020 and 2019. There were no net settlement exercises during the years ended December 31, 2020 and 2019.
We have issued less than 0.1 million shares of stock related to the vesting of restricted stock awards since the balance sheet date.
Employee Stock Purchase Plan
Under the Employee Stock Purchase Plan (“ESPP”), we are authorized to issue up to 0.55 million shares of our common stock to full-time employees, nearly all of whom are eligible to participate. Under the terms of the ESPP, employees may elect to have up to 15% of their gross compensation withheld through payroll deduction to purchase our common stock, capped at $25,000 annually and no more than 0.01 million shares per offering period. The purchase price of the stock is 85% of the lower of the market price at the beginning or end of each three-month participation period. As of December 31, 2020, there were less than 0.1 million shares available for purchase. For the years ended December 31, 2020 and 2019, we recorded compensation expense of $0.0 million associated with grants under the ESPP which includes the fair value of the look-back feature of each grant as well as the 15% discount on the purchase price. This expense fluctuates each period primarily based on the level of employee participation.
We did not receive any cash from our employee stock purchase plan for the years ended December 31, 2020 and 2019. We did not issue any shares related to the ESPP for the years ended December 31, 2020 and 2019.
NOTE 8 — BENEFIT PLANS
We have established a defined contribution retirement plan for our employees under section 401(k) of the Internal Revenue Code (the “401(k) Plan”) that is available to all U.S. employees 21 years of age or older with a month of service. Beginning in 2012, we adopted a Safe Harbor 401(k) requiring us to contribute 3% of the employee's compensation for each eligible employee, regardless of whether the employee chooses to participate in the plan. All employee contributions are fully vested immediately and employer contributions vest over a period of three years. Evolving Systems U.K. has established a defined contribution pension scheme that is available to all employees in their first full month of employment. Employees may contribute a percentage of their earnings, the amount of which is dependent upon the age of the employee, not to exceed the maximum statutory contribution amount. We match 5% of employee contributions. All contributions are immediately vested in their entirety.
During each of 2020 and 2019, we recorded a consolidated expense of $0.4 million under the aforementioned plans.
In accordance with Indian law, the Company provides certain defined benefit plans covering substantially all of its Indian employees. The gratuity plan provides a lump-sum payment to vested employees upon retirement or termination of employment in an amount based on each employee’s salary and duration of employment with the Company. The leave encashment plan requires the Company to pay employees leaving the Company a specific formula taking into account earned leaves up to a certain maximum and the employee’s most recent salary. The annual projected cost of these defined benefit plans is actuarially determined. The Company’s liability was $0.4 million and $0.2 million as of December 31, 2020 and 2019, respectively.
NOTE 9 — EARNINGS (LOSS) PER SHARE
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):
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
2020
|
|
2019
|
|
Basic earnings (loss) per common share:
|
|
|
|
|
|
|
Net income (loss)
|
$
|
643
|
|
$
|
(9,695)
|
|
Basic weighted average shares outstanding
|
|
12,187
|
|
|
12,157
|
|
Basic earnings (loss) per common share:
|
$
|
0.05
|
|
$
|
(0.80)
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per common share:
|
|
|
|
|
|
|
Net income (loss)
|
$
|
643
|
|
$
|
(9,695)
|
|
Weighted average shares outstanding
|
|
12,187
|
|
|
12,157
|
|
Effect of dilutive securities - options and restricted stock
|
|
84
|
|
|
—
|
|
Diluted weighted average shares outstanding
|
|
12,271
|
|
|
12,157
|
|
Diluted earnings (loss) per common share:
|
$
|
0.05
|
|
$
|
(0.80)
|
Weighted average options to purchase approximately 0.4 million shares of common stock equivalents were excluded from the computation of diluted weighted average shares outstanding for the years ended December 31, 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.
NOTE 10 — COMMITMENTS AND CONTINGENCIES
(a)Lease Commitments
Under Topic 842, operating lease expense is generally recognized evenly over the term of the lease. The Company has operating leases primarily consisting of facilities with remaining lease terms of one year to seven years. We lease office and operating facilities
under non-cancelable operating leases. Current facility leases include our offices in Englewood, Colorado, New York, New York, London, England, Bangalore and Kolkata India, Johannesburg, South Africa, Kuala Lumpur, Malaysia, Grenoble, France, Cluj-Napoca, Romania and Madrid, Spain. The Company entered into one new lease in Kuala Lumpur, Malaysia that contributed less than $0.1 million to our right-of-use asset/operating lease liability in the year ended December 31, 2020. 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. Total rent expense consisted of operating lease expense of $0.4 million and short-term lease expense of $0.2 million for the year ended December 31, 2020. Total rent expense consisted of operating lease expense of $0.5 million and short-term lease expense of $0.2 million for the year ended December 31, 2019. There was no sublease rental income for the years ended December 31, 2020 and 2019. We paid $0.4 million and $0.5 million against Lease obligations — operating leases in the years ended December 31, 2020 and 2019, respectively.
Leases with an initial term of twelve months or less are not recorded on the consolidated balance sheet. For lease agreements entered into or reassessed after the adoption of Topic 842, we combine the lease and non-lease components in determining the lease liabilities and right-of-use (“ROU’) assets.
Our lease agreements generally do not provide an implicit borrowing rate; therefore, an internal incremental borrowing rate is determined based on information available at lease commencement date for purposes of determining the present value of lease payments. We used the incremental borrowing rate on January 1, 2019 for all leases that commenced prior to that date.
ROU lease assets and lease liabilities for our operating leases were recorded in the consolidated balance sheet as follows:
|
|
|
|
|
|
|
|
|
As of
|
|
As of
|
|
|
December 31, 2020
|
|
December 31, 2019
|
|
Other Long-term assets - right of use assets
|
$
|
915
|
|
$
|
1,205
|
|
|
|
|
|
|
|
|
Lease obligations — operating leases
|
$
|
294
|
|
$
|
321
|
|
Lease obligations — operating leases, net of current portion
|
|
613
|
|
|
876
|
|
Total lease liability
|
$
|
907
|
|
$
|
1,197
|
|
|
|
|
|
|
|
|
Weighted average remaining operating lease term (in years)
|
|
3.6
|
|
|
4.4
|
|
Weighted average discount rate
|
|
6.50%
|
|
|
6.75%
|
Future lease payments included in the measurement of lease liabilities on the consolidated balance sheet as of December 31, 2020, for the following five fiscal years and thereafter were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ending
|
|
2021
|
|
|
|
$
|
334
|
|
2022
|
|
|
|
|
307
|
|
2023
|
|
|
|
|
170
|
|
2024
|
|
|
|
|
71
|
|
2025
|
|
|
|
|
71
|
|
Thereafter
|
|
|
|
|
42
|
|
Total future minimum lease payments
|
|
|
|
|
995
|
|
Present value Adjustment
|
|
|
|
|
88
|
|
Total
|
|
|
|
$
|
907
|
|
|
|
|
|
|
|
(b)Other Commitments
As permitted under Delaware law, we have agreements with officers and directors under which we agree to indemnify them for certain events or occurrences while the officer or director is, or was, serving at our request in this capacity. The term of the indemnification period is indefinite. There is no limit on the amount of future payments we could be required to make under these indemnification agreements; however, we maintain Director and Officer insurance policies, as well as an Employment Practices Liability Insurance Policy, that may enable us to recover a portion of any amounts paid. As a result of our insurance policy coverage, we believe the estimated fair value of these indemnification agreements is minimal. Accordingly, we did not record any liabilities for these agreements as of December 31, 2020 and 2019.
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. We did not record any liabilities for these agreements as of December 31, 2020 and 2019.
Our standard license agreements contain product warranties that the software will be free of material defects and will operate in accordance with the stated requirements for a limited period of time. The product warranty provisions require us to cure any defects through any reasonable means. We believe the estimated fair value of the product warranty provisions in the license agreements in place with our customers is minimal. Accordingly, there were no liabilities recorded for these product warranty provisions as of December 31, 2020 and 2019.
Our software arrangements generally include a product indemnification provision whereby we will indemnify and defend a customer in actions brought against the customer for claims that our products infringe upon a copyright, trade secret, or valid patent of a third party. We have not historically incurred any significant costs related to product indemnification claims. Accordingly, there were no liabilities recorded for these indemnification provisions as of December 31, 2020 and 2019.
(c)Litigation
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 Supreme Court of New Jersey against us. He is seeking $3.5 million for incentive compensation he claims he earned during his tenure as Evolving’s CEO, severance payments and benefits that he would have been contractually entitled to receive had he been terminated without cause, as well as additional damages in relation to his termination. The Company has engaged legal counsel through its insurance carrier and has begun discovery. The Company
intends to defend this matter rigorously and the ultimate outcome is not estimable or determinable at this time, although substantially all of the relief sought would be covered by insurance, if successful.
In June 2018, we agreed to a Mutual Release and Settlement Agreement and a Contribution Agreement (the “SSM Agreements”) with certain parties related to our September 30, 2015 acquisition of SSM. The SSM Agreements settled a dispute with a former SSM contractor, for which the Company asserted indemnification from the SSM sellers. Under the SSM Agreements, in July 2018 we paid $0.3 million toward the settlement, $0.1 million of which was on the Company’s behalf and was recorded as other expense for the fiscal year ending December 31, 2018. The Company and the SSM sellers agreed to offset the Company’s contribution to the settlement against the final payment due to the SSM sellers and, therefore, we were released from a $0.3 million final payment due to the sellers of SSM. In 2019, we agreed to and received a settlement of $0.2 million, with our insurance carrier at the time of claim, for coverage related to the reimbursement of costs incurred on this matter.
NOTE 11 — 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 U.K.-based subsidiaries. Additionally, personnel in Cluj -Napoca, Romania; Grenoble, France; and Bangalore and Kolkata, India; provide software development services and support to our global operations. Financial information relating to U.S. based companies and by international geographic region exceeding the threshold (defined as contributing at least 10%) of revenue from operations is as follows (in thousands):
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
December 31, 2019
|
|
Long-lived assets, net
|
|
|
|
|
|
|
United States
|
$
|
1,352
|
|
$
|
2,063
|
|
United Kingdom
|
|
1,578
|
|
|
1,727
|
|
Other
|
|
1,286
|
|
|
1,562
|
|
|
$
|
4,216
|
|
$
|
5,352
|
ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. 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 the 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 Annual Report on Form 10-K. Based on that evaluation, our Chief Executive Officer and Senior Vice President of Finance have concluded that our disclosure controls and procedures were effective as of the end of December 31, 2020.
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.
Management’s report on internal control over financial reporting. Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Under the supervision and with the participation of our management, including our Chief Executive Officer and Senior Vice President of Finance, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the 2013 framework set forth in the report entitled Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). The COSO framework summarizes each of the components of a company’s internal control system, including (i) the control environment, (ii) risk assessment, (iii) control activities, (iv) information and communication, and (v) monitoring.
Based on our evaluation under the framework in Internal Control — Integrated Framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2020.
This Annual Report on Form 10-K does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our independent registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit us to provide only management’s report in this Annual Report on Form 10-K.
Changes in internal control over financial reporting. During the quarter ended December 31, 2020, there was no change in our internal control over financial reporting or in other factors that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B.OTHER INFORMATION
None
PART III
ITEM 10.DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information called for by this Item will be set forth in our Proxy Statement for the Annual Meeting of Stockholders, to be filed within 120 days of December 31, 2020 and is incorporated herein by reference.
ITEM 11.EXECUTIVE COMPENSATION
The information called for by this Item will be set forth in our Proxy Statement for the Annual Meeting of Stockholders, to be filed within 120 days of December 31, 2020 and is incorporated herein by reference.
ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information called for by this Item will be set forth in our Proxy Statement for the Annual Meeting of Stockholders, to be filed within 120 days of December 31, 2020 and is incorporated herein by reference.
ITEM 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information called for by this Item will be set forth in our Proxy Statement for the Annual Meeting of Stockholders, to be filed within 120 days of December 31, 2020 and is incorporated herein by reference.
ITEM 14.PRINCIPAL ACCOUNTING FEES AND SERVICES
Incorporated by reference to the section of the Evolving Systems, Inc. 2020 Proxy Statement, anticipated to be filed within 120 days of December 31, 2020, entitled “Proposal No. 3-Ratification of Selection of Independent Registered Public Accounting Firm.”
PART IV
ITEM 15.EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)The following documents are filed as part of this Annual Report on Form 10-K:
|
1.
| |
Consolidated Financial Statements. |
Our Consolidated Financial Statements are listed in the “Index to Consolidated Financial Statements” under Part II, Item 8 of
this Annual Report on Form 10-K.
|
2.
| |
Consolidated Financial Statements Schedules. |
All schedules have been omitted because the required information is not present, or not present in amounts sufficient to require submission of the schedules or because the required information is provided in the Consolidated Financial Statements or Notes thereto.
EXHIBIT INDEX
|
|
|
|
|
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
|
|
Restated Certificate of Incorporation, as filed as an exhibit to the Registrant’s registration statement on Form S-1 filed on 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.
|
|
4.1
|
|
Evolving Systems, Inc. Amended and Restated 2007 Stock Incentive Plan, as filed as Appendix A to the Registrant’s Definitive Proxy Statement on Schedule 14A filed with the Commission on April 30, 2015 and incorporated herein by reference.
|
|
4.2†
|
|
Specimen stock certificate representing shares of Common Stock as filed as an exhibit to the Registrant’s registration statement on Form S-1 filed on January 9, 1998 and incorporated herein by reference.
|
|
4.3
|
|
Description of Registrant's securities registered pursuant to Section 12 of the Securities Exchange Act of 1934, as filed as an exhibit to the Registrant’s annual report on Form 10-K filed on March 30, 2020 and incorporated herein by reference.
|
|
10.1*
|
|
Form of Indemnification Agreement, entered into by the Registrant and each of its directors and executive officers, as filed as Exhibit 10.2 to the Registrant’s Form 8-K filed on July 31, 2014 and incorporated herein by reference.
|
|
10.2*
|
|
Employee Stock Purchase Plan, as filed as an exhibit to the Registrant’s registration statement on Form S-1 filed on January 9, 1998 and incorporated herein by reference.
|
|
10.3
|
|
Fifth Amendment to Office Building Lease Agreement, as filed as Exhibit 10.21 to the Registrant’s Form 10-Q filed May 11, 2007 and incorporated herein by reference.
|
|
10.4
|
|
Loan and Security Agreement between Evolving Systems, Inc. and East West Bank, as filed as Exhibit 10.1(a) to the Registrant’s Form 8-K filed on October 25, 2012 and incorporated herein by reference.
|
|
10.5
|
|
Amendment to Loan and Security Agreement between Evolving Systems, Inc. and East West Bank, as filed as Exhibit 10.1 to the Registrant’s Form 8-K filed on November 6, 2014 and incorporated herein by reference.
|
|
10.6
|
|
Third Amendment to Loan and Security Agreement between Evolving Systems, Inc. and East West Bank, as filed as Exhibit 10.1 to the Registrant’s Form 8-K filed on September 30, 2015 and incorporated herein by reference.
|
|
10.7
|
|
Fourth Amendment to Loan and Security Agreement between Evolving Systems, Inc. and East West Bank, as filed as Exhibit 10.1 to the Registrant’s Form 8-K filed on November 10, 2015 and incorporated herein by reference.
|
|
10.8
|
|
Fifth Amendment to Loan and Security Agreement between Evolving Systems, Inc. and East West Bank, as filed as Exhibit 10.1 to the Registrant’s Form 8-K filed on March 3, 2016 and incorporated herein by reference.
|
|
10.9
|
|
Sixth Amendment to Loan and Security Agreement between Evolving Systems, Inc. and East West Bank, as filed as Exhibit 10.1 to the Registrant’s Form 8-K filed on October 9, 2019 and incorporated herein by reference.
|
|
10.10
|
|
First Amendment 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, Lumata UK Limited, and East West Bank as Lender, as filed as Exhibit 10.2 to the Registrant’s Form 8-K filed on October 9, 2019 and incorporated herein by reference.
|
|
10.11*
|
|
Evolving Systems, Inc. 2016 Stock Incentive Plan, as amended, as filed as Appendix A to the Registrant’s Definitive Proxy Statement on Schedule 14A filed with the Commission on April 26, 2018 and incorporated herein by reference.
|
|
10.12
|
|
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 and East West Bank as Lender dated August 16, 2017, as filed as Exhibit 10.1 to the Registrant’s Form 8-K filed on August 22, 2017 and incorporated herein by reference.
|
|
10.13
|
|
Debenture entered into by and among Evolving Systems Holdings Limited, the Original Guarantors and East West Bank, dated August 16, 2017, as filed as Exhibit 10.2 to the Registrant’s Form 8-K filed on August 22, 2017 and incorporated herein by reference.
|
|
10.14
|
|
Subordination Deed entered into by and among Evolving Systems, Inc., Evolving Systems Holdings Limited, the Original Guarantors and East West Bank, dated August 16, 2017, as filed as Exhibit 10.3 to the Registrant’s Form 8-K filed on August 22, 2017 and incorporated herein by reference.
|
|
10.15*
|
|
Employment Agreement dated December 4, 2017, entered into between Evolving Systems, Inc. and Mark P. Szynkowski, as filed as Exhibit 10.1 to the Registrant’s Form 8-K filed on December 4, 2017 and incorporated herein by reference.
|
|
10.16
|
|
East West Bank Fixed Coverage Charge Waiver Letter dated, as filed as Exhibit 10.32 to the Registrant’s Form 10-K filed on April 4, 2019 and incorporated herein by reference.
|
|
10.17*
|
|
Employment Agreement entered into between Evolving Systems, Inc. and Matthew Stecker, as filed as Exhibit 10.1 to the Registrant’s Form 8-K filed on July 23, 2019 and incorporated herein by reference.
|
|
10.18*
|
|
Amendment to Employment Agreement entered into between Evolving Systems, Inc. and Matthew Stecker, as filed as Exhibit 10.1 to the Registrant’s Form 8-K filed on May 22, 2020 and incorporated herein by reference.
|
|
10.19
|
|
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.
|
|
14.1
|
|
Code of Business Conduct, filed herewith.
|
|
21.1
|
|
Subsidiaries of the Registrant, as filed as an exhibit to the Registrant’s annual report on Form 10-K filed on March 30, 2020 and incorporated herein by reference.
|
|
23.1
|
|
Consent of Marcum LLP, Independent Registered Public Accounting Firm related to Registration Statements on Forms S-8 (filed herewith).
|
|
24.1
|
|
Power of Attorney (included on signature page)
|
|
31.1
|
|
Certification of Chief Executive Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
|
|
31.2
|
|
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
|
|
32.1
|
|
Certifications of Chief Executive Officer and 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).
|
|
32.2
|
|
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
|
|
The following financial information from the annual report on Form 10-K of Evolving Systems, Inc. for the year ended December 31, 2020, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated Balance Sheets as of December 31, 2020 and 2019 (ii) Consolidated Statements of Operations for the years ended December 31, 2020 and 2019 (iii) Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2020 and 2019 (iv) Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2020 and 2019, (v) Consolidated Statements of Cash Flows for the years ended December 31, 2020 and 2019 and (vi) Notes to the Consolidated Financial Statements.
|
__________________________
*Identifies each management contract or compensatory plan or arrangement.
ITEM 16.FORM 10-K SUMMARY
Not applicable.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
EVOLVING SYSTEMS, INC.
|
22
|
|
|
|
|
|
By:
|
/s/ MATTHEW STECKER
|
|
Chief Executive Officer and Executive Chairman
|
March 17, 2021
|
|
|
Matthew Stecker
|
|
(Principal Executive Officer)
|
|
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Matthew Stecker, his attorney-in-fact, each with the power of substitution, for him in any and all capacities, to sign any amendments to this Report, and to file the same, with exhibits thereto and other documents in connections therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his or her substitute or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
|
2
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
|
|
By:
|
/s/ MATTHEW STECKER
|
|
Chief Executive Officer and Executive Chairman
|
|
March 17, 2021
|
|
|
Matthew Stecker
|
|
(Principal Executive Officer)
|
|
|
|
|
|
|
|
|
|
|
By:
|
/s/ MARK P. SZYNKOWSKI
|
|
Senior Vice President of Finance
|
|
March 17, 2021
|
|
|
Mark P. Szynkowski
|
|
(Principal Financial and Accounting Officer)
|
|
|
|
|
|
|
|
|
|
|
By:
|
/s/ DAVID J. NICOL
|
|
Director
|
|
March 17, 2021
|
|
|
David J. Nicol
|
|
|
|
|
|
|
|
|
|
|
|
|
By:
|
/s/ DAVID S. OROS
|
|
Director
|
|
March 17, 2021
|
|
|
David S. Oros
|
|
|
|
|
|
|
|
|
|
|
|
|
By:
|
/s/ JULIAN D. SINGER
|
|
Director
|
|
March 17, 2021
|
|
|
Julian D. Singer
|
|
|
|
|
