Symbolic Logic, Inc. - Quarter Report: 2015 September (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 September 30, 2015

 

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: 001-34261

 

EVOLVING SYSTEMS, INC.

(Exact name of registrant as specified in its charter)

 

 

(303) 802-1000

(Registrant’s telephone number, including area code)

 

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

 

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

 

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

 

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 November 5, 2015 there were 11,702,768 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

September 30, 2015

Table of Contents

 

PART I — FINANCIAL INFORMATION
Item 1	Financial Statements
	Condensed Consolidated Balance Sheets as of September 30, 2015 and December 31, 2014 (Unaudited)
	Condensed Consolidated Statements of Income for the Three and Nine months Ended September 30, 2015 and 2014 (Unaudited)
	Condensed Consolidated Statements of Comprehensive (Loss) Income for the Three and Nine months Ended September 30, 2015 and 2014 (Unaudited)
	Condensed Consolidated Statement of Changes in Stockholders’ Equity for the Nine months Ended September 30, 2015 (Unaudited)
	Condensed Consolidated Statements of Cash Flows for the Nine months Ended September 30, 2015 and 2014 (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

 

2

Table of Contents

 

PART I — FINANCIAL INFORMATION

 

ITEM 1.  FINANCIAL STATEMENTS

 

EVOLVING SYSTEMS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands except share data)

(unaudited)

 

		September 30,			December 31,
		2015			2014
ASSETS
Current assets:
Cash and cash equivalents		$	9,410		$	9,781
Contract receivables, net of allowance for doubtful accounts of $42 at September 30, 2015 and $43 at December 31, 2014		9,935			9,182
Unbilled work-in-progress, net of allowance of $306 at September 30, 2015 and December 31, 2014		3,370			4,995
Deferred income taxes		—			80
Prepaid and other current assets		1,533			1,331
Total current assets		24,248			25,369
Property and equipment, net		595			659
Amortizable intangible assets, net		5,179			608
Goodwill		23,553			17,010
Long-term deferred income taxes		—			586
Total assets		$	53,575		$	44,232
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of capital lease obligations		$	5		$	5
Accounts payable and accrued liabilities		5,704			4,460
Income taxes payable		466			1,227
Unearned revenue		4,343			3,883
Total current liabilities		10,518			9,575
Long-term liabilities:
Capital lease obligations, net of current portion		3			7
Revolving line of credit, net of current portion		10,000			—
Deferred income taxes		1,065			—
Contingent earn-out obligation		178			178
Long-term unearned revenue		—			420
Total liabilities		21,764			10,180
Commitments and contingencies
Stockholders’ equity:
Preferred stock, $0.001 par value; 2,000,000 shares authorized; no shares issued and outstanding as of September 30, 2015 and December 31, 2014		—			—
Common stock, $0.001 par value; 40,000,000 shares authorized; 11,879,407 shares issued and 11,700,518 outstanding as of September 30, 2015 and 11,843,564 shares issued and 11,664,675 outstanding as of December 31, 2014		12			12
Additional paid-in capital		96,307			96,005
Treasury stock 178,889 shares as of September 30, 2015 and December 31, 2014, at cost		(1,253		)	(1,253		)
Accumulated other comprehensive loss		(5,443		)	(4,534		)
Accumulated deficit		(57,812		)	(56,178		)
Total stockholders’ equity		31,811			34,052
Total liabilities and stockholders’ equity		$	53,575		$	44,232

 

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

 

3

Table of Contents

 

EVOLVING SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(in thousands except per share data)

(unaudited)

 

		For the Three Months Ended September 30,						For the Nine Months Ended September 30,
		2015			2014			2015			2014
REVENUE
License fees and services		$	3,228		$	5,141		$	11,177		$	14,690
Customer support		2,545			2,419			7,327			7,391
Total revenue		5,773			7,560			18,504			22,081
COSTS OF REVENUE AND OPERATING EXPENSES
Costs of license fees and services, excluding depreciation and amortization		1,043			1,446			3,458			4,437
Costs of customer support, excluding depreciation and amortization		396			509			1,116			1,417
Sales and marketing		1,336			1,363			4,435			4,344
General and administrative		1,010			877			2,943			2,654
Product development		913			948			2,887			2,786
Depreciation		97			74			277			172
Amortization		24			24			71			71
Restructuring		—			—			—			237
Total costs of revenue and operating expenses		4,819			5,241			15,187			16,118
Income from operations		954			2,319			3,317			5,963
Other income (expense)
Interest income		5			6			14			13
Interest expense		(3		)	(4		)	(9		)	(13		)
Other loss		—			—			—			(27		)
Foreign currency exchange gain (loss)		(244		)	185			(218		)	13
Other income (expense), net		(242		)	187			(213		)	(14		)
Income from operations before income taxes		712			2,506			3,104			5,949
Income tax expense		142			827			894			1,943
Net income		$	570		$	1,679		$	2,210		$	4,006
Basic income per common share		$	0.05		$	0.14		$	0.19		$	0.34
Diluted income per common share		$	0.05		$	0.14		$	0.19		$	0.34
Cash dividend declared per common share		$	0.11		$	0.11		$	0.33		$	0.31
Weighted average basic shares outstanding		11,687			11,647			11,677			11,635
Weighted average diluted shares outstanding		11,927			11,934			11,938			11,919

 

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

 

4

Table of Contents

 

 

EVOLVING SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

(in thousands except per share data)

(unaudited)

 

		For the Three Months Ended September 30,						For the Nine Months Ended September 30,
		2015			2014			2015			2014
Net income		$	570		$	1,679		$	2,210		$	4,006
Other comprehensive loss:
Foreign currency translation loss		(975		)	(1,306		)	(909		)	(412		)
Other comprehensive loss		(975		)	(1,306		)	(909		)	(412		)
Comprehensive (loss) income		$	(405	)	$	373		$	1,301		$	3,594

 

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

 

5

Table of Contents

 

EVOLVING SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENT 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, 2014		11,664,675		$	12		$	96,005		$	(1,253	)	$	(4,534	)	$	(56,178	)	$	34,052
Stock option exercises		10,823		—			28			—			—			—			28
Common Stock issued pursuant to the Employee Stock Purchase Plan		6,052		—			45			—			—			—			45
Stock-based compensation expense		—		—			229			—			—			—			229
Restricted stock issuance, net of cancellations		18,968		—			—			—			—			—			—
Common stock cash dividends		—		—			—			—			—			(3,844		)	(3,844		)
Net income		—		—			—			—			—			2,210			2,210
Foreign currency translation adjustment		—		—			—			—			(909		)	—			(909		)
Balance at September 30, 2015		11,700,518		$	12		$	96,307		$	(1,253	)	$	(5,443	)	$	(57,812	)	$	31,811

 

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

 

6

Table of Contents

 

EVOLVING SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

		For the Nine Months Ended September 30,
		2015			2014
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income		$	2,210		$	4,006
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		277			172
Amortization of intangible assets		71			71
Amortization of debt issuance costs		8			13
Stock based compensation		229			309
Unrealized foreign currency transaction losses, net		218			(13		)
Provision for deferred income taxes		(25		)	(15		)
Change in operating assets and liabilities:
Contract receivables		(137		)	745
Unbilled work-in-progress		1,604			(3,896		)
Prepaid and other assets		(183		)	133
Accounts payable and accrued liabilities		(934		)	(295		)
Unearned revenue		(439		)	(1,486		)
Net cash provided by (used in) operating activities		2,899			(256		)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment		(191		)	(275		)
Business combinations, net of cash		(9,014		)	—
Net cash used in investing activities		(9,205		)	(275		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Capital lease payments		(4		)	(7		)
Proceeds from the revolving line of credit		10,000			—
Common stock cash dividends		(3,844		)	(3,608		)
Excess tax benefits from stock-based compensation		—			821
Proceeds from the issuance of stock		73			244
Net cash provided by (used in) financing activities		6,225			(2,550		)
Effect of exchange rate changes on cash		(290		)	273
Net decrease in cash and cash equivalents		(371		)	(2,808		)
Cash and cash equivalents at beginning of period		9,781			13,785
Cash and cash equivalents at end of period		$	9,410		$	10,977
Supplemental disclosure of cash and non-cash transactions:
Income taxes paid		$	1,092		$	111
Property and equipment purchased and included in accounts payable		12			—
Issuance of common stock related to acquisition		—			19

 

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

 

7

Table of Contents

 

EVOLVING SYSTEMS, INC.

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1 — BASIS OF PRESENTATION

 

Organization — We are a provider of software solutions and services to the wireless, wireline and cable markets. We maintain long-standing relationships with many of the largest wireless, wireline and cable companies worldwide. Our customers rely on us to develop, deploy, enhance and maintain software solutions that provide a variety of service activation and provisioning functions.  Our service activation solution, Tertio® (“TSA”) is used to activate bundles of voice, video and data services for wireless, wireline and cable network operators; our SIM card activation solution, Dynamic SIM Allocation TM (“DSA”) is used to dynamically allocate and assign resources to Mobile Network Operators (“MNOs”) devices that rely on SIM cards; our Mobile Data Enablement TM (“MDE”) solution provides a data consumption and policy management solution for wireless carriers and Mobile Virtual Network Operators (“MVNOs”) that monitor the usage and consumption of data services; our Total Number Management™ (“TNM”) product is a scalable and fully automated database solution that enables operators to reliably and efficiently manage their telephone numbers as well as other communication identifiers (i.e. SIMs, MSISDNs, IMSIs, ICCIDs, IPs). Our solutions can be deployed on premise or offered as a Software-as-a-Service (“SaaS”).

 

On September 30, 2015 we announced the acquisition of privately held RateIntegration, Inc., d/b/a Sixth Sense Media (“SSM”), a provider of real time analytics and marketing solutions to wireless carriers.  SSM’s software solution platform, Real-time Lifecycle Marketing™ (“RLM”), enables carriers’ marketing departments to innovate, execute and manage highly-personalized and contextually-relevant, interactive campaigns that engage consumers in real time.

 

We believe the addition of SSM’s RLM product to our existing service activation and data enablement products will produce a powerful platform for wireless carriers. A product suite which we refer to as our Mobile Marketing Solutions (“MMS”) will provide sophisticated, highly tailored mobile campaigns which can be executed based on critical subscriber data captured during the initial activation experience (DSA and RLM) as well as in-life subscriber usage via MDE.  We see the opportunity to leverage our technology to provide MNOs with sophisticated mobile marketing campaigns that will extend beyond voice, text and data usage campaigns and provide marketing services that will assist MNOs to market services that include retail mobile marketing, gaming, streaming video as well as social media based campaigns.

 

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 and nine months ended September 30, 2015 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, 2014 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 income are translated at the weighted average rate of exchange during the applicable period.  The resulting unrealized cumulative translation adjustment is recorded as a component of accumulated other comprehensive loss in stockholders’ equity.  Realized and unrealized transaction gains and losses generated by transactions denominated in a currency different from the functional currency of the applicable entity are recorded in other income (expense) in the consolidated statements of operations in the period in which they occur.

 

8

Table of Contents

 

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.

 

Intangible Assets — Amortizable intangible assets consist primarily of purchased software and licenses, customer contracts and relationships, trademarks and tradenames, non-competition and business partnerships acquired in conjunction with our purchase of Telespree Communications (“Evolving Systems Labs, Inc.”) and RateIntegration, Inc. d/b/a Sixth Sense Media (“Evolving Systems NC, Inc.”).  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.

 

9

Table of Contents

 

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.

 

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 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 (Loss) — Comprehensive income (loss) consists of two components, net income and other comprehensive income (loss). Other comprehensive income (loss) 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 (loss) consists of foreign currency translation adjustments from those subsidiaries not using the U.S. dollar as their functional currency.

 

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 May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers,” Topic 606.  This Update affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets, unless those contracts are within the scope of other standards. The guidance in this Update supersedes the revenue recognition requirements in Topic 605, Revenue Recognition and most industry-specific guidance. The core principle of the guidance is that an entity should recognize revenue to illustrate the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new guidance also includes a cohesive set of disclosure requirements that will provide users of financial statements with comprehensive information about the nature, amount, timing, and uncertainty of revenue and cash flows arising from a reporting organization’s contracts with customers. This ASU is effective retrospectively for fiscal years, and interim periods within those years beginning after December 15, 2016 for public companies and 2017 for non-public entities, however the FASB has deferred the effective date by one year. We do not expect the adoption of this standard to have a significant impact on the Company’s financial position and results of operations.

 

In August 2014, the FASB issued ASU 2014-15 Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern .  Management of public and private companies will be required to evaluate whether there are conditions and events that raise

 

10

Table of Contents

 

substantial doubt about the entity’s ability to continue as a going concern within one year after the financial statements are issued (or available to be issued when applicable) and, if so, disclose that fact. Management will be required to make this evaluation for both annual and interim reporting periods, if applicable. The standard is effective for annual periods ending after December 15, 2016 and interim periods ending after December 15, 2016. Early adoption is permitted for annual or interim reporting periods for which the financial statements have not previously been issued. We do not expect the adoption of this ASU to impact the consolidated financial statements.

 

NOTE 2 — ACQUISITION

 

On September 30, 2015 we acquired privately held RateIntegration, Inc. d/b/a Sixth Sense Media (“SSM”), now known as Evolving Systems NC, Inc. for an initial payment of approximately $9.75 million and a $0.5 million working capital adjustment.  We also agreed to make a payment on the one year anniversary of the transaction of $250,000, with such payment being available to secure RateIntegration’s representations and warranties in the agreement.

 

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 $6.9 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 2016. The results of RateIntegration’s operations have been included in the consolidated financial statements since the acquisition date.

 

We believe this acquisition complements our activation and SIM management products. Combining SSM’s real-time analytics and campaign capabilities with our DSA and MDE solutions will allow the company to offer global wireless carriers solutions that utilize the highly valuable contextual data captured from the subscribers’ initial welcome experience via DSA, their network usage via RLM and their on-device app usage via MDE. The combined solutions will create a highly personalized experience that engages subscribers in real time from the first time subscribers power on their new devices right through their day-to-day usage.

 

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, mobile marketing campaigns, advertising and analytics and management of services.

 

Total purchase price is summarized as follows (in thousands):

 

		September 30, 2015
Cash Consideration
Initial Cash Purchase Price		$	9,750
Cash/Working Capital Adjustment		535
Total Cash Consideration		$	10,285
Assumed Liabilities		250
Total purchase price		$	10,535

 

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

 

		September 30, 2015
Cash and cash equivalents		$	1,521
Contract receivables		1,057
Unbilled work-in-progress		89
Intangible assets		4,642
Prepaid and other current assets		68
Other assets, non-current		32
Total identifiable assets acquired		$	7,409
Accounts payable and accrued liabilities		$	1,506
Deferred tax liability		1,760
Deferred revenue		557
Total identifiable liabilities acquired		$	3,823
Net identifiable assets acquired		3,586
Goodwill		6,949
Net assets acquired		$	10,535

 

11

Table of Contents

 

We recorded $4.6 million in intangible assets as of the acquisition date with a weighted-average amortization period of approximately seven years and are amortizing the value of the trade name, technology, non-competition and customer relationships over an estimated useful life of 2, 8, 2 and 7 years, respectively.  No amortization expense related to the acquired intangible assets was recorded during the period ended September 30, 2015.

 

The $5.4 million of goodwill was assigned to the license and service segment and $1.5 million was assigned to the customer support segment.  The goodwill recognized is attributed primarily to expected synergies and the assembled workforce of SSM.  As of the date of this report there were no changes in the recognized amounts of goodwill resulting from the acquisition of SSM.

 

Intangible assets related to the Evolving Systems NC, Inc.’s acquisition as of September 30, 2015 (in thousands):

 

		September 30, 2015
		Gross Amount			Accumulated Amortization			Net Carrying Amount			Weighted-Average Amortization Period
Purchased software		$	1,679		$	—		$	1,679		8 yrs
Trademarks and tradenames		122			—			122			2 yrs
Non-competition		33						33			2 yrs
Customer relationships		2,808			—			2,808			7 yrs
		$	4,642		$	—		$	4,642		7.19 yrs

 

Pro Forma

 

The following unaudited pro forma financial information reflects the consolidated results of operations of as if the acquisition of SSM had taken place on January 1, 2015 and 2014. The pro forma information includes adjustments for the amortization of intangible assets. The pro forma financial information is not necessarily indicative of the results of operations as they would have been had the transaction been effected on the assumed date (in thousands).

 

		For the Nine Months ended September 30,
		2015			2014
Revenue		$	23,118		$	26,637
Earnings		2,559			4,415

 

12

Table of Contents

 

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.			India			U.K.			U.S.			U.K.			Goodwill
Balance as of December 31, 2014		$	1,097		$	—		$	7,118		$	—		$	8,795		$	17,010
Goodwill acquired during the year		5,209			184						1,556						6,949
Effects of changes in foreign
currency exchange rates (1)		—			—			(182		)	—			(224		)	(406		)
Balance at September 30, 2015		$	6,306		$	184		$	6,936		$	1,556		$	8,571		$	23,553

 

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

 

We performed our annual goodwill impairment test as of July 31, 2015, which we had $17.0 million of goodwill included the following reporting units, License and Services (“L&S”) — US,  Evolving Systems Labs, Inc. of $1.1 million and UK of $7.2 million and Customer Support (“CS”) — UK of $8.7 million. The fair value of each reporting unit was estimated using both market and income based approaches. Specifically, we incorporated observed market multiple data from selected guideline public companies and values arrived at through the application of discounted cash flow analyses which in turn were based upon our financial projections as of the valuation date. In our analysis, we weighted the application of discounted cash flow analysis at 70% and observed market multiple data from selected guideline public companies at 30%.  This analysis requires significant judgments, including estimation of future cash flows, which is dependent on internal forecasts, estimation of the long-term rate of growth for our business, estimation of the useful life over which cash flows will occur, and determination of our weighted average cost of capital. Changes in these estimates and assumptions could materially affect the determination of fair value and goodwill impairment for each reporting unit. If the carrying value of a reporting unit were to exceed its fair value, we would then be required to perform a second step of the impairment analysis which could lead to goodwill impairment should the carrying amount exceed the fair value.  The excess of carrying amount over fair value would be charged to operations as an impairment loss. If the projected future performance of either of our segments as estimated in the income valuation approach is adjusted downward or is lower than expected in the future, we could be required to record a goodwill impairment charge.  As a result of the first step of the 2015 goodwill impairment analysis, the fair value of each reporting unit exceeded its carrying value.  Therefore the second step was not necessary.  However, a hypothetical decrease of approximately 20% due to lower than estimated future cash flows in the estimated fair value of our L&S-U.S. Evolving Systems Labs, Inc. reporting unit would result in its carrying value exceeding its estimated fair value and therefore require the second step, which could result in impairment for that reporting unit. From July 31, 2015 through the date of this report, no events have occurred that we believe may have impaired goodwill.

 

As a result of the acquisition of SSM, $6.9 million of goodwill was acquired during the period, of which $5.4 million was assigned to the license and service segment and $1.5 million was assigned to the customer support segment.

 

We amortized identifiable intangible assets for Evolving Systems Labs, Inc. on a straight-line basis over their estimated lives ranging from one to eight years.  As of September 30, 2015 and December 31, 2014, identifiable intangibles were as follows (in thousands):

 

		September 30, 2015									December 31, 2014									Weighted-
		(2) Gross Amount			Accumulated Amortization			Net Carrying Amount			Gross Amount			Accumulated Amortization			Net Carrying Amount			Average Amortization Period
Purchased software		$	2,118		$	105		$	2,013		$	439		$	64		$	375		7.3 yrs
Trademarks and tradenames		185			24			161			63			15			48			2.6 yrs
Non-competition		33			—			33			—			—			—			2.0 yrs
Customer relationships		3,024			52			2,972			216			31			185			6.8 yrs
		$	5,360		$	181		$	5,179		$	718		$	110		$	608		6.8 yrs

 

(2)           Changes in intangible values as of September 30, 2015 compared to December 31, 2014 are the direct result of the acquisition of Evolving Systems NC, Inc. in the third quarter of 2015.

 

13

Table of Contents

 

Amortization expense of identifiable intangible assets was $24,000 for the three months and $71,000 for the nine months ended September 30, 2015 and 2014, respectively.  Expected future amortization expense related to identifiable intangibles based on our carrying amount as of September 30, 2015 was as follows (in thousands):

 

Twelve months ending September 30,
2016		$	783
2017		783
2018		705
2019		694
2020		693
Thereafter		1,521
		$	5,179

 

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 September 30,						For the Nine Months Ended September 30,
		2015			2014			2015			2014
Basic income per share:
Net income available to common stockholders		$	570		$	1,679		$	2,210		$	4,006
Basic weighted average shares outstanding		11,687			11,647			11,677			11,635
Basic income per share:		$	0.05		$	0.14		$	0.19		$	0.34
Diluted income per share:
Net income available to common stockholders		$	570		$	1,679		$	2,210		$	4,006
Weighted average shares outstanding		11,687			11,647			11,677			11,635
Effect of dilutive securities - options		240			287			261			284
Diluted weighted average shares outstanding		11,927			11,934			11,938			11,919
Diluted income per share:		$	0.05		$	0.14		$	0.19		$	0.34

 

For the three months ended September 30, 2015 and 2014, 0.3 million and 0.1 million shares, respectively, of common stock were excluded from the dilutive stock calculation because their exercise prices were greater than the average fair value of our common stock for the period.

 

For the nine months ended September 30, 2015 and 2014, 0.3 million and 0.2 million shares, respectively of common stock were excluded from the dilutive stock calculation because their exercise prices were greater than the average fair value of our common stock for the period.

 

14

Table of Contents

 

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 September 30, 2015 and 2014 and $0.2 million and $0.3 million for the nine months ended September 30, 2015 and 2014, respectively.  The following table summarizes stock-based compensation expenses recorded in the consolidated statement of operations (in thousands):

 

		For the Three Months Ended September 30,						For the Nine Months Ended September 30,
		2015			2014			2015			2014
Cost of license fees and services, excluding depreciation and amortization		$	17		$	20		$	56		$	56
Cost of customer support, excluding depreciation and amortization		3			2			8			6
Sales and marketing		10			5			26			26
General and administrative		23			49			76			138
Product development		16			32			63			83
Total share based compensation		$	69		$	108		$	229		$	309

 

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 September 30, 2015 and December 31, 2014, 0.1 million options remained outstanding under the Option Plan.

 

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.  In June 2015, our stockholders approved an amendment to the 2007 Stock Plan which increased the maximum shares that may be awarded under the plan to 2,002,209.  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 September 30, 2015, there were approximately 0.3 million shares available for grant under the 2007 Stock Plan, as amended.  At September 30, 2015 and December 31, 2014, 0.8 and 0.6 million were issued and outstanding under the 2007 Stock Plan as amended, respectively.

 

During the three months ended September 30, 2015 there were 20,000 grants of restricted stock to members of our senior management.  During the nine months ended September 30, 2015 there were 20,000 grants of restricted stock to members of our senior management.  No grants of restricted stock were offered during the nine months ended September 30, 2014.  During the three months ended September 30, 2015 and 2014, 0 and 2,000 shares of restricted stock vested, respectively and 94 and 6,000 shares of restricted stock vested, respectively during the nine months ended September 30, 2015 and 2014. No shares of restricted stock were forfeited during the three months ended September 30, 2015 and 2014. Approximately 1,031 and 938 shares of restricted stock were forfeited during the nine months ended September 30, 2015 and 2014, 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 $0 and $15,000 for the three months ended September 30, 2015 and 2014, respectively, and $1,000 and $46,000 for the nine months ended September 30, 2015 and 2014, 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.

 

15

Table of Contents

 

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 September 30,				For the Nine Months Ended September 30,
		2015		2014		2015		2014
Expected term (years)		6.0		*		6.0		6.0
Risk-free interest rate		1.37	%	*		1.37	%	1.69	%
Expected volatility		37.76	%	*		42.47	%	55.88	%
Expected dividend yield		7.33	%	*		6.32	%	3.99	%

 

* - None granted

 

The following is a summary of stock option activity under the plans for the nine months ended September 30, 2015:

 

							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, 2014		630		$	4.94		5.69		$	2,959
Options granted		298		7.25
Less options forfeited		(19	)	9.39
Less options expired		(8	)	9.39
Less options exercised		(11	)	2.57
Options outstanding at September 30, 2015		890		$	5.61		6.46		$	1,425
Options exercisable at September 30, 2015		532		$	4.20		4.50		$	1,418

 

There were 172,000 stock options granted during the three months ended September 30, 2015.  No stock options were granted during the three months ended September 30, 2014.  The weighted-average grant-date fair value of stock options granted during the three months ended September 30, 2015 was $0.96.  As of September 30, 2015, there were approximately $0.5 million of total unrecognized compensation costs related to unvested stock options.  These costs are expected to be recognized over a weighted average period of 2.55 years.  The total fair value of stock options vested during the three months ended September 30, 2015 and 2014 was approximately $0.1 million, respectively.  The total fair value of stock options vested during the nine months ended September 30, 2015 and 2014 was approximately $0.3 million and $0.2 million, respectively.

 

The deferred income tax benefits from stock option expense related to Evolving Systems U.K. totaled approximately $5,000 and $4,000 for the three months ended September 30, 2015 and 2014, respectively.  The deferred income tax benefits from stock option expense related to Evolving Systems U.K. totaled approximately $14,000 and $12,000 for the nine months ended September 30, 2015 and 2014, respectively.

 

Cash received from stock option exercises for the three months ended September 30, 2015 and 2014 was $0 and $0.1 million, respectively.  Cash received from stock option exercises for the nine months ended September 30, 2015 and 2014 was $27,000 and $0.2 million, respectively.

 

16