Symbolic Logic, Inc. - Quarter Report: 2018 June (Form 10-Q)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

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

 

For the quarterly period ended June 30, 2018

 

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.

 

 

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

 

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 August 9, 2018, there were 12,117,014 shares outstanding of Registrant’s Common Stock (par value $0.001 per share)

 

 

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EVOLVING SYSTEMS, INC.

Quarterly Report on Form 10-Q

June 30, 2018

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	PART I — FINANCIAL INFORMATION
Item 1	Financial Statements	3
	Condensed Consolidated Balance Sheets as of June 30, 2018 and December 31, 2017 (Unaudited)	3
	Condensed Consolidated Statements of Income for the Three and Six Months Ended June 30, 2018 and 2017 (Unaudited)	4
	Condensed Consolidated Statements of Comprehensive (Loss) Income for the Three and Six Months Ended June 30, 2018 and 2017 (Unaudited)	5
	Condensed Consolidated Statement of Changes in Stockholders’ Equity for the Six Months Ended June 30, 2018 (Unaudited)	6
	Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2018 and 2017 (Unaudited)	7
	Notes to Unaudited Condensed Consolidated Financial Statements	8
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23
Item 3	Quantitative and Qualitative Disclosures About Market Risk	29
Item 4	Controls and Procedures	30
	PART II — OTHER INFORMATION
Item 1	Legal Proceedings	31
Item 1A	Risk Factors	31
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	31
Item 3	Defaults upon Senior Securities	31
Item 4	Mine Safety Disclosures	31
Item 5	Other Information	31
Item 6	Exhibits	31
Signatures		32

 

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PART I — FINANCIAL INFORMATION

 

ITEM 1.  FINANCIAL STATEMENTS

 

EVOLVING SYSTEMS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

(unaudited)

 

		June 30, 2018			December 31, 2017
ASSETS
Current assets:
Cash and cash equivalents		$	9,293		$	7,562
Contract receivables, net of allowance for doubtful accounts of $854 and $970 at June 30, 2018 and December 31, 2017, respectively		9,335			10,151
Unbilled work-in-progress, net of allowance for doubtful accounts of $559 and $107 at June 30, 2018 and December 31, 2017, respectively		4,709			5,823
Prepaid and other current assets		1,777			2,053
Total current assets		25,114			25,589
Property and equipment, net		215			258
Amortizable intangible assets, net		5,095			5,613
Goodwill		25,074			25,216
Deferred income taxes		406			274
Total assets		$	55,904		$	56,950
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Term loan - current portion		$	3,577		$	2,805
Accounts payable and accrued liabilities		5,904			6,890
Contingent earn-out		847			396
Income taxes payable		485			1,107
Unearned revenue		6,327			5,397
Total current liabilities		17,140			16,595
Long-term liabilities:
Term loan, net of current portion		4,156			5,942
Total liabilities		21,296			22,537
Commitments and contingencies
Stockholders’ equity:
Preferred stock, $0.001 par value; 2,000,000 shares authorized; no shares issued and outstanding as of June 30, 2018 and December 31, 2017, respectively		—			—
Common stock, $0.001 par value; 40,000,000 shares authorized; 12,295,903 shares issued and 12,117,014 outstanding as of June 30, 2018 and 12,119,961 shares issued and 11,941,072 outstanding as of December 31, 2017		12			12
Additional paid-in capital		99,010			98,517
Treasury stock 178,889 shares as of June 30, 2018 and December 31, 2017, at cost		(1,253		)	(1,253		)
Accumulated other comprehensive loss		(9,143		)	(8,202		)
Accumulated deficit		(54,018		)	(54,661		)
Total stockholders’ equity		34,608			34,413
Total liabilities and stockholders’ equity		$	55,904		$	56,950

 

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

 

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EVOLVING SYSTEMS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except share data)

(unaudited)

 

		For the Three Months Ended June 30,						For the Six Months Ended June 30,
		2018			2017			2018			2017
REVENUE
License fees		$	249		$	720		$	584		$	1,063
Services		7,888			5,502			15,711			11,034
Total revenue		8,137			6,222			16,295			12,097
COSTS OF REVENUE AND OPERATING EXPENSES
Costs of revenue, excluding depreciation and amortization		2,891			1,564			5,748			3,109
Sales and marketing		1,599			978			3,236			2,046
General and administrative		2,188			1,020			3,928			1,993
Product development		955			669			1,808			1,143
Depreciation		49			50			81			101
Amortization		251			196			493			392
Total costs of revenue and operating expenses		7,933			4,477			15,294			8,784
Income from operations		204			1,745			1,001			3,313
Other income (expense)
Interest income		2			1			30			1
Interest expense		(123		)	(71		)	(249		)	(143		)
Other income (expense)		18			—			(13		)	—
Foreign currency exchange income (loss)		224			(219		)	136			(392		)
Other income (expense), net		121			(289		)	(96		)	(534		)
Income from operations before income taxes		325			1,456			905			2,779
Income tax expense		167			354			262			704
Net income		$	158		$	1,102		$	643		$	2,075
Basic income per common share - net income		$	0.01		$	0.09		$	0.05		$	0.17
Diluted income per common share - net income		$	0.01		$	0.09		$	0.05		$	0.17
Weighted average basic shares outstanding		12,112			11,935			12,094			11,928
Weighted average diluted shares outstanding		12,124			11,972			12,145			11,958

 

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 (LOSS) INCOME

(in thousands)

(unaudited)

 

		For the Three Months Ended June 30,						For the Six Months Ended June 30,
		2018			2017			2018			2017
Net income		$	158		$	1,102		$	643		$	2,075
Other comprehensive (loss) income
Foreign currency translation (loss) income		(1,663		)	813			(941		)	1,167
Comprehensive (loss) income		$	(1,505	)	$	1,915		$	(298	)	$	3,242

 

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

 

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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) income			deficit			equity
Balance at December 31, 2017		11,941,072		$	12		$	98,517		$	(1,253	)	$	(8,202	)	$	(54,661	)	$	34,413
Stock option exercises		1,857		—			—			—			—			—			—
Common stock issued pursuant to the Employee Stock Purchase Plan		85		—			—			—			—			—			—
Restricted stock vested		174,000		—			—			—			—			—			—
Share based compensation expense		—		—			493			—			—			—			493
Net income		—		—			—			—			—			643			643
Foreign currency translation adjustment		—		—			—			—			(941		)	—			(941		)
Balance at June 30, 2018		12,117,014		$	12		$	99,010		$	(1,253	)	$	(9,143	)	$	(54,018	)	$	34,608

 

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 Six Months Ended June 30,
		2018			2017
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income		$	643		$	2,075
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		81			101
Amortization of intangible assets		493			392
Amortization of debt issuance costs		5			10
Share based compensation expense		493			264
Bad debt expense		460			—
Change in fair value of contingent earn-out		413			—
Unrealized foreign currency transaction (income) loss, net		(137		)	392
Provision for deferred income taxes		(253		)	(170		)
Change in operating assets and liabilities:
Contract receivables		726			(1,797		)
Unbilled work-in-progress		282			(1,471		)
Prepaid and other assets		16			(549		)
Accounts payable and accrued liabilities		(1,299		)	832
Unearned revenue		1,091			162
Net cash provided by operating activities		3,014			241
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment		(47		)	(6		)
Net cash used in investing activities		(47		)	(6		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Capital lease payments		—			(1		)
Principal payments on notes payable		(1,000		)	(1,000		)
Payments for debt issuance costs		—			(19		)
Proceeds from the issuance of stock		—			25
Net cash used in financing activities		(1,000		)	(995		)
Effect of exchange rate changes on cash and cash equivalents and short-term restricted cash		(236		)	217
Net increase (decrease) in cash and cash equivalents and short-term restricted cash		1,731			(543		)
Cash and cash equivalents and short-term restricted cash at beginning of period		7,562			7,614
Cash and cash equivalents and short-term restricted cash at end of period		$	9,293		$	7,071
Supplemental disclosure of cash and non-cash transactions:
Income taxes paid		$	157		$	977
Measurement period adjustment to goodwill and intangible assets		$	281		$	—

 

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

 

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EVOLVING SYSTEMS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1 — BASIS OF PRESENTATION

 

Organization — Evolving Systems, Inc. (“we,” “us,” “our,” the “Company”, and “Evolving Systems”) is a provider of real-time digital engagement solutions and services of software solutions and services to the wireless carrier and consumer financial services markets. We maintain long-standing relationships with many of the largest wireless companies worldwide. The Company’s portfolio includes market-leading solutions and services for real-time analytics, customer acquisition and activation, customer value management and loyalty for the telecom industry promoting partnerships into retail and financial services.

 

In 2016, we began a shift from selling technology to offering business solutions. The value proposition has moved from cost savings to revenue increases for the carrier and our business model has moved from classic capex license and services to opex models based on recurring managed services with performance fees. Our software solution platforms enable carriers’ marketing departments to innovate, execute and manage highly-personalized and contextually-relevant, interactive campaigns that engage consumers in real time and enhance customer retention through deploying loyalty programs. Our service activation solution, Tertio® (“TSA”) is used to activate bundles of voice, video and data services for wireless, wireline and cable network operators; our SIM card activation solution, Dynamic SIM Allocation TM (“DSA”), is used to dynamically allocate and assign resources to Mobile Network Operators (“MNOs”) devices that rely on SIM cards; our Mobile Data Enablement TM (“MDE”) solution provides a data consumption and policy management solution for wireless carriers and Mobile Virtual Network Operators (“MVNOs”) that monitor the usage and consumption of data services; our Total Number Management™ (“TNM”) product is a scalable and fully automated database solution that enables operators to reliably and efficiently manage their telephone numbers as well as other communication identifiers (i.e. SIMs, MSISDNs IMSIs, ICCIDs, IPs). Our solutions can be deployed on premise or as a Software-as-a-Service (“SaaS”).

 

In July 2017 we completed the acquisition of Business Logic Systems (“BLS”). BLS, headquartered in Newbury, UK, specializes in data-driven customer value management and customer engagement solutions that have been implemented in over 20 mobile operators in Europe, Africa, Asia-Pacific and the Caribbean. BLS solutions turn customer data into actionable insights and personalized contextual offers. Customer engagement occurs through in-bound and out-bound offers and is further extended through a suite of loyalty and retention solutions.

 

In September 2017 we completed the acquisition of four business operating units of Lumata Holdings Ltd. (“the “Lumata Entities”). The Lumata Entities are a leading global provider of real-time, next generation loyalty and customer lifecycle management software and services that helps businesses gain value from their customer data for relevant and contextual insights and actions of value to both customers and enterprises. Its customers include mobile operators including Orange, Telefonica and other Tier-1 and emerging operators in Europe and around the world. The acquisition is expected to be accretive to Evolving Systems’ operations once the integration of the business is completed during 2018.

 

We believe the acquisitions of BLS and the Lumata Entities further reinforced our commitment to the customer acquisition and customer value management (“CVM”) domains that began with the acquisition of Sixth Sense Media (“Evolving Systems NC, Inc.”). With these recent acquisitions, we now have a customer base of more than 100 customers spanning 64 countries across the world. The experienced team and technology from BLS, which provides actionable insights and relevant offers based on customer data, greatly complements our software portfolio and 25 years of expertise in customer acquisition, activation and retention. The technology further expands our Managed Services platform for delivering on-tap strategic and tactical solutions. The Lumata Entities’ value lies in its patented technology, industry expertise and strong customer relationships, in particular, those across Western Europe. Led by the explosive growth in mobile, the next generation of CVM is moving beyond traditional CRM and points-based loyalty systems to highly personalized and contextual, real-time, omni-channel consumer engagement in multiple verticals including telecom, finance, and retail.

 

Interim Condensed Consolidated Financial Statements — The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“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 consolidated financial statements are adequate to make the information presented not misleading. The unaudited condensed consolidated financial statements included in this document have been prepared on the same basis as the annual consolidated financial statements, and in our opinion reflect all adjustments, which include normal recurring adjustments necessary for a fair presentation in accordance with GAAP and SEC regulations for interim financial statements. The results for the three and six months ended June 30, 2018 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

 

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the audited consolidated financial statements and the notes to those statements for the year ended December 31, 2017 included in our Annual Report on Form 10-K.

 

Use of Estimates — The preparation of condensed consolidated 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 consolidated financial statements, as well as the reported amounts of revenue and expenses during the reporting period. We made estimates with respect to revenue recognition for progress toward completion and direct profit or loss on contracts, allowance for doubtful accounts, income tax valuation allowance, fair values of long-lived assets, valuation of intangible assets and goodwill, useful lives for property, equipment and intangible assets, business combinations, capitalization of internal software development costs and fair value of stock-based compensation amounts. Actual results could differ from these estimates.

 

Foreign Currency — Our functional currency is the U.S. dollar. The functional currency of our foreign operations, generally, is the respective local currency for each foreign subsidiary. Assets and liabilities of foreign operations denominated in local currencies are translated at the spot rate in effect at the applicable reporting date. Our condensed 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 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 period in which they occur.

 

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

 

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 the reporting unit, and determination of the fair value of the reporting unit.

 

Intangible Assets — Amortizable intangible assets consist primarily of purchased software and licenses, customer relationships, trademarks and tradenames, non-competition and purchased software acquired in conjunction with our purchase of Telespree Communications (“Evolving Systems Labs, Inc.”), Evolving Systems NC, Inc., EVOL BLS and the Lumata Entities. These assets are amortized using the straight-line method over their estimated lives.

 

We assess the impairment of identifiable intangibles if events or changes in circumstances indicate that the carrying value of the asset 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.

 

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Revenue Recognition — Effective January 1, 2018, we adopted Financial Accounting Standards Board (“FASB”) Topic 606, Revenue from Contacts with Customers (“ASC 606”). ASC 606 was applied using the modified retrospective method. Accordingly, comparative periods have not been adjusted and continue to be reported under FASB ASC Topic 605, Revenue Recognition (“ASC 605”). There was no cumulative effect of the initial application to be recognized as an adjustment to opening retained earnings at January 1, 2018 as the adoption did not have a material impact on the Company’s results of operations or financial condition.

 

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

 

A performance obligation is a promise in a contract to transfer a distinct service to the customer. The transaction price of a contract is allocated to each distinct performance obligation and recognized as revenue when or as, the customer receives the benefit of the performance obligation. Our customers typically receive the benefit of our services as they are performed. Substantially all customer contracts provide that we are compensated for services performed to date. Losses on fixed-price projects are recorded when identified. Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction, that are collected by us from a customer, are excluded from revenue.

 

Nature of goods and services

 

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

 

i. License Revenue

 

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

 

ii. Customer Support Revenue

 

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

 

iii. Services Revenue

 

We recognize revenue from fixed-price service contracts using the input method of accounting. Under the input method, revenue is recognized revenue on the basis of an entity’s efforts or inputs toward satisfying a performance obligation. We recognize revenue from professional services provided pursuant to time-and-materials based contracts and training services as the services are performed, as that is when our performance obligation to our customers under such arrangements is fulfilled.

 

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iv. Managed Services

 

We recognize revenue from our managed services contracts primarily over the service contract period. On occasion, our managed services contracts will contain a specified number of hours to work over the term of the contract. Revenue for this type of managed service contract is recognized using the input method of accounting, as previously described.

 

Disaggregation of revenue

 

In the following table, revenue is disaggregated by primary geographical market, major products/service lines, and timing of revenue recognition (in thousands):

 

		For the Three Months Ended June 30,						For the Six Months Ended June 30,
		2018			2017			2018			2017
Primary geographical markets
United Kingdom		$	1,627		$	1,448		$	3,433		$	2,477
Philippines		317			708			555			1,005
Other		6,193			4,066			12,307			8,615
		$	8,137		$	6,222		$	16,295		$	12,097
Major products/service lines
Licensing fees		$	249		$	720		$	584		$	1,063
Customer support, including warranty support fees		2,512			2,010			5,121			4,037
Services		2,352			1,840			5,303			3,876
Managed services		3,024			1,652			5,287			3,121
Total Services		7,888			5,502			15,711			11,034
		$	8,137		$	6,222		$	16,295		$	12,097
Timing of revenue recognition
Products transferred at a point in time		$	162		$	550		$	322		$	601
Products and services transferred over time		7,975			5,672			15,973			11,496
		$	8,137		$	6,222		$	16,295		$	12,097

 

Contract balances

 

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

 

		June 30, 2018			December 31, 2017
Assets
Contract receivables, net		$	9,335		$	10,151
Unbilled work-in-progress, net		$	4,709		$	5,823
Liabilities
Unearned revenue		$	6,327		$	5,397

 

Contract receivables are recorded at the invoiced amount and do not bear interest. Credit is extended based on the evaluation of a customer’s financial condition and collateral is not required. Unbilled work-in-progress is revenue which has been earned but not invoiced. The contract assets are transferred to the receivables when invoiced.

 

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

 

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Transaction price allocated to the remaining performance obligations

 

Remaining performance obligations represent the transaction price of firm orders for which work has not been performed as of the period end date and excludes unexercised contract options and potential orders under ordering-type contracts (e.g., indefinite-delivery, indefinite-quantity). As of June 30, 2018, the aggregate amount of the transaction price allocated to remaining performance obligations greater than one-year was $2.5 million. The Company expects approximately 71% of remaining performance obligations to be recognized into revenue within the next twelve months, with the remaining 29% recognized thereafter.

 

We apply the practical expedient in paragraph 606-10-50-14 and do not disclose information about remaining performance obligations that have original expected durations of one-year or less. We apply the transition practical expedient in paragraph 606-10-65-1(f)(3) and do not disclose the amount of the transaction price allocated to the remaining performance obligations and an explanation of when we expect to recognize that amount as revenue. Additionally, applying the practical expedient in paragraph 340-40-25-4, the Company recognizes the incremental costs of obtaining contracts (i.e., commissions) as an expense when incurred if the amortization period of the assets that the Company otherwise would have recognized is one-year or less.

 

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.

 

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. Of the restrictions on the stock awards granted during the three months ended March 31, 2017, 20% vested in January 2018, and 10% annually beginning on the one-year anniversary of their offering thereafter for four years. The remaining 40%, will be released evenly over four years beginning in 2018 contingent upon the attainment of annual performance goals established by our Board of Directors. In the current period the first tranche was forfeited based on the annual performance goals established.

 

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 stockholders’ 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.

 

Income Taxes — We record deferred tax assets and liabilities for the estimated future tax effects of temporary differences between the tax bases of assets and liabilities and amounts reported in the accompanying condensed consolidated balance sheets, as well as operating losses and tax credit 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 financial statement recognition and measurement of tax positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more likely than not to be sustained upon examination by taxing authorities.

 

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

 

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

 

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Recent Accounting Pronouncements — In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842), which requires lessees to put most leases on their balance sheets by recognizing a lessee’s rights and obligations, while expenses will continue to be recognized in a similar manner to today’s legacy lease accounting guidance. In July 2018, the FASB issued Accounting Standards Update No 2018-10, “Codification Improvements to Topic 842 Leases” (“ASU 2018-10”). ASU 2018-10 provides narrow amendments to clarify how to apply certain aspects of the new lease standard. In July 2018, the FASB issued ASU 2018-11, Leases – Targeted Improvements (“ASU 2018-11”) which provides an additional (and optional) transition method to recognize the cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. ASU 2018-11 also provides lessor with the practical expedient to not separate non-lease components from associated lease component under limited circumstances. We are continuing to evaluate this guidance and the impact to us, as both lessor and lessee, on our consolidated financial statements. The effective date and transition requirements for ASU 2016-02, ASU 2018-01, ASU 2018-10 and ASU 2018-11 are the same.  This ASU could also significantly affect the financial ratios used for external reporting and other purposes, such as debt covenant compliance. This ASU will be effective for us on January 1, 2019, with early adoption permitted. We are currently in the process of assessing the impact of this ASU on our consolidated financial statements.

 

In February 2018, the FASB issued ASU 2018-02, Income Statement — Reporting Comprehensive Income (Topic 220); Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The amendments in this ASU allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Act. Consequently, the amendments eliminate the stranded tax effects resulting from the Act and will improve the usefulness of information reported to financial statement users. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted in any interim period after issuance of the ASU. We are currently in the process of assessing the impact of this ASU on our condensed consolidated financial statements.

 

In June 2018, the FASB issued ASU 2018-07, Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. ASU 2018-07 is intended to reduce cost and complexity and to improve financial reporting for share-based payments issued to nonemployees. This ASU expands the scope of ASC Topic 718, Compensation - Stock Compensation, which currently only includes share-based payments issued to employees, to also include share-based payments issued to nonemployees for goods and services. Consequently, the accounting for share-based payments to nonemployees and employees will be substantially aligned. ASU 2018-07 supersedes ASC Subtopic 505-50, Equity - Equity-Based Payments to Non-Employees. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. We are currently in the process of assessing the impact of this ASU on our condensed consolidated financial statements.

 

Recently Adopted Accounting Pronouncements — In November 2016, the FASB issued ASU No. 2016-18, Restricted Cash (Topic 230): Statement of Cash Flows (“ASU No. 2016-18”). ASU No. 2016-18 requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents and amounts generally described as restricted cash or restricted cash equivalents. Restricted cash and restricted cash equivalents will be included with cash and cash equivalents when reconciling the beginning of period and end of period balances on the statement of cash flows upon adoption of this standard. As a result of the adoption of the new guidance, the Company increased the end of period total amount shown on the condensed consolidated statement of cash flows by $0 and $1,557 for the six months ended June 30, 2018 and 2017, respectively. These amounts represent the balance of restricted cash included in the consolidated balance sheets as of June 30, 2018 and 2017, respectively. Short-term restricted cash is related to the escrow deposit for the BLS acquisition.

 

NOTE 2 — ACQUISITIONS

 

Business Logic Systems

 

On July 3, 2017, we completed the purchase by BLS Limited (“EVOL BLS”), a wholly owned subsidiary of Evolving Systems, Inc., a Delaware corporation (the “Company”), of Business Logic Systems Limited (“Seller”).  EVOL BLS and Seller are both companies incorporated under the laws of England and Wales.  Under the terms of the Asset Purchase Agreement, dated as of May 5, 2017 (the “Purchase Agreement”), the Seller agreed to sell substantially all of its assets and transfer certain liabilities relating to Seller’s business of providing customer value management solutions and data driven marketing solutions for £1.2 million ($1.6 million) in cash, plus (a) an additional sum of £100,000 ($134,000), which was reduced in full by the sums paid by EVOL BLS to certain employees’ severance obligations (collectively, the “Cash Payments”); (b) a percentage of collections on certain receivables over a 24  month period; and (c) an earnout equal to 50% of BLS based revenue over $4.8 million per year for 3 years after the closing date. The Company agreed to guarantee EVOL BLS’ obligations under the Purchase Agreement.

 

The Purchase Agreement contains a two year “no solicitation” provision which restricts the Seller’s ability to compete with EVOL BLS with respect to the BLS business or to solicit BLS customers or BLS employees serving in an executive, managerial, sales or technical role.

 

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 $0.3 million, was recorded as goodwill. The results of EVOL BLS’s operations have been

 

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included in the consolidated financial statements since the acquisition date.  The amortization of the intangible assets is deductible for tax purposes.

 

During the second quarter of 2018, we identified and recorded measurement period adjustments to our preliminary purchase price allocation that was disclosed in our Form 10-K, for the fiscal year ended December 31, 2017. These adjustments are reflected in the tables below. If the measurement period adjustments were reflected in the Form 10-K, it would have increased operating expenses by approximately $1,000 consisting of increases to amortization expense. The measurement period adjustments were the result of additional analysis performed and updated information.

 

When we acquired EVOL BLS on July 3, 2017, we agreed to make up to three annual cash payments equal to 50% of the EVOL BLS revenue in excess of $4.8 million for the 12-month periods ending July 3, 2018, 2019 and 2020. The Company also agreed to guarantee the EVOL BLS obligations under the Purchase Agreement. As of June 30, 2018, we estimate the total annual cash payments for the three 12-month periods to be $0.8 million which is a $0.4 million increase from our $0.4 million estimate as of March 31, 2018 and December 31, 2017. This amount is shown in the contingent earnout financial statement line item on our unaudited condensed consolidated balance sheet at June 30, 2018. We recognized $0.4 million in the other income (expense) financial statement line item on our unaudited condensed consolidated statements of income for the three and six months ended June 30, 2018 as a result of our increased obligation.

 

The following table summarizes the purchase price and fair values of the assets acquired and liabilities assumed at the date of acquisition as disclosed in the Form 10-K and as adjusted for measurement period adjustments identified during the current quarter (in thousands):

 

		At July 3, 2017 (preliminary)			Measurement Period Adjustments			At July 3, 2017 (adjusted)
Total cash consideration		$	1,553		$	—		$	1,553
Earnout		380			47			427
Total purchase price		$	1,933		$	47		$	1,980

 

		At July 3, 2017 (preliminary)			Measurement Period Adjustments			At July 3, 2017 (adjusted)
Contract receivables		$	1,037		$	—		$	1,037
Unbilled work-in-progress		1,039			—			1,039
Intangible assets		246			18			264
Prepaid and other current assets		437			—			437
Other assets, non-current		55			—			55
Total identifiable assets acquired		2,814			18			2,832
Accounts payable and accrued liabilities		$	792		$	—		$	792
Deferred revenue		338			—			338
Total identifiable liabilities acquired		1,130			—			1,130
Net identifiable assets acquired		1,684			18			1,702
Goodwill		249			29			278
Net assets acquired		$	1,933		$	47		$	1,980

 

Lumata

 

On September 4, 2017, Evolving Systems Holdings Limited (“EVOL Holdings”), a wholly owned subsidiary of Evolving Systems, Inc., completed the acquisition under a Share Purchase Agreement (the “Purchase Agreement”) with Lumata Holdings Limited (“Lumata Holdings” or “Seller”) and Francisco Partners III (Cayman) L.P., as Guarantor (the “Acquisition”).  EVOL Holdings acquired all of the issued and outstanding shares of four Lumata Holdings subsidiaries, Lumata France SAS, Lumata Spain S.L., Lumata UK Ltd and Lumata Deutschland GmbH (collectively, “Lumata Entities”) in exchange for a cash payment totaling €4.0

 

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million ($4.8 million), subject to certain adjustments. The Seller and certain members of the Seller’s management entered into Management Warranty Deeds to secure Lumata Holdings’ representations and warranties under the Purchase Agreement and, to the extent the amounts provided under the Management Warranty Deeds are not sufficient to satisfy post-closing claims, EVOL Holdings may seek recovery from the Guarantor in an amount not to exceed €400,000 ($476,000).  EVOL Holdings and Seller are both companies incorporated under the laws of England and Wales.

 

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 $3.1 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 during the third quarter of 2018. The results of the Lumata Entities’ operations have been included in the consolidated financial statements since the acquisition date. The amortization of the intangible assets is not deductible for tax purposes.

 

During the second quarter of 2018, we identified and recorded measurement period adjustments to our preliminary purchase price allocation that was disclosed in our Form 10-K, for the fiscal year ended December 31, 2017. These adjustments are reflected in the tables below. If the measurement period adjustments were reflected in the Form 10-K, it would have no change in operating expenses.  The measurement period adjustments were the result of additional analysis performed and information identified during the second quarter of 2018 based on facts and circumstances that existed as of the purchase date.

 

The following table summarizes the purchase price and fair values of the assets acquired and liabilities assumed at the date of acquisition as disclosed in the Form 10-K and as adjusted for measurement period adjustments identified during the current quarter (in thousands):

 

		At September 4, 2017 (preliminary)			Measurement Period Adjustments			At September 4, 2017 (adjusted)
Total Cash Consideration		$	4,766		$	—		$	4,766
Total purchase price		$	4,766		$	—		$	4,766

 

		At September 4, 2017 (preliminary)			Measurement Period Adjustments			At September 4, 2017 (adjusted)
Cash and cash equivalents		$	386		$	—		$	386
Contract receivables		1,444			—			1,444
Unbilled work-in-progress		110			(82		)	28
Intangible assets		1,935			—			1,935
Prepaid and other current assets		1,539			—			1,539
Other assets, non-current		19			—			19
Total identifiable assets acquired		5,433			(82		)	5,351
Accounts payable and accrued liabilities		$	3,086		$	—		$	3,086
Deferred tax liability		329			—			329
Deferred revenue		325			152			477
Total identifiable liabilities acquired		3,740			152			3,892
Net identifiable assets acquired		1,693			(234		)	1,459
Goodwill		3,073			234			3,307
Net assets acquired		$	4,766		$	—		$	4,766

 

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Pro Forma

 

The following table presents the unaudited pro forma results of the Company for the three and six months ended June 30, 2018 and 2017 as if the acquisitions of EVOL BLS and Lumata Entities occurred on January 1, 2017. The pro forma results include estimates and assumptions which management believes are necessary. For EVOL BLS, the unaudited pro forma revenue was $0.6 million and $1.4 million and net losses were $(1.1) million and $(2.0) million for the three and six months ended June 30, 2017, respectively. For the Lumata entities, the unaudited pro forma revenue was $2.3 million and $3.7 million and net profits were $0.1 million and $0.2 million for the three and six months ended June 30, 2017, respectively. However, the pro forma results do not include any anticipated cost savings or their effects of the planned integration of EVOL BLS and Lumata Entities and are not necessarily indicative of the results that would have occurred if the business combination had been in effect on the dates indicated, or which may result in the future. The pro forma information includes adjustments for the amortization of intangible assets.

 

		For the Three Months Ended June 30,						For the Six Months Ended June 30,
		2018			2017			2018			2017
Revenue		$	8,137		$	9,121		$	16,295		$	17,192
Net income		$	158		$	60		$	643		$	70

 

EVOL BLS or the Lumata Entities did not have any material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings.

 

NOTE 3 — GOODWILL AND INTANGIBLE ASSETS

 

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

 

		Total
		Goodwill
Balance at December 31, 2017		$	25,216
Measurement period adjustments		263
Effects of changes in foreign currency exchange rates (1)		(405		)
Balance at June 30, 2018		$	25,074

 

(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, 2017, at which time we had $21.5 million of goodwill. The fair value of the reporting unit was estimated using both market and income-based approaches. Specifically, we incorporated observed market multiple data from selected guideline public companies and values arrived at through the application of discounted cash flow analyses, which in turn were based upon our financial projections as of the valuation date. We believe that a market participant would weigh both possibilities without a bias to one or the other. Consequently, we gave equal consideration to both. This analysis requires significant judgments, including estimation of future cash flows, which is dependent on internal forecasts, estimation of the long-term rate of growth for our business, estimation of the useful life over which cash flows will occur, and determination of our weighted average cost of capital. Changes in these estimates and assumptions could materially affect the determination of fair value and goodwill impairment for each reporting unit. If the carrying value of a reporting unit were to exceed its fair value, we would then compare the fair value of the reporting unit’s goodwill to its carrying amount, and any excess of the carrying amount over the fair value would be charged to operations as an impairment loss. If the projected future performance of our segment 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 2017 goodwill impairment analysis, the fair value of the reporting unit exceeded its carrying value. Therefore, the second step was not necessary. From July 31, 2017, through the date of this report, no events have occurred that we believe may have impaired goodwill.

 

We amortized identifiable intangible assets for Evolving Systems Labs, Evolving Systems NC, EVOL BLS, and the Lumata entities on a straight-line basis over their estimated useful lives. As of June 30, 2018, and December 31, 2017, identifiable intangibles were as follows (in thousands):

 

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		June 30, 2018
		Gross Amount			Accumulated Amortization			Net Carrying Amount			Weighted- Average Amortization Period
Purchased software		$	2,921		$	(951	)	$	1,970		7.7 yrs
Trademarks and tradenames		311			(213		)	98			3.7 yrs
Non-competition		40			(37		)	3			2.0 yrs
Customer relationships		4,380			(1,356		)	3,024			8.7 yrs
		$	7,652	(1)	$	(2,557	)	$	5,095		6.8 yrs

 

		December 31, 2017
		Gross Amount			Accumulated Amortization			Net Carrying Amount			Weighted- Average Amortization Period
Purchased software		$	2,921		$	(743	)	$	2,178		7.7 yrs
Trademarks and tradenames		310			(189		)	121			3.7 yrs
Non-competition		40			(35		)	5			2.0 yrs
Customer relationships		4,363			(1,054		)	3,309			8.7 yrs
		$	7,634		$	(2,021	)	$	5,613		6.8 yrs

 

(1)         2018 increase in gross amount due to measurement period adjustments relating to the EVOL BLS purchase price allocation. See Note 2 — Acquisitions for additional information.

 

Amortization expense of identifiable intangible assets was $0.3 million and $0.2 million for the three months ended June 30, 2018 and 2017, respectively, and $0.5 million and $0.4 million for the six months ended June 30, 2018 and 2017, respectively. Expected future amortization expense related to identifiable intangibles based on our carrying amount as of June 30, 2018 was as follows (in thousands):

 

Twelve months ending June 30,
2019		$	953
2020		946
2021		946
2022		891
2023		518
Thereafter		841
		$	5,095

 

NOTE 4 — BALANCE SHEET COMPONENTS

 

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

 

		June 30, 2018			December 31, 2017
Accounts payable and accrued liabilities:
Accounts payable		$	1,247		$	1,530
Accrued compensation and related expenses		1,923			1,749
Accrued liabilities		2,734			3,611
		$	5,904		$	6,890

 

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NOTE 5 — 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 and restricted stock.

 

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. We exclude unvested restricted stock from our basic earnings per share. Our restricted stock, which vests based on the passage of time is included in dilutive earnings per share. Our restricted stock which vests contingent upon the attainment of annual performance goals is included in dilutive earnings per share as the performance goals are achieved. 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 June 30,						For the Six Months Ended June 30,
		2018			2017			2018			2017
Basic income per common share:
Net income		$	158		$	1,102		$	643		$	2,075
Basic weighted average shares outstanding		12,112			11,935			12,094			11,928
Basic income per common share:		$	0.01		$	0.09		$	0.05		$	0.17
Diluted income per common share:
Net income		$	158		$	1,102		$	643		$	2,075
Weighted average shares outstanding		12,112			11,935			12,094			11,928
Effect of dilutive securities - options and restricted stock		12			37			51			30
Diluted weighted average shares outstanding		12,124			11,972			12,145			11,958
Diluted income per common share:		$	0.01		$	0.09		$	0.05		$	0.17

 

For the three months ended June 30, 2018 and 2017, 0.6 million and 0.4 million shares, respectively, underlying stock options 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 six months ended June 30, 2018 and 2017, 0.6 million and 0.4 million shares, respectively, underlying stock options 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.

 

All shares of unvested performance-based restricted stock were excluded from basic and dilutive earnings per share for the three and six months ended June 30, 2018. For the three and six months ended June 30, 2017, 0.6 million shares of unvested restricted stock were excluded from basic earnings per share.

 

NOTE 6 — SHARE-BASED COMPENSATION

 

We recognized $0.1 million and $0.2 million of compensation expense in the consolidated statements of operations, with respect to our stock-based compensation plans for the three months ended June 30, 2018 and 2017, and $0.5 million and $0.3 million for the six months ended June 30, 2018 and 2017, respectively.

 

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

 

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