Symbolic Logic, Inc. - Quarter Report: 2012 March (Form 10-Q)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended March 31, 2012

 

OR

 

o         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: 0-24081

 

EVOLVING SYSTEMS, INC.

(Exact name of registrant as specified in its charter)

 

 

(303) 802-1000

(Registrant’s telephone number, including area code)

 

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

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes x No o

 

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

 

 

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

 

As of May 3, 2012 there were 11,221,879 shares outstanding of Registrant’s Common Stock (par value $0.001 per share).

 

EVOLVING SYSTEMS, INC.

Quarterly Report on Form 10-Q

March 31, 2012

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PART I — FINANCIAL INFORMATION
Item 1	Financial Statements
	Condensed Consolidated Balance Sheets as of March 31, 2012 and December 31, 2011 (Unaudited)
	Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2012 and 2011 (Unaudited)
	Condensed Consolidated Statements of Other Comprehensive income for the Three Months Ended March 31, 2012 and 2011 (Unaudited)
	Condensed Consolidated Statements of Changes in Stockholders’ Equity and Comprehensive Income (Loss) for the Three Months Ended March 31, 2012 (Unaudited)
	Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2012 and 2011 (Unaudited)
	Notes to Unaudited Condensed Consolidated Financial Statements
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3	Quantitative and Qualitative Disclosures About Market Risk
Item 4	Controls and Procedures
PART II — OTHER INFORMATION
Item 1	Legal Proceedings
Item 1A	Risk Factors
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds
Item 3	Defaults upon Senior Securities
Item 5	Other Information
Item 6	Exhibits
Signature

 

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PART I — FINANCIAL INFORMATION

 

ITEM 1.  FINANCIAL STATEMENTS

 

EVOLVING SYSTEMS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands except share data)

(unaudited)

 

		March 31,			December 31,
		2012			2011
ASSETS
Current assets:
Cash and cash equivalents		$	13,775		$	34,290
Short-term restricted cash		52			50
Contract receivables, net of allowance for doubtful accounts of $77 and $52 at March 31, 2012 and December 31, 2011, respectively		3,114			4,540
Unbilled work-in-progress		1,760			1,361
Prepaid and other current assets		1,048			1,259
Interest receivable, long-term investments, related parties		785			357
Total current assets		20,534			41,857
Long-term investments, related party		17,225			16,448
Property and equipment, net		354			369
Amortizable intangible assets, net		503			584
Goodwill		16,328			15,782
Long-term restricted cash		—			2
Total assets		$	54,944		$	75,042
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of capital lease obligations		$	9		$	8
Accounts payable and accrued liabilities		4,085			3,657
Income taxes payable		815			848
Dividends payable		558			22,271
Unearned revenue		2,599			3,401
Total current liabilities		8,066			30,185
Long-term liabilities:
Capital lease obligations, net of current portion		19			—
Deferred income taxes		415			145
Total liabilities		8,500			30,330
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 March 31, 2012 and December 31, 2011		—			—
Common stock, $0.001 par value; 40,000,000 shares authorized; 11,400,423 shares issued and 11,221,534 outstanding as of March 31, 2012 and 11,314,493 shares issued and 11,135,604 outstanding as of December 31, 2011		11			11
Additional paid-in capital		90,329			90,062
Treasury stock 178,889 shares as of March 31, 2012 and December 31, 2011, respectively at cost		(1,253		)	(1,253		)
Accumulated other comprehensive loss		(3,466		)	(4,247		)
Unrealized losses on investments, related parties, net of tax		200			(284		)
Accumulated deficit		(39,377		)	(39,577		)
Total stockholders’ equity		46,444			44,712
Total liabilities and stockholders’ equity		$	54,944		$	75,042

 

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

 

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EVOLVING SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands except per share data)

(unaudited)

 

		For the Three Months Ended March 31,
		2012			2011
REVENUE
License fees and services		$	3,784		$	3,143
Customer support		2,124			2,249
Total revenue		5,908			5,392
COSTS OF REVENUE AND OPERATING EXPENSES
Costs of license fees and services, excluding depreciation and amortization		1,818			1,234
Costs of customer support, excluding depreciation and amortization		360			687
Sales and marketing		1,341			1,851
General and administrative		913			1,102
Product development		729			679
Depreciation		73			88
Amortization		99			178
Total costs of revenue and operating expenses		5,333			5,819
Income (loss) from operations		575			(427		)
Other income (expense)
Interest income		21			8
Interest income, related party		432			—
Interest expense		(0		)	(12		)
Foreign currency exchange gain (loss)		(96		)	110
Other income (expense), net		357			106
Income (loss) from continuing operations before income taxes		932			(321		)
Income tax expense (benefit)		174			(92		)
Income (loss) from continuing operations		$	758		$	(229	)
Income from discontinued operations, net of tax		—			1,162
Net income		$	758		$	933
Basic income (loss) per common share - continuing operations		$	0.07		$	(0.02	)
Diluted income (loss) per common share - continuing operations		$	0.07		$	(0.02	)
Basic income per common share - discontinued operations		$	—		$	0.11
Diluted income per common share - discontinued operations		$	—		$	0.10
Basic income per common share - net income		$	0.07		$	0.09
Diluted income per common share - net income		$	0.07		$	0.08
Cash dividend declared per common share		$	0.05		$	0.05
Weighted average basic shares outstanding		11,164			10,754
Weighted average diluted shares outstanding		11,369			11,223

 

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EVOLVING SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OTHER COMPREHENSIVE INCOME

(in thousands except per share data)

(unaudited)

 

		For the Three Months Ended March 31,
		2012			2011
Net income		$	758		$	933
Other comprehensive income:
Foreign currency translation gain (loss)		782			746
Unrealized gains on available-for-sale securities
Unrealized holding gains arising during period		772			—
Other comprehensive income, before tax		1,554			746
Income tax expense related to components of other comprehensive income		(289		)	—
Other comprehensive income, net of tax		1,265			746
Comprehensive income		$	2,023		$	1,679

 

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

 

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EVOLVING SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME (LOSS)

(in thousands, except share data)

(unaudited)

 

													Accumulated
		Common					Additional						Other						Total
		Stock					Paid-in			Treasury			Comprehensive			Accumulated			Stockholders’
		Shares		Amount			Capital			Stock			Income (Loss)			(Deficit)			Equity
Balance at December 31, 2011		11,135,604		$	11		$	90,062		$	(1,253	)	$	(4,531	)	$	(39,577	)	$	44,712
Stock option exercises		87,512		0			195			—			—			—			195
Common Stock issued pursuant to the Employee Stock Purchase Plan		292		0			1			—			—			—			1
Stock-based compensation expense		—		—			71			—			—			—			71
Restricted stock issuance, net of cancellations		(1,874	)	(0		)	—			—			—			—			(0		)
Common stock cash dividends		—		—			—			—			—			(558		)	(558		)
Comprehensive income (loss):
Net income		—		—			—			—			—			758
Net unrealized losses on investments, related party, net of tax													483
Foreign currency translation adjustment		—		—			—			—			782			—
Comprehensive income																			2,023
Balance at March 31, 2012		11,221,534		$	11		$	90,329		$	(1,253	)	$	(3,266	)	$	(39,377	)	$	46,444

 

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EVOLVING SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

 

		For the Three Months Ended March 31,
		2012			2011
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income		$	758		$	933
Income from discontinued operations		—			1,162
Income from continuing operations		758			(229		)
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		73			88
Amortization of intangible assets		99			178
Amortization of debt issuance costs		—			11
Stock based compensation		71			176
Accretion of discount on marketable securities		(5		)	—
Unrealized foreign currency transaction (gains) and losses, net		96			(110		)
Benefit from deferred income taxes		(1		)	(380		)
Change in operating assets and liabilities:
Contract receivables		1,538			1,890
Unbilled work-in-progress		(352		)	(494		)
Prepaid and other assets		(185		)	(131		)
Accounts payable and accrued liabilities		294			139
Unearned revenue		(880		)	(507		)
Other long-term obligations		—			—
Net cash provided by operating activities of continuing operations		1,506			631
Net cash provided by operating activities of discontinued operations		—			5,968
Net cash provided by operating activities		1,506			6,599
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment		—			(39		)
Restricted cash		—			(3		)
Net cash used in investing activities of continuing operations		—			(42		)
Net cash used in investing activities of discontinued operations		—			(5		)
Net cash used in investing activities		—			(47		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Capital lease payments		(6		)	(4		)
Common stock cash dividends		(22,271		)	(532		)
Proceeds from the issuance of stock		196			75
Net cash used in financing activities of continuing operations		(22,081		)	(461		)
Net cash used in financing activities of discontinued operations		—			(3		)
Net cash used in financing activities		(22,081		)	(464		)
Effect of exchange rate changes on cash		60			115
Net increase in cash and cash equivalents		(20,515		)	6,203
Cash and cash equivalents at beginning of period		34,290			10,801
Cash and cash equivalents at end of period		$	13,775		$	17,004
Supplemental disclosure of other cash and non-cash financing transactions:
Interest paid		$	—		$	1
Income taxes paid		220			79
Common stock dividend declared		558			538
Property and equipment purchased and included in accounts payable		29			20
Unrealized gain on investments, related party		320			—

 

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EVOLVING SYSTEMS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1 — BASIS OF PRESENTATION

 

Organization — We are a provider of software solutions and services to the wireless, wireline and cable markets. We maintain long-standing relationships with many of the largest wireless, wireline and cable companies worldwide. Our customers rely on us to develop, deploy, enhance, maintain and integrate complex, highly reliable software solutions for a range of Operations Support Systems (“OSS”).  We offer software products and solutions focused on activation and provisioning: our service activation solution, TertioTM (“TSA”) used to activate complex bundles of voice, video and data services for traditional and next generation wireless and wireline networks;  our SIM card activation solution, Dynamic SIM Allocation TM (“DSA”) used to dynamically allocate and assign resources to wireless devices that rely on SIM cards, and our connected devices activation solution, Intelligent M2M Controller that support the activation of M2M devices with intermittent or infrequent usage patterns.

 

Interim Consolidated Financial Statements — The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and in conformity with the instructions to Form 10-Q and Article 10 of Regulation S-X and the related rules and regulations of the Securities and Exchange Commission (“SEC”).  Accordingly, certain information and note disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. However, we believe that the disclosures included in these financial statements are adequate to make the information presented not misleading. The unaudited condensed consolidated financial statements included in this document have been prepared on the same basis as the annual consolidated financial statements, and in our opinion reflect all adjustments, which include normal recurring adjustments necessary for a fair presentation in accordance with GAAP and SEC regulations for interim financial statements. The results for the three months ended March 31, 2012 are not necessarily indicative of the results that we will have for any subsequent period.  These unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes to those statements for the year ended December 31, 2011 included in our Annual Report on Form 10-K.

 

Discontinued Operations - On April 21, 2011, we announced the execution of an Asset Purchase Agreement, dated as of April 21, 2011 (the “Purchase Agreement”), with NeuStar, Inc., a Delaware corporation (the “Buyer”).  Under the terms of the Purchase Agreement, we agreed to sell our Numbering Solutions Business (the “Numbering Business”) to the Buyer for $39.4 million in cash, subject to increase or decrease in accordance with a post-closing working capital adjustment and the assumption of certain liabilities related to the Numbering Business (the “Asset Sale”). The Asset Sale qualified for treatment as discontinued operations during the second quarter of 2011 upon receipt of shareholder approval at a special meeting of shareholders on June 23, 2011. On July 1, 2011, we completed the Asset Sale of the Numbering Business. There was no post-closing working capital adjustment. This divested business is reflected in these consolidated financial statements as discontinued operations and historical information related to the divested business has been reclassified accordingly. Refer to Note 9, Discontinued Operations, for more information regarding the Asset Sale.

 

Revisions and Reclassifications — We have changed the classification of revenue totaling approximately $62,000 from continuing operations to discontinued operations and depreciation expense of approximately $22,000 from discontinued operations to continuing operations at March 31, 2011.  Net income for the period remained at $0.9 million.

 

Use of Estimates — The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities, at the date of the financial statements, as well as the reported amounts of revenue and expenses during the reporting period. We made estimates with respect to revenue recognition for estimated hours to complete projects accounted for using the percentage-of-completion method, 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 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, net of applicable income taxes, is recorded as a component of accumulated other comprehensive income (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 consolidated statements of operations 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

 

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consolidation.

 

Goodwill — Goodwill is the excess of acquisition cost of an acquired entity over the fair value of the identifiable net assets acquired.  Goodwill is not amortized, but tested for impairment annually or whenever indicators of impairment exist. These indicators may include a significant change in the business climate, legal factors, operating performance indicators, competition, sale or disposition of a significant portion of the business or other factors. Application of the goodwill impairment test requires judgment, including the identification of reporting units, assignment of assets and liabilities to reporting units, assignment of goodwill to reporting units, and determination of the fair value of each reporting unit.

 

We performed our annual goodwill impairment test as of July 31, 2011, when we had $16.9 million of goodwill included the following reporting units, License and Services (“L&S”) — UK of $7.6 million and Customer Support (“CS”) — UK of $9.3 million. The fair value of each reporting unit was estimated using both market and income based approaches. Specifically, we incorporated observed market multiple data from selected guideline public companies and values arrived at through the application of discounted cash flow analyses which in turn were based upon our financial projections as of the valuation date. We believe that a market participant would weigh both possibilities without a bias to one or the other. Consequently, we gave equal consideration to both. This analysis requires significant judgments, including estimation of future cash flows, which is dependent on internal forecasts, estimation of the long-term rate of growth for our business, estimation of the useful life over which cash flows will occur, and determination of our weighted average cost of capital. Changes in these estimates and assumptions could materially affect the determination of fair value and goodwill impairment for each reporting unit. If the carrying value of a reporting unit were to exceed its fair value, we would then compare the fair value of the reporting unit’s goodwill to its carrying amount, and any excess of the carrying amount over the fair value would be charged to operations as an impairment loss. If the projected future performance of either of our segments as estimated in the income valuation approach is adjusted downward or is lower than expected in the future, we could be required to record a goodwill impairment charge.  As a result of the first step of the 2011 goodwill impairment analysis, the fair value of each reporting unit exceeded its carrying value.  Therefore the second step was not necessary.  A hypothetical 5% decrease in the estimated fair value of our CS-UK reporting unit still result in the estimated fair value exceeding its carrying value.  However, a hypothetical 5% decrease in the estimated fair value of our L&S-UK reporting unit would result in its carrying value exceeding its estimated fair value and therefore require the second step, which could result in impairment for that reporting unit.

 

Intangible Assets — Amortizable intangible assets consist primarily of purchased software and licenses, customer contracts and relationships, trademarks and tradenames, and business partnerships acquired in conjunction with our purchase of Tertio Telecoms Ltd. (“Evolving Systems U.K.”).  These assets are amortized using the straight-line method over their estimated lives.

 

We assess the impairment of identifiable intangibles if events or changes in circumstances indicate that the carrying value of the asset may not be recoverable. Factors that we consider significant which could trigger an impairment analysis include the following:

 

·                  Significant under-performance relative to historical or projected future operating results;

 

·                  Significant changes in the manner of use of the acquired assets or the strategy of the overall business;

 

·                  Significant negative industry or economic trends; and/or

 

·                  Significant decline in our stock price for a sustained period.

 

If, as a result of the existence of one or more of the above indicators of impairment, we determine that the carrying value of intangibles and/or long-lived assets may not be recoverable, we compare the estimated undiscounted cash flows expected to result from the use of the asset and its eventual disposition to the asset’s carrying amount. If an amortizable intangible or long-lived asset is not deemed to be recoverable, we recognize an impairment loss representing the excess of the asset’s carrying value over its estimated fair value.

 

Fair Value Measurements — Fair value is the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is estimated by applying the following hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement:

 

Level 1 — Quoted prices in active markets for identical assets or liabilities.

 

Level 2 — Observable inputs other than quoted prices in active markets for identical assets and liabilities, quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

 

Level 3 — Inputs that are generally unobservable and typically reflect management’s estimate of assumptions that market participants would use in pricing the asset or liability.

 

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The valuation techniques used to measure our marketable debt securities were derived from quoted prices in active markets for identical assets or liabilities.

 

Cash, Cash Equivalents and Marketable Securities - All highly liquid investments with maturities of three months or less at the date of purchase are classified as cash equivalents. Our marketable debt securities have been classified and accounted for as available-for-sale and are reported at fair value.  Unrealized gains and losses related to changes in the fair value of securities are recognized in the accumulated other comprehensive income, net of tax in our consolidated balance sheets.  Changes in the fair value of available-for-sale securities impact our net income only when such securities are sold or an other-than-temporary impairment is recognized.  Realized gains and losses on the sale of securities are determined by specific identification of each security’s cost basis.  We review our marketable debt securities to determine if the securities are other-than-temporarily impaired, which would require us to record an impairment charge in the period any such determination is made.  In making the judgment, we evaluate, among other things, the duration and extent to which the fair value of the securities are less than its cost, the financial condition of the issuer and any changes thereto, our intent to sell, or whether it is more likely than not it will be required to sell, the securities before recovery of the investment’s amortized cost basis.  Management’s assessment on whether a security is other-than-temporarily impaired could change in the future due to new developments or changes in assumptions related to our security.  Management determines the appropriate classification of its investments at the time of purchase and re-evaluates the available-for-sale designations as of each balance sheet date. We classify our marketable debt securities as either short-term or long-term based on each instrument’s underlying contractual maturity date. Marketable debt securities with maturities of 12 months or less are classified as short-term and marketable debt securities with maturities greater than 12 months are classified as long-term.

 

Revenue Recognition — We recognize revenue when an agreement is signed, the fee is fixed or determinable and collectability is reasonably assured. We recognize revenue from two primary sources: license fees and services, and customer support.   The majority of our license fees and services revenue is generated from fixed-price contracts, which provide for licenses to our software products and services to customize such software to meet our customers’ use.   When the customization services are determined to be essential to the functionality of the delivered software, we recognize revenue using the percentage-of-completion method of accounting. In these types of arrangements, we do not typically have Vendor Specific Objective Evidence (“VSOE”) of fair value on the license fee/services portion (services are related to customizing the software) of the arrangement due to the large amount of customization required by our customers; however, we do have VSOE for the warranty/maintenance services based on the renewal rate of the first year of maintenance in the arrangement. The license/services portion is recognized using the percentage-of-completion method of accounting and the warranty/maintenance services are separated based on the renewal rate in the contract and recognized ratably over the warranty or maintenance period. We estimate the percentage-of-completion for each contract based on the ratio of direct labor hours incurred to total estimated direct labor hours and recognize revenue based on the percent complete multiplied by the contract amount allocated to the license fee/services.  Since estimated direct labor hours, and changes thereto, can have a significant impact on revenue recognition, these estimates are critical and we review them regularly. If the arrangement includes a customer acceptance provision, the hours to complete the acceptance testing are included in the total estimated direct labor hours; therefore, the related revenue is recognized as the acceptance testing is performed. Revenue is not recognized in full until the customer has provided proof of acceptance on the arrangement.  Generally, our contracts are accounted for individually. However, when certain criteria are met, it may be necessary to account for two or more contracts as one to reflect the substance of the group of contracts. We record amounts billed in advance of services being performed as unearned revenue. Unbilled work-in-progress represents revenue earned but not yet billable under the terms of the fixed-price contracts. All such amounts are expected to be billed and collected within 12 months.

 

We may encounter budget and schedule overruns on fixed-price contracts caused by increased labor or overhead costs. We make adjustments to cost estimates in the period in which the facts requiring such revisions become known. We record estimated losses, if any, in the period in which current estimates of total contract revenue and contract costs indicate a loss. If revisions to cost estimates are obtained after the balance sheet date but before the issuance of the interim or annual financial statements, we make adjustments to the interim or annual financial statements accordingly.

 

In arrangements where the services are not essential to the functionality of the delivered software, we recognize license revenue when a license agreement has been signed, delivery and acceptance have occurred, the fee is fixed or determinable and collectability is reasonably assured. Where applicable, we unbundle and record as revenue fees from multiple element arrangements as the elements are delivered to the extent that VSOE of fair value of the undelivered elements exist. If VSOE for the undelivered elements does not exist, we defer fees from such arrangements until the earlier of the date that VSOE does exist on the undelivered elements or all of the elements have been delivered.

 

We recognize revenue from fixed-price service contracts using the proportional performance method of accounting, which is similar to the percentage-of-completion method described above. We recognize revenue from professional services provided pursuant to time-and-materials based contracts and training services as the services are performed, as that is when our obligation to our customers under such arrangements is fulfilled.

 

We recognize customer support, including maintenance revenue, ratably over the service contract period. When maintenance is bundled with the original license fee arrangement, its fair value, based upon VSOE, is deferred and recognized during the periods when services are provided.

 

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Stock-based Compensation — We account for stock-based compensation by applying a fair-value-based measurement method to account for share-based payment transactions with employees and directors. 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.

 

Comprehensive Income - Comprehensive income consists of two components, net income and other comprehensive income. Other comprehensive income refers to revenue, expenses, gains, and losses that under GAAP are recorded as an element of shareholders’ equity but are excluded from net income. Other comprehensive income consists of foreign currency translation adjustments from those subsidiaries not using the U.S. dollar as their functional currency and unrealized gains and losses on marketable securities categorized as available-for-sale.

 

Income Taxes — We record deferred tax assets and liabilities for the estimated future tax effects of temporary differences between the tax bases of assets and liabilities and amounts reported in the accompanying condensed consolidated balance sheets, as well as operating loss 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.

 

Recent Accounting Pronouncements - In June 2011, the Financial Accounting Standards Board issued guidance on presentation of comprehensive income. The new guidance eliminates the current option to report other comprehensive income and its components in the statement of changes in equity. Instead, an entity will be required to present either a continuous statement of net income and other comprehensive income or in two separate but consecutive statements. The new guidance will be effective for us beginning March 31, 2012 and will result in presentation changes only.

 

NOTE 2 — FINANCIAL INSTRUMENTS

 

All highly liquid investments with maturities of three months or less at the date of purchase are classified as cash equivalents. Marketable debt securities have been classified and accounted for as available-for-sale. Management determines the appropriate classification of its investments at the time of purchase and reevaluates the available-for-sale designations as of each balance sheet date. We classify our marketable debt securities as either short-term or long-term based on each instrument’s underlying contractual maturity date. Marketable debt securities with maturities of 12 months or less are classified as short-term and marketable debt securities with maturities greater than 12 months are classified as long-term.

 

The following tables summarize our available-for-sale securities’ adjusted cost, gross unrealized gains, gross unrealized losses and fair value by significant investment category recorded as long-term marketable securities as of March 31, 2012 (in thousands):

 

		March 31, 2012
		Adjusted			Unrealized			Unrealized		Fair			Long-term
		Cost			Gains			Losses		Value			Investments
Level:2
Corporate debt securities		$	16,905		$	320		—		$	17,225		$	17,225

 

The net unrealized gains as of March 31, 2012 are related to long-term corporate debt securities. We may sell certain corporate debt securities prior to their stated maturities for strategic reasons including, but not limited to, anticipation of credit deterioration and duration management. We recognized no net realized gains or losses during the three ended March 31, 2012. The maturities of our long-term corporate debt securities range from five to eight years.

 

We consider the declines in market value of our corporate debt securities investment portfolio to be temporary in nature. Our investment policy requires investments to be rated B- or better. Fair values were determined for each individual security in the investment portfolio. When evaluating the investments for other-than-temporary impairment, we review factors such as the length of time and extent to which fair value has been below cost basis, the financial condition of the issuer and any changes thereto, and our intent to sell, or whether it is more likely than not we will be required to sell the investment before recovery of the investment’s amortized cost basis. During the three months ended March 31, 2012, we did not recognize any impairment charges. As of March 31, 2012, we do not consider any of our investments to be other-than-temporarily impaired.

 

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As of March 31, 2012 all of our corporate debt security investments are concentrated within the senior secured notes of a single issuer, which is a related party (see note 13).  The corporate debt securities mature on April 15, 2017 and earn interest at a rate of 10%. The senior notes are secured by a pledge of and first lien security interest in (subject to certain exceptions) substantially all of the assets of the issuer, rank senior in right of payment to existing and future subordinated indebtedness of the issuer and upon the occurrence of certain changes of control (as defined in the senior notes indenture), the issuer must give holders of the senior notes an opportunity to sell their notes to the issuer at a purchase price of 101% of the principal amount, plus accrued and unpaid interest, if any, to the date of purchase. During the three months ended March 31, 2012, we recorded interest income of $0.4 million and have interest receivable of $0.8 million.  These debt securities represent approximately 7% of the issuer’s total series of senior secured notes. Any significant adverse developments in that issuer’s business, industry, operations or financial condition could have a disproportionately adverse impact on the value of our investment, our receipt of interest and principal payments under the notes, or our financial condition and operating results.  As of April 23, 2012 the investments were sold for approximately $17.8 million and we will record the related gain on sale in the second quarter of 2012.

 

NOTE 3 — GOODWILL AND INTANGIBLE ASSETS

 

We recorded goodwill as a result of the acquisition of Evolving Systems U.K. in November 2004.

 

Changes in the carrying amount of goodwill by reporting unit were as follows (in thousands):

 

		License and Services			Customer Support			Total
		UK			UK			Goodwill
Balance as of December 31, 2011		$	7,059		$	8,723		$	15,782
Effects of changes in foreign currency exchange rates		244			302			546
Balance as of March 31, 2012		$	7,303		$	9,025		$	16,328

 

We conducted our annual goodwill impairment test as of July 31, 2011, and we determined that goodwill was not impaired as of the test date. From July 31, 2011 through March 31, 2012, no events have occurred that we believe may have impaired goodwill.

 

We amortized identifiable intangible assets on a straight-line basis over estimated lives ranging from one to seven years and include the cumulative effects of foreign currency exchange rates.  As of March 31, 2012 and December 31, 2011, identifiable intangibles were as follows (in thousands):

 

		March 31, 2012									December 31, 2011									Weighted-
								Net									Net			Average
		(1) Gross			Accumulated			Carrying			(1) Gross			Accumulated			Carrying			Amortization
		Amount			Amortization			Amount			Amount			Amortization			Amount			Period
Purchased software		$	1,424		$	1,424		$	—		$	1,376		$	1,376		$	—		4.6 yrs
Trademarks and tradenames		718			590			128			694			545			149			7.0 yrs
Business partnerships		117			117			—			113			113			—			5.0 yrs
Customer relationships		2,102			1,727			375			2,031			1,596			435			5.3 yrs
		$	4,361		$	3,858		$	503		$	4,214		$	3,630		$	584		5.2 yrs

 

(1)  Changes in intangible gross values as of March 31, 2012 compared to December 31, 2011 are the direct result of the changes in foreign currency exchange rates for the periods then ended.

 

All U.S. intangible assets were sold as part of the Asset Sale. Amortization expense of identifiable intangible assets was $0.1 million and $0.2 million for the three months ended March 31, 2012 and 2011, respectively.  As Evolving Systems U.K. uses the British Pound Sterling as its functional currency, the amount of future amortization actually recorded will be based upon exchange rates in effect at that time. Expected future amortization expense related to identifiable intangibles based on our carrying amount as of March 31, 2012 was as follows (in thousands):

 

Three Months Ending March 31:
2012		$	302
2013		201
		$	503

 

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NOTE 4 — EARNINGS PER COMMON SHARE

 

We compute basic earnings per share (“EPS”) by dividing net income or loss available to common stockholders by the weighted average number of shares outstanding during the period, including common stock issuable under participating securities. We compute diluted EPS using the weighted average number of shares outstanding, including participating securities, plus all potentially dilutive common stock equivalents. Common stock equivalents consist of stock options.

 

Our policy is to treat unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents, whether paid or unpaid, as participating securities, included in the computation of both basic and diluted earnings per share.

 

The following is the reconciliation of the denominator of the basic and diluted EPS computations (in thousands, except per share data):

 

		Three Months Ended March 31,
		2012			2011
Basic income (loss) per share:
Income (loss) from continuing operations		$	758		$	(229	)
Income from discontinued operations, net of tax		$	—		$	1,162
Net income		$	758		$	933
Basic weighted average shares outstanding		11,164			10,754
Basic income (loss) per share:
Continuing operations		$	0.07		$	(0.02	)
Discontinued operations		$	0.00		$	0.11
Net Income		$	0.07		$	0.09
Diluted income (loss) per share:
Income (loss) from continuing operations		$	758		$	(229	)
Income from discontinued operations, net of tax		$	—		$	1,162
Net income		$	758		$	933
Weighted average shares outstanding		11,164			10,754
Effect of dilutive securities - options		205			469
Diluted weighted average shares outstanding		11,369			11,223
Diluted income (loss) per share:
Continuing operations		$	0.07		$	(0.02	)
Discontinued operations		$	—		$	0.10
Net Income		$	0.07		$	0.08

 

For the three months ended March 31, 2012 and 2011, 0.3 million and 0.4 million shares, respectively, of common stock were excluded from the dilutive stock calculation because their exercise prices were greater than the average fair value of our common stock for the period.

 

NOTE 5 — SHARE-BASED COMPENSATION

 

We account for stock-based compensation by applying a fair-value-based measurement method to account for share-based payment transactions with employees and directors, and record compensation cost for all stock awards granted after January 1, 2006 and awards modified, repurchased, or cancelled after that date, using the modified prospective method. We record compensation costs associated with the vesting of unvested options on a straight-line basis over the vesting period. We recognized $0.1 million and $0.2 million of compensation expense in the consolidated statements of operations, with respect to our stock-based compensation plans for

 

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the three months ended March 31, 2012 and 2011, respectively.  The following table summarizes stock-based compensation expenses recorded in the consolidated statement of operations (in thousands):

 

		For the Three Months Ended March 31,
		2012			2011
Cost of license fees and services, excluding depreciation and amortization		$	5		$	11
Cost of customer support, excluding depreciation and amortization		1			1
Sales and marketing		6			24
General and administrative		53			115
Product development		6			25
Share based compensation - continuing operations		71			176
Discontinued operations		—			11
Total share based compensation		$	71		$	187

 

Stock Incentive Plans

 

In January 1996, our stockholders approved an Amended and Restated Stock Option Plan (the “Option Plan”).  Under the Option Plan, as amended, 4,175,000 shares were reserved for issuance.  Options issued under the Option Plan were at the discretion of the Board of Directors, including the vesting provisions of each stock option granted. Options were granted with an exercise price equal to the closing price of our common stock on the date of grant, generally vest over four years and expire no more than ten years from the date of grant. The Option Plan terminated on January 18, 2006; options granted before that date were not affected by the plan termination.  At March 31, 2012 and December 31, 2011, 0.4 million options remained outstanding under the Option Plan, respectively.

 

In March 2007, upon the hiring of our Vice President of World Wide Sales and Marketing, in accordance with then-NASDAQ Marketplace Rule 4350(i)(1)(a)(iv) (now Rule 5635(c)(iv)), the Board of Directors approved an inducement award under a stand-alone equity incentive plan.  We granted 50,000 non-qualified options to purchase shares of our common stock at an exercise price equal to the closing price of our common stock on the date of grant.  The options vested over four years and expired ten years from the date of grant. At March 31, 2012 and December 31, 2011, 0 and 50,000 options remained outstanding under this plan, respectively.

 

In June 2007, our stockholders approved the 2007 Stock Incentive Plan (the “2007 Stock Plan”) with a maximum of 1,000,000 shares reserved for issuance. In June 2010, our stockholders approved an amendment to the 2007 Stock Plan which increased the maximum shares that may be awarded under the plan to 1,250,000. Awards permitted under the 2007 Stock Plan include:  Stock Options, Stock Appreciation Rights, Restricted Stock, Restricted Stock Units, Performance Awards and Other Stock-Based Awards.  Awards issued under the 2007 Stock Plan are at the discretion of the Board of Directors.  As applicable, awards are granted with an exercise price equal to the closing price of our common stock on the date of grant, generally vest over four years for employees and one year for directors and expire no more than ten years from the date of grant.  At March 31, 2012, there were approximately 0.2 million shares available for grant under the 2007 Stock Plan, as amended, as well as an increase of 45,749 authorized shares as a result of the antidilution modification in connection with the special dividend (see details below).  At March 31, 2012 and December 31, 2011, 0.4 million options were issued and outstanding under the 2007 Stock Plan as amended, respectively.

 

During the three months ended March 31, 2012 and 2011, we awarded a total of 0 and 10,000 shares of restricted stock, respectively to members of our Board of Directors and senior management.  During the three months ended March 31, 2012 and 2011, 2,000 and 9,000 shares of restricted stock vested, respectively.  During the three months ended March 31, 2012 and 2011 1,875 and 625 shares of restricted stock were forfeited, respectively. The fair market value of restricted shares for share-based compensation expensing is equal to the closing price of our common stock on the date of grant. Stock-based compensation expense includes $9,000 and $45,000 for the three months ended March 31, 2012 and 2011, respectively, of expense related to restricted stock grants. The restrictions on the stock awards are released quarterly, generally over four years for senior management and over one year for board members.

 

As described above, on November 10, 2011, we declared a special cash dividend of $2.00 per share on all of the issued and outstanding common stock, or an aggregate of approximately $22.3 million, which was paid on January 3, 2012. In connection with the special dividend, the Compensation Committee of the Board of Directors of the Company approved anti-dilution adjustments to outstanding stock option awards pursuant to the Company’s equity-based compensation plans to take into account the payment of the special cash dividend. Outstanding stock option awards were adjusted on January 3, 2012 (the ex-dividend date), by reducing the exercise price and increasing the number of shares issuable upon the exercise of each option, in accordance with safe harbor provisions of Section 409A of the Internal Revenue Code, such that the aggregate difference between the market price and exercise price times the number of shares issuable upon exercise was substantially the same immediately before and after the payment of the

 

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special dividend. The antidilution modification made with respect to such options resulted in a decrease in the weighted average exercise price from $7.46 to $5.80 and an increase in the aggregate number of shares issuable upon exercise of such options by 45,749.  Since our Stock Plan permits, but does not require, antidilution modifications, FAS 123R requires a comparison of the fair value of each award immediately prior to and after the date of modification, assuming the value immediately prior to modification contains no antidilution protection, and the value immediately after modification contains full antidilution protection. This comparison resulted in no aggregate difference or additional compensation expense in the three months ended March 31, 2012.

 

The fair value of each option grant is estimated on the date of grant using the Black-Scholes model.  The Black-Scholes model uses four assumptions to calculate the fair value of each option grant.  The expected term of share options granted is derived using the simplified method, which we adopted in January 2008. The risk-free interest rate is based upon the rate currently available on zero-coupon U.S. Treasury instruments with a remaining term equal to the expected term of the stock options.  The expected volatility is based upon historical volatility of our common stock over a period equal to the expected term of the stock options.  The expected dividend yield is based upon historical and anticipated payment of dividends.  The weighted-average assumptions used in the fair value calculations are as follows:

 

		For the Three Months Ended March 31,
		2012		2011
Expected term (years)		5.8		*
Risk-free interest rate		0.86	%	*
Expected volatility		65.5	%	*
Expected dividend yield		3.5	%	*

 

* - None granted

 

The following is a summary of stock option activity under the plans for the three months ended March 31, 2012:

 

							Weighted-
							Average
		(1)		Weighted-			Remaining		Aggregate
		Number of		Average			Contractual		Intrinsic
		Shares		Exercise			Term		Value
		(in thousands)		Price			(Years)		(in thousands)
Options outstanding at December 31, 2011		862		$	5.80		5.06		$	1,635
Options granted		53		$	5.76
Less options forfeited		(18	)	$	6.73
Less options exercised		(88	)	$	2.22
Options outstanding at March 31, 2012		809		$	6.17		5.18		$	1,211
Options exercisable at March 31, 2012		675		$	6.53		4.54		$	1,039

 

(1)         Beginning balance of options outstanding as of December 31, 2011, was adjusted by 45,749 options due to the aforementioned anti-dilution adjustments to outstanding stock option awards.

 

There were 52,800 stock options granted during the three months ended March 31, 2012.  No stock options were granted during the three months ended March 31, 2011. The weighted-average grant-date fair value of stock options granted during the three months ended March 31, 2012 was $2.60.

 

As of March 31, 2012, there was approximately $0.3 million of total unrecognized compensation costs related to unvested stock options.  These costs are expected to be recognized over a weighted average period of 2.0 years.

 

The total fair value of stock options vested during the three months ended March 31, 2012 and 2011 was $0.1 million and $0.2 million, respectively. The deferred income tax benefits from stock option expense related to Evolving Systems U.K. totaled approximately $4,000 and $14,000 for the three months ended March 31, 2012 and 2011, respectively.

 

Cash received from stock option exercises for the three months ended March 31, 2012 and 2011 was $0.2 million and $69,000, respectively.

 

During the three months ended March 31, 2011, we had net settlement exercises of stock options, whereby the optionee did not pay cash for the options but instead received the number of shares equal to the difference between the exercise price and the market price on the date of exercise. Net settlement exercises during the three months ended March 31, 2011, resulted in approximately 91,000 shares

 

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issued and 120,000 options cancelled in settlement of shares issued.  There were no net settlement exercises during the three months ended March 31, 2012.

 

Employee Stock Purchase Plan

 

Under the Employee Stock Purchase Plan (“ESPP”), we  are authorized to issue up to 550,000 shares under the ESPP. 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 10,000 shares per offering period. The purchase price of the stock is 85% of the lower of the market price at the beginning or end of each three-month participation period. As of March 31, 2012, there were approximately 74,000 shares available for purchase.  For the three months ended March 31, 2012 and 2011, we recorded compensation expense of $300 and $3,000, respectively, associated with grants under the ESPP which includes the fair value of the look-back feature of each grant as well as the 15% discount on the purchase price.  This expense fluctuates each period primarily based on the level of employee participation.

 

The fair value of each purchase made under our ESPP is estimated on the date of purchase using the Black-Scholes model.  The Black-Scholes model uses four assumptions to calculate the fair value of each purchase.  The expected term of each purchase is based upon the three-month participation period of each offering.  The risk-free interest rate is based upon the rate currently available on zero-coupon U.S. Treasury instruments with a remaining term equal to the expected term of each offering.  The expected volatility is based upon historical volatility of our common stock.  The expected dividend yield is based upon historical and anticipated payment of dividends.  The weighted average assumptions used in the fair value calculations are as follows:

 

		Three Months Ended March 31,
		2012		2011
Expected term (years)		0.25		0.25
Risk-free interest rate		0.1	%	0.1	%
Expected volatility		35.22	%	44.6	%
Expected dividend yield		3.58	%	2.8	%

 

Cash received from employee stock plan purchases for the three months ended March 31, 2012 and 2011 was $2,000 and $6,000, respectively.

 

We issued shares related to the ESPP of approximately 300 and 1,000 for the three months ended March 31, 2012 and 2011.

 

NOTE 6 — CONCENTRATION OF CREDIT RISK

 

For the three months ended March 31, 2012 and 2011, one significant customer (defined as contributing at least 10%) accounted for 24% and 11%, respectively, of revenue from continuing operations.  The significant customer for the three months ended March 31, 2012 is a large telecommunications operator in Europe.  The significant customer for the three months ended March 31, 2011 is a large telecommunications operator in Asia.

 

As of March 31, 2012, one significant customer accounted for approximately 11% of contract receivables and unbilled work-in-progress.  This customer is a large telecommunications operator in Central America.  At December 31, 2011, three significant customers accounted for approximately 32% (12%, 10% and 10%) of contract receivables and unbilled work-in-progress.  These customers are two large telecommunications operators in Europe and one in Africa.

 

As of March 31, 2012 all of our corporate debt security investments were concentrated within one issuer. These debt securities are senior secured and our holdings were approximately 7% of the issuer’s total debt offering.  These debt securities have been sold as of April 23, 2012.

 

NOTE 7 — INCOME TAXES

 

We recorded net income tax expense (benefit) of $0.2 million and ($0.1) million for the three months ended March 31, 2012 and 2011, respectively.  The net expense during the three months ended March 31, 2012 consisted of current income tax expense of $0.2 million and a deferred tax benefit of ($30,000). The current tax expense consists primarily of Alternative Minimum Tax (“AMT”), state tax and unrecoverable foreign withholding tax in the U.S., income tax from our U.K.-based operations and income taxes related to our operations in India. The majority of the U.K. income tax expense is related to unrecoverable foreign withholding taxes. The foreign withholding taxes are typically used to offset our income tax liability, but we do not believe we will have enough taxable income to utilize the foreign withholding taxes during the year. The deferred tax expense was net of a tax benefit primarily related to intangible assets from our U.K.-based operations. The net benefit during the three months ended March 31, 2011 consisted of current income tax expense of $0.3 million and a deferred tax benefit of $0.4 million. The current tax expense consists of income tax from our U.K.-based operations, Alternative Minimum Tax (“AMT”), state income taxes and unrecoverable foreign withholding tax in the U.S. The deferred tax benefit was related to the release of our valuation allowance on our tax asset from our Indian

 

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operations as we will begin to utilize Minimum Alternative Tax (“MAT”) payments made during our tax holiday, which can be applied toward future taxes payable since the tax holiday expired on March 31, 2011. We also had a tax benefit related to intangible assets from our U.K.-based operations.

 

In conjunction with the acquisition of Evolving Systems U.K., we recorded certain identifiable intangible assets.  Since the amortization of these identifiable intangibles is not deductible for income tax purposes, we established a long-term deferred tax liability of $4.6 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. As of March 31, 2012 and December 31, 2011, this component of the deferred tax liability was $0.1 million, respectively.  This deferred tax liability relates to Evolving Systems U.K., and has no impact on our ability to recover U.S.-based deferred tax assets.  This deferred tax liability will be recognized as a reduction of deferred income tax expense as the identifiable intangibles are amortized.

 

As of March 31, 2012 and December 31, 2011 we continued to maintain a valuation allowance on portions of our domestic net deferred tax asset as we have determined it is more likely than not that we will not realize these deferred tax assets.  Such assets primarily consist of certain net operating loss carryforwards and other tax credits.  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 $0.4 million of deferred tax liabilities as of March 31, 2012, were comprised of the following:

 

		March 31, 2012
Deferred tax assets:
Net operating loss carryforwards		$	4,441
Research & Development Credits		303
AMT/MAT credit		942
Stock Compensation		628
Depreciable assets		97
Accrued liabilities and reserves		209
Total deferred tax assets		6,620
Deferred tax liabilities
Undistributed Foreign Earnings		$	(1,476	)
Intangibles		(141		)
Unrealized gains on investments		(120		)
Total deferred tax liability		(1,737		)
Net deferred tax assets, before valuation allowance		$	4,883
Valuation allowance		(5,298		)
Net deferred tax liabilities		$	(415	)

 

As of March 31, 2012 and December 31, 2011 we had no liability for unrecognized tax benefits.  We do not believe there will be any material changes in our unrecognized tax positions over the next twelve months.

 

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 United Kingdom, Germany and India.

 

NOTE 8 — RESTRUCTURING

 

During the second and fourth quarter of 2011, we undertook a reduction in workforce involving the termination of employees resulting in an expense of $1.1 million primarily related to severance for the affected employees. The reduction in workforce was related to the Asset Sale and was completed by December 31, 2011. There were no additional restructuring expenses during the three months ended March 31, 2012.

 

As of March 31, 2012, $0.4 million remains as an accrued liability which will be fully paid by the fourth quarter of 2012.

 

NOTE 9 — DISCONTINUED OPERATIONS

 

On July 1, 2011, we completed the Asset Sale related to our Numbering Business. The Asset Sale qualified for treatment as discontinued operations during the second quarter of 2011 upon receipt of stockholder approval at a special meeting of stockholders on June 23, 2011. Summary results of operations of the Numbering Business for the three months ended March 31, 2011 and

 

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