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Symbolic Logic, Inc. - Quarter Report: 2014 March (Form 10-Q)

Table of Contents

 

 

 

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, 2014

 

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)

 

 

Delaware

 

84-1010843

(State or other jurisdiction of incorporation or organization)

 

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

 

 

 

9777 Pyramid Court, Suite 100 Englewood, Colorado

 

80112

(Address of principal executive offices)

 

(Zip Code)

 

(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.

 

Large accelerated filer o

 

Accelerated filer o

 

 

 

Non-accelerated filer o

 

Smaller reporting company x

(Do not check if a smaller reporting company)

 

 

 

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

 

As of May 1, 2014 there were 11,631,975 shares outstanding of Registrant’s Common Stock (par value $0.001 per share).

 

 

 



Table of Contents

 

EVOLVING SYSTEMS, INC.

Quarterly Report on Form 10-Q

March 31, 2014

Table of Contents

 

PART I — FINANCIAL INFORMATION

Item 1

Financial Statements

 

Condensed Consolidated Balance Sheets as of March 31, 2014 and December 31, 2013 (Unaudited)

 

Condensed Consolidated Statements of Operations for the Three months Ended March 31, 2014 and 2013 (Unaudited)

 

Condensed Consolidated Statements of Comprehensive Income for the Three months Ended March 31, 2014 and 2013 (Unaudited)

 

Condensed Consolidated Statements of Changes in Stockholders’ Equity for the Three months Ended March 31, 2014 (Unaudited)

 

Condensed Consolidated Statements of Cash Flows for the Three months Ended March 31, 2014 and 2013 (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 4

Mine Safety Disclosures

Item 5

Other Information

Item 6

Exhibits

 

 

Signature

 

 

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Table of Contents

 

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,

 

 

 

2014

 

2013

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

12,406

 

$

13,785

 

Short-term restricted cash

 

24

 

 

Contract receivables, net of allowance for doubtful accounts of $69 and $73 at March 31, 2014 and December 31, 2013, respectively

 

5,877

 

6,420

 

Unbilled work-in-progress, net of allowance of $320 and $317 at March 31, 2014 and December 31, 2013, respectively

 

3,190

 

2,423

 

Deferred income taxes

 

133

 

131

 

Prepaid and other current assets

 

1,141

 

1,173

 

Total current assets

 

22,771

 

23,932

 

Property and equipment, net

 

392

 

342

 

Amortizable intangible assets, net

 

679

 

702

 

Goodwill

 

18,090

 

17,936

 

Long-term restricted cash

 

 

24

 

Long-term deferred income taxes

 

195

 

248

 

Total assets

 

$

42,127

 

$

43,184

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Current portion of capital lease obligations

 

$

7

 

$

8

 

Accounts payable and accrued liabilities

 

3,694

 

4,479

 

Income taxes payable

 

497

 

459

 

Unearned revenue

 

4,108

 

4,287

 

Total current liabilities

 

8,306

 

9,233

 

Long-term liabilities:

 

 

 

 

 

Capital lease obligations, net of current portion

 

10

 

11

 

Contingent earn-out obligation

 

178

 

178

 

Long-term unearned revenue

 

871

 

1,027

 

Total liabilities

 

9,365

 

10,449

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

Preferred stock, $0.001 par value; 2,000,000 shares authorized; no shares issued and outstanding as of March 31, 2014 and December 31, 2013

 

 

 

Common stock, $0.001 par value; 40,000,000 shares authorized; 11,807,717 shares issued and 11,628,828 outstanding as of March 31, 2014 and 11,779,507 shares issued and 11,600,618 outstanding as of December 31, 2013

 

12

 

12

 

Additional paid-in capital

 

94,123

 

93,895

 

Treasury stock 178,889 shares as of March 31, 2014 and December 31, 2013, at cost

 

(1,253

)

(1,253

)

Accumulated other comprehensive loss

 

(2,705

)

(3,016

)

Accumulated deficit

 

(57,415

)

(56,903

)

Total stockholders’ equity

 

32,762

 

32,735

 

Total liabilities and stockholders’ equity

 

$

42,127

 

$

43,184

 

 

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

 

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Table of Contents

 

EVOLVING SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands except per share data)

(unaudited)

 

 

 

For the Three Months Ended March 31,

 

 

 

2014

 

2013

 

REVENUE

 

 

 

 

 

License fees and services

 

$

4,367

 

$

4,507

 

Customer support

 

2,215

 

2,162

 

Total revenue

 

6,582

 

6,669

 

 

 

 

 

 

 

COSTS OF REVENUE AND OPERATING EXPENSES

 

 

 

 

 

Costs of license fees and services, excluding depreciation and amortization

 

1,478

 

1,536

 

Costs of customer support, excluding depreciation and amortization

 

420

 

308

 

Sales and marketing

 

1,660

 

1,301

 

General and administrative

 

834

 

895

 

Product development

 

883

 

713

 

Depreciation

 

46

 

37

 

Amortization

 

23

 

98

 

Restructuring

 

211

 

 

Total costs of revenue and operating expenses

 

5,555

 

4,888

 

 

 

 

 

 

 

Income from operations

 

1,027

 

1,781

 

 

 

 

 

 

 

Other income (expense)

 

 

 

 

 

Interest income

 

3

 

3

 

Interest expense

 

(5

)

(6

)

Foreign currency exchange loss

 

(96

)

(43

)

Other expense, net

 

(98

)

(46

)

 

 

 

 

 

 

Income from operations before income taxes

 

929

 

1,735

 

Income tax expense

 

278

 

562

 

Net income

 

$

651

 

$

1,173

 

 

 

 

 

 

 

Basic income per common share

 

$

0.06

 

$

0.10

 

 

 

 

 

 

 

Diluted income per common share

 

$

0.05

 

$

0.10

 

 

 

 

 

 

 

Cash dividend declared per common share

 

$

0.10

 

$

0.08

 

 

 

 

 

 

 

Weighted average basic shares outstanding

 

11,621

 

11,409

 

Weighted average diluted shares outstanding

 

11,917

 

11,691

 

 

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

 

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EVOLVING SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands except per share data)

(unaudited)

 

 

 

For the Three Months Ended March 31,

 

 

 

2014

 

2013

 

 

 

 

 

 

 

Net income

 

$

651

 

$

1,173

 

 

 

 

 

 

 

Other comprehensive income (loss):

 

 

 

 

 

Foreign currency translation gain (loss)

 

311

 

(1,148

)

Other comprehensive income (loss)

 

311

 

(1,148

)

 

 

 

 

 

 

Comprehensive income

 

$

962

 

$

25

 

 

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

 

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Table of Contents

 

EVOLVING SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(in thousands, except share data)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

Other

 

 

 

Total

 

 

 

Common Stock

 

Paid-in

 

Treasury

 

Comprehensive

 

Accumulated

 

Stockholders’

 

 

 

Shares

 

Amount

 

Capital

 

Stock

 

Loss

 

(Deficit)

 

Equity

 

Balance at December 31, 2013

 

11,600,618

 

$

12

 

$

93,895

 

$

(1,253

)

$

(3,016

)

$

(56,903

)

$

32,735

 

Stock option exercises

 

27,160

 

 

109

 

 

 

 

109

 

Common Stock issued pursuant to the Employee Stock Purchase Plan

 

156

 

 

1

 

 

 

 

1

 

Stock-based compensation expense

 

 

 

88

 

 

 

 

88

 

Issuance of common stock related to acquisition

 

1,832

 

 

19

 

 

 

 

19

 

Excess tax benefits from stock-based compensation

 

 

 

11

 

 

 

 

11

 

Restricted stock issuance, net of cancellations

 

(938

)

 

 

 

 

 

 

Common stock cash dividends

 

 

 

 

 

 

(1,163

)

(1,163

)

Net income

 

 

 

 

 

 

651

 

651

 

Foreign currency translation adjustment

 

 

 

 

 

311

 

 

311

 

Balance at March 31, 2014

 

11,628,828

 

$

12

 

$

94,123

 

$

(1,253

)

$

(2,705

)

$

(57,415

)

$

32,762

 

 

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

 

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EVOLVING SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

 

 

For the Three Months Ended March 31,

 

 

 

2014

 

2013

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

Net income

 

$

651

 

$

1,173

 

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

 

 

 

 

 

Depreciation

 

46

 

37

 

Amortization of intangible assets

 

23

 

98

 

Amortization of debt issuance costs

 

4

 

5

 

Stock based compensation

 

88

 

75

 

Unrealized foreign currency transaction (gains) and losses, net

 

96

 

43

 

Provision for deferred income taxes

 

54

 

86

 

Change in operating assets and liabilities:

 

 

 

 

 

Contract receivables

 

474

 

(641

)

Unbilled work-in-progress

 

(737

)

1,028

 

Prepaid and other assets

 

44

 

219

 

Accounts payable and accrued liabilities

 

(758

)

(230

)

Unearned revenue

 

(308

)

875

 

Net cash (used in) provided by operating activities

 

(323

)

2,768

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

Purchase of property and equipment

 

(90

)

(15

)

Restricted cash

 

 

2

 

Net cash used in investing activities

 

(90

)

(13

)

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

Capital lease payments

 

(3

)

(1

)

Common stock cash dividends

 

(1,163

)

 

Excess tax benefits from stock-based compensation

 

11

 

 

Proceeds from the issuance of stock

 

110

 

37

 

Net cash (used in) provided by financing activities

 

(1,045

)

36

 

 

 

 

 

 

 

Effect of exchange rate changes on cash

 

79

 

(175

)

 

 

 

 

 

 

Net (decrease) increase in cash and cash equivalents

 

(1,379

)

2,616

 

Cash and cash equivalents at beginning of period

 

13,785

 

8,844

 

Cash and cash equivalents at end of period

 

$

12,406

 

$

11,460

 

 

 

 

 

 

 

Supplemental disclosure of cash and non-cash financing transactions:

 

 

 

 

 

Income taxes paid

 

$

33

 

$

37

 

Common stock dividend declared

 

 

913

 

Property and equipment purchased and included in accounts payable

 

 

10

 

Issuance of common stock related to acquisition

 

19

 

 

 

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

 

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Table of Contents

 

EVOLVING SYSTEMS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1 — BASIS OF PRESENTATION

 

OrganizationWe 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, Tertio® (“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; our cloud-based (SaaS) service activation, self—service mobile applications and data enablement solutions to wireless carriers and Mobile Virtual Network Operators (MVNOs); and our connected devices activation solution, Intelligent M2M Controller and DataSpreeSM that support the activation of M2M devices.

 

Reclassifications - Certain reclassifications have been made to the 2013 financial statements to conform to the consolidated 2014 financial statement presentation. These reclassifications had no effect on net earnings or cash flows as previously reported.

 

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 Rule 8-03 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, 2014 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, 2013 included in our Annual Report on Form 10-K.

 

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 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 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.

 

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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 Telespree Communications (“Evolving Systems Labs”).  These assets are amortized using the straight-line method over their estimated lives.

 

We assess the impairment of identifiable intangibles if events or changes in circumstances indicate that the carrying value of the asset may not be recoverable.  If we determine that the carrying value of intangibles and/or long-lived assets may not be recoverable, we compare the estimated undiscounted cash flows expected to result from the use of the asset and its eventual disposition to the asset’s carrying amount. If an amortizable intangible or long-lived asset is not deemed to be recoverable, we recognize an impairment loss representing the excess of the asset’s carrying value over its estimated fair value.

 

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

 

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

 

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

 

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

 

Cash and Cash Equivalents — All highly liquid investments with maturities of three months or less at the date of purchase are classified as cash equivalents.

 

Revenue Recognition — We recognize revenue when an agreement is signed, the fee is fixed or determinable and collectability is reasonably assured. We recognize revenue from two primary sources: license fees and services, 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 changes or increases 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.

 

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

 

We recognize revenue from our Mobile Data Enablement (“MDE”) contracts based on the number of transactions per month multiplied by a factor based on a unique table for transaction volumes relating to each account.

 

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

 

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.

 

Restricted CashAs of March 31, 2014 and December 31, 2013 we had $24,000 of restricted cash related to securing a letter of credit for our San Francisco, California lease.  The restricted cash will become unrestricted at the expiration of the lease in 2015.

 

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 July 2013, the FASB issued ASU 2013-11 regarding ASC Topic 740 “Income Tax.” This ASU clarifies the guidance on the presentation of an unrecognized tax benefit, or a portion of an unrecognized tax benefit, in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward. This ASU will be effective for our fiscal year beginning January 1, 2014. We adopted this pronouncement as of January 1, 2014.  We do not expect the adoption of this standard to affect our financial position or results of operations.

 

NOTE 2 — ACQUISITION

 

On October 24, 2013 we acquired privately held Telespree, now known as Evolving Systems Labs, Inc. for an initial payment of approximately $1.6 million comprised of approximately $0.8 million in cash and approximately $0.8 million in stock.  We also agreed to make a payment on the 1 year anniversary of the transaction of $0.5 million, with such payment being available to secure Telespree’s representations and warranties in the agreement.  We will potentially make additional payments in cash on the achievement of certain financial targets for the period from October 25, 2013 through October 24, 2016.

 

We accounted for this business combination by applying the acquisition method, and accordingly, the purchase price was allocated to the assets and liabilities assumed based upon their fair values at the acquisition date. The excess of the purchase price over the net assets and liabilities, approximately $1.1 million, was recorded as goodwill. The Company is in the process of finalizing the purchase allocation, thus the provisional measures of deferred income taxes, intangibles and goodwill are subject to change. The Company expects the purchase price allocation will be finalized in 2014. The results of Telespree’s operations have been included in the consolidated financial statements since the acquisition date.

 

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We believe this acquisition complements our activation and SIM management products, adding technology used in the delivery and management of mobile data services to end-users.   Our strategic focus is 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.

 

Total purchase price is summarized as follows:

 

 

 

October 24, 2013

 

Cash Consideration

 

$

794

 

Final Cash Payment

 

494

 

Stock Consideration (73,281 shares)

 

761

 

Estimated Contingent Consideration

 

178

 

Total purchase price

 

$

2,227

 

 

The fair value of the 73,281 common shares issued was determined based on the closing market price of our common shares on the acquisition date.

 

The estimated contingent consideration arrangement requires us to pay $0.2 million of additional consideration to Telespree’s former shareholders if we meet certain performance metrics over the three years following the acquisition date.  In each of the years, the former shareholders are entitled to a deferred payment equal to 34 percent of all qualifying revenue in excess of the qualifying revenue threshold for such deferred payment period.  The initial qualifying revenue threshold is $2.3 million, but shall be increased in subsequent years if the qualified revenue falls under the qualifying revenue threshold in the previous period.

 

The contingent consideration was valued using the Income Approach-Probability Weighted Expected Payment.  Multiple forecasted scenarios were evaluated which include (i) an upside case, (ii) a base case and (iii) a downside case.  We determined the potential Deferred Payment cash flows of Telespree based on each scenario.  The cash flow payments were converted to a present value using a discount rate of 5 percent based on the cost of debt.  Finally, we probability weighted each scenario.

 

The following table summarizes the preliminary estimated fair values of the assets and liabilities assumed at the acquisition date:

 

 

 

October 24, 2013

 

Cash and cash equivalents

 

$

382

 

Contract receivables

 

210

 

Unbilled work-in-progress

 

150

 

Intangible assets

 

718

 

Prepaid and other current assets

 

37

 

Deferred tax asset

 

98

 

Other assets, non-current

 

43

 

Total identifiable assets acquired

 

$

1,638

 

 

 

 

 

Accounts payable and accrued liabilities

 

$

504

 

Assumed liabilities

 

4

 

Total identifiable assets acquired

 

$

508

 

 

 

 

 

Net identifiable assets acquired

 

1,130

 

 

 

 

 

Goodwill

 

1,097

 

Net assets acquired

 

$

2,227

 

 

We recorded $0.7 million in intangible assets as of the acquisition date with a weighted-average amortization period of five to eight years and are amortizing the value of the trade name, technology, and customer relationships over an estimated useful life of 3.8, 4.6 and 4.6 years, respectively.  Amortization expense related to the acquired intangible assets resulting from the acquisition, which is included in amortization expense, was approximately $23,000 for the three months ended March 31, 2014.

 

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The $1.1 million of goodwill was assigned to the license and service segment.  The goodwill recognized is attributed primarily to expected synergies and the assembled workforce of Telespree.  As of March 31, 2014 there were no changes in the recognized amounts of goodwill resulting from the acquisition of Telespree.

 

NOTE 3 — GOODWILL AND INTANGIBLE ASSETS

 

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

 

 

 

License and Services

 

Customer
Support

 

Total

 

 

 

U.S.

 

UK

 

UK

 

Goodwill

 

Balance as of December 31, 2013

 

$

1,097

 

$

7,532

 

$

9,307

 

$

17,936

 

Effects of changes in foreign currency exchange rates (1)

 

 

69

 

85

 

154

 

Balance at March 31, 2014

 

$

1,097

 

$

7,601

 

$

9,392

 

$

18,090

 

 


(1)         Represent primarily the impact of foreign currency translation for instances when goodwill is recorded in foreign entities whose functional currency is also their local currency. Goodwill balances are translated into U.S. dollars using exchange rates in effect at period end. Adjustments related to foreign currency translation are included in other comprehensive income.

 

We conducted our annual goodwill impairment test as of July 31, 2013, and we determined that goodwill was not impaired as of the test date. From July 31, 2013 through the date of this report, no events have occurred that we believe may have impaired goodwill.

 

We amortized identifiable intangible assets on a straight-line basis over their estimated lives ranging from one to seven years and include the cumulative effects of foreign currency exchange rates.  As of March 31, 2014 and December 31, 2013, identifiable intangibles were as follows (in thousands):

 

 

 

March 31, 2014

 

December 31, 2013

 

Weighted-

 

 

 

Gross
Amount

 

Accumulated
Amortization

 

Net
Carrying
Amount

 

Gross
Amount

 

Accumulated
Amortization

 

Net
Carrying
Amount

 

Average
Amortization
Period

 

Purchased software

 

$

439

 

$

23

 

$

416

 

$

439

 

$

9

 

$

430

 

4.6 yrs

 

Trademarks and tradenames

 

63

 

5

 

58

 

63

 

2

 

61

 

3.8 yrs

 

Customer relationships

 

216

 

11

 

205

 

216

 

5

 

211

 

4.6 yrs

 

 

 

$

718

 

$

39

 

$

679

 

$

718

 

$

16

 

$

702

 

4.54 yrs

 

 

Amortization expense of identifiable intangible assets was $23,000 and $0.1 million for the three months ended March 31, 2014 and 2013, respectively.  Expected future amortization expense related to identifiable intangibles based on our carrying amount as of March 31, 2014 was as follows (in thousands):

 

Twelve months ending March 31,

 

 

 

2015

 

$

94

 

2016

 

94

 

2017

 

94

 

2018

 

94

 

2019

 

89

 

Thereafter

 

214

 

 

 

$

679

 

 

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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):

 

 

 

For the Three Months Ended March 31,

 

 

 

2014

 

2013

 

Basic income per share:

 

 

 

 

 

Net income available to common stockholders

 

$

651

 

$

1,173

 

Basic weighted average shares outstanding

 

11,621

 

11,409

 

Basic income per share:

 

$

0.06

 

$

0.10

 

 

 

 

 

 

 

Diluted income per share:

 

 

 

 

 

Net income available to common stockholders

 

$

651

 

$

1,173

 

Weighted average shares outstanding

 

11,621

 

11,409

 

Effect of dilutive securities - options

 

296

 

282

 

Diluted weighted average shares outstanding

 

11,917

 

11,691

 

Diluted income per share:

 

$

0.05

 

$

0.10

 

 

For the three months ended March 31, 2014 and 2013, 0.1 million shares, of common stock were excluded from the dilutive stock calculation because their exercise prices were greater than the average fair value of our common stock for the period.

 

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 of compensation expense in the consolidated statements of operations, with respect to our stock-based compensation plans for the three months ended March 31, 2014 and 2013.  The following table summarizes stock-based compensation expenses recorded in the consolidated statement of operations (in thousands):

 

 

 

For the Three Months Ended March 31,

 

 

 

2014

 

2013

 

Cost of license fees and services, excluding depreciation and amortization

 

$

16

 

$

7

 

Cost of customer support, excluding depreciation and amortization

 

2

 

1

 

Sales and marketing

 

11

 

5

 

General and administrative

 

42

 

57

 

Product development

 

17

 

5

 

Total share based compensation

 

$

88

 

$

75

 

 

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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, 2014 and December 31, 2013, 0.1 and 0.2 million options remained outstanding under the Option 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. In June 2013, our stockholders approved an amendment to the 2007 Stock Plan which increased the maximum shares that may be awarded under the plan to 1,502,209.  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, 2014, there were approximately 0.1 million shares available for grant under the 2007 Stock Plan, as amended.  At March 31, 2014 and December 31, 2013, 0.6 million and 0.5 million options were issued and outstanding under the 2007 Stock Plan as amended, respectively.

 

During the three months ended March 31, 2014 and 2013, there were 0 and 16,000 grants of restricted stock to members of our senior management.  During the three months ended March 31, 2014 and 2013, 2,000 and 6,000 shares of restricted stock vested, respectively.  Approximately 938 and 1,250 shares of restricted stock were forfeited during the three months ended March 31, 2014 and 2013, 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 $15,000 and $40,000 for the three months ended March 31, 2014 and 2013, respectively, of expense related to restricted stock grants. The restrictions on the stock awards are released quarterly, generally over two and four years for senior management and over one year for board members.

 

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,

 

 

 

2014

 

2013

 

Expected term (years)

 

5.9

 

6.1

 

Risk-free interest rate

 

1.69

%

0.76

%

Expected volatility

 

55.98

%

61.48

%

Expected dividend yield

 

3.90

%

3.10

%

 

The following is a summary of stock option activity under the plans for the nine months ended March 31, 2014:

 

 

 

 

 

 

 

Weighted-

 

 

 

 

 

 

 

 

 

Average

 

 

 

 

 

 

 

Weighted-

 

Remaining

 

Aggregate

 

 

 

Number of

 

Average

 

Contractual

 

Intrinsic

 

 

 

Shares

 

Exercise

 

Term

 

Value

 

 

 

(in thousands)

 

Price

 

(Years)

 

(in thousands)

 

Options outstanding at December 31, 2013

 

676

 

$

5.11

 

4.76

 

$

3,491

 

Options granted

 

155

 

10.34

 

 

 

 

 

Less options forfeited

 

(91

)

13.57

 

 

 

 

 

Less options exercised

 

(55

)

5.44

 

 

 

 

 

Options outstanding at March 31, 2014

 

685

 

$

5.14

 

6.45

 

$

2,877

 

 

 

 

 

 

 

 

 

 

 

Options exercisable at March 31, 2014

 

423

 

$

2.55

 

4.50

 

$

3,371

 

 

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There were 154,500 and 33,000 stock options granted during the three months ended March 31, 2014 and 2013. The weighted-average grant-date fair value of stock options granted during the three months ended March 31, 2014 and 2013 was $3.90 and $2.78, respectively.  As of March 31, 2014, there was approximately $0.9 million of total unrecognized compensation costs related to unvested stock options.  These costs are expected to be recognized over a weighted average period of 2.83 years.  The total fair value of stock options vested during the three months ended March 31, 2014 and 2013 was approximately $38,000 and $44,000, respectively.

 

The deferred income tax benefits from stock option expense related to Evolving Systems U.K. totaled approximately $4,000 for the three months ended March 31, 2014 and 2013.

 

Cash received from stock option exercises for the three months ended March 31, 2014 and 2013 was $0.1 million and $34,000, respectively.

 

During the three months ended March 31, 2014, 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, 2014, resulted in approximately 7,094 shares issued and 26,376 options cancelled in settlement of shares issued.  There were no net settlement exercises during the three months ended March 31, 2013.

 

Employee Stock Purchase Plan

 

Under the Employee Stock Purchase Plan (“ESPP”), we are authorized to issue up to 550,000 shares.  Employees may elect to have up to 15% of their gross compensation withheld through payroll 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, 2014, there were approximately 67,000 shares available for purchase.  For the three months ended March 31, 2014 and 2013, we recorded compensation expense of $7,000 and $700, 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:

 

 

 

For the Three Months Ended March 31,

 

 

 

2014

 

2013

 

Expected term (years)

 

0.25

 

0.25

 

Risk-free interest rate

 

0.04

%

0.10

%

Expected volatility

 

43.24

%

46.34

%

Expected dividend yield

 

4.44

%

3.63

%

 

Cash received from employee stock plan purchases for the three months ended March 31, 2014 and 2013 was $26,000 and $2,000, respectively.

 

We issued shares related to the ESPP of approximately 3,000 and 500 for the three months ended March 31, 2014 and 2013, respectively.

 

NOTE 6 — CONCENTRATION OF CREDIT RISK

 

For the three months ended March 31, 2014, two significant customer (defined as contributing at least 10%) accounted for 28% (17% and 11%) of revenue from operations.  The significant customers for the three months ended March 31, 2014 are large

 

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telecommunications operators in Europe and Mexico.  For the three months ended March 31, 2013, two significant customers accounted for 28% (18% and 10%) of revenue from operations. The significant customers for the three months ended March 31, 2013 are large telecommunications operators in the Philippines and Europe.

 

As of March 31, 2014, two significant customers accounted for approximately 44% (24% and 20%) of contract receivables and unbilled work-in-progress.  These customers are large telecommunication operators in Europe and Africa.  As of December 31, 2013, four significant customers accounted for approximately 56% (18%, 15%, 12% and 11%) of contract receivables and unbilled work-in-progress.  These customers are a large telecommunications operator in Africa, Europe, Brazil and Europe.

 

NOTE 7 — LONG-TERM DEBT

 

On October 22, 2012, we entered into a $5.0 million Loan and Security Agreement (the “Revolving Facility”).  The $5.0 million Revolving Facility bears interest at the greater of 2.75% or the U.S.A Prime Rate minus one half of one percent (0.5%).  Prime Rate was 3.25% as of March 31, 2014.  The Revolving Facility is secured by all 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.  There is no mandated borrowing required against the Revolving Facility.  To take an advance under the Revolving Facility, we must have a balance of $3.0 million in cash on deposit and have quarterly net income and a specified ratio of current assets to current liabilities, as defined in the Revolving Facility.  The Revolving Facility requires us to pay an annual credit facility fee of $10,000.  All accrued interest on outstanding borrowings under the Revolving Facility is payable monthly, with any outstanding balance due with a final maturity of October 22, 2014.  As of March 31, 2014, we are in compliance with the covenants and have $5.0 million available to borrow under this Revolving Facility.

 

NOTE 8 — INCOME TAXES

 

We recorded net income tax expense of $0.3 million and $0.6 million for the three months ended March 31, 2014 and 2013, respectively.  The net expense during the three months ended March 31, 2014 consisted of current income tax expense of $0.2 million and a deferred tax expense of $57,000. The current tax expense consists primarily of income tax from our U.S.,  U.K. and India based operations and unrecoverable foreign withholding taxes in the U.S. The deferred tax expense was primarily related to undistributed foreign earnings, a decrease in deferred tax assets related to accrued liabilities and capitalized expenses for tax purpose related to the acquisition of Telespree.  The net expense during the three months ended March 31, 2013 consisted of current income tax expense of $0.5 million and a deferred tax expense of $0.1 million. The current tax expense consists primarily of unrecoverable foreign withholding tax in the U.S. and income tax from our U.S. and U.K. based operations. The deferred tax expense was primarily related to undistributed foreign earnings offset by intangible assets from our U.K. based operations.

 

Our effective tax rate of 30% for the three months ended March 31, 2014 decreased from an effective tax rate of 32% for the three months ended March 31, 2013.  The decrease in our effective tax rate relates to a higher proportion of our income being generated in the U.K., for which the statutory corporate tax rate was decreased in 2014.  When utilized, windfall tax benefits related to stock-based compensation are recorded as a reduction to our taxes payable when realized, with a corresponding credit to additional paid in capital, not income tax expense.

 

In conjunction with the acquisition of Evolving Systems Labs, we recorded certain identifiable intangible assets of $0.7 million.  These assets are amortizable for both book and tax purposes.

 

As of March 31, 2014 and December 31, 2013 we continued to maintain a valuation allowance on portions of our domestic net deferred tax asset.  Such assets primarily consist of certain NOL carryforwards and other tax credits.  These NOL’s are comprised of windfall tax benefits related to stock-based compensation. The $0.3 million of net deferred tax assets as of March 31, 2014, were comprised of the following:

 

 

 

March 31, 2014

 

Deferred tax assets:

 

 

 

Net operating loss carryforwards

 

$

2,858

 

Research & Development Credits

 

303

 

AMT/MAT credit

 

966

 

Stock Compensation

 

589

 

Depreciable assets

 

164

 

Intangibles

 

88

 

Accrued liabilities and reserves

 

144

 

Total deferred tax assets

 

5,112

 

 

 

 

 

Deferred tax liabilities

 

 

 

Undistributed Foreign Earnings

 

$

(777

)

Total deferred tax liability

 

(777

)

 

 

 

 

Net deferred tax assets, before valuation allowance

 

$

4,335

 

Valuation allowance

 

(4,007

)

Net deferred tax asset

 

$

328

 

 

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As of March 31, 2014 and December 31, 2013 we had no liability for unrecognized tax benefits.

 

We conduct business globally and, as a result, Evolving Systems, Inc. or one or more of our subsidiaries file income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions.  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 9 — STOCKHOLDERS’ EQUITY

 

Common Stock Dividend

 

On March 11, 2014, our Board of Directors declared a first quarter cash dividend of $0.10 per share, payable March 31, 2014, to stockholders of record March 24, 2014.

 

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, financial covenants to which we are subject, earnings outlook and other relevant factors at that time.

 

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 March 31, 2014 and December 31, 2013, no shares of preferred stock were outstanding.

 

In addition, we are subject to the anti-takeover provisions of Section 203 of Delaware General Corporation Law which prohibit us from engaging in a “business combination” with an “interested stockholder” for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in the prescribed manner. The application of Section 203 may have the effect of delaying or preventing changes in control of our management, which could adversely affect the market price of our common stock by discouraging or preventing takeover attempts that might result in the payment of a premium price to our stockholders.

 

NOTE 10 — 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 Vice President of Finance as our chief operating decision-makers (“CODM”). These chief operating decision makers review revenues by segment and review overall results of operations.

 

We currently operate our business as two operating segments based on revenue type:  license fees and services revenue, and customer support revenue (as shown on the consolidated statements of operations).  License fees and services (“L&S”) revenue represents the fees received from the license of software products and those services directly related to the delivery of the licensed products, such as fees for custom development and integration services.  Customer support (“CS”) revenue includes 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. Total assets by segment have not been disclosed as the information is not available to the chief operating decision-makers.

 

Segment information is as follows (in thousands):

 

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Table of Contents

 

 

 

For the Three Months Ended March 31,

 

 

 

2014

 

2013

 

Revenue

 

 

 

 

 

License fees and services

 

$

4,367

 

$

4,507

 

Customer support

 

2,215

 

2,162

 

Total revenue

 

6,582

 

6,669

 

 

 

 

 

 

 

Revenue less costs of revenue, excluding depreciation and amortization

 

 

 

 

 

License fees and services

 

2,889

 

2,971

 

Customer support

 

1,795

 

1,854

 

 

 

4,684

 

4,825

 

Unallocated Costs

 

 

 

 

 

Other operating expenses

 

3,377

 

2,909

 

Depreciation and amortization

 

69

 

135

 

Restructuring

 

211

 

 

Interest income

 

(3

)

(3

)

Interest expense

 

5

 

6

 

Foreign currency exchange loss

 

96

 

43

 

 

 

 

 

 

 

Income from operations before income taxes

 

$

929

 

$

1,735

 

 

Geographic Regions

 

We are headquartered in Englewood, a suburb of Denver, Colorado. We use customer locations as the basis for attributing revenues to individual countries. We provide products and services on a global basis through our headquarters,  our London-based Evolving Systems U.K. subsidiary and our San Franciso-based Evolving Systems Labs, subsidiary. Additionally, personnel in Bangalore, India provide software development services to our global operations. Financial information relating to operations by geographic region is as follows (in thousands):

 

 

 

For the Three Months Ended March 31,

 

 

 

2014

 

2013

 

 

 

L&S

 

CS

 

Total

 

L&S

 

CS

 

Total

 

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

United Kingdom

 

$

1,098

 

$

500

 

$

1,598

 

$

913

 

$

484

 

$

1,397

 

Nigeria

 

631

 

91

 

722

 

190

 

97

 

287

 

Mexico

 

588

 

114

 

702

 

72

 

104

 

176

 

Other

 

2,050

 

1,510

 

3,560

 

3,332

 

1,477

 

4,809

 

Total revenues

 

$

4,367

 

$

2,215

 

$

6,582

 

$

4,507

 

$

2,162

 

$

6,669

 

 

 

 

March 31,

 

December 31,

 

 

 

2014

 

2013

 

Long-lived assets, net

 

 

 

 

 

United States

 

$

1,869

 

$

1,840

 

United Kingdom

 

17,146

 

16,985

 

Other

 

146

 

155

 

 

 

$

19,161

 

$

18,980

 

 

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Table of Contents

 

NOTE 11 — COMMITMENTS AND CONTINGENCIES

 

(a)           Other Commitments

 

As permitted under Delaware law, we have agreements with officers and directors under which we agree to indemnify them for certain events or occurrences while the officer or director is, or was, serving at our request in this capacity. The term of the indemnification period is indefinite. There is no limit on the amount of future payments we could be required to make under these indemnification agreements; however, we maintain Director and Officer insurance policies, as well as an Employment Practices Liability Insurance Policy, that may enable us to recover a portion of any amounts paid. As a result of our insurance policy coverage, we believe the estimated fair value of these indemnification agreements is minimal. Accordingly, there were no liabilities recorded for these agreements as of March 31, 2014 or December 31, 2013.

 

We enter into standard indemnification terms with customers and suppliers, in the ordinary course of business, for third party claims arising under our contracts. In addition, as we may subcontract the development of deliverables under customer contracts, we could be required to indemnify customers for work performed by subcontractors. Depending upon the nature of the indemnification, the potential amount of future payments we could be required to make under these indemnification agreements may be unlimited. We may be able to recover damages from a subcontractor or other supplier if the indemnification results from the subcontractor’s or supplier’s failure to perform. To the extent we are unable to recover damages from a subcontractor or other supplier, we could be required to reimburse the indemnified party for the full amount. We have never incurred costs to defend lawsuits or settle claims relating to an indemnification. As a result, we believe the estimated fair value of these agreements is minimal. Accordingly, there were no liabilities recorded for these agreements as of March 31, 2014 or December 31, 2013.

 

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 March 31, 2014 or December 31, 2013.

 

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 March 31, 2014 or December 31, 2013.

 

(b)          Litigation

 

We are involved in various legal matters arising in the normal course of business.  Losses, including estimated costs to defend, are recorded for these matters to the extent they are probable of loss and the amount of loss can be reasonably estimated.  As of March 31, 2014 we are not involved in any legal matters.

 

NOTE 12 — RESTRUCTURING

 

During the first quarter of 2014, we undertook a reduction in workforce involving the termination of employees resulting in an expense of $0.2 million primarily related to severance for the affected employees. The reduction in workforce was related to the acquisition of Telespree in the fourth quarter of 2013.  There was no restructuring expense for the three months ended March 31, 2013.

 

As of March 31, 2014, $23,000 has been paid.  The restructuring liability as of March 31, 2014 was $0.2 million.

 

NOTE 13 — SUBSEQUENT EVENTS

 

On May 6, 2014, our Board of Directors declared a second quarter cash dividend of $0.10 per share, payable May 30, 2014, to stockholders of record May 20, 2014.

 

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Table of Contents

 

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

 

SPECIAL NOTE ABOUT FORWARD-LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q contains forward-looking statements that have been made pursuant to the provisions of the Private Securities Litigation Reform Act of 1995.  These forward-looking statements are based on current expectations, estimates, and projections about Evolving Systems’ industry, management’s beliefs, and certain assumptions made by management.  Forward-looking statements include our expectations regarding product, services, and maintenance revenue, annual savings associated with the organizational changes effected in prior years, and short- and long-term cash needs.  In some cases, words such as “anticipates”, “expects”, “intends”, “plans”, “believes”, “estimates”, variations of these words, and similar expressions are intended to identify forward-looking statements.  The statements are not guarantees of future performance and are subject to certain risks, uncertainties, and assumptions that are difficult to predict; therefore, actual results may differ materially from those expressed or forecasted in any forward-looking statements.  Risks and uncertainties of our business include those set forth in our Annual Report on Form 10-K for the year ended December 31, 2013 under “Item 1A. Risk Factors” as well as additional risks described in this Form 10-Q.  Unless required by law, we undertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future events, or otherwise.  However, readers should carefully review the risk factors set forth in other reports or documents we file from time to time with the Securities and Exchange Commission, particularly the Quarterly Reports on Form 10-Q and any Current Reports on Form 8-K.

 

OVERVIEW

 

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 network operators worldwide. Our customers rely on us to develop, deploy, enhance, maintain and integrate complex, highly reliable software solutions for a range of OSS.  We offer software products and solutions focused on activation and provisioning: our service activation solution, TSA is 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, DSA is used to dynamically allocate and assign resources to wireless devices that rely on SIM cards, and our connected devices activation solution, DataSpreeSM and IMC supports the activation of M2M devices.

 

We recognize revenue in accordance with the prescribed accounting standards for software revenue recognition under generally accepted accounting principles.  Our license fees and services revenues fluctuate from period to period as a result of the timing of revenue recognition on existing projects.

 

RECENT DEVELOPMENTS

 

Consolidated revenue decreased to $6.6 million from $6.7 million for three months ended March 31, 2014 and 2013, respectively.  The decrease in revenue is due to lower license and services revenue primarily from DSA.

 

Our twelve month backlog increased to $13.1 million as of March 31, 2014, compared to $9.8 million as of March 31, 2013.

 

We have operations in foreign countries where the local currency is used to prepare the financial statements which are translated into our reporting currency, U.S. Dollars. Changes in the exchange rates between these currencies and our reporting currency are partially responsible for some of the changes from period to period in our financial statement amounts. The chart below summarizes how our revenue and expenses would change had they been reported on a constant currency basis. The constant currency basis assumes that the exchange rate was constant for the periods presented (in thousands).

 

 

 

For the Three Months
Ended March 31,

 

 

 

2014 vs. 2013

 

Revenue

 

$

118

 

Costs of revenue and operating expenses

 

179

 

Operating loss

 

$

(61

)

 

The net effect of our foreign currency translations for the three months ended March 31, 2014 was a $0.2 million increase in revenue and a $0.2 million increase in operating expenses versus the three months ended March 31, 2013.

 

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Table of Contents

 

RESULTS OF OPERATIONS

 

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

 

 

 

For the Three Months Ended March 31,

 

 

 

2014

 

2013

 

REVENUE

 

 

 

 

 

License fees and services

 

66

%

68

%

Customer support

 

34

%

32

%

Total revenue

 

100

%

100

%

 

 

 

 

 

 

COSTS OF REVENUE AND OPERATING EXPENSES

 

 

 

 

 

Costs of license fees and services,

 

 

 

 

 

excluding depreciation and amortization

 

22

%

23

%

Costs of customer support,

 

 

 

 

 

excluding depreciation and amortization

 

6

%

5

%

Sales and marketing

 

25

%

19

%

General and administrative

 

13

%

13

%

Product development

 

14

%

11

%

Depreciation

 

1

%

1

%

Amortization

 

 

1

%

Restructuring and other recovery

 

3

%

 

Total costs of revenue and operating expenses

 

84

%

73

%

 

 

 

 

 

 

Income from operations

 

16

%

27

%

 

 

 

 

 

 

Other income (expense)

 

 

 

 

 

Interest income

 

0

%

0

%

Interest expense

 

(0

)%

(0

)%

Foreign currency exchange gain (loss)

 

(2

)%

(1

)%

Other income (expense), net

 

(2

)%

(1

)%

 

 

 

 

 

 

Income from operations before income taxes

 

14

%

26

%

Income tax expense

 

4

%

8

%

Net income

 

10

%

18

%

 

Revenue

 

Revenue is comprised of license fees/services and customer support.  License fees and services revenue represent the fees we receive from the licensing of our software products and those services directly related to the delivery of the licensed product as well as integration and consulting services.  Customer support revenue includes annual support, recurring maintenance and warranty services.  Warranty services consist of maintenance services and are typically bundled with a license sale and the related revenue, based on Vendor-Specific Objective Evidence (“VSOE”), is deferred and recognized ratably over the warranty period.

 

Revenue for the three months ended March 31, 2014 and 2013 was $6.6 million and $6.7 million, respectively.  Decreased revenue in the period is primarily due to decreased license and services revenue from our DSA.

 

License Fees and Services

 

License fees and services revenue decreased $0.1 million, or 3%, to $4.4 million for the three months ended March 31, 2014 from $4.5 million for the three months ended March 31, 2013.  The decrease in revenue is primarily related to lower revenue from DSA.

 

Customer Support

 

Customer support revenue was $2.2 million for the three months ended March 31, 2014 and 2013.

 

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Table of Contents

 

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, excluding depreciation and amortization, were $1.9 million and $1.8 million for the three months ended March 31, 2014 and 2013.

 

Costs of License Fees and Services, Excluding Depreciation and Amortization

 

Costs of license fees and services, excluding depreciation and amortization was $1.5 million for the three months ended March 31, 2014 and 2013. As a percentage of license fees and services revenue, costs of license fees and services, excluding depreciation and amortization, was 34% for the three months ended March 31, 2014 and 2013.

 

Costs of Customer Support, Excluding Depreciation and Amortization

 

Costs of customer support, excluding depreciation and amortization, increased $0.1 million, or 36%, to $0.4 million for the three months ended March 31, 2014 from $0.3 million for the three months ended March 31, 2013.  The increase in costs is primarily related to support fees for software for our DSA product and increased hours spent on support projects during the period.  As a percentage of customer support revenue, costs of customer support revenue, excluding depreciation and amortization, increased to 19% for the three months ended March 31, 2014 from 14% for the three months ended March 31, 2013.  The increase in costs as a percentage of revenue is primarily the result of the aforementioned increase in expenses during the period.

 

Sales and Marketing

 

Sales and marketing expenses primarily consist of compensation costs, including incentive compensation and commissions, travel expenses, advertising, marketing and facilities expenses. Sales and marketing expenses increased $0.4 million, or 28%, to $1.7 million for the three months ended March 31, 2014 from $1.3 million for the three months ended March 31, 2013.  The increase in expenses is related primarily to higher labor, travel and marketing expense primarily related to the acquisition of Evolving Systems, Labs.  As a percentage of total revenue, sales and marketing expenses increased to 25% for the three months ended March 31, 2014 from 20% for the three months ended March 31, 2013. The increase in sales and marketing expenses as a percentage of revenue is primarily due to the aforementioned increase in expenses during the period.

 

General and Administrative

 

General and administrative expenses consist principally of employee related costs and professional fees for the following departments: facilities, finance, legal, human resources, and certain executive management.  General and administrative expenses decreased $0.1 million, or 7%, to $0.8 million for the three months ended March 31, 2014 from $0.9 million for the three months ended March 31, 2013.  The decrease in general and administrative expenses is primarily the result of lower incentive compensation and professional fees.  As a percentage of revenue, general and administrative expenses were 13% for the three months ended March 31, 2014 and 2013.

 

Product Development

 

Product development expenses consist primarily of employee related costs and subcontractor expenses.  Product development expenses increased $0.2 million, or 24%, to $0.9 million for the three months ended March 31, 2014 from $0.7 million for the three months ended March 31, 2013.  The increase in product development expenses is primarily related to increased employee related costs due to the acquisition of Evolving Systems, Labs.  As a percentage of revenue, product development expenses for the three months ended March 31, 2014 and 2013, increased to 13% from 11%, respectively.  The increase as a percentage of revenue is primarily due to the aforementioned increase in expense during the period.

 

Depreciation

 

Depreciation expense consists of depreciation of long-lived property and equipment.  Depreciation expense increased $9,000, or 24%, to $46,000 from $37,000 for the three months ended March 31, 2014 and 2013, respectively.  As a percentage of total revenue, depreciation expense for the three months ended March 31, 2014 and 2013, remained at 1%.

 

Amortization

 

Amortization expense consists of amortization of identifiable intangible assets acquired through our acquisition of Evolving Systems U.K and Evolving Systems, Labs.  Amortization expense decreased $0.1 million, or 77% to $23,000 from $0.1 million for the three months ended March 31, 2014 and 2013, respectively.  As a percentage of total revenue, amortization expense for the three months ended March 31, 2014 decreased to 0% from 1% for the three months ended March 31, 2013.

 

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Table of Contents

 

Restructuring

 

Restructuring expense includes the costs associated with a reduction in workforce involving the termination of employees.  Restructuring increased to $0.2 million for the three months ended March 31, 2014.  There were no restructuring expenses for the three months ended March 31, 2013.  As a percentage of revenue, restructuring expense was 3% for the three months ended March 31, 2014 up from 0% for the three months ended March 31, 2013.

 

Interest Income

 

Interest income includes interest income earned on cash and cash equivalents.  Interest income was $3,000 for the three months ended March 31, 2014 and 2013, respectively.

 

Interest Expense

 

Interest expense includes interest expense from the amortization of debt issuance costs, our revolving debt facility and interest expense from our capital lease obligations.  Interest expense was $5,000 and $6,000 for the three months ended March 31, 2014 and 2013, respectively. The increase of $1,000 is primarily due to the amortization of interest expense from our capital lease obligations.

 

Foreign Currency Exchange Loss

 

Foreign currency transaction losses resulted from transactions denominated in a currency other than the functional currency of the respective subsidiary and were $0.1 million and $43,000 for the three months ended March 31, 2014 and 2013 respectively..  The losses were generated primarily through the re-measurement of certain non-functional currency denominated financial assets and liabilities of our Evolving Systems U.K. and India subsidiaries.

 

Other Comprehensive Income (Loss)

 

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. Other comprehensive income increased to $1.0 million during the three months ended March 31, 2014 compared to $25,000 during the three months ended March 31, 2013. The increase is related to the re-measurement of certain non-functional currency denominated financial assets and liabilities of our Evolving Systems U.K. and India subsidiaries.

 

Income Taxes

 

We recorded net income tax expense of $0.3 million and $0.6 million for the three months ended March 31, 2014 and 2013, respectively.  The net expense during the three months ended March 31, 2014 consisted of current income tax expense of $0.2 million and a deferred tax expense of $57,000. The current tax expense consists primarily of income tax from our U.S., U.K. and India based operations and unrecoverable foreign withholding taxes in the U.S. The deferred tax expense was primarily related to undistributed foreign earnings, a decrease in deferred tax assets related to accrued liabilities and capitalized expenses for tax purpose related to the acquisition of Telespree.  The net expense during the three months ended March 31, 2013 consisted of current income tax expense of $0.5 million and a deferred tax expense of $0.1 million. The current tax expense consists primarily of unrecoverable foreign withholding tax in the U.S. and income tax from our U.S. and U.K. based operations. The deferred tax expense was primarily related to undistributed foreign earnings offset by intangible assets from our U.K. based operations.

 

Our effective tax rate of 30% for the three months ended March 31, 2014 decreased from an effective tax rate of 32% for the three months ended March 31, 2013.  The decrease in our effective tax rate relates to a higher proportion of our income being generated in the U.K., for which the statutory corporate tax rate was decreased in 2014.  When utilized, windfall tax benefits related to stock-based compensation are recorded as a reduction to our taxes payable when realized, with a corresponding credit to additional paid in capital, not income tax expense.

 

In conjunction with the acquisition of Evolving Systems Labs, we recorded certain identifiable intangible assets of $0.7 million.  These assets are amortizable for both book and tax purposes.

 

As of March 31, 2014 and December 31, 2013 we continued to maintain a valuation allowance on portions of our domestic net deferred tax asset.    Such assets primarily consist of certain NOL carryforwards and other tax credits.  These NOL’s are comprised of windfall tax benefits related to stock-based compensation.  See Note 8 to the financial statements for a summary of our net deferred tax asset.

 

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Table of Contents

 

FINANCIAL CONDITION

 

Our working capital position decreased slightly to $14.5 million as of March 31, 2014 from $14.7 million as of December 31, 2013.

 

CONTRACTUAL OBLIGATIONS

 

There have been no material changes to the contractual obligations as disclosed in our 2013 Annual Report on Form 10-K.

 

LIQUIDITY AND CAPITAL RESOURCES

 

We have historically financed operations through cash flows from operations and equity transactions.  At March 31, 2014, our principal source of liquidity was $12.4 million in cash and cash equivalents and $5.9 million in contract receivables, net of allowances and $5.0 million of unused availability under our revolving credit facility.

 

Net cash (used in) provided by operating activities for the three months ended March 31, 2014 and 2013 was ($0.3 million) and $2.8 million, respectively.  The decrease in cash provided by operating activities for the three months ended March 31, 2014 was primarily due to decreases in net income, accounts payable, accrued liabilities and unearned revenue coupled with an increase in unbilled work-in-progress, partially offset by a decrease in contract receivables and prepaid and other assets.

 

Net cash used in investing activities during each of the three months ended March 31, 2014 and 2013 was $0.1 million and $13,000, respectively.  The increase in cash used in investing activities is primarily due to increased purchase of property and equipment in the three months ended March 31, 2014.

 

Net cash (used in) provided by financing activities for the three months ended March 31, 2014 and 2013 was ($1.0 million) and $36,000, respectively.  The increase in cash used in financing activities is primarily due to the $0.10 per share common stock cash dividend paid on March 31, 2014.  No dividends were paid during the three months ended March 31, 2013.

 

We believe that our current cash and cash equivalents, together with anticipated cash flow from operations will be sufficient to meet our working capital, capital expenditure and financing requirements for at least the next twelve months. In making this assessment we considered the following:

 

·                                                Our cash and cash equivalents balance at March 31, 2014 of $12.4 million;

 

·                                                Our working capital balance of $14.5 million;

 

·                                                Our demonstrated ability to historically generate positive cash flows from operations;

 

·                                                The declaration of our quarterly cash dividends of $0.10 per share for the first quarter of 2014, and the possibility of future dividends;

 

·                                                Our backlog as of March 31, 2014 of approximately $13.1 million, including $7.8 million in license fees and services and $5.3 million in customer support;

 

·                                                The availability under our revolving credit facility of $5.0 million as of March 31, 2014.

 

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 three months ended March 31, 2014 and 2013, the effect of exchange rate changes resulted in a $0.1 million increase and $0.2 million decrease to consolidated cash.  We do not currently hedge our foreign currency exposure, but we monitor rate changes and may hedge our exposures if we see significant negative trends in exchange rates.

 

OFF-BALANCE SHEET ARRANGEMENTS

 

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

 

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Table of Contents

 

ITEM 3.  QUANTITATIVE AND QUALITATIVE MARKET RISK DISCLOSURES

 

In the ordinary course of business, we are exposed to certain market risks, including changes in interest rates and foreign currency exchange rates. Uncertainties that are either non-financial or non-quantifiable such as political, economic, tax, other regulatory, or credit risks are not included in the following assessment of market risks.

 

Interest Rate Risks

 

Our cash balances are subject to interest rate fluctuations and as a result, interest income amounts may fluctuate from current levels.

 

Foreign Currency Risk

 

We are exposed to favorable and unfavorable fluctuations of the U.S. dollar (our functional currency) against the currencies of our operating subsidiaries. Any increase (decrease) in the value of the U.S. dollar against any foreign currency that is the functional currency of one of our operating subsidiaries will cause the parent company to experience unrealized foreign currency translation losses (gains) with respect to amounts already invested in such foreign currencies.  In addition, we and our operating subsidiaries are exposed to foreign currency risk to the extent that we enter into transactions denominated in currencies other than our respective functional currencies, such as accounts receivable (including intercompany amounts) that are denominated in a currency other than their own functional currency. Changes in exchange rates with respect to these items will result in unrealized (based upon period-end exchange rates) or realized foreign currency transaction gains and losses upon settlement of the transactions. In addition, we are exposed to foreign exchange rate fluctuations related to our operating subsidiaries’ monetary assets and liabilities and the financial results of foreign subsidiaries and affiliates when their respective financial statements are translated into U.S. dollars for inclusion in our consolidated financial statements. Cumulative translation adjustments are recorded in accumulated other comprehensive income (loss) as a separate component of equity. As a result of foreign currency risk, we may experience economic loss and a negative impact on earnings and equity with respect to our holdings solely as a result of foreign currency exchange rate fluctuations.

 

The relationship between the British pound sterling, Indian rupee and the U.S. dollar, which is our functional currency, is shown below, per one U.S. dollar:

 

 

 

March 31,

 

December 31,

 

Spot rates:

 

2014

 

2013

 

 

 

 

 

 

 

British pound sterling

 

0.60089

 

0.60638

 

 

 

 

 

 

 

Indian rupee

 

59.88024

 

61.91951

 

 

 

 

For the Three Months Ended March 31,

 

Average rates:

 

2014

 

2013

 

 

 

 

 

 

 

British pound sterling

 

0.60419

 

0.64276

 

 

 

 

 

 

 

Indian rupee

 

61.72488

 

54.39724

 

 

At the present time, we do not hedge our foreign currency exposure or use derivative financial instruments that are designed to reduce our long-term exposure to foreign currency exchange risk.  To the extent that translation and transaction gain and losses become significant, we will consider various options to reduce this risk.

 

ITEM 4.  CONTROLS AND PROCEDURES

 

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 Vice President Finance and Administration, as appropriate, to allow timely decisions regarding required disclosure.

 

Our management, including our Chief Executive Officer and Vice President Finance and Administration, has evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. 

 

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Table of Contents

 

Based on that evaluation, our Chief Executive Officer and Vice President Finance and Administration have concluded that our disclosure controls and procedures were effective as of the end of such period.

 

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

 

During the three months ended March 31, 2014, there were no changes in our internal controls over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) or in other factors that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

PART II — OTHER INFORMATION

 

ITEM 1.  LEGAL PROCEEDINGS

 

We are involved in various legal matters arising in the normal course of business.  Losses, including estimated costs to defend, are recorded for these matters to the extent they were probable of loss and the amount of loss could be reasonably estimated.  We had no pending legal proceedings as of March 31, 2014.

 

ITEM 1A.  RISK FACTORS

 

There have been no material changes in the risk factors previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2013, filed with the SEC on March 11, 2014, except with respect to the following:

 

Dividends - Our Board of Directors has declared a first quarter cash dividend of $0.10 per share. The decision to pay dividends in the future 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.

 

This Quarterly Report on Form 10-Q should be read in conjunction with the risk factors defined in our Annual Report on Form 10-K for the year ended December 31, 2013 under “Item 1A. Risk Factors.”

 

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

 

None

 

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

 

None

 

ITEM 4.  MINE SAFETY DISCLOSURES

 

None

 

ITEM 5.  OTHER INFORMATION

 

None

 

ITEM 6.  EXHIBITS

 

(a)         Exhibits

 

Exhibit 31.1 — Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

Exhibit 31.2 — Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

Exhibit 32.1 — Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

Exhibit 32.2 — Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

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Exhibit 101 - The following financial information from the quarterly report on Form 10-Q of Evolving Systems, Inc. for the quarter ended March 31, 2014, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Operations, (iii) Condensed Consolidated Statements of Comprehensive income, (iv) Condensed Consolidated Statements of Changes in Stockholders’ Equity, (v) Condensed Consolidated Statements of Cash Flows, and (vi) Notes to the Condensed Consolidated Financial Statements.

 


*                 Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

 

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SIGNATURE

 

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

 

Date: May 6, 2014

/s/ DANIEL J. MOORHEAD

 

Daniel J. Moorhead

 

Vice President Finance and Administration,

 

Treasurer and Secretary

 

(Principal Financial and Accounting Officer)

 

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