2016 ANNUAL REPORT
NOTICE OF 2017 ANNUAL MEETING
AND PROXY STATEMENT
We caution you that certain information in this proxy statement may contain, in addition to historical
information, “forward-looking” statements within the meaning of the Private Securities Litigation Reform Act of
1995 that are based upon management’s beliefs, as well as on assumptions made by management. These forward
looking statements involve known and unknown risks, uncertainties and other factors that cause our actual results,
performance or achievements to be materially different from what we say or imply with such forward looking
statements. When we use the words “may,” “will,” “expects,” “intends,” “estimates,” “anticipates,” “believes,”
“plans,” “seeks” or “continues,” or similar expressions, we intend to identify forward looking statements. You
should be aware that the telecommunications industry is changing rapidly, and, therefore, the forward looking
statements and statements of expectations, plans and intent are subject to a greater degree of risk than similar
statements regarding certain other industries.
Although we believe that our expectations with respect to the forward looking statements are based upon
reasonable assumptions, we cannot assure you that our actual results, performance or achievements will meet these
expectations. Other than as may be required by applicable law, we undertake no obligation to release publicly the
results of any revisions to these forward looking statements.
Letter from the CEO
To Our Investors:
May 5, 2017
We are pleased to present Evolving Systems’ 2016 annual report and proxy. During
the past year, your management team made solid progress in reshaping the way the
Company does business. The cornerstone of this process was our transition from a
traditional software license model to a recurring revenue model based on managed
services. This model is similar to the models that have been successfully adopted by
leading companies across the telecom and technology sectors in recent years, and
we believe it will strengthen Evolving Systems’ ability to deliver compelling business
solutions that result in successful business outcomes for our growing, worldwide
base of customers. This, in turn, should result in profitable growth for our business
and significant shareholder value creation over the long term.
The transition to managed services necessitated major changes in the development,
sales and marketing, and delivery of our solutions. On the development side, we
have migrated to a model where product development is initially funded by internal
R&D and subsequently expanded based on customer demand and funding. This has
helped us improve efficiencies, reduce headcount and lower product development
costs by 22% year over year. On the sales and marketing front, we have retrained
and strengthened our direct sales force, moving away from a one-and-done sales
culture in favor of a long-term approach that generates more revenue over a longer
period of time. On the delivery side, we have improved efficiencies by replacing
customer specific teams for implementation and support with a shared resource
pool off-site complemented by a small team on-site with each carrier. This approach
ideally positions us to identify and meet our customers’ evolving needs and create
upsell opportunities that drive increased revenue for our customers and for us.
By design, the transition of our business model will result in lower up-front revenue
in favor of more recurring and total revenue over the long term. Our revenue
should also become more predictable through our conversion to monthly recurring
fees with incremental upside revenue potential through performance fees and
managed service upsell.
Late in 2016 we began to see results from our business transition. We closed four
Managed Service deals with major carrier customers in Asia and Latin America. We
won these deals in the face of stiff competition because our customers recognized
that licensing software alone will not help them fully maximize their business
opportunities. It also requires a team with deep industry expertise to help them
accelerate customer acquisition, upsell new services, increase subscriber loyalty and
monetize consumer behavior based on its experience and results in other markets.
In each of the deals we won, it was this expertise and experience that carriers cited
as the determining factor in their selection of Evolving Systems.
From a financial performance perspective, we continue to generate strong cash
flows, achieving a 301% increase in cash flow from operations in the fourth
quarter – to $1.4 million – and a 210% increase for the full year – to $6.9 million.
We also saw continued improvement in our bottom line, closing 2016 with our
35th consecutive profitable quarter during which net income increased 19% with
EPS of $0.11, and adjusted EBITDA increased 12% to $2.1 million. Gross margins in
the fourth quarter were 78% and adjusted EBITDA margins were 34%. For the full
year, net income increased 4% with EPS of $0.29 and adjusted EBITDA increased
38% to $7.9 million. Gross margins in 2016 were 79% and adjusted EBITDA margins
were 32%.
In closing, while we have made good progress in re-focusing our business over the
past year, there is more work to do. We want to continue to evolve our culture and
become a more nimble company in terms of adopting the tools and processes that
are common in high growth entrepreneurial organizations. We want to leverage our
strengths in technology, talent base and customer relationships to achieve organic
growth. And we want to pursue selective M&A opportunities that can add new
customers and revenue streams and augment our solutions offerings.
As always, we appreciate the support of our shareholders and look forward to
communicating our progress as we move through the year.
Sincerely,
Thomas Thekkethala
President and CEO
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON JUNE 14, 2017
To the Stockholders of Evolving Systems, Inc.:
You are invited to attend the annual meeting of the stockholders of Evolving Systems, Inc. which will be held at 9:00 a.m. local
time at the Company’s headquarters located at 9777 Pyramid Court, Suite 100, Englewood, Colorado 80112, on June 14, 2017.
At the meeting, you will be asked to act on the following matters:
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2.
3.
4.
5.
to elect the six nominees named in this Proxy Statement as directors, each for a one-year term;
to approve an amendment to the Company’s 2016 Stock Incentive Plan to increase the total number of shares of
common stock authorized for issuance under such plan by 400,000 shares;
to approve, on a non-binding, advisory basis, the compensation paid to our named executive officers;
to ratify the selection of Friedman LLP as our independent registered public accounting firm to audit the consolidated
financial statements of Evolving Systems for our fiscal year ending December 31, 2017; and
to consider such other business as may properly come before the meeting or any adjournment or postponement of the
meeting.
The Proxy Statement accompanying this Notice describes these items more fully.
Only holders of record of shares of Evolving Systems’ common stock at the close of business on April 17, 2017 are entitled to
vote at the meeting or any postponements or adjournments of the meeting.
YOUR VOTE IS IMPORTANT. PLEASE READ THE PROXY STATEMENT AND VOTE BY
FOLLOWING THE VOTING INSTRUCTIONS SENT TO YOU.
By order of the Board of Directors,
Englewood, Colorado
April 28, 2017
Daniel J. Moorhead
Chief Financial Officer & Secretary
9777 Pyramid Court, Suite 100
Englewood, Colorado 80112
PROXY STATEMENT
FOR ANNUAL MEETING OF STOCKHOLDERS
June 14, 2017
This proxy statement contains information related to the annual meeting of stockholders of Evolving Systems, Inc. which will
be held at 9:00 a.m. local time at the Company’s headquarters located at 9777 Pyramid Court, Suite 100, Englewood, Colorado 80112,
on June 14, 2017, and any postponements or adjournments of the meeting. Evolving Systems first mailed, or made available on the
Internet, these proxy materials to stockholders on or about May 5, 2017. In this proxy statement, "Company," "Evolving Systems,"
"we," "us," and "our" each refer to Evolving Systems, Inc. and its subsidiaries.
ABOUT THE PROXY MATERIALS
We are furnishing proxy materials to our stockholders primarily via the Internet, instead of mailing printed copies of those
materials to each stockholder. By doing so, we save costs and reduce the environmental impact of our Annual Meeting. This proxy is
being solicited by the Board of Directors, and the cost of solicitation of the proxies will be paid by Evolving Systems. Our officers,
directors and regular employees, without additional compensation, also may solicit proxies by further mailing, by telephone or
personal conversations. We have no plans to retain any firms or otherwise incur any extraordinary expense in connection with the
solicitation.
The proxy materials include:
• Our proxy statement for the annual meeting; and
• Our 2016 Annual Report to Stockholders, which includes our audited consolidated financial statements.
We are sending a Notice of Internet Availability of Proxy Materials (the "Notice") to all stockholders of record on April 17,
2017. All stockholders of record will have the ability to access the proxy materials on a website referred to in the Notice
(http://www.evolving.com/investors), or request to receive a printed set of the proxy materials. Instructions on how to access the proxy
materials over the Internet or to request a printed copy may be found in the Notice. In addition, stockholders may request to receive
proxy materials in printed form by mail or electronically by email on an ongoing basis.
The Notice will provide you with instructions regarding how to:
• View our proxy materials for the annual meeting on the Internet; and
•
Instruct us to send our future proxy materials to you electronically by email.
Choosing to receive your future proxy materials by email will save us the cost of printing and mailing documents to you and
will reduce the impact of our annual stockholders’ meetings on the environment. If you choose to receive future proxy materials by
email, you will receive an email next year with instructions containing a link to those materials and a link to the proxy voting site.
Your election to receive proxy materials by email will remain in effect until you terminate it.
Stockholder of Record: Shares Registered in Your Name
If you are a stockholder of record, you may vote in person at the Annual Meeting, vote by proxy using the enclosed proxy card or
vote by proxy on the Internet. Whether or not you plan to attend the Annual Meeting, we urge you to vote by proxy to ensure that your
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vote is counted. You may vote in person at the Annual Meeting only if you bring a form of personal picture identification with you.
You may deliver your completed proxy card in person or you may vote by completing a ballot, which will be available at the Annual
Meeting.
•
•
To vote using the proxy card, simply complete, sign and date the enclosed proxy card and return it promptly in the
envelope provided. If you return your signed proxy card to us before the Annual Meeting, we will vote your shares as you
direct.
To vote on the Internet, go to www.voteproxy.com to complete an electronic proxy card. You will be asked to provide the
eleven-digit number beneath the account number on the enclosed proxy card. Your vote must be received by 11:59 p.m.,
Eastern Daylight Time on June 13, 2017 to be counted.
Beneficial Owner: Shares Registered in the Name of a Broker or Bank
If you are a beneficial owner of shares registered in the name of your broker, bank, or other agent, you should have received
instructions for granting proxies with these proxy materials from that organization rather than from the Company. A number of
brokers and banks participate in a program provided through Broadridge Financial Services which enables beneficial holders to grant
proxies to vote shares via telephone or the Internet. If your shares are held by a broker or bank that participates in the Broadridge
program, you may grant a proxy to vote those shares telephonically by calling the telephone number on the instructions received from
your broker or bank, or via the Internet at Broadridge’s website at www.proxyvote.com. To vote in person at the Annual Meeting,
you must obtain a valid proxy from your broker, bank, or other agent. Follow the instructions from your broker, bank or other agent
included with these proxy materials, or contact your broker, bank or other agent to request a proxy form.
What You Are Voting On
At the Annual Meeting, there are four matters scheduled for a vote of the stockholders:
• Election of Directors. Election of David J. Nicol, David S. Oros, Richard R. Ramlall, Julian D. Singer, Matthew Stecker
and Thomas Thekkethala as members to the Company’s Board of Directors to serve until the 2018 annual meeting of
stockholders or until their successors have been duly elected and qualified;
• Amendment of 2016 Stock Incentive Plan. Approval of an amendment to the Company’s 2016 Stock Incentive Plan to
increase the total number of shares of common stock authorized for issuance under such plan by 400,000 shares;
• Advisory Vote on Executive Compensation. Advisory approval in a non-binding vote of the compensation of the
Company's named executive officers as disclosed in this Proxy Statement, or "say on pay." Even though your vote is
advisory and, therefore, will not be binding on the Company, the Board's Compensation Committee will review the
voting results and take them into consideration when making future decisions regarding executive compensation; and
• Ratification of the Appointment of Independent Registered Public Accounting Firm. Ratification of the appointment
of Friedman LLP as the Company’s independent registered public accounting firm for its fiscal year ending
December 31, 2017.
You may either vote "For" each of the nominees to the Board of Directors or you may "Withhold" your vote for any nominee you
specify. For the other matters to be voted on, you may vote "For" or "Against" or abstain from voting. If you receive more than one
proxy card, your shares are registered in more than one name, or are registered in different accounts, please complete, sign and return
each proxy card to ensure that all of your shares are voted.
Quorum and Required Votes
Only holders of record of shares of Evolving Systems’ common stock at the close of business on April 17, 2017, the record
date, are entitled to vote at the meeting or any postponements or adjournments of the meeting. As of the record date, Evolving
Systems had 12,464,900 shares of common stock outstanding.
The presence at the meeting of a majority of the outstanding shares, in person or by proxy relating to any matter to be acted
upon at the meeting, is necessary to constitute a quorum for the meeting. Each outstanding share of common stock is entitled to one
vote.
Proxies marked "Abstain" and broker "non-votes" will be treated as shares that are present for purposes of determining the
presence of a quorum. An "abstention" occurs when a stockholder sends in a proxy with explicit instructions to decline to vote
regarding a particular matter. A broker non-vote occurs when a broker or other nominee who holds shares for another person does not
vote on a particular proposal because that holder does not have the discretionary voting power for the proposal and has not received
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voting instructions from the beneficial owner of the shares so the broker is unable to vote those uninstructed shares. Abstentions and
broker non-votes, while included for quorum purposes, will not be counted as votes "cast" for or against any proposal.
The following table summarizes the votes required for passage of each proposal and the effect of abstentions and uninstructed
shares held by brokers. Please note that brokers may not vote your shares on the election of directors or proposals 2 or 3 if you
have not given your broker specific instructions as to how to vote. Please be sure to give specific voting instructions to your
broker so that your vote can be counted.
Proposal
Number
1
Description
Election of Directors
2
3
4
Approval of Amendment to 2016
Stock Incentive Plan
Advisory vote on executive
compensation ("Say on Pay")
Ratification of Independent
Registered Public Accounting Firm
Votes Required for
Approval
Nominees receiving highest
number of votes
Majority of votes cast
Abstentions
Uninstructed Shares
Not voted
Not voted
Not voted
Not voted
Majority of votes cast
Not voted
Not voted
Majority of votes cast
Not voted
Discretionary vote –
brokers may vote
Recommendation of Board of Directors
Unless you instruct otherwise on your proxy card, the persons named as proxy holders on the proxy card will vote in
accordance with the recommendations of the Board of Directors. Specifically, the Board’s recommendations are as follows:
• FOR the election of each of the six nominees for director;
• FOR the approval of the amendment to the 2016 Stock Incentive Plan to increase the total number of shares of
common stock authorized for issuance under such plan by 400,000 shares;
• FOR the approval, on a non-binding, advisory basis, of the compensation paid to our named executive officers; and
• FOR the ratification of the selection of Friedman LLP as our independent registered public accounting firm to audit
the consolidated financial statements of Evolving Systems for our fiscal year ending December 31, 2017.
The proxy holders will vote as recommended by the Board of Directors with respect to any other matter that properly comes
before the annual meeting, including any postponements or adjournments thereof. If the Board of Directors on any such matter gives
no recommendation, the proxy holders will vote in their own discretion.
Revocation of Proxies
After you have submitted your proxy, you may change your vote at any time before the proxy is exercised by filing with the
Secretary of Evolving Systems either a notice of revocation or a duly executed proxy bearing a later date. The powers of the proxy
holders will be suspended if you attend the annual meeting in person and request to recast your vote. Attendance at the annual meeting
will not, by itself, revoke a previously granted proxy.
Householding
To reduce costs and reduce the environmental impact of our Annual Meeting a single proxy statement and annual report,
along with individual proxy cards or individual Notices of Internet Availability, will be delivered in one envelope to certain
stockholders having the same last name and address and to individuals with more than one account registered at our transfer agent
with the same address. This process, which is commonly referred to as "householding," potentially means extra convenience for
security holders and cost savings for Evolving Systems. Once you have received notice from your broker or us that they will be
"householding" communications to your address, "householding" will continue until you are notified otherwise or until you revoke
your consent. If, at any time, you no longer wish to participate in "householding" and would prefer to receive a separate proxy
statement, please notify your broker, or direct your written request to Evolving Systems, Inc., Daniel J. Moorhead, Secretary,
9777 Pyramid Court, Suite 100, Englewood, Colorado 80112, or contact Daniel J. Moorhead at 303-802-1000.
Stockholders who currently receive multiple copies of the proxy statement at their address and would like to request
"householding" of their communications should contact their broker.
We encourage you to access and review all of the important information contained in the proxy materials before voting.
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Voting Procedures and Tabulation of Votes
Our independent election inspector will tabulate votes cast by proxy or in person at the meeting. We will also report the
results in a Form 8-K filed with the Securities and Exchange Commission ("SEC") within four business days of the Annual Meeting.
PROPOSAL 1
ELECTION OF DIRECTORS
Our Board of Directors is currently composed of 6 members, with each member elected annually for a term of one year.
Vacancies on the Board may be filled only by persons elected by a majority of the remaining directors. A director elected by the Board
to fill a vacancy (including a vacancy created by an increase in the Board of Directors) will serve for the remainder of the full term of
the director for which the vacancy occurred and until the director’s successor is elected and qualified.
Under the director independence guidelines, the Board of Directors must affirmatively determine a director has no
relationship that would interfere with the exercise of independent judgment in carrying out his responsibilities as a director in order to
qualify as independent. To facilitate this determination, annually each director completes a questionnaire that provides information
about relationships that might affect the determination of independence. Management provides the Governance and Nominating
Committee and our Board with relevant facts and circumstances of any relationship bearing on the independence of a director or
nominee that is outside the categories permitted under the director independence guidelines.
Based on the review and recommendation by the Governance and Nominating Committee, the Board of Directors analyzed
the independence of each director and determined that five of our directors (Messrs. Nicol, Oros, Ramlall, Singer and Stecker) are
independent under NASDAQ’s current listing standards and that each of them is free of any relationship that would interfere with his
individual exercise of independent judgment. Mr. Thekkethala, the Company’s CEO, is not considered independent under NASDAQ’s
current listing standards. The Board of Directors determined that the consulting arrangement between Mr. Ramlall and the Company
during calendar year 2016 described under "Certain Relationships and Related Transactions—Consulting Agreements with Related
Parties," did not affect Mr. Ramlall’s independence.
All of our directors have terms of office expiring in 2017. The Board has nominated Messrs. Nicol, Oros, Ramlall, Singer,
Stecker and Thekkethala for re-election. Proxies cannot be voted for a greater number of persons than the number of nominees named.
If elected at the annual meeting, each of the nominees would serve until the 2018 annual meeting of stockholders.
Required Vote and Recommendation of the Board of Directors
Directors are elected by a plurality of the votes present in person or represented by proxy and entitled to vote at the meeting.
Shares represented by executed proxies will be voted, if authority to do so is not withheld, "FOR" the election of the nominees named
below. The persons nominated for election have agreed to serve if elected, and management has no reason to believe that the nominees
will be unable to serve. The Board of Directors expects that each of the nominees will be available for election, but if any of them is
unable to serve at the time the election occurs, the proxy will be voted for the election of another nominee designated by our Board.
Set forth below is biographical information for the persons nominated for election as a director at the annual meeting. Ages
are as of April 28, 2017.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" EACH NOMINEE.
Nominees for Election for a One-Year Term Expiring at the 2018 Annual Meeting
David J. Nicol
David J. Nicol, 71, became a member of the Board of Directors in March 2004. Mr. Nicol also serves on the boards or
advisory boards of several private companies. A member of the National Association of Corporate Directors (since 2004) and
Financial Executives International, since 2015 he has been on the faculty in the Finance Department at the Bloch School of
Management at UMKC. From 2012 through 2014, Mr. Nicol was President/COO of a security innovation company since acquired.
Prior to that assignment, he was a consultant to several companies, each subsequently acquired by listed companies. From 2006
through 2009, he was EVP/Chief Financial Officer for Solutionary, a managed IT security services provider, since acquired by NTT
Security. During 2004-5, Mr. Nicol raised ‘A’ round venture funding and helped launch Sipera Systems (VOIP security solutions),
later acquired by Avaya. From 2001 through 2004, he was Senior Vice President for VeriSign Communications Services, a provider of
signaling and intelligent network services to communication service providers. Prior to its acquisition by VeriSign in 2001, Mr. Nicol
held the same position at Illuminet (Nasdaq) from 1996, and its predecessor company ITN from 1994. In those capacities, he was
responsible for strategy, business development, product management and development, and application services support. From 1990
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to 1994, he was Chief Operating Officer for two private technology services companies, each subsequently acquired by listed
companies. From 1984 to 1990, Mr. Nicol held officer positions with United Telecom (now Sprint), lastly serving as Corporate Vice
President Planning. Mr. Nicol holds a B.Sc. from Ohio State University, an M.A. from Case Institute of Technology, and a Ph.D.
from Case Western Reserve University.
With his years of executive experience at United Telecom, ITN, Illuminet, Verisign and Solutionary, Mr. Nicol brings to the
Board senior-level, functionally broad management ability, with deep experience in telecom, IT services and technology, both
domestic and international. Complimenting his appointment to the Finance faculty at the UMKC Bloch School, his experience as CFO
at Solutionary gives him an in-depth understanding of financial strategy and operations. Mr. Nicol is able to draw upon, among other
things, his knowledge of raising capital and investor communications, having served as a member of the roadshow team that took
Illuminet public (Nasdaq), as well as having raised significant debt and equity funding for Solutionary and several other early-stage
companies. In addition, Mr. Nicol has a Ph.D. in corporate finance and has taught corporate finance at the MBA level at the
Weatherhead School of Management of Case Western Reserve University and elsewhere.
David S. Oros
David S. Oros, 57, joined our Board of Directors in March 2008. Since March 2013, he has been a founding partner of
Gamma 3 LLC, a Baltimore, Maryland based investment initiative focused on acquiring, building and incubating advanced technical
intellectual property and providing early stage funding to advanced technology companies. Over the last ten years, Mr. Oros has
started over eight companies primarily in the technology field. He is currently the Chairman and founder of Terbium Labs, an
information security company that runs Matchlight, a data intelligence system, and he is also Chairman of Gemstone Biotherapeutics
LLC, a leader in the field of tissue engineering and regenerative medicine. From June 2006 to February 2013, Mr. Oros was the
managing partner of Global Domain Partners, LLC, a managed futures company that uses advanced optimization modeling as a
predictive tool for worldwide markets, currencies and commodities. From 2006 to 2010, Mr. Oros served as Chairman of the Board of
NexCen Brands, Inc., a leading vertically integrated brand acquisition and management firm focused on brand management. From
1996 until June 2006, Mr. Oros was the Chairman of the Board and CEO of Aether Systems, Inc., a leading provider of wireless and
mobile data solutions for the transportation, fleet management and public safety industries. From 1994 until 1996, Mr. Oros was
President of NexGen Technologies, L.L.C., a wireless software development company. From 1992 until 1994, he was President of the
Wireless Data Group at Westinghouse Electric. Prior to that, from 1982 until 1992, Mr. Oros was at Westinghouse Electric directing
internal research and managing large programs in advanced airborne radar design and development. Mr. Oros received a B.S. in
mathematics and physics from the University of Maryland, and holds a U.S. patent for a multi-function radar system. Mr. Oros
currently serves on the Board of Visitors for the University of Maryland Baltimore County.
Mr. Oros has had front line exposure to many of the issues facing public companies, particularly on operational, financial and
corporate governance matters, from his former role as Managing Partner of Global Domain Partners and previously having served as
Chairman of NexCen Brands, CEO of Aether Systems, President of NexGen Technologies, LLC and President of the Wireless Data
Group of Westinghouse Electric. With his knowledge of the complex issues facing global companies and his understanding of what
makes businesses work effectively and efficiently, Mr. Oros is a skilled advisor. His formal education and his experience in directing
large research and development programs while at Westinghouse Electric also provides him with the background and expertise to
assist the Board with technology-related issues.
Richard R. Ramlall
Richard R. Ramlall, 61, became a member of the Board of Directors in March 2008. He currently serves as the Vice
President of Investor and Public Relations at Internap (NASDAQ:INAP) since January 1, 2017. Internap is a leading technology
provider of Internet infrastructure services. Prior to his current assignment, from September 2013 to December 2016, through Ramlall
Partners LLC, he provided investor relations, financial and regulatory due diligence and compliance, business development, strategic
planning, and public relations consulting to public and private organizations in the financial, telecom and energy sectors. He also was
selected to the 2014-2017 Advisory Board of the Washington Wizards NBA Franchise. Prior to his consulting with his LLC, he
served as Senior Vice President, Corporate Development and Chief Communications Officer of Primus Telecommunications Group,
Incorporated (NYSE:PTGI), from November 2010 to August 2013. Before being successfully sold to various entities, Primus was a
leading provider of advanced communication solutions, including broadband Internet, traditional and IP voice, data, mobile services,
collocation, hosting, and outsourced managed services to business and residential customers in the United States, Canada and
Australia. From March 2005 to August 2010, he served as Senior Vice President, Strategic External Affairs and Programming at
RCN Corporation, the leading overbuilder broadband provider of video, data, and voice services to residential, business and
commercial/carrier customers. Prior to joining RCN in March 2005, Mr. Ramlall served as Senior Managing Director and Executive
Vice President of Spencer Trask Media and Communications Group, LLC (a division of New York-based venture capital firm Spencer
Trask & Company) based in Reston, Virginia, from June 1999. From March 1997 to June 1999, Mr. Ramlall served as Vice President
and Managing Director for Strategy, Marketing and International Government Affairs for Bechtel Telecommunications, a subsidiary
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of Bechtel Corporation. Prior to that, Mr. Ramlall was Executive Director for International Business Affairs for Bell Atlantic
International and spent over 18 years at Bell Atlantic (now Verizon) including assignments in Product Management, Legal,
Regulatory, Rates, Forecasting and Country Manager–Indian Subcontinent. In 1990, Mr. Ramlall was selected to serve a one-year
appointment under the Presidential Exchange Executive Program of the White House. Mr. Ramlall formerly served on the
Alzheimer’s Association—National Capital Area Board of Directors from 2008-2012 and a number of private company Boards.
Mr. Ramlall holds a B.S. in Business Administration and an M.G.A. (Technology Management) from the University of Maryland.
Mr. Ramlall brings to our Board more than 39 years of experience in the telecommunications/IT industry and more than
24 years of international business experience, as well as operational experience at a senior executive level, with particular emphasis on
Indian operations. As Senior Vice President for Corporate Development and Chief Communications Officer at Primus, in addition to
previous assignments, Mr. Ramlall was responsible for International Business Development, M&A, Investor Relations, Public
Relations and Regulatory Affairs, bringing valuable investor and corporate governance expertise and experience to our Board and our
management team. Mr. Ramlall has won more than 25 Business Communications awards and in March 2013 was recognized as one of
the Top 25 Minority Business leaders in the Washington D.C. Metro Area.
Julian D. Singer
Julian D. Singer, 33, became a member of the Board of Directors in January 2015. Prior to that, he served as a nonvoting
observer to the Board of Directors from July 2014 until December 2014. Since May 2013 Mr. Singer has been engaged as an
independent investment advisor. Prior to that, from April 2006 through June 2011, Mr. Singer served as an assistant trader and an analyst
with York Capital Management where he evaluated potential mergers and acquisitions. Mr. Singer currently serves on the Board of
Directors of Live MicroSystems, Inc., which sold its operating assets in 2013, and Fiber Span, a privately held company providing
distributed antenna systems (DAS) technology primarily for public safety projects. Mr. Singer has a B.S. in Finance from Lehigh
University and an M.B.A. from the NYU Stern School of Business.
Mr. Singer has a background in finance and investing in various industries, including software and telecommunications, as well
as mergers and acquisitions. Drawing from his experience in these areas, Mr. Singer provides valuable strategic and financing advice to
the Company’s management and the Board.
Matthew Stecker
Matthew Stecker, 48, joined our Board of Directors in March 2016 and was named Chairman of the Board in August 2016.
He has served as a Senior Policy Advisor to the United States Department of Commerce since November 2014 and currently serves on
the board of Live Microsystems, Inc. (OTC:LMSC). He previously served on the boards of MRV Communications from April 2013 to
June 2016 and HealthWarehouse.com Inc. from December 2010 to August 2013, where he also served on the compensation
committee. From January to November 2014, Mr. Stecker served as the Vice President of Mobile Entertainment for RealNetworks
(NASDAQ:RNWK). From November 2009 to December 2013, he served as CEO of Live MicroSystems, Inc., and from April 2005 to
November 2009 he was a senior executive in both Telecom Operations and Strategy at Cartesian, Inc. (NASDAQ:CRTN). He
received his BA in Political Science and Computer Science from Duke University, and his JD from the University of North Carolina at
Chapel Hill School of Law.
Mr. Stecker brings to our Board 20 years of experience as a public company executive in the telecommunications and wireless
industries, which are highly relevant to the Company’s business and will assist the Company in developing, executing and evaluating
business strategies and industry partnerships. As a new director, he also brings a fresh perspective to issues the Company is facing.
Thomas Thekkethala
Thomas Thekkethala, 55, was promoted to CEO in January 2016 after being named President and a Director of Evolving
Systems when RateIntegration, Inc. d/b/a Sixth Sense Media, was acquired by Evolving Systems on September 30, 2015.
Mr. Thekkethala was a founding investor, Chairman and CEO of RateIntegration from February 2004 until the company’s acquisition by
Evolving Systems in September 2015. Prior to Sixth Sense Media, from December 1999 until September 2015, he was Founder and
Managing General Partner at JT Ventures, an early stage technology venture fund where he led investments in Allegro (acquired by
Cisco), Fidelia (acquired by NetScout) and Ibrix (acquired by HP).
Mr. Thekkethala also co-founded telecom software companies SRG Inc. and Consolidated Communication Systems and
Services, where he developed the product vision and market strategy, and led the companies to their successful acquisitions.
Mr. Thekkethala started his career at an early-stage wireless carrier that grew to a market leader before its acquisition by Ameritech (now
ATT Wireless). Mr. Thekkethala serves on the board of LearnforLifeFoundation.Org. He holds a Bachelors in Electrical Engineering
and a Masters in Information Management from Washington University, St. Louis.
6
Mr. Thekkethala has over 25 years of experience in financing and building enterprise software companies and managing them in
all stages of business, through formation, capital raising, growth and acquisition. As a director who is also our Chief Executive Officer,
he has detailed knowledge of the Company’s business and operational matters and brings a keen understanding of these issues to Board
deliberations.
INFORMATION REGARDING THE BOARD AND ITS COMMITTEES
Board Leadership Structure
Our Board believes it is important to retain flexibility in allocating the responsibilities of the Chief Executive Officer
("CEO") and Chairman of the Board in any way that is in the best interests of our Company based on the circumstances existing at a
particular point in time. Accordingly, we do not have a strict policy on whether these roles should be served independently or jointly.
Currently, we have an independent Chairman of the Board with Mr. Stecker serving in that role. He provides valuable experience on
the Company’s business and industry and works closely with our CEO in establishing Board meeting agendas to discuss key business
and strategic issues.
Inasmuch as our Chairman position is held by an independent director, we do not have a separate Lead Independent Director.
The Board’s Role in Risk Oversight
The Board as a whole actively oversees management of the Company’s risks and looks to its committees, as well as senior
management, to support the Board’s oversight role. The Company’s Compensation Committee provides information about risks
relating to the Company’s compensation plans and arrangements. The Audit Committee assists with oversight of financial risks, and
the Nominating and Governance Committee focuses on risks associated with the independence of the Board of Directors and potential
conflicts of interest. While each committee is responsible for evaluating certain risks, the full Board regularly receives information
through committee reports and from members of senior management on areas of material risk to the Company, including operational,
financial, legal and regulatory, technical and strategic risks.
Meetings and Committees of the Board of Directors
Our business, property and affairs are managed under the direction of our Board of Directors and its committees. Our Board
of Directors provides management oversight, helps guide the Company on strategic planning, approves the Company’s operating
budgets and meets regularly in executive sessions. Members of our Board are kept informed of our business through discussions with
our Chief Executive Officer and other officers and employees, by reviewing materials provided to them, by visiting our offices and by
participating in meetings of the Board and its committees.
Our Board holds regularly scheduled quarterly meetings. In addition to the quarterly meetings, typically there is at least one
other regularly scheduled meeting and several special meetings each year. At least twice a year, time is set aside for the independent
directors to meet without management present. Our Board met formally nine times in 2016 in addition to conference calls throughout
the year. In fiscal year 2016 each director attended at least 75% of all Board meetings held during such director’s tenure on the Board.
The Board has an Audit Committee, a Compensation Committee, and a Nominating and Governance Committee. Below is a
table that provides membership and meeting information for each of the Board committees during 2016. In fiscal year 2016 each
committee member attended at least 75% of the meetings of each applicable committee.
Name
Mr. Nicol .......................................................
Mr. Oros ........................................................
Mr. Ramlall ....................................................
Mr. Singer ............................................................
Mr. Stecker ....................................................
Mr. Thekkethala.............................................
Mr. Dupper (1) ...............................................
Total meetings in fiscal year 2016 .................
Audit
X*
X
X
4
Compensation
X*
X
X
Nominating &
Governance
X
X
X*
**
1
(1) Thaddeus Dupper was a member of the Company’s Board of Directors until August 16, 2016.
* Denotes Committee Chair as of December 31, 2016.
7
** The Committee members met informally several times during the year, following which they acted formally through unanimous
consent resolutions.
Below is a description of each committee of the Board of Directors. Each of the committees has authority to engage legal
counsel or other experts or consultants as it deems appropriate to carry out its responsibilities. The Board of Directors has determined
that each member of each committee meets the independence requirements under the NASDAQ’s current listing standards and each
member is free of any relationship that would interfere with his individual exercise of independent judgment.
The Audit Committee. The Audit Committee assists the Board of Directors in its oversight of the integrity of the
Company’s accounting, auditing, and reporting practices. The Audit Committee meets with our independent registered public
accounting firm at least annually to review the results of the annual audit and discuss the financial statements. The Committee also
meets with our independent registered public accounting firm quarterly to discuss the results of the accountants’ quarterly reviews as
well as quarterly results and quarterly earnings releases; recommends to the Board the registered public accounting firm to be retained;
and receives and considers the accountants’ comments as to internal controls and procedures in connection with audit and financial
controls. The Audit Committee reviews all financial reports prior to filing with the Securities and Exchange Commission (SEC) and
reviews all financial press releases prior to release. The specific responsibilities in carrying out the Audit Committee’s oversight role
are set forth in the Audit Committee’s Charter, a copy of which is posted on the Company’s website, www.evolving.com, under
"Investors — Corporate Governance." The Audit Committee currently consists of Messrs. Nicol, Oros and Stecker, all of whom are
independent directors as required under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), Section 10A(m)(3)
and NASDAQ listing standards. The Board of Directors has determined that Mr. Nicol is an "audit committee financial expert" as
defined by the rules of the Securities and Exchange Commission. For more information concerning the Audit Committee see the
"Report of the Audit Committee" contained in this proxy statement.
The Compensation Committee. The primary responsibilities of the Compensation Committee are to review and recommend
to the Board the compensation of our executive officers, to review and recommend an incentive compensation plan, approve grants of
stock awards to employees and consultants under our stock incentive plan and otherwise determine compensation levels and perform
such other functions regarding compensation as the Board may delegate. The Compensation Committee consists of Messrs. Nicol,
Oros and Ramlall, all of whom are independent directors under NASDAQ listing standards.
The Compensation Committee meets outside the presence of all of our executive officers to consider appropriate
compensation for our chief executive officer, or CEO. The Compensation Committee annually analyzes our CEO’s performance and
determines his base salary and incentive compensation and stock awards, based on its assessment of his performance and other
considerations described in the Compensation Discussion and Analysis. For our other named executive officer, the Compensation
Committee meets separately with our CEO. Our CEO annually reviews our other named executive officer’s performance with the
Compensation Committee and makes recommendations to the Compensation Committee with respect to the appropriate base salary,
payments to be made under our incentive compensation plan and equity incentive awards for all officers, excluding himself. Based in
part on these recommendations from our CEO and other considerations described in the Compensation Discussion and Analysis, the
Compensation Committee approves the annual compensation package of our other executive officer. In 2010 the Compensation
Committee engaged the services of Radford, an Aon Hewitt company, to assist the Committee in establishing compensation levels for
executive officers. The Committee has made no significant changes to the executive officers’ compensation plans since
commissioning the study.
The specific responsibilities and functions of the Compensation Committee are discussed in the Compensation Committee
Charter, which is posted on our website, www.evolving.com, under "Investors — Corporate Governance."
Nominating and Governance Committee. The primary responsibilities of the Nominating and Governance Committee are
to monitor corporate governance matters, to determine the slate of director nominees for election to the Company’s Board of
Directors, to identify and recommend candidates to fill vacancies occurring on the Board of Directors, and to assist the Board with
assessing the independence of the members of our Board of Directors.
Criteria and Diversity. In filling vacancies that occur on the Board, and nominating candidates for election, the Nominating
and Governance Committee takes into account certain minimum qualifications and qualities that the Committee believes are necessary
for one or more of the Company’s directors to possess. These qualifications and qualities are as follows:
• Experience with businesses and other organizations comparable to the Company. For example, experience in the
telecommunications industry, doing business internationally and/or experience in a software development company is
desirable.
8
• Experience in reviewing, and the ability to understand, financial statements.
• Experience in investor relations and the operational and corporate governance aspects of running a public company.
• Experience working with or overseeing management and establishing effective compensation strategies to align
management with Company objectives and stockholder financial returns.
• The candidate’s independence from conflict or direct economic relationship with the Company.
• The candidate’s contacts within the telecommunications industry, and/or within the finance and investment banking
industry.
• Experience with mergers and acquisitions.
• The ability of the candidate to attend Board and committee meetings regularly (either in person or by telephone) and
devote an appropriate amount of effort in preparation for those meetings.
• A reputation, strength of character and business judgment befitting a director of a publicly held company.
Candidates for the Board should have some, but not necessarily all, of the above-described criteria. Although the Company
has no formal policy regarding diversity, the Committee seeks diversity in the broadest sense, with the goal of having a Board
composed of a broad diversity of experience, professions, skills, geographic representation, backgrounds and culture. The Committee
does not assign specific weights to particular criteria and no particular criterion is necessarily applicable to all prospective nominees.
The Committee evaluates each individual in the context of the Board as a whole, with the objective of recommending a group that can
best contribute to the success of the business and represent stockholder interests using its diversity of experience and sound business
judgment. Nominees or potential nominees are not discriminated against on the basis of race, religion, national origin, sexual
orientation, disability or any other basis proscribed by law.
The process used by the Nominating and Governance Committee for identifying and evaluating nominees for directors is as
follows:
• Nomination of an existing Board member whose term is expiring. Each year prior to preparation of the proxy
statement for the annual meeting, the Nominating and Governance Committee meets to determine whether current Board
members desire to remain on the Board and, if so, whether each individual should be recommended for nomination. The
Committee evaluates whether each individual continues to meet the then current qualifications and qualities established
by the Committee for Board membership, as well as the contributions made by the individual during his or her tenure on
the Board. The Committee, among other things, takes into consideration the individual’s attendance at Board and
committee meetings and his or her participation in, and preparation for, such meetings. In the event the Committee
determines that it is in the Company’s best interest to nominate an existing Board member for re-election, the Committee
will adopt a formal recommendation for consideration and adoption by the full Board of Directors, which, if adopted by
the Board of Directors, will be contained in the proxy statement.
• Consideration of candidates proposed by stockholders. The Nominating and Governance Committee will consider
candidates for the Board proposed by stockholders. Stockholders wishing to nominate a candidate for consideration by
the Committee may do so by writing to the Company’s Secretary and providing the candidate’s name, biographical data
and qualifications. The Committee will consider the candidate for nomination in the same manner as described below,
"Consideration of new candidates for the Board." A stockholder proposal for inclusion in the proxy statement (and
received in accordance with the procedures described in our Bylaws and our previous year’s proxy statement) will be
included in the proxy statement in accordance with SEC regulations.
• Consideration of new candidates for the Board. The Nominating and Governance Committee will consider new
candidates for the Board to fill vacancies that occur on the Board or to expand the size of the Board. Recommendations
for candidates may be submitted to the Committee through the Company’s Secretary. The Secretary will forward names
and qualifications of proposed candidates to the Committee members. The Committee will review the materials to
determine whether the candidate appears to meet the qualifications and qualities established by the Committee for Board
membership. If the candidate appears to be qualified, the Committee will conduct an interview of the candidate and the
candidate may be asked to interview with management as well as other members of the Board. The Committee may
recommend a candidate for membership on the Board, subject to final approval of a majority of the Board of Directors,
and the results of a background investigation and reference check of the candidate.
9
The specific responsibilities and functions of the Nominating and Governance Committee are set forth in the Nominating
Committee Charter. The Committee’s charter is posted on our website, www.evolving.com, under "Investors — Corporate
Governance." The current members of the Nominating and Governance Committee are Messrs. Stecker, Ramlall and Singer, all of
whom are independent directors under NASDAQ listing standards.
DIRECTOR COMPENSATION
The 2016 compensation plan for non-employee members of the Board of Directors and the committees of the Board is
described in the table below.
Board of Directors ..............................
Audit Committee ................................
Compensation Committee ..................
Annual retainer
(payable in quarterly
increments)
$
$
$
20,000
0
0
Additional annual cash
compensation for
non-employee Chairperson
$
$
$
N/A
5,000
5,000
Upon joining our Board of Directors, each non-employee director receives stock options to purchase an aggregate of 15,000
shares of our common stock. This initial award may be granted in installments. Options are priced at the closing price of our common
stock on the date of the grant. In 2016 no restricted stock awards were made to our non-employee directors.
We do not provide any deferred compensation, health or other personal benefits to our directors. We reimburse each director
for reasonable out-of-pocket expenses incurred to attend Board and Committee meetings. We encourage, but do not require, our Board
members to own stock in the Company.
The table below summarizes the compensation earned by non-employee directors for the fiscal year ended December 31, 2016.
2016 Director Compensation Table
(a)
Name (1)
(b)
Fees Paid in Cash
($)
(c)
Option Awards
($)(5)
(d)
Total
($)
David J. Nicol ......................................
David S. Oros ......................................
Richard R. Ramlall (2) .......................
Julian D. Singer ..................................
Matthew Stecker (3) ...........................
Thaddeus Dupper (4) ..........................
$
$
$
$
$
$
30,000
20,000
65,500
20,000
11,401
33,968
$
$
$
$
$
$
0
0
0
0
61,500
0
$
$
$
$
$
$
30,000
20,000
65,500
20,000
72,901
33,968
(1) See the Summary Compensation Table on page 23 for information on compensation earned by Mr. Thekkethala during fiscal year
2016.
(2) In addition to his compensation as a director, Mr. Ramlall earned $45,500 in consulting fees for providing investor relations
consulting services during 2016.
(3) Mr. Stecker was appointed to the Board on March 17, 2016.
(4) Mr. Dupper, the Company’s former Chief Executive Officer, was a member of the Company’s Board of Directors until August 16,
2016. See Certain Relationships and Related Transactions on page 31 for information relating to fees paid to Mr. Dupper for severance
and consulting services during 2016.
(5) This column reflects the aggregate grant date fair value of stock options granted during the year computed in accordance with
Statement of Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 718 ("FASB ASC
Topic 718"). For further information on these awards, see Note 9, "Share Based Compensation" of our consolidated financial statements
included in Form 10-K for the year ended December 31, 2016, filed with the SEC on March 28, 2017. As of December 31, 2016, each
director named above held outstanding options to purchase the following number of shares: Mr. Dupper: 91,089; Mr. Nicol: 23,200;
Mr. Oros: 16,175; Mr. Ramlall: 14,625; Mr. Singer: 15,000; and Mr. Stecker: 15,000.
10
Information Regarding Stockholder Communication with the Board of Directors; Attendance of Board
Members at the Annual Meeting
Stockholders may contact an individual director, the Board as a group, or a specified Board committee or group, including
the non-employee directors as a group, at the following address: Corporate Secretary, Evolving Systems, Inc., 9777 Pyramid Court,
Suite 100, Englewood, CO 80112, Attn: Board of Directors. Our Secretary will process communications before forwarding them to
the addressee. Directors generally will not be forwarded stockholder communications that are primarily commercial in nature, relate to
improper or irrelevant topics, or request general information about the Company.
We encourage, but do not require, Board members to attend our Annual Meeting of Stockholders. Two members of the
Board attended the 2016 Annual Stockholders’ Meeting.
Statement on Corporate Governance
We regularly monitor developments in the area of corporate governance by reviewing federal laws affecting corporate
governance, as well as rules adopted by the SEC and NASDAQ. In response to those developments, we review our processes and
procedures and implement corporate governance practices which we believe are in the best interests of the Company and its
stockholders. Among other things, we have established a Disclosure Committee, comprised of executives and senior managers who
are actively involved in the disclosure process, to specify, coordinate and oversee the review procedures that we use each quarter,
including at fiscal year-end, to prepare our periodic SEC reports.
The Board has approved a set of corporate governance guidelines to promote the functioning of the Board and its Committees
and to set forth a common set of expectations as to how the Board should perform its functions. Our Corporate Governance Guidelines
are posted on the Company’s website under "Investors — Corporate Governance." On an annual basis, each director and executive
officer is obligated to complete a Director and Officer Questionnaire which requires disclosure of any transactions with the Company
in which the director or executive officer, or any member of his or her immediate family, has a direct or indirect material interest.
The Board has also approved a Code of Business Conduct and a Code of Ethics for Finance Employees (collectively, the
"Codes"), posted on our website, www.evolving.com, under "Investors — Corporate Governance." We require all employees and
directors to adhere to the Code of Business Conduct in discharging their Company-related activities and our finance employees to also
comply with the Code of Ethics for Finance Employees. Employees and directors are required to report any conduct that they believe
in good faith to be an actual or apparent violation of the Codes. We intend to disclose on our website, or on a Current Report on
Form 8-K, any amendments to or waivers of the Codes applicable to those of our senior officers to whom the Codes apply within four
business days following the date of such amendment or waiver. Our Audit Committee has established a confidential hotline and
procedures to receive, retain and treat complaints we receive regarding ethics, accounting and internal accounting controls of auditing
matters, and to allow for the confidential, anonymous submission by our employees of concerns regarding ethics, accounting or
auditing matters.
Policies and Procedures for Approval of Related Person Transactions
We may encounter business arrangements or transactions with businesses and other organizations in which one of our
directors or executive officers, significant stockholders or their immediate families may also be a director, executive officer or investor
or have some other direct or indirect material interest. We refer to these transactions as related person transactions. Related person
transactions have the potential to create actual or perceived conflicts of interest between Evolving Systems and its directors and
officers or their immediate family members.
In March 2007, the Board formally adopted a policy with respect to related person transactions to document procedures
pursuant to which such transactions are reviewed, approved or ratified. The policy applies to any transaction in which (1) the
Company is a participant, (2) any related person has a direct or indirect material interest and (3) the amount involved exceeds
$120,000, but excludes any transaction that does not require disclosure under Item 404(a) of Regulation S-K. The Audit Committee is
responsible for reviewing, approving and/or ratifying any related person transaction. The Audit Committee intends to approve only
those related person transactions that are in, or are not inconsistent with, the best interests of the Company and its stockholders.
Transactions with related persons below the threshold level are reviewed and approved by the Compensation Committee.
11
PROPOSAL NO. 2
APPROVAL OF AN AMENDMENT TO THE
2016 STOCK INCENTIVE PLAN
Introduction
In June 2016, our stockholders approved the 2016 Stock Incentive Plan (the "2016 Stock Incentive Plan" or the "2016 Plan").
The Board has adopted, subject to stockholder approval, an amendment to the 2016 Plan to increase by 400,000 the number of shares
of common stock that may be awarded under the plan to a total of 500,000 shares (the "Amendment"). As of April 17, 2017, there
were 31,134 shares remaining for issuance of stock awards under the 2016 Plan.
Purpose of the 2016 Plan
The 2016 Plan was adopted to give us the ability to provide equity-based compensation to participants to encourage them to
continue providing services to the Company and to better assure that their interests are aligned with the interests of our stockholders.
We believe that employees, directors and key consultants should have a significant stake in the Company under programs that link
compensation to stockholder return. As a result, stock awards are an integral part of our compensation plan. The grant of a stock
award has several attractive characteristics, both to the recipient and to the Company, which make such grants more attractive than
increasing the level of cash compensation. For example, granting stock awards provides an incentive to individuals because stock
ownership permits them to share in our growth. We benefit because these individuals will be motivated to grow and improve the
performance of the Company. In addition, the grant of certain stock awards preserves our cash resources.
If the stockholders approve the Amendment to the 2016 Plan, we will reserve an additional 400,000 shares of common stock
for issuance under the 2016 Plan. We anticipate that, following the receipt of stockholder approval of this proposal, we will, from time
to time, make stock awards to eligible participants as part of our overall compensation strategy. In determining whether to vote for this
proposal, stockholders should consider that they are subject to the risk of dilution to their interests which would result if additional
shares of common stock are issued under the 2016 Plan, and that as a result of the issuance of such common stock the current
stockholders will own a smaller percentage of our outstanding common stock.
We have not made any specific determinations regarding individuals who may receive awards, the size of stock awards or
other terms of the awards. If the stockholders do not approve Proposal No. 2, the Company will continue the 2016 Plan according to
its terms prior to the Amendment; as noted above, however, there are only 31,134 shares remaining for issuance under the 2016 Plan
as of the record date.
By seeking stockholder approval of the 2016 Plan, we are also asking our stockholders to re-approve the performance goals
set forth in the 2016 Plan, as described below. Because the Company intends for certain awards made under the 2016 Plan to comply
with the requirements for performance-based compensation pursuant to Section 162(m) of the Internal Revenue Code, the Company
must obtain stockholder approval every five years of the material terms of performance goals.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" PROPOSAL NO. 2,
APPROVAL OF AN AMENDMENT TO THE 2016 STOCK INCENTIVE PLAN.
SUMMARY OF THE KEY TERMS OF THE 2016 PLAN
The following is a brief description of the 2016 Plan, as proposed to be amended. The full text of the 2016 Plan, as proposed
to be amended, is attached as Appendix A to this Proxy Statement, and the following description is qualified in its entirety by
reference to the text of the 2016 Plan, as amended, set forth in Appendix A.
Administration of the 2016 Plan
The Compensation Committee of the Board of Directors (the "Committee") administers the 2016 Plan and determines
recipients and types of awards to be granted, including the exercise price, exercisability and number of shares subject to the award.
The Committee may also delegate administrative powers to a subcommittee or to officers of the Company subject to certain
conditions. All action by the Committee under the Plan must be unanimous.
Eligibility
All employees (including officers), consultants and Directors of the Company or any parent or any subsidiary of the
Company are eligible to receive stock awards under the 2016 Plan (each employee, consultant, and Director who receives such a stock
12
award is referred to as a "participant"). Participants will receive grants of stock awards at the discretion of the Committee as
compensation for their services to the Company.
Types of Awards
The types of stock awards that are available for grant under the 2016 Plan are:
•
•
•
•
•
•
•
incentive stock options;
non-statutory stock options;
restricted stock;
restricted stock units;
stock appreciation rights;
performance awards; and
other stock-based awards.
Stock Subject to the 2016 Plan
Following the proposed amendment to increase the number of shares subject to the 2016 Plan by 400,000 shares, the
maximum aggregate number of shares of our common stock that may be issued under the 2016 Plan may not exceed 500,000 shares,
the "share reserve," subject to adjustment for changes in capitalization. Each share of common stock issued pursuant to an award
granted under the 2016 Plan will reduce the share reserve by one share. Subject to certain limitations, shares of common stock covered
by stock awards that expire, are cancelled, terminate, are repurchased by us at cost or reacquired by us prior to vesting will revert to
and be added to the share reserve or become available for issuance under the 2016 Plan. In addition, the share reserve will be reduced
by the full number of shares of common stock covered by a stock appreciation right that is exercised or settled.
Annual Award Limits
Awards may be denominated in shares of common stock. The 2016 Plan contains a calendar year per participant limit of
125,000 shares underlying grants of awards, subject to adjustment as provided in Section 14 of the 2016 Plan, unless the Committee
specifically determines at the time of grant that the award is not intended to qualify as performance-based compensation under the
2016 Plan. In addition, the annual limit will not apply in the following circumstances: the Company acquires all or substantially all
(greater than seventy-five percent (75%)) of the fair market value of the assets of another entity or the Company acquires a
Controlling Interest (as defined in the 2016 Plan) of another entity.
Adjustment
Transactions not involving the receipt of consideration by the Company, such as a merger, consolidation, reorganization,
stock dividend, or stock split, may change the class and number of shares of common stock subject to the 2016 Plan and outstanding
awards. In that event, the 2016 Plan will be appropriately adjusted as to the class and the maximum number of shares of common
stock subject to the 2016 Plan and other share limits. Outstanding awards also will be adjusted as to the class, number of shares and
price per share of common stock subject to such awards.
Fair Market Value
Generally, fair market value of the Company’s common stock will be the closing sales price of one share of the Company’s
common stock on the NASDAQ Capital Market on the date of determination. The fair market value of the Company’s stock as of
April 17, 2017 was $4.80.
Stock Options and Stock Appreciation Rights
The Committee may award stock options in the form of non-statutory stock options or incentive stock options or stock
appreciation rights, each with a maximum term of ten years. The exercise price for the option and the grant price for the stock
appreciation right may not be less than 100% of the fair market value of one share of common stock on the date of grant. The
Committee will establish the vesting schedule for stock options and stock appreciation rights and the method of payment for the
exercise price of an option, which may include cash, shares, or other awards. The Committee will establish in the award agreement the
period of time that the participant will have after termination of continuous service with the Company to exercise the vested portion of
an outstanding option or stock appreciation right. Stockholder approval of the class of eligible participants under the 2016 Plan and the
limit on the number of shares covered by an award granted to any one participant during a calendar year is intended to satisfy the
stockholder approval conditions for stock options and stock appreciation rights to qualify as deductible under Section 162(m) of the
Internal Revenue Code.
13
Restricted Stock and Restricted Stock Units
The Committee may award restricted stock and restricted stock units and establish applicable restrictions, including any
limitation on voting rights or the receipt of dividends. The Committee may decide to include dividends or dividend equivalents as part
of an award of restricted stock or restricted stock units and may defer the payment of dividends, with or without interest, until the
award is vested or paid. The Committee will establish the manner and timing under which restrictions may lapse. If the participant’s
continuous service is terminated during the applicable restriction period, shares of restricted stock and restricted stock units still
subject to restriction will be forfeited, except as determined otherwise by the Committee.
Performance Awards and Other Stock-Based Awards
The Committee may grant performance awards, which may be denominated in cash, shares, other securities or other awards
and payable to, or exercisable by, the participant upon the achievement of performance goals during performance periods, as
established by the Committee. Performance criteria mean any measures, as determined by the Committee, which may be used to
measure the level of performance of the Company or the participant during a performance period. The Committee may grant other
stock-based awards that are denominated or payable in shares, under the terms and conditions as the Committee will determine.
Dividends and Dividend Equivalents
The Committee may provide in an award agreement that the participant is entitled to receive, currently, or on a deferred basis,
dividends or dividend equivalents, with respect to the shares of common stock covered by the award.
Material Terms of Performance Goals for Covered Persons
The Company intends for certain awards made under the 2016 Plan to comply with the requirements for performance-based
compensation pursuant to Section 162(m) of the Internal Revenue Code. Generally, current federal tax law does not allow a publicly
held company to obtain tax deductions for compensation of more than $1 million paid in any year to the chief executive officer and
the three other most highly compensated executive officers (other than the chief financial officer) unless such payments are
"performance-based" as defined in the tax laws. One of the requirements for compensation to be performance-based under those laws
is that the company must obtain stockholder approval every five years of the material terms of performance goals where the
Committee has the authority to select one or more performance goals previously approved by stockholders.
Group of Employees Covered
The group of employees whose compensation would be subject to the performance goals would include the Company’s
senior executive officers, including the chief executive officer and the three most highly compensated executive officers (other than
the chief executive officer and chief financial officer), "covered officers," and other officers or individuals who may become covered
officers.
Business Criteria
The Company intends to use one or more of the following performance criteria as the basis for the performance
goals: (i) revenue, (ii) earnings before interest, taxes, depreciation and amortization (EBITDA), (iii) Adjusted EBITDA (earnings
before interest, taxes, depreciation, amortization, impairment, stock compensation and gain/loss on foreign exchange transaction)
(iv) net earnings, (v) net income, (vi) product-related targets and (vii) cash flow, subject to adjustment by the Committee to remove
the effect of charges for restructurings, discontinued operations, extraordinary items and all items of gain, loss or expense determined
to be extraordinary or unusual in nature or infrequent in occurrence, related to the disposal of a segment or a business, or related to a
change in accounting principle or otherwise. The Committee may establish performance goals that are measured either individually,
alternatively or in any combination, applied to either the Company as a whole or to a business unit or related company, and measured
quarterly, annually or cumulatively over a period of years, on an absolute basis or relative to a pre-established target, to a previous
quarter’s or year’s results or to a designated comparison group, in each case as specified by the Committee in the award. The
Committee may establish the threshold, target and maximum performance levels, and the number of shares or dollar amounts payable
at various performance levels from the threshold to the maximum.
The Committee has established qualifying performance criteria and maximum amounts that it considers appropriate in light
of foreseeable contingencies and future business conditions. If the amendments to the 2016 Plan are approved by the stockholders, the
Company reserves the right to award or pay other additional forms of compensation (including, but not limited to, salary, or other
stock-based awards under the 2016 Plan) to the Company’s covered officers. These other forms of compensation may be paid
regardless of whether or not the qualifying performance goals for performance awards described above are achieved in any future
year, and whether or not payment of such other forms of compensation would be tax deductible.
14
Effect of Change of Control
Upon certain changes of control of the Company, the successor corporation may assume outstanding stock awards or
substitute equivalent stock awards. If the successor corporation refuses to do so, such stock awards will become fully vested and
exercisable for a period of 15 days after notice from the Company but the option will terminate if not exercised during that period. For
this purpose, a "Change of Control" means the occurrence of any of the following:
(i)
(ii)
(a) the date any person or group acquires ownership of stock of the Company that, together with stock held by the
person or group, constitutes more than fifty percent (50%) of the total fair market value or total voting power of the
stock of the Company; (b) a liquidation or dissolution of the Company; or (c) the sale of all or substantially all
(greater than seventy five percent (75%)) of the fair market value of the assets of the Company;
the acquisition by any person, entity or "group," within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities
Exchange Act, of beneficial ownership within the meaning of Rule 13-d promulgated under the Securities Exchange
Act of more than fifty percent (50%) of either the then-outstanding shares of the Company's common stock or the
combined voting power of the Company's then-outstanding voting securities entitled to vote generally in the election
of directors (hereinafter referred to as the ownership of a "Controlling Interest") excluding, for this purpose, any
acquisitions by (a) the Company or its Affiliates; or (b) any employee benefit plan of the Company or its Affiliates;
or any one person, or more than one person acting as a group, acquires (or has acquired during the twelve
(12) month period ending on the date of the most recent acquisition by such person or persons) ownership of stock
of the Company possessing fifty percent (50%) percent or more of the total voting power of the stock of such
corporation;
(iii)
individuals who constitute the majority of the Board as of the date of this Agreement (the "lncumbent Board") cease
for any reason to constitute at least a majority of the Board; provided that any individual who becomes a member of
the Board after the date of this Agreement whose election, or nomination for election by holders of the Company's
securities, was approved by the vote of at least a majority of the Individuals then constituting the Incumbent Board
will be considered a member of the Incumbent Board; or
(iv)
any other change in effective control described in Treas. Reg. Section 1.409A(i)(5)(vi).
Limitations on Transfer
Awards are not transferable other than by will or the laws of descent and distribution unless determined otherwise by the
Committee. Awards may not be pledged or otherwise encumbered.
Amendment and Termination of the 2016 Plan
The Board may, by unanimous approval, amend, suspend or terminate the 2016 Plan in any respect and at any time, subject
to stockholder approval, if such approval is required by applicable law or stock exchange rules. The Committee may waive conditions
or amend the term of awards, or otherwise amend or suspend awards already granted subject to certain conditions.
Effective Date of Amendment; Term of the 2016 Plan
The amendment of the 2016 Plan will become effective immediately upon its approval by the Company’s stockholders.
Unless earlier terminated by the Board, the 2016 Plan will terminate on March 8, 2026.
FEDERAL INCOME TAX INFORMATION
The following discussion of the U.S. federal income tax consequences of the 2016 Plan is intended to be a summary of the
applicable federal law as currently in effect. Foreign, state and local tax consequences may differ and laws may be amended or
interpreted differently during the term of the 2016 Plan or of stock awards granted under the 2016 Plan. Because the income tax rules
governing stock awards and related payments are complex and subject to frequent change, participants are advised to consult their
individual tax advisors.
Non-statutory Stock Options
The grant of a non-statutory stock option will not result in the recognition of taxable income by the participant or in a
deduction for the Company. Upon exercise, the participant will recognize ordinary income in an amount equal to the excess of the fair
market value of the shares of common stock purchased over the exercise price, and generally, the Company is entitled to a tax
deduction for the amount of the income recognized by the participant (subject to Section 162(m) of the Internal Revenue Code). If the
participant later sells any of the shares acquired upon exercise of the non-statutory stock option, any gain or loss recognized will be
capital gain or loss (long-term or short-term, depending upon the holding period for the shares sold). Certain additional rules apply if
the exercise price is paid in shares previously owned by the participant.
15
Incentive Stock Options
Incentive stock options granted under the 2016 Plan are intended to be eligible for the favorable federal income tax treatment
accorded "incentive stock options" under Section 422 of the Internal Revenue Code. There generally are no federal income tax
consequences to the participant or the Company upon the grant or exercise of an incentive stock option. However, the excess of the
fair market value of the shares of common stock on the date of exercise over the exercise price will result in an adjustment to taxable
income for purposes of the alternative minimum tax. If the participant holds stock acquired through exercise of an incentive stock
option for at least two (2) years from the date on which the option is granted and at least one (1) year from the date on which the
shares are transferred to the participant upon exercise of the option, any gain or loss on a disposition of the shares will be a long-term
capital gain or loss. Generally, if the participant disposes of the stock before the expiration of either of these holding periods (a
"disqualifying disposition"), then at the time of disposition the participant will realize taxable ordinary income equal to the lesser of
(i) the excess of the stock’s fair market value on the date of exercise over the exercise price, or (ii) the participant’s actual gain, if any,
on the disposition. The participant may also have additional gain or loss upon the disqualifying disposition, which will be capital gain
or loss (long-term or short-term, depending upon the holding period for the shares). To the extent the participant recognizes ordinary
income by reason of a disqualifying disposition, the Company will generally be entitled to a corresponding deduction for the tax year
in which the disqualifying disposition occurs.
Stock Appreciation Rights
The grant of a stock appreciation right will not result in the recognition of taxable income by the participant or in a deduction
for the Company. Upon exercise, the participant will recognize ordinary income in an amount equal to the then fair market value of
the shares of common stock or cash distributed to the participant. The Company is entitled to a tax deduction equal to the amount of
such income (subject to Section 162(m) of the Internal Revenue Code). Gain or loss upon a subsequent sale of any shares received by
the participant will generally be taxed as capital gain or loss (long-term or short-term, depending upon the holding period for the
shares sold).
Other Awards
A participant who is granted restricted stock, restricted stock units, performance awards or other stock-based awards will
generally not be taxed at the time of grant of the award unless the participant makes a Section 83(b) election under the Internal
Revenue Code to be taxed at the time of grant or exercise, as applicable. Upon the payment of shares with respect to units or upon the
lapse of restrictions on transferability or the lapse of risk of forfeiture with respect to restricted stock, the participant will be taxed at
ordinary income tax rates on the then fair market value of the shares. The Company is required to withhold tax on the amount of
income recognized and the Company will generally be allowed a tax deduction on the amount of the income recognized (subject to
Section 162(m) of the Internal Revenue Code). The participant’s tax basis in the shares will be equal to the amount of ordinary income
recognized. Upon subsequent disposition of the shares, the participant will realize capital gain or loss (long-term or short-term,
depending upon the holding period for the shares sold).
Section 162(m) – Potential Limit on Company Deduction
Section 162(m) of the Internal Revenue Code limits the deduction for compensation paid to the chief executive officer and
the four other most highly compensated executive officers of a publicly held corporation to $1 million per fiscal year, with exceptions
for certain performance-based compensation. In accordance with Treasury regulations issued under Section 162(m), compensation
attributable to stock options and stock appreciation rights will qualify as performance-based compensation if the award is granted by a
compensation committee comprised solely of "outside directors" and the plan is approved by the stockholders and contains a
per-employee limitation on the number of shares for which such awards may be granted during a specified period, and (i) either the
exercise price of the award is no less than the fair market value of the stock on the date of grant, or (ii) the award is granted (or
exercisable) only upon the achievement (as certified in writing by the compensation committee) prior to vesting or exercisability of an
objective performance goal established in writing by the compensation committee while the outcome is substantially uncertain, and
the stockholders have approved the material terms of the award (including the class of employees eligible for such award, the business
criteria on which the performance goal is based, and the maximum amount, or formula used to calculate the amount, payable upon
attainment of the performance goal).
Restricted stock, restricted stock units, performance awards, and other stock-based awards qualify as performance-based
compensation under the Treasury regulations only if (i) the award is granted by a compensation committee comprised solely of
"outside directors," (ii) the award is granted (or exercisable) only upon the achievement of an objective performance goal established
in writing by the compensation committee while the outcome is substantially uncertain, (iii) the compensation committee certifies in
writing prior to the granting (or exercisability) of the award that the performance goal has been satisfied and (iv) prior to the granting
(or exercisability) of the award, stockholders have approved the material terms of the award (including the class of employees eligible
for such award, the business criteria on which the performance goal is based, and the maximum amount, or formula used to calculate
the amount, payable upon attainment of the performance goal).
16
Section 409A – Deferred Compensation
Certain grants made under the 2016 Plan may constitute deferred compensation for purposes of Section 409A of the Internal
Revenue Code. If the requirements of Section 409A are not satisfied for these awards, the participant may be subject to a 20%
additional tax, in addition to ordinary income tax, at the time the award becomes vested, plus interest on late payments.
PROPOSAL 3
ADVISORY VOTE ON EXECUTIVE COMPENSATION
Introduction
In 2013 our stockholders voted to have an advisory vote on executive compensation every two years. Our last advisory
approval was obtained at our 2015 annual meeting. Accordingly, we are again requesting our stockholders to approve, on an advisory
basis, the compensation of our named executive officers as described in the "Executive Compensation" section of this Proxy
Statement. This proposal, commonly known as a "say on pay" proposal, gives our stockholders the opportunity to express their views
on the compensation of our named executive officers.
Compensation Program and Philosophy
Our executive compensation program is designed to attract, reward, and retain key employees, including our named executive
officers, who are vital to our success. We tie a substantial percentage of an executive’s compensation to the attainment of financial
performance measures that our Board believes are important to the business and will enhance stockholder value. As described more
fully in the Compensation Discussion and Analysis, the mix of fixed and performance based compensation and equity awards, as well
as executives’ employment and change in control agreements, are all designed to attract and retain talented employees and create a
close correlation between performance and compensation. Our Compensation Committee and Board believe that the compensation
plans of our named executive officers fulfill this objective. We recommend that stockholders read the "Compensation Discussion and
Analysis" of this Proxy Statement, which discusses in detail how our compensation policies implement our compensation philosophy
and the related compensation tables which set forth the fiscal year 2016 compensation of our named executive officers. Sixty-five
percent of the stockholders voted in favor of the compensation plans in the 2015 advisory vote. There were 2.5 million broker
non-votes, 21 percent of our issued and outstanding shares. Following the advisory vote in 2015, the Compensation Committee
evaluated whether changes should be made to the compensation plans of the named executive officers and elected not to make any
material changes.
Recommendation
Our Compensation Committee believes that the compensation plans of our named executive officers are structured to retain
executive talent while also protecting stockholder and Company interests. As a result, we are asking our stockholders to indicate their
support for the compensation of our named executive officers as described in this Proxy Statement by voting in favor of the following
resolution:
"RESOLVED, that the compensation of the Company’s named executive officers, as disclosed in the Compensation
Discussion and Analysis, related compensation tables, and the accompanying narrative disclosure, is hereby APPROVED."
While this say on pay vote is advisory and therefore will not be binding on the Company, our Compensation Committee and
Board value the opinions of our stockholders. Accordingly, to the extent there is a significant majority vote approving or disapproving
the compensation of our named executive officers, we expect to take into account the outcome of the vote when considering future
executive compensation.
THE BOARD RECOMMENDS A VOTE "FOR" THE APPROVAL OF THE
COMPENSATION OF OUR NAMED EXECUTIVE OFFICERS, AS DISCLOSED
IN THIS PROXY STATEMENT.
17
PROPOSAL 4
RATIFICATION OF THE APPOINTMENT OF FRIEDMAN LLP AS OUR
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM FOR 2017
The Board of Directors has selected Friedman LLP as the Company’s independent registered public accounting firm for the
fiscal year ending December 31, 2017, and has further directed that management submit the selection of the independent registered
public accounting firm for ratification by the stockholders at the Annual Meeting. Representatives of Friedman LLP are expected to be
available at the Annual Meeting to make a statement if they so desire, and to respond to appropriate questions from stockholders
present at the meeting.
Stockholder ratification of the selection of Friedman LLP as the Company’s independent registered public accounting firm is
not required by our bylaws or otherwise. However, the Board is submitting the selection of Friedman LLP to the stockholders for
ratification as a matter of good corporate practice. If the stockholders fail to ratify the selection, the Audit Committee and the Board
will reconsider whether or not to retain that firm. Even if the selection is ratified, the Audit Committee and the Board in their
discretion may direct the appointment of a different independent registered public accounting firm at any time during the year if they
determine that such a change would be in the best interests of the Company and its stockholders.
Required Vote and Recommendation of Board of Directors
The ratification of Friedman LLP as Evolving Systems’ independent registered public accounting firm is considered a routine
matter for brokers that hold their clients’ shares in "street name" and brokers are entitled to vote these shares on this proposal. The
affirmative vote of a majority of the shares of our common stock, present or represented and voting at the annual meeting, will be
required to ratify the appointment of Friedman LLP as our independent registered public accounting firm. Abstentions will have no
effect on the outcome of the vote with respect to this proposal. Because this is a routine proposal on which a broker or other nominee
is generally empowered to vote, we do not expect any broker non-votes with respect to this proposal.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" PROPOSAL 4,
RATIFICATION OF FRIEDMAN LLP AS OUR INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM FOR 2017.
Fees Billed by Independent Registered Public Accounting Firm
The following table sets forth information regarding fees for services rendered by Friedman LLP related to the fiscal years
ended December 31, 2016 and December 31, 2015:
Types of Fees
Audit Fees .........................................
Other Fees .........................................
Total Fees ..........................................
Fees for 2016
$
$
$
122,500
0
122,500
Fees for 2015
$
$
$
116,000
51,500
167,500
Audit Fees were for professional services for the audit of the consolidated financial statements and other fees for services
that only our independent registered public accounting firm can perform, such as the review of our interim consolidated financial
statements included in our Form 10-Q and 10-Q/A filings, consents and assistance with and review of documents filed with the SEC.
Other Fees for 2015 were for services related to our acquisition of RateIntegration, Inc.
The Audit Committee has considered the nature of all non-audit services and believes that such services are compatible with
maintaining the independent registered public accounting firm’s independence.
Policy on Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services
The Audit Committee has established a process for review and approval of fees and services of the independent registered
public accounting firm. Requests to the Audit Committee for approval of fees and services for the independent registered public
accounting firm are made in writing or via e-mail by our Chief Financial Officer. The request must be specific as to the particular
services to be provided, but may be either for specific services or a type of service for predictable or recurring services. The Chairman
of the Audit Committee reviews the request and provides a response, in writing or via e-mail, to our Chief Financial Officer and
18
approved requests are subsequently ratified by the Committee as a whole. All of the services provided by the independent registered
public accounting firm in 2016 and 2015 were pre-approved by the Audit Committee.
The Audit Committee, with the ratification of the stockholders, engaged Friedman LLP to perform an annual audit of the
Company’s consolidated financial statements for the fiscal year ended December 31, 2016. Our Audit Committee entered into an
engagement agreement with Friedman LLP which sets forth the terms by which Friedman LLP performed audit services for the
Company.
MANAGEMENT
As of April 17, 2017, the Company’s named executive officers are as follows:
Name
Age
Position
Thomas Thekkethala ....................
55 Chief Executive Officer and President
Daniel J. Moorhead ......................
44 Chief Financial Officer and Secretary
Thomas Thekkethala. For biographical information on Mr. Thekkethala, please see Proposal No. 1, "Election of Directors."
Daniel J. Moorhead was promoted to Chief Financial Officer on January 1, 2016 after having served as Vice President of
Finance & Administration from December 2011 through December 2015. He served as Corporate Controller for the Company from
2002 to 2005 and re-joined the Company in December 2008 in this same role. From August 2005 to November 2008, he was Chief
Financial Officer for High Country Club, a destination club. Prior to 2002, he was the Assistant Controller at Convergent
Communications and Auditor at Malouff and Co., P.C. Mr. Moorhead is a CPA and holds a B.B.A. in Accounting from the
University of Northern Colorado.
EXECUTIVE COMPENSATION
Compensation Discussion and Analysis
Executive Compensation Objectives and Practices
We designed our executive officer compensation program to attract, motivate and retain key executives who drive our
success. We strive to have pay reflect our performance and align with the interests of long-term stockholders, which we achieve with
compensation that:
•
Provides executives with competitive compensation that maintains a balance between cash and stock compensation,
encouraging our executive officers to act as owners with an equity stake in our company;
• Ties a significant portion of total compensation to achievement of the Company’s business goals such as quarterly and
annual revenue, and Adjusted EBITDA targets;
• Enhances retention by having equity compensation subject to multi-year vesting; and
• Does not encourage unnecessary and excessive risk taking.
The Compensation Committee evaluates both performance and compensation to ensure the Company maintains its ability to
attract and retain superior employees in key positions and compensation provided to key employees remains competitive relative to
the compensation paid to similarly situated executives of other software companies our size.
Elements of Executive Compensation
Our compensation for senior executive officers generally consists of the following elements: base salary; performance-based
incentive compensation determined primarily by reference to objective financial operating criteria; long-term equity compensation in
the form of stock options and restricted stock; and employee benefits that are generally available to all our employees.
Base Salary
The Company provides named executive officers and other employees with base salary to compensate them for services
rendered during the fiscal year. It is our policy to set base salary levels taking into account a number of factors, such as annual
19
revenue, the nature of the software business, the structure of other companies’ compensation programs and the availability of
compensation information. When setting base salary levels, in a manner consistent with the objectives outlined above, the
Compensation Committee considers our performance, the individual’s breadth of knowledge and performance and levels of
responsibility. In determining salaries for 2016, the Compensation Committee did not engage compensation consultants.
Mr. Thekkethala joined the Company as President when the Company acquired RateIntegration, Inc. on September 30, 2015
and was promoted to Chief Executive Officer on January 1, 2016. The Compensation Committee elected to keep his annual base
salary unchanged, set at $300,000, from what he received as Chief Executive Officer of RateIntegration. Mr. Moorhead’s annual base
salary in 2016 was $200,000.
Quarterly and Annual Performance-Based Incentive Compensation
Our performance-based incentive compensation program is designed to compensate executives when financial performance
goals are achieved. Executives have the opportunity to earn quarterly and annual cash compensation equal to a percentage of their
base salary. In 2016, on an annual basis, the potential incentive compensation percentages was 50% of the executive’s base salary (as
specifically noted in the "Grants of Plan-Based Awards" table on page 24), payable in five increments (four smaller quarterly
payments and one larger annual payment) based upon quarterly and annual revenue and Adjusted EBITDA targets. Quarterly
incentive compensation payments were equal to 30% of each executive’s total incentive compensation and 70% was based on
achievement of the annual targets. Quarterly incentive compensation was capped at 100% of the quarterly target. Achievement of
100% of the revenue or Adjusted EBITDA target paid out at 75% of the targeted incentive compensation. For extraordinary
performance there was an opportunity to receive more than 100% of the targeted incentive compensation associated with the annual
increment if certain "stretch" Company annual performance targets were attained – specifically, up to 200% for exceeding the annual
revenue target by 20%; and up to 200% for exceeding the Adjusted EBITDA target by 26%. These Company performance targets also
served as the basis for incentive compensation paid to non-executive officers, and certain managers and non-commissioned
employees, to assure that all employees are motivated toward the same corporate financial goals.
Each year the Compensation Committee determines the appropriate performance measurement criteria that it believes best
aligns executive compensation with the Company’s business goals for the year. For fiscal 2016, the Compensation Committee
determined that 50% of incentive compensation would be tied to revenue, and 50% would be tied to profitability, using quarterly and
annual earnings targets before interest, taxes, depreciation, amortization, impairment, stock compensation and gain/loss on foreign
exchange transactions – what we refer to as "Adjusted EBITDA."
For 2016, we did not achieve our revenue or Adjusted EBITDA targets; as a result, our named executive officers did not
receive any incentive compensation payments.
In general, we set targeted levels of performance at the threshold range that require above average performance in order to
qualify for payouts. Payouts above the target range are set at levels that are much more difficult to achieve. See footnote (4) to our
"Summary Compensation Table" for additional information regarding percentage of target levels achieved for 2014 and 2015.
The Compensation Committee’s policy with respect to the adjustment or recovery of compensation in the event of a material
change in our financial statements requiring an accounting restatement is to retain discretion over all pay elements and reserve the
right to reduce or forego future compensation based on any required restatement or adjustment. The Compensation Committee intends
to review its policies with respect to such adjustment or recovery of compensation on an ongoing basis as part of its annual review.
Long-Term Incentive Compensation – Equity Compensation
Our executive officers are eligible for stock awards. We believe that stock awards give executives a significant, long-term
interest in our success, help retain key executives in a competitive market, and align executive interests with stockholder interests and
long-term performance of the Company. We have granted options as well as restricted stock under our 2016 Stock Incentive Plan and
predecessor plans. Stock awards also provide each individual with an added incentive to manage the Company from the perspective of
an owner with an equity stake in the business. Moreover, the long-term vesting schedule (which is generally four years for employees
and one year for non-employee directors, although this may vary at the discretion of the Compensation Committee) encourages a
long-term commitment to the Company by our executive officers and other participants. Each year the Compensation Committee
reviews the number of shares owned by, or subject to options held by, each executive officer, and additional awards are considered
based upon the executive’s past performance, as well as anticipated future performance, of the executive officer. The Compensation
Committee continues to believe that equity compensation should be an important element of the Company’s compensation package.
Typically, we have awarded stock options to executives upon joining the Company and thereafter grants may be at the
discretion of the Compensation Committee. Sometimes we grant options upon the occurrence of an event, such as a promotion or an
20
acquisition. Generally, options are priced at the closing price of the Company’s common stock on the date of each grant, or, in the
case of new employees, such later date as the employee joins the Company. We also have granted restricted stock to members of the
Board of Directors, executive officers, and a limited number of non-executive officers from time to time.
We do not have a formal written policy relating to the timing of equity awards. We encourage, but we do not require, that our
executive officers own stock in the Company.
Retirement and Other Benefits
All employees in the United States who are at least twenty-one years of age and who have worked for the Company for a
period of 30 days are eligible to participate in our 401(k) plan.
Stock Purchase Plan
The Company maintains an employee stock purchase plan (the "Purchase Plan"). Generally, any employee, including each
named executive officer, who is customarily employed at least 20 hours per week and five months per calendar year by the Company
(or by any parent or subsidiary of the Company) on the first day of an offering is eligible to participate. Offerings occur quarterly.
Employees who own 5% or more of the Company’s common stock may not participate in the Purchase Plan.
No employee may accrue the right to purchase more than 10,000 shares in any offering period or more than $25,000 worth of
common stock (determined at the fair market value of the shares at the time such rights are granted) in any calendar year. Rights
granted under the Purchase Plan are not transferable and may be exercised only by the employee to whom such rights are granted.
Employees are eligible to participate in the first offering commencing after the date they are employed by the Company or an
affiliate of the Company. Subject to the limitations described above, employees who participate in an offering may have up to 15% of
their compensation withheld pursuant to the Purchase Plan and applied at the end of each offering period to the purchase of shares of
common stock. The price of common stock purchased under the Purchase Plan is equal to 85% of the lower of the fair market value of
the common stock on the commencement date of each offering period or the purchase date. Employees may end their participation in
the offering at any time prior to the end of the offering and participation ends automatically upon termination of employment with the
Company.
Rights granted under the Purchase Plan are intended to qualify for favorable federal income tax treatment associated with
rights granted under an employee stock purchase plan which qualifies under provisions of Section 423 of the Internal Revenue Code.
For U.S.-based employees, no income will be taxable to a participant until disposition of the acquired shares, or until the participant’s
death while holding the acquired shares, and the amount of taxation will depend upon the holding period of the acquired shares.
Employees located outside of the United States may be subject to different tax treatment based upon local tax laws.
Life Insurance and Disability Insurance
Our executive officers have the same life insurance and disability benefits as our U.S.-based employees, namely, a benefit at
the rate of 66-2/3% of an employee’s base pay, with a monthly benefit cap of $5,667.
Perquisites and Other Personal Benefits
We do not provide additional perquisites and other personal benefits to our executive officers.
Indemnification Agreements
We have entered into an indemnification agreement with each of our named executive officers and members of our Board of
Directors. Information regarding those agreements is provided under the heading "Certain Relationships and Related Transactions"
on page 31.
Employment and Severance Agreements
Our named executive officers are employed "at-will," although our Chief Executive Officer and Chief Financial Officer have
severance provisions in their employment agreements providing for payments to them upon termination of employment, subject to
certain limitations. Information regarding potential payments and benefits under these employment agreements is provided under the
heading "Potential Payments Upon Termination or Change of Control" on page 25.
Change of Control Arrangements
The compensation agreements we have entered into with Mr. Thekkethala and Mr. Moorhead contain change of control
benefits. In our experience, change of control benefits for executive officers are common among our peer group, and our Board of
Directors and Compensation Committee believe that providing these arrangements to our named executive officers will protect
stockholders’ interests in the event of a change of control by enabling executives to consider corporate transactions that are in the best
21
interests of the stockholders and other constituents of the Company without undue concern over whether the transaction may
jeopardize the executive’s own employment. Information regarding potential payments and benefits under such arrangements is
provided under the heading "Potential Payments Upon Termination or Change of Control" on page 25.
Limitation on Deduction of Compensation Paid to Certain Executive Officers
Section 162(m) of the Internal Revenue Code, or Section 162(m), generally limits the Company deduction for federal income
tax purposes to no more than $1 million of compensation paid to each of the named executive officers in a taxable year. Compensation
above $1 million may be deducted if it is "performance-based compensation" within the meaning of the Code. While the
Compensation Committee considers deductibility as one factor in determining executive compensation, in some cases the
Compensation Committee may decide that it is not possible to satisfy all of the conditions of Section 162(m) for deductibility and still
meet our compensation needs. In some circumstances, compensation that we provide may not satisfy all of the requirements for
deductibility under Section 162(m).
Compensation of Chief Executive Officer
On January 1, 2016, the Board promoted Mr. Thekkethala, President of the Company, to the position of Chief Executive
Officer. Mr. Thekkethala’s annual base salary is $300,000 and his potential incentive compensation percentage is 50% of his base
salary. In 2016 he was also eligible to receive commissions on certain carry-over RateIntegration contracts. In 2016, Mr. Thekkethala
was paid $61,626 in commission on these contracts.
COMPENSATION COMMITTEE REPORT
The Compensation Committee of the Board of Directors has reviewed and discussed the Compensation Discussion and
Analysis required by Item 402(b) of Regulation S-K with management and, based on such review and discussions, the Compensation
Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in this proxy
statement and the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.
THE COMPENSATION COMMITTEE
David J. Nicol, Chairman
David S. Oros
Richard R. Ramlall
COMPENSATION RISK ASSESSMENT
The Compensation Committee has discussed the concept of risk as it relates to our compensation programs and the
Committee does not believe our compensation programs encourage excessive or inappropriate risk taking. We structure our pay to
consist of fixed and variable compensation and the variable portions (cash and equity) are designed to reward both short- and
long-term corporate performance. Our employees are encouraged to take a balanced approach that focuses on revenue, profitability
and our new products, and our targets are applicable to our executives and employees alike, thus encouraging consistent behavior
across the organization.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Messrs. Nicol, Oros and Ramlall served as members of the Compensation Committee of the Board of Directors during fiscal
2016. None of the members of the Compensation Committee were, at any time during fiscal 2016, nor at any other time, officers or
employees of the Company. No member of the Compensation Committee or executive officer of the Company has a relationship that
would constitute an interlocking relationship with executive officers or directors of another entity.
22
2016 SUMMARY COMPENSATION TABLE
The table below summarizes the total compensation paid to or earned by each of the named executive officers for the fiscal years
ended December 31, 2016, December 31, 2015 and December 31, 2014.
(a)
(b)
(c)
(d)
(e)
Name and
Principal Position (1)
Year
Salary
($)
Stock
Awards
($) (2)
Option
Awards
($) (3)
(f)
Non-Equity
Incentive Plan
Compensation
($) (4)
(g)
(h)
All Other
Compensation
($) (5)
Total
($)
Thomas Thekkethala
President and Chief Executive
Officer ...............................................
2016
2015
$ 300,000
$ 75,000
$
─
$ 90,000
$
$
─
96,261
$
$
─
─
$
$
78,230
1,500
$
$
378,230
262,761
Daniel J. Moorhead
Chief Financial Officer
and Secretary ......................................
2016
$ 200,000
2015
2014
$ 200,000
$ 200,000
$
$
$
─ $
─ $
─ $
35,909 $
13,867 $
21,065 $
─ $
27,392 $
263,301
─ $
49,763 $
22,664 $
26,482 $
236,531
297,310
(1) Mr. Thekkethala was named President of the Company on September 30, 2015 when the Company acquired RateIntegration, Inc.
d/b/a Sixth Sense Media. He was promoted to the Chief Executive Officer position on January 1, 2016. Daniel J. Moorhead served
as the Company’s Vice President of Finance & Administration in calendar year 2015 and was promoted to Chief Financial Officer on
January 1, 2016.
(2) The amounts in column (d) reflect the grant date fair value of restricted stock awards granted under the Company’s 2007 Stock
Incentive Plan during the fiscal year noted, computed in accordance with FASB ASC Topic 718. For further information on these
awards, see Note 9, "Share Based Compensation" of our consolidated financial statements included in Form 10-K for the year ended
December 31, 2016, filed with the SEC on March 28, 2017.
(3) The amounts in column (e) reflect the grant date fair value of stock options granted in the associated fiscal year granted pursuant to
the Company’s 2007 Stock Incentive Plan, computed in accordance with FASB ASC Topic 718. For further information on these
awards, see the Grants of Plan-Based Awards table on page 24 of this proxy statement and Note 9, "Share Based Compensation" of
our consolidated financial statements included in Form 10-K for the year ended December 31, 2016, filed with the SEC on March 28,
2017.
(4) The amounts shown in column (f) represent incentive compensation earned for 2016, 2015 and 2014, some of which was paid in the
subsequent calendar year. The Company achieved incentive compensation targets established by the Compensation Committee as
follows: In 2016: first quarter: 0%; second quarter: 0%; third quarter: 0%; fourth quarter: 0%; annual: 0%; and full year: 0%. In
2015: first quarter: 0%; second quarter: 0%; third quarter: 0%; fourth quarter: 0%; annual: 0%; and full year: 0%. In 2014: first
quarter: 0%; second quarter: 87%; third quarter: 50%; fourth quarter: 50%; annual: 59%; and full year: 55%.
(5) Column (g) reflects amounts paid for each named executive officer as follows. Excluded from these amounts are premiums paid by
the Company for group life and medical insurance also available to non-executive employees:
Named Executive Officer
Thomas Thekkethala ...................
Daniel J. Moorhead .....................
Retirement Plan
Matching
Contributions
Unused Paid
Time Off
Commission and
Other Payments
$
$
$
$
$
7,950
1,500
6,623
7,665
6,867
$
$
$
$
$
8,654
─
20,769
14,999
19,615
$
61,626 *
$
─
Year
2016
2015
2016
2015
2014
* See page 22 for a discussion of Mr. Thekkethala 's earned commissions.
23
2016 GRANTS OF PLAN-BASED AWARDS
Estimated future payouts under
non-equity incentive plan awards
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
(i)
Name
Thomas Thekkethala (3) ............
Grant Date
Threshold
($)
$
─
Target
($) (1)
150,000
Maximum
($)
300,000
Daniel J. Moorhead (4) ................
3/9/2016 $
─ $ 100,000 $ 200,000
All other
stock
awards;
Number of
shares of
stock
(#) (2)
All other
option
awards:
number of
securities
underlying
options
(#)
Exercise
price of
option
awards
($/share)
Grant date
fair value of
stock and
option
awards
($)
─
─
─ $
─ $
─
50,000 $
5.28 $
35,909
(1) Columns (c), (d) and (e) reflect the amounts that would have been earned by the named executive officers had we achieved our
2016 performance objectives established by the Compensation Committee (see "Compensation Discussion and Analysis"
discussion on page 19). Target amounts shown in column (d) would have been earned if we achieved 103% of our annual revenue
target and 102% of our Adjusted EBITDA target. The maximum amount would have been earned if we achieved 123% of our
annual revenue target and 129% of our annual Adjusted EBITDA target.
(2) The amounts in column (i) reflect the grant date fair value of restricted stock awards and stock options granted under the Company’s
2007 Stock Incentive Plan during fiscal year 2016, computed in accordance with FASB ASC Topic 718. For further information on
these awards, see Note 9, "Share Based Compensation" of our consolidated financial statements included in Form 10-K for the year
ended December 31, 2016, filed with the SEC on March 28, 2017.
(3) Mr. Thekkethala’s 2016 compensation plan provided for target incentive pay equal to 50% of his base salary.
(4) Mr. Moorhead’s 2016 compensation plan provided for target incentive pay equal to 50% of his base salary.
OUTSTANDING EQUITY AWARDS AT DECEMBER 31, 2016
(a)
Name
Thomas Thekkethala ..............
Daniel J. Moorhead .................
Option Awards (1)
(b)
Number of
Securities
Underlying
Unexercised
Options
(#) Exercisable
(c)
Number of
Securities
Underlying
Unexercised
Options
(#) Unexercisable
31,250
68,750
9,375
2,187
3,437
2,343
2,590
2,280
5,945
40,625
2,813
1,563
157
─
─
─
(d)
(e)
Option
Exercise Price
($/share)
$
$
$
$
$
$
$
$
6.00
5.28
8.96
10.90
6.45
4.42
3.72
1.00
Option
Expiration
Date
9/29/2025
3/8/2026
1/28/2025
1/20/2024
1/21/2023
1/5/2022
1/6/2020
11/30/2018
Stock Awards
(f)
Number of
shares of
stock that
have not
vested
(#)(2)
(g)
Market value
of shares of
stock that have
not vested
($)(3)
11,250
$
46,125
─
─
(1) Options were granted ten years prior to the option expiration date. Options generally vest at a rate of 25% per year over the first
four years of the ten-year option term, and will be fully vested four years after the date of grant.
(2) One-quarter of the restricted stock will vest on the first anniversary date of the grant of the award, and the remaining three-quarters
will vest over the remaining three years, with full vesting of the award by November 10, 2019.
(3) Market value was calculated by multiplying the number of shares shown in the table by $4.10, which was the closing price per
share on December 31, 2016, the last day of our fiscal year.
24
The table below reflects options exercised by the named executive officers and vesting of restricted stock awards during fiscal year 2016.
2016 OPTION EXERCISES AND STOCK VESTED
Option Awards (1)
Stock Awards (2)
Name
Number of shares
acquired on exercise
(#)
Thomas Thekkethala ...................
Daniel J. Moorhead .....................
─
─
Value realized
on exercise ($)
$
$
─
─
Number of shares
acquired on vesting
(#)
3,750
─
Value realized
on vesting
($)
$ 16,313
$
─
(1) Neither of our named executive officers exercised options in 2016.
(2) Represents the aggregate dollar amount realized by the named executive officer upon vesting of restricted stock, computed by
multiplying the number of shares of stock by the market value of the underlying shares on the vesting dates.
The Company does not maintain any defined benefit retirement plans. In the United States, the Company maintains a 401(k)
plan; in the United Kingdom, the Company maintains a defined contribution pension benefit plan.
PENSION BENEFITS
COMPENSATION AGREEMENTS
General Overview
Our compensation arrangement with our executive officers provides for base salary and incentive compensation. In 2016,
potential incentive compensation of our named executive officers was 50% of the executive’s base salary, and was payable if we
attained targets established by our Compensation Committee for quarterly and annual revenue and Adjusted EBITDA. Quarterly
incentive targets were capped at 100%; there was a potential to earn in excess of 100% of the annual target if we exceeded the annual
targets. See the "Grants of Plan-Based Awards Table" on page 24 for more information about the "stretch" amounts, as well as the
"Executive Compensation, Quarterly and Annual Performance-Based Incentive Compensation" section on page 20 for percentages
achieved in 2016.
On September 30, 2015, the Company entered into an employment agreement with Mr. Thekkethala which generally
provides that in the event the Company terminates his employment, other than for cause, death or disability, he will be paid severance
pay. The amount of his severance is described below under the heading "Potential Payments Upon Termination or Change of
Control." In exchange for severance, Mr. Thekkethala is required to execute a full release of all employment claims with the
Company and agree to not compete with us and to not solicit our employees for the period of time during which severance is paid.
The employment agreement does not change the "at will" nature of Mr. Thekkethala’s employment with the Company. Either the
Company or the executive may terminate his employment at any time.
On January 1, 2016, the Company entered into an employment agreement with Mr. Moorhead which generally provides that
in the event the Company terminates his employment, other than for cause, death or disability, he will be paid severance pay. The
amount of his severance is described below under the heading "Potential Payments Upon Termination or Change of Control." In
exchange for severance, Mr. Moorhead is required to execute a full release of all employment claims with the Company and agree to
not compete with us and to not solicit our employees for the period of time during which severance is paid. The employment
agreement does not change the "at will" nature of Mr. Moorhead’s employment with the Company. Either the Company or the
executive may terminate his employment at any time.
POTENTIAL PAYMENTS UPON TERMINATION OR CHANGE OF CONTROL
The tables below reflect the potential amount of compensation for each of the named executive officers in the event of
termination of such executive’s employment. The amount of compensation payable to each named executive officer upon voluntary
termination, involuntary not-for-cause termination, retirement, disability or death, and termination following a change of control of the
executive is shown below. The amounts shown assume that such termination was effective as of December 31, 2016 and thus include
amounts earned through such time and are estimates of the amounts which would be paid to the executives upon their termination. The
25
actual payments to Mr. Thekkethala or Mr. Moorhead may be more or less than the amounts described below. In addition, the
Company may enter into new arrangements or modify these arrangements from time to time.
Payments Made Upon Termination
Regardless of the manner in which a named executive officer’s employment terminates, the executive is entitled to receive
amounts earned during his term of employment. Such amounts include:
•
•
•
•
non-equity incentive compensation earned through the date of separation. Quarterly and annual incentive compensation
payments are pro-rated to the date of separation;
vested stock options, which must be exercised within three (3) months, or for options granted on or after December 10, 2009,
six (6) months of the date of separation, except in the case of disability (12 months), death (18 months) or, in the case of a
change of control of the Company (see discussion below);
stock vested on the date of separation pursuant to restricted stock awards; and
salary and unused paid time off through the date of separation.
Involuntary Not-for-Cause Termination
If the executive’s employment is terminated for reasons other than cause, or the executive resigns for "Good Reason," he will
receive severance pay equal to 12 months of base pay and incentive compensation at 100% achievement. "Good Reason" is defined in
the employment agreement, but generally is a material diminution in title, status, authority, duties or responsibilities; a requirement to
relocate more than 25 miles away from the Company’s current location or such executive principal office; a reduction in
compensation of 5% or more; or a failure by the Company to pay compensation when due.
Voluntary Termination or Retirement
Except for amounts described under "Payments Made Upon Termination," the Company does not have an agreement or
practice to pay a named executive officer on voluntary termination or retirement.
Disability or Death
In the event of the disability or death of the executive, the executive will receive benefits under the Company’s disability
benefits or payments under the Company’s life insurance benefits, as applicable.
Change of Control
Upon a Change of Control and a "Qualified Termination" (described below) each executive will receive the following
severance benefits:
•
•
•
•
•
an amount equal to 18 months of his base salary, payable in equal increments over an equal period (the "Severance
Period") (or such shorter period as required for compliance with Section 409A of the U.S. Internal Revenue Code),
in the Company’s normal payroll cycles;
an amount equal to 1.5 times the executive’s target incentive compensation, assuming achievement at 100% of the
performance goals, payable in equal installments over his Severance Period;
continuation of benefits under the Company’s health insurance plan as provided by law, with the Company continuing its
contributions to the premiums during the executive’s Severance Period;
tax advice services in an amount not to exceed $7,500; and
all stock options and restricted stock held by the executive will automatically vest and become exercisable.
A Qualified Termination will occur upon any of the following:
•
•
termination of the executive’s employment by us, without cause, within 180 days before or 365 days after a change of
control; or
resignation by the executive for "Good Reason" during the same period.
26
None of the executives will receive severance payments solely upon the occurrence of a change of control, except that 50%
of the executive’s outstanding equity awards (options and restricted stock) will automatically vest upon a change of control even if the
executive’s employment is not terminated.
For this purpose, a change of control will occur upon:
•
•
•
the date any person or group acquires ownership of stock of the Company that, together with stock held by the person or
group, constitutes more than 50% of the total fair market value or total voting power of the stock of the Company, the
liquidation or dissolution of the Company or the sale of all of substantially all (greater than 75%) of the fair market value
of the assets of the Company;
the acquisition by any person, entity or group, within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities
Exchange Act, of beneficial ownership within the meaning of Rule 13d-3 of the Securities Exchange Act, of more than
50% of either the then outstanding shares of the Company’s common stock or the combined voting power of the
Company’s then outstanding voting securities entitled to vote generally in the election of directors; or any one person, or
more than one person acting as a group, acquires or has acquired during the 12-month period ending on the date of the
most recent acquisition by such person or persons, ownership of stock of the Company possessing 50% or more of the
total voting power of the Company’s stock; or
the date the individuals who constituted a majority of the Board as of the date of execution of the employment agreement
(the "Incumbent Board") cease for any reason to constitute at least a majority of the Board provided that any individual
who becomes a member of the Board following such date who was approved by a majority of the Incumbent Board shall
be considered a member of the Incumbent Board.
In exchange for severance payments and benefits, the executive will be required to execute a full release of employment
claims with the Company and agree not to compete with us and not to solicit our employees during the Severance Period.
Thomas Thekkethala
The following table shows the potential payments upon termination or a change of control of the Company for Thomas
Thekkethala, our President and Chief Executive Officer.
Executive Benefits and Payments
Upon Separation
Cash Compensation
• Base Salary ....................................................
• Incentive Compensation .................................
Equity Compensation
• Stock Options (1)
o Unvested and accelerated ........................
• Restricted Stock (2)
o Unvested and accelerated ........................
Benefits and Perquisites
• Health and Welfare Benefits (3) ....................
• Accrued Paid Time Off ..................................
• Tax services ...................................................
Total ......................................................................
Involuntary Not-for-Cause
Termination (other than
Following
Change of Control)
Change of Control
Without Qualified
Termination
Change of Control
With Qualified
Termination
$
$
$
$
$
$
$
$
300,000
150,000
0
0
0
17,308
0
467,308
$
$
$
$
$
$
$
$
0
0
0
23,063
0
0
0
23,063
$
$
$
$
$
$
$
$
450,000
225,000
0
46,125
0
17,308
7,500
745,933
(1) The payments relating to stock options represent the value as of December 31, 2016, calculated by multiplying the number of
unvested options by the difference between the exercise price and the closing price of our common stock on December 31, 2016 ($4.10).
All of Mr. Thekkethala’s unvested stock options had an exercise price greater than the closing price of our common stock on
December 31, 2016.
(2) Mr. Thekkethala had 11,250 shares of unvested restricted stock on December 31, 2016.
(3) Mr. Thekkethala does not participate in the Company's health plan.
27
Daniel J. Moorhead
The following table shows the potential payments upon termination or a change of control of the Company for Daniel J.
Moorhead, our Chief Financial Officer.
Executive Benefits and Payments
Upon Separation
Cash Compensation
• Base Salary .................................................
•
Incentive Compensation ..............................
Equity Compensation
• Stock Options (1)
o Unvested and accelerated ........................
• Restricted Stock (2)
o Unvested and accelerated ........................
Benefits and Perquisites
• Health and Welfare Benefits ..........................
• Accrued Paid Time Off ..................................
• Tax services ...................................................
Total ......................................................................
Involuntary Not-for-Cause
Termination (other than
Following
Change of Control)
Change of Control
Without Qualified
Termination
Change of Control
With Qualified
Termination
$
$
$
$
$
$
$
$
200,000
100,000
0
0
12,071
9,615
0
321,686
$
$
$
$
$
$
$
$
0
0
0
0
0
0
0
0
$
$
$
$
$
$
$
$
300,000
150,000
0
0
18,106
9,615
7,500
485,221
(1) All of Mr. Moorhead’s unvested stock options had an exercise price greater than the closing price of our common stock on
December 31, 2016.
(2) Mr. Moorhead did not have any unvested restricted stock on December 31, 2016.
TABLE OF EQUITY COMPENSATION PLANS
The following table contains summary information as of December 31, 2016 concerning the Company’s Employee Stock
Purchase Plan, 1996 Stock Option Plan, 2007 Amended and Restated Stock Incentive Plan and 2016 Stock Incentive Plan. All of the
Plans were approved by the stockholders. See "Security Ownership of Certain Beneficial Owners and Management."
Equity Compensation Plans
Approved by Security Holders
1996 Stock Option Plan ...........................................
2007 Amended Stock Incentive Plan .......................
2016 Stock Incentive Plan ......................................
Employee Stock Purchase Plan ...............................
Number of shares to
be issued upon exercise
of outstanding options,
warrants and rights
Weighted-average
exercise price of
outstanding options,
warrants and rights
Number of shares
remaining available
for future issuance
under equity
compensation plan
0
574,039
0 (1)
309,336 (2)
250,000 (3)
51,218
(1) Our 1996 Stock Option Plan expired on January 18, 2006. As a result, no additional equity awards can be made under this plan
and all options granted under this plan expired as of January 18, 2016.
(2) As of April 17, 2017, the record date, there were no shares remaining available for future issuance under the 2007 Amended
Stock Incentive Plan.
(3) Our 2016 Stock Incentive Plan was approved by the stockholders on June 15, 2016. As of April 17, 2017, 218,866 shares have
been issued from the Plan.
28
INFORMATION REGARDING BENEFICIAL OWNERSHIP OF PRINCIPAL STOCKHOLDERS,
DIRECTORS, AND MANAGEMENT
The following table sets forth certain information regarding the ownership of the Company’s common stock as of April 17,
2017 by: (i) each director and nominee for director; (ii) each executive officer named in the Summary Compensation Table; (iii) all
executive officers and directors of the Company as a group; and (iv) all those known by the Company to be beneficial owners of more
than five percent (5%) of its common stock.
This table is based upon information supplied by officers, directors and principal stockholders and Schedules 13D and 13G
filed with the Securities and Exchange Commission (the "SEC"). Unless otherwise indicated in the footnotes to this table and subject
to community property laws where applicable, the Company believes that each of the stockholders named in this table has sole voting
and investment power with respect to the shares indicated as beneficially owned. Applicable percentages are based on shares
outstanding on April 17, 2017, adjusted as required by rules promulgated by the SEC.
Name and Address of Beneficial Owner
David J. Nicol (2)
c/o Evolving Systems, Inc.
9777 Pyramid Ct, Suite 100
Englewood, CO 80112 ......................................................................
David S. Oros (3)
c/o Evolving Systems, Inc.
9777 Pyramid Ct., Suite 100
Englewood, CO 80112 ......................................................................
Richard R. Ramlall
c/o Evolving Systems, Inc.
9777 Pyramid Ct., Suite 100
Englewood, CO 80112 ......................................................................
Julian D. Singer (4)
c/o Evolving Systems, Inc.
9777 Pyramid Ct., Suite 100
Englewood, CO 80112 ......................................................................
Matthew Stecker (5)
c/o Evolving Systems, Inc.
9777 Pyramid Ct., Suite 100
Englewood, CO 80112 ......................................................................
Thomas Thekkethala (6)
c/o Evolving Systems, Inc.
9777 Pyramid Ct., Suite 100
Englewood, CO 80112 .....................................................................
Daniel J. Moorhead (7)
c/o Evolving Systems, Inc.
9777 Pyramid Ct., Suite 100
Englewood, CO 80112 .....................................................................
All executive officers and directors as a group
Shares of Common Stock
Beneficially Owned (1)
Number of
Shares
Percentage
Ownership
93,859
*
220,095
1.8 %
81,200
* %
450,138
3.6 %
26,250
* %
342,407
2.8 %
53,114
* %
(7 persons) (8) ...................................................................................
1,268,488
10.2 %
Piton Capital Partners LLC (9)
c/o Kokino LLC
201 Tresser Boulevard, 3rd Floor
Stamford, CT 06901 ..........................................................................
660,872
5.3 %
29
Name and Address of Beneficial Owner
Karen Singer, Trustee of the
Shares of Common Stock
Beneficially Owned (1)
Number of
Shares
Percentage
Ownership
Singer Children’s Management Trust (10)
212 Vaccaro Drive
Cresskill, NJ 07626 ..........................................................................
2,645,638
21.2 %
*
Less than one percent (1.0%).
(1) Percentage of common stock beneficially owned is based on 12,464,900 shares of common stock outstanding on April 17, 2017.
(2)
Includes approximately 5,000 shares purchased on the open market. Mr. Nicol holds his shares in a brokerage account which
permits borrowing on margin.
(3)
Includes approximately 176,000 shares purchased on the open market.
(4)
Includes approximately 245,000 shares purchased on the open market.
(5)
Includes 1,250 shares subject to stock options exercisable within 60 days of April 17, 2017.
(6)
Includes approximately 65,000 shares purchased on the open market.
(7)
Includes 3,749 shares subject to stock options exercisable within 60 days of April 17, 2017.
(8)
Includes 4,999 shares subject to stock options exercisable within 60 days of April 17, 2017.
(9) Based solely upon the Schedule 13D information filed with the SEC by Piton Capital Partners LLC on April 27, 2017.
(10) Based solely upon the Schedule 13D/A information filed with the SEC by Karen Singer on April 7, 2017. The reporting person
disclaims beneficial ownership of these securities, except to the extent of her pecuniary interest therein.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires our directors and executive officers, and persons who own more than ten percent
of a registered class of our equity securities, to file with the SEC initial reports of ownership and reports of changes in ownership of
our common stock and other equity securities. Officers, directors and greater than ten percent stockholders are required by SEC
regulation to furnish us with copies of all Section 16(a) forms they file.
To our knowledge, based solely on a review of the copies of such reports furnished to us and written representations that no
other reports were required, during the fiscal year ended December 31, 2016, all Section 16(a) filing requirements applicable to our
officers, directors and greater than ten percent beneficial owners were complied with.
REPORT OF THE AUDIT COMMITTEE
The Audit Committee of the Board of Directors (the "Audit Committee") is comprised of three (3) directors appointed by the
Board of Directors. Each of the committee members who served during 2016, Messrs. Nicol, Oros and Stecker, satisfied the
independence and financial management expertise requirements of NASDAQ’s Audit Committee Policy, and Mr. Nicol has been
designated by the Board as the Audit Committee’s "financial expert." For a description of Mr. Nicol’s relevant experience, please see
his biographical information contained in Proposal 1 of this proxy statement.
On May 25, 2000, the Board of Directors adopted a charter for the Audit Committee (the "Charter"). An Amended and
Restated Charter was adopted by the Board of Directors on March 4, 2004. A copy of the Amended and Restated Charter can be found
on our website, www.evolving.com, under "Investors — Corporate Governance."
Management is responsible for the preparation, presentation, and integrity of our financial statements, accounting and
financial reporting principles, and internal controls and procedures designed to ensure compliance with accounting standards,
30
applicable laws and regulations. Our independent registered public accounting firm is responsible for performing an independent audit
of the consolidated financial statements and expressing an opinion on the conformity of those financial statements with accounting
principles generally accepted in the United States of America.
The Audit Committee’s primary responsibilities are to:
(1)
(2)
(3)
hold meetings periodically with the independent registered public accounting firm, the Board and management to review
and monitor the adequacy and effectiveness of reporting, internal controls, risk assessment and compliance with
Company policies;
establish policies and procedures for appointing, reviewing and overseeing the performance and independence of the
independent registered public accounting firm;
review with the independent registered public accounting firm and financial management of the Company and approve
the plan and scope of audit and permissible audit-related work;
(4)
review financial press releases with management;
(5)
review consolidated financial statements and disclosures;
(6)
pre-approve all audit and permitted non-audit services; and
(7)
develop procedures for receiving, on an anonymous basis, and responding to concerns about our accounting and auditing
practices.
Review of Fiscal Year 2016 Consolidated Financial Statements
In connection with its review of our Fiscal Year 2016 Consolidated Financial Statements, the Audit Committee has:
(1)
reviewed and discussed the audited consolidated financial statements with management;
(2)
(3)
discussed with Friedman LLP, our independent registered public accounting firm, the matters required to be discussed by
Public Company Accounting Oversight Board Auditing Standard No. 1301, Communications with Audit Committees; and
received from Friedman LLP the written disclosures and letter required by applicable requirements of the Public
Company Accounting Oversight Board and discussed with Friedman LLP their independence.
Based upon the review and discussions described above, the Audit Committee recommended to the Board of Directors that
the audited consolidated financial statements for fiscal year ended December 31, 2016 be included in the Company’s 2016 Annual
Report on Form 10-K.
BY THE AUDIT COMMITTEE OF THE BOARD OF DIRECTORS:
David J. Nicol, Chairman
David S. Oros
Matthew Stecker
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Change of Control Provisions with our Named Executive Officers
We have entered into Employment Agreements with our named executive officers which contain a Change of Control
provision. These agreements were approved by our Compensation Committee and are described above in the section entitled
"Potential Payments Upon Termination or Change of Control."
Indemnification Agreements
We have entered into indemnification agreements (the "Indemnification Agreements") with each of our directors and named
executive officers. Subject to the provisions of the Indemnification Agreements, we will indemnify and advance expenses to such
31
directors and executives in connection with their involvement in any event or occurrence which arises in their capacity as, or as a
result of, their position with the Company.
Our Indemnification Agreements are provided as part of the compensation arrangements with our executives, which are
subject to approval of the Compensation Committee. Indemnification for directors was approved by the Board of Directors and is part
of the standard arrangement for all Company directors.
Consulting Agreements with Related Parties
On July 9, 2015, we entered into a Consulting Agreement with Ramlall Partners LLC, a limited liability company in which
Richard Ramlall, one of the members of our Board of Directors, is the principal. Mr. Ramlall has provided investor relations
consulting services to the Company. His Consulting Agreement was terminated as of December 31, 2016. In 2016 we paid Ramlall
Partners LLC $45,500 for services provided under the Agreement. No additional amounts are owed to Ramlall Partners LLC.
On January 1, 2016, we entered into a Consulting Agreement with Thaddeus Dupper, the Company’s former Chief Executive
and Chairman of the Board to provide transition services to the Company. In 2016 we paid Mr. Dupper $21,600 for services provided
under the Agreement. The Agreement was terminated in August 2016. We also entered into a Separation and Release Agreement
with Mr. Dupper under which we paid Mr. Dupper $494,476 in severance and related payments in accordance with his employment
agreement. All payments owed to Mr. Dupper under the Separation and Release Agreement were completed in 2016 and no additional
amounts are owed to Mr. Dupper.
The above agreements were approved by our Board of Directors. Because the value of the agreements was below $120,000,
they were not subject to our related person transactions approval policy and were not separately approved by our Audit Committee.
FORWARD LOOKING STATEMENTS
We caution you that certain information in this proxy statement may contain, in addition to historical information, "forward-
looking" statements within the meaning of the Private Securities Litigation Reform Act of 1995 that are based upon management’s
beliefs, as well as on assumptions made by management. These forward-looking statements involve known and unknown risks,
uncertainties and other factors that cause our actual results, performance or achievements to be materially different from what we say
or imply with such forward-looking statements. When we use the words "may," "will," "expects," "intends," "estimates," "anticipates,"
"believes," "plans," "seeks" or "continues," or similar expressions, we intend to identify forward-looking statements. You should be
aware that the telecommunications industry is changing rapidly, and, therefore, the forward-looking statements and statements of
expectations, plans and intent are subject to a greater degree of risk than similar statements regarding certain other industries.
Although we believe that our expectations with respect to the forward-looking statements are based upon reasonable
assumptions, we cannot assure you that our actual results, performance or achievements will meet these expectations. Other than as
may be required by applicable law, we undertake no obligation to release publicly the results of any revisions to these forward-looking
statements.
WHERE YOU CAN FIND MORE INFORMATION ABOUT EVOLVING SYSTEMS
As a reporting company, we are subject to the informational requirements of the Exchange Act and accordingly file our
annual reports on Form 10-K and Form 10-K/A, quarterly reports on Form 10-Q and 10-Q/A, current reports on Form 8-K, proxy
statements and other information with the SEC. The public may read and copy any materials filed with the SEC at their Public
Reference Room at 100 F Street NE, Washington, DC 20549. Please call the SEC at (800) SEC-0330 for further information on the
Public Reference Room. As an electronic filer, our public filings are maintained on the SEC’s Internet site that contains reports, proxy
information statements, and other information regarding issuers that file electronically with the SEC. The address of that website is
http://www.sec.gov. In addition, our annual reports on Form 10-K and Form 10-K/A, quarterly reports on Form 10-Q and 10-Q/A,
current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange
Act, may be accessed free of charge through our website, as soon as reasonably practicable after we have electronically filed such
material with, or furnished it to, the SEC. Also, our Code of Business Conduct and Corporate Governance Guidelines, as well as the
Charters for our Audit, Compensation, Nominating and Governance, and Investment Committees are available on our website and
amendments to, or waivers of, the Code of Business Conduct will be disclosed on our website. The address of our website is
www.evolving.com; however, the information found on our website is not part of this proxy statement.
Our common stock is traded on the NASDAQ Capital Market under the symbol EVOL.
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This proxy statement has been preceded or accompanied by the Annual Report for the fiscal year ended December 31, 2016.
Stockholders are referred to such report for financial and other information about the activities of the Company.
Our transfer agent is American Stock Transfer & Trust Company, LLC. Their address is 59 Maiden Lane, Plaza Level, New
York, NY 10038.
You may request copies of documents we have filed with the SEC, as well as copies of documents that appear on our
website, from us, without charge, upon written or oral request to:
Evolving Systems, Inc.
9777 Pyramid Ct., Suite 100
Englewood, CO 80112
Attn: Daniel J. Moorhead, Chief Financial Officer & Secretary
1-800-649-6562
STOCKHOLDER PROPOSALS FOR THE 2018 ANNUAL MEETING OF STOCKHOLDERS
If any stockholder intends to present a proposal to be considered for inclusion in the Company’s proxy materials in
connection with the 2018 Annual Meeting of Stockholders, the proposal must be in proper form (per SEC Regulation 14A,
Rule 14a-8 – Stockholder Proposals) and received by the Secretary of the Company on or before January 5, 2018. A stockholder
proposal or nomination for director for consideration at the 2018 annual meeting but not included in the proxy statement and proxy
must be received by the Secretary of Evolving Systems no earlier than March 16, 2018 and no later than April 15, 2018. The
submission of a stockholder proposal does not guarantee that it will be presented at the annual meeting. Stockholders interested in
submitting a proposal are advised to contact knowledgeable legal counsel with regard to the detailed requirements of applicable
federal securities laws and Evolving Systems’ bylaws, as applicable.
The Board of Directors knows of no other matters that will be presented for consideration at the Annual Meeting. If any other
matters are properly brought before the meeting, it is the intention of the persons named in the accompanying proxy to vote on such
matters in accordance with their best judgment.
OTHER MATTERS
By Order of the Board of Directors,
Daniel J. Moorhead
Chief Financial Officer & Secretary
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Appendix A
2016 Stock Incentive Plan, as Amended
EVOLVING SYSTEMS, INC.
2016 STOCK INCENTIVE PLAN
Adopted by the Board of Directors on March 9, 2016
Approved by the Stockholders on June 15, 2016
Amended by the Board of Directors on February 14, 2017
1.
GENERAL
(a)
Purpose. The primary purposes of the Evolving Systems, Inc. 2016 Stock Incentive Plan are to attract, retain and
motivate employees, directors and consultants, to compensate them for their contributions to the growth and profits of the Company
and its Affiliates and to encourage them to own Common Stock.
(b)
Types of Awards. The Plan permits the award of (i) Incentive Stock Options, (ii) Nonstatutory Stock Options,
(iii) Stock Appreciation Rights, (iv) Restricted Stock, (v) Restricted Stock Units, (vi) Performance Awards, and (vii) Other Stock-
Based Awards.
2.
DEFINITIONS
Except as otherwise provided in an applicable Award Agreement, the following capitalized terms shall have the meanings indicated
below for purposes of the Plan and any Award:
(a)
"Affiliate" means a parent or subsidiary of the Company, with "parent" meaning an entity that controls the Company
directly or indirectly, through one or more intermediaries, and "subsidiary" meaning an entity that is controlled by the Company
directly or indirectly, through one or more intermediaries. Solely with respect to the grant of an Incentive Stock Option, Affiliate
means any parent corporation or subsidiary corporation of the Company, whether now or hereafter existing, as those terms are defined
in Sections 424(e) and (f), respectively, of the Code.
(b)
"Award" means any award of an Option, Stock Appreciation Right, Restricted Stock, Restricted Stock Unit,
Performance Award, or Other Stock-Based Award.
(c)
"Award Agreement" means the written or electronic document setting forth the terms and conditions of an Award.
The Award Agreement is subject to the terms and conditions of the Plan.
(d)
(e)
"Board" means the Board of Directors of Evolving Systems, Inc.
"Change of Control" means the occurrence of any of the following events:
(i)
the date any person or group acquires ownership of stock of the Company that, together with stock held by
the person or group, constitutes more than fifty percent (50%) of the total fair market value or total voting power of the stock of the
Company; (b) a liquidation or dissolution of the Company; or (c) the sale of all or substantially all (greater than seventy five percent
(75%)) of the fair market value of the assets of the Company.
(ii)
the acquisition by any person, entity or "group," within the meaning of Section 13(d)(3) or 14(d)(2) of the
Securities Exchange Act, of beneficial ownership within the meaning of Rule 13-d promulgated under the Securities Exchange Act of
more than fifty percent (50%) of either the then-outstanding shares of the Company's common stock or the combined voting power of
the Company's then-outstanding voting securities entitled to vote generally in the election of directors (hereinafter referred to as the
ownership of a "Controlling Interest") excluding, for this purpose, any acquisitions by (a) the Company or its Affiliates; or (b) any
employee benefit plan of the Company or its Affiliates; or any one person, or more than one person acting as a group, acquires (or has
acquired during the twelve (12) month period ending on the date of the most recent acquisition by such person or persons) ownership
of stock of the Company possessing fifty percent (50%) percent or more of the total voting power of the stock of such corporation; or
(iii)
individuals who constitute the majority of the Board as of the date of this Agreement (the "lncumbent
Board") cease for any reason to constitute at least a majority of the Board; provided that any individual who becomes a member of the
Board after the date of this Agreement whose election, or nomination for election by holders of the Company's securities, was
approved by the vote of at least a majority of the Individuals then constituting the Incumbent Board will be considered a member of
the Incumbent Board.
(iv)
"Code" means the Internal Revenue Code of 1986, as amended, and the applicable rulings, regulations and guidance
any other change in effective control described in Treas. Reg. Section 1.409A(i)(5)(vi).
(f)
thereunder.
1
(g)
"Committee" means the Compensation Committee of the Board which shall consist of three (3) members of the
Board, and, so long as the Singer Children’s Management Trust (the "Trust") is the beneficial owner of no less than twenty percent
(20%) of the Company’s issued and outstanding Common Stock, shall further consist of at least two (2) members of the Board that
have been nominated by the Trust.
(h)
(i)
(j)
"Common Stock" means a share of Evolving Systems, Inc., common stock, $0.001 par value per share.
"Company" means Evolving Systems, Inc., a Delaware corporation.
"Consultant" means any person, including an advisor, engaged by the Company or an Affiliate to render consulting
or advisory services and who is compensated for such services.
(k)
"Continuous Service" means continuous service as an Employee, Director or Consultant to the Company or an
Affiliate. Unless otherwise stated in the applicable Award Agreement, a Participant’s change in position or duties with the Company
or any Affiliate shall not result in interrupted or terminated service, so long as such Participant continues service as an Employee,
Director or Consultant. Whether a termination or interruption in service shall have occurred for purposes of the Plan shall be
determined by the Committee (or its designee), which determination shall be final, binding and conclusive.
(l)
"Covered Employee" means the chief executive officer and other highest compensated officers of the Company for
whom total compensation is required to be reported to stockholders under the Exchange Act, as determined for purposes of Section
162(m) of the Code and other employees who may become subject to such reporting.
(m)
(n)
(o)
"Director" means a member of the Board.
"Dividend Equivalents" means any right granted under Section 11 of the Plan.
"Employee" means any person employed by the Company or an Affiliate, determined in accordance with the
Company’s standard personnel policies and practices.
"Exchange Act" means the U.S. Securities Exchange Act of 1934, as it may be amended from time to time, or any
"Fair Market Value" means, as of any date, the value of the Common Stock of the Company determined as follows:
(i)
If the Common Stock is listed on any established stock exchange, or traded on the Nasdaq Market, the Fair
Market Value of a share of Common Stock shall be the closing sales price for such stock (or the closing bid, if no sales were reported)
as quoted on such exchange or market (or the exchange or market with the greatest volume of trading in Common Stock) on the
determination date, as reported in The Wall Street Journal or such other source as the Board deems reliable. Unless otherwise
provided by the Committee, if there is no closing sales price (or closing bid if no sales were reported) for the Common Stock on the
determination date, then the Fair Market Value shall be the closing sales price (or closing bid if no sales were reported) on the last
preceding date for which such quotation exists.
(ii)
In the absence of such markets for the Common Stock, the Fair Market Value shall be determined in good
faith by the Committee.
"Full-Value Award" means an Award of Restricted Stock, Restricted Stock Units, Performance Award or Other
(p)
successor act thereto.
(q)
(r)
Stock-Based Award.
(s)
"Incentive Stock Option" means an Option granted under Section 6 of the Plan that is intended to meet the
requirements of Section 422 of the Code, or any successor provision thereto.
(t)
"Non-statutory Stock Option" means an Option granted under Section 6 of the Plan that is not intended to be an
Incentive Stock Option.
(u)
(v)
(w)
(x)
(y)
"Option" or "Stock Option" means a right to purchase one or more shares of Common Stock.
"Other Stock-Based Award" means any right granted under Section 10 of the Plan.
"Participant" means an eligible individual who is granted an Award under the Plan.
"Performance Award" means any right granted under Section 9 of the Plan.
"Performance Criteria" means any quantitative or qualitative measures, as determined by the Committee, which
may be used to measure the level of performance of the Company, an Affiliate or any individual Participant during a Performance
Period, including any Qualifying Performance Criteria.
(z)
(aa)
"Performance Period" means any period as determined by the Committee in its sole discretion.
"Person" means any individual, corporation, partnership, association, joint-stock company, trust, unincorporated
organization, or government or political subdivision thereof.
(bb)
"Qualifying Performance Criteria" means one or more of the following performance criteria applied to the
individual, the Company as a whole, an Affiliate, a business unit, or any combination thereof, and measured quarterly, annually or
2
cumulatively over a period of years, on an absolute basis or relative to a pre-established target, to a previous quarter or year’s results
or to a designated comparison group, in each case as specified by the Committee in the Award Agreement: (i) revenue (ii) earnings
before interest, taxes, depreciation and amortization (EBITDA), (iii) adjusted EBITDA (earnings before interest, taxes, depreciation,
amortization, impairment, stock compensation and gain/loss on foreign exchange transaction), (iv) net earnings, (v) net income,
(vi) product-related targets and (vii) cash flow, subject to adjustment by the Committee to remove the effect of charges for
restructurings, discontinued operations, extraordinary items and all items of gain, loss or expense determined to be extraordinary or
unusual in nature or infrequent in occurrence, related to the disposal of a segment or a business, or related to a change in accounting
principle or otherwise.
(cc)
(dd)
(ee)
"Plan" means this Evolving Systems, Inc. 2016 Stock Incentive Plan.
"Restricted Stock" means an Award of shares of Common Stock granted under Section 8 of the Plan.
"Restricted Stock Unit" means a right granted under Section 8 of the Plan that is denominated in shares of Common
Stock.
(ff)
(gg)
(hh)
"Share Reserve" means as defined in Section 4 of the Plan.
"Stock Appreciation Right" means any right granted under Section 7 of the Plan.
"Substitute Award" means an Award granted in substitution for, or in assumption of, outstanding awards previously
granted by an entity acquired by the Company or an Affiliate or with which the Company or Affiliate combines.
3.
PLAN ADMINISTRATION
(a)
Authority of the Committee. Except as otherwise provided herein, the Plan shall be administered by the Committee,
which shall have the power to interpret the Plan and to adopt such rules and guidelines for implementing the terms of the Plan as it
may deem appropriate. The Committee shall have the ability to modify the Plan provisions, to the extent necessary, or delegate such
authority, to accommodate any changes in law and regulations in jurisdictions in which Participants will receive Awards. Subject to
the terms of the Plan and applicable law, the Committee shall have full power and authority to:
(i)
(ii)
(iii)
designate Participants;
determine the type or types of Awards to be granted to each Participant under the Plan;
determine the number of shares of Common Stock to be covered by (or with respect to which payments,
rights, or other matters are to be calculated in connection with) Awards;
(iv)
(v)
determine the terms and conditions of any Award;
determine whether, to what extent, and under what circumstances Awards may be settled or exercised in
cash, shares of Common Stock, other securities, or other Awards, or canceled, forfeited, or suspended, and the method or methods by
which Awards may be settled, exercised, canceled, forfeited, or suspended;
(vi)
determine whether, to what extent, and under what circumstances cash, shares of Common Stock, other
securities, other Awards, and other amounts payable with respect to an Award under the Plan shall be deferred either automatically or
at the election of the holder thereof or of the Committee;
(vii)
interpret and administer the Plan and any instrument or agreement relating to, or Award made under, the
Plan;
establish, amend, suspend, or waive such rules and guidelines;
appoint such agents as it shall deem appropriate for the proper administration of the Plan;
make any other determination and take any other action that the Committee deems necessary or desirable
(viii)
(ix)
(x)
for the administration of the Plan; and
(xi)
correct any defect, supply any omission, or reconcile any inconsistency in the Plan or any Award in the
manner and to the extent it shall deem desirable to carry the Plan into effect.
(b)
Administrative Actions. Unless otherwise expressly provided in the Plan, subject to the limitations described in
subsection (a) above, all designations, determinations, interpretations, and other decisions under or with respect to the Plan or any
Award shall be within the sole discretion of the Committee, may be made at any time, and shall be final, conclusive, and binding upon
all Persons, including the Company, any Affiliate, any Participant, any holder or beneficiary of any Award, any stockholder, and any
employee of the Company or of any Affiliate.
(c)
No Liability. No member of the Committee shall be liable for any action or determination made in good faith with
respect to the Plan, any Award or any Award Agreement.
(d)
Action by the Committee. Notwithstanding anything to the contrary expressed or implied in this Plan, any and all
actions by the Committee required or permitted under this Plan shall require the unanimous approval of all Committee members.
3
4.
SHARES SUBJECT TO THE PLAN
(a)
Shares Available. Subject to adjustment as provided in Section 14 of the Plan, the maximum aggregate number of
shares of Common Stock that may be issued pursuant to Awards granted under the Plan shall be 500,000 shares ("Share Reserve").
Each share of Common Stock issued pursuant to an Award shall reduce the Share Reserve by one (1) share. To the extent that a
distribution pursuant to an Award is made in cash, the Share Reserve shall be reduced by the number of shares of Common Stock
subject to the redeemed or exercised portion of the Award.
(b)
Annual Individual Participant Award Limits. The following calendar year annual limits apply, on a per Participant
basis, to grants of Awards unless the conditions described in subsection (iii) apply or the Committee specifically determines at the
time of grant that the Award is not intended to qualify as performance-based compensation under the Plan: (i) 125,000 shares, subject
to adjustment as provided in Section 14, for grants of stock options, stock appreciation rights, restricted stock awards, restricted stock
units, performance shares and other stock-based awards; and (ii) $0.00 in annual Performance Awards payable in cash or other cash-
based awards. The limit set forth in subsection (i) will not apply in the following circumstances: (iii) the Company acquires all or
substantially all (greater than seventy five percent (75%)) of the fair market value of the assets of another entity or the Company
acquires a Controlling Interest (as defined in Section 2(e) of this Plan) of another entity.
(c)
Changes to the Share Reserve. If an Award granted under the Plan shall for any reason (i) expire, be canceled or
otherwise terminate, in whole or in part, without having been exercised or redeemed in full, (ii) be reacquired by the Company prior to
vesting, or (iii) be repurchased at cost by the Company prior to vesting, the shares of Common Stock not acquired by the Participant
under such Award shall revert or be added to the Share Reserve and become available for issuance under the Plan; provided, however,
that shares of Common Stock shall not revert or be added to the Share Reserve that had been (A) tendered in payment of an Option,
(B) withheld by the Company to satisfy any tax withholding obligation, or (C) purchased by the Company with the proceeds from the
exercise of Options, and provided, further, that shares of Common Stock covered by a Stock Appreciation Right, to the extent the
right is exercised and settled in shares of Common Stock, and whether or not shares of Common Stock are actually issued to the
Participant upon exercise of the Stock Appreciation Right, shall be considered issued or transferred pursuant to the Plan.
(d)
Source of Shares. Any shares of Common Stock delivered pursuant to an Award may consist, in whole or in part, of
authorized and unissued shares or reacquired shares, bought on the market or otherwise.
(e)
Substitute Awards. In the case of Substitute Awards, the shares of Common Stock subject to the Substitute Award
shall not reduce the Share Reserve. If a Substitute Award shall for any reason expire, be canceled or otherwise terminate, in whole or
in part, be settled in cash or otherwise settled by issuance of fewer shares, the shares of Common Stock not acquired by the Participant
shall not be added to the Share Reserve. Further, any shares of Common Stock withheld or delivered to pay tax withholding
obligations relating to a Substitute Award shall not reduce the Share Reserve.
5.
ELIGIBILITY
Individuals eligible to participate in this Plan include Employees, Directors and Consultants of the Company, or any Affiliate;
provided, however, to the extent required under Section 409A of the Code, an Affiliate of the Company shall include only an entity in
which the Company possesses at least twenty percent (20%) of the total combined voting power of the entity’s outstanding voting
securities or such other threshold ownership percentage permitted under Section 409A of the Code.
6.
STOCK OPTIONS
(a)
Grant of Options. The Committee is hereby authorized to grant Options to Participants with the following terms and
conditions, and any other terms and conditions not inconsistent with the provisions of the Plan, as the Committee shall determine.
Incentive Stock Options may be granted only to eligible Employees of the Company or of any parent corporation or subsidiary
corporation (as permitted by Section 422 of the Code).
(b)
Award Agreement. Each Option granted under the Plan shall be evidenced by an Award Agreement. The Award
Agreement shall specify whether the Option is intended to be an Incentive Stock Option or a Nonstatutory Stock Option.
(i)
Exercise Price. The purchase price per share of Common Stock that may be purchased by an Option shall
be determined by the Committee; provided, however, and except with respect to Substitute Awards or as provided in Section 14, that
such purchase price shall not be less than 100% of the Fair Market Value of a share of Common Stock on the date of grant of such
Option.
(ii)
Term. The term of each Option shall not exceed ten (10) years from the date of grant.
4
(iii)
Vesting; Restrictions on Exercise. The Award Agreement shall set forth any installment or other
restrictions on exercise of the Option during the term of the Option. Each Option shall become exercisable and shall vest over such
period of time, or upon such events or such Performance Criteria, as determined by the Committee.
(iv)
Time and Method of Exercise. The Committee shall establish in the applicable Award Agreement the time
or times at which an Option may be exercised in whole or in part, and the method or methods by which, and the form or forms,
including, without limitation, cash, shares of Common Stock, or other Awards or any combination thereof, having a Fair Market Value
on the exercise date equal to the relevant exercise price, in which payment of the exercise price with respect thereto may be made or
deemed to have been made.
(v)
Termination of Continuous Service. Each Award Agreement shall set forth the extent, if any, to which the
Participant shall have the right to exercise the Option following termination of the Participant’s Continuous Service. Such provisions
shall be determined in the sole discretion of the Committee, need not be uniform among all Options issued pursuant to the Plan, and
may reflect distinctions based on the reasons for termination of Continuous Service. In the absence of specific provisions in an Award
Agreement setting forth rights to exercise following termination of a Participant’s Continuous Service, the following shall apply:
(A)
Termination of Continuous Service Other than as a Result of Disability or Death. In the event a
Participant’s Continuous Service terminates (other than upon the Participant’s death or disability), the Participant may exercise his or
her Option (to the extent that the Participant was entitled to exercise it as of the date of termination) but only within such period of
time ending on the earlier of (a) the date three (3) months after the termination of the Participant’s Continuous Status as an Employee,
Director or Consultant (or such longer or shorter period specified in the Option Agreement), or (b) the expiration of the term of the
Option as set forth in the Option Agreement. If, at the date of termination, the Participant is not entitled to exercise his or her entire
Option, the shares covered by the un-exercisable portion of the Option shall revert to and again become available for issuance under
the Plan. If, after termination, the Participant does not exercise his or her Option within the time specified in the Option Agreement,
the Option shall terminate, and the shares covered by such Option shall not become available for issuance under the Plan.
(B)
Disability of a Participant. In the event a Participant’s Continuous Service terminates as a result
of the Participant’s disability, the Participant may exercise his or her Option (to the extent that the Participant was entitled to exercise
it as of the date of termination), but only within such period of time ending on the earlier of (i) the date twelve (12) months following
such termination (or such longer or shorter period specified in the Option Agreement), or (ii) the expiration of the term of the Option
as set forth in the Option Agreement. If, at the date of termination, the Participant is not entitled to exercise his or her entire Option,
the shares covered by the un-exercisable portion of the Option shall revert to and again become available for issuance under the Plan.
If, after termination, the Participant does not exercise his or her Option within the time specified herein, the Option shall terminate,
and the shares covered by such Option shall not become available for issuance under the Plan.
(C)
Death of a Participant. In the event of the death of a Participant during, or within a period
specified in the Option Agreement after the termination of, the Participant’s Continuous Service, the Option may be exercised (to the
extent the Participant was entitled to exercise the Option as of the date of death) by the Participant’s estate, by a person who acquired
the right to exercise the Option by bequest or inheritance or by a person designated to exercise the option upon the Participant’s death
pursuant to subsection 15(b), but only within the period ending on the earlier of (1) the date eighteen (18) months following the date of
death (or such longer or shorter period specified in the Option Agreement), or (2) the expiration of the term of such Option as set forth
in the Option Agreement. If, at the time of death, the Participant was not entitled to exercise his or her entire Option, the shares
covered by the un-exercisable portion of the Option shall revert to and again become available for issuance under the Plan. If, after
death, the Option is not exercised within the time specified herein, the Option shall terminate, and the shares covered by such Option
shall not become available for issuance under the Plan.
(c)
Limitations on Incentive Stock Options.
(i)
Initial Exercise. The aggregate Fair Market Value of the shares of Common Stock with respect to which
Incentive Stock Options are exercisable for the first time by a Participant in any calendar year, under the Plan or otherwise, shall not
exceed $100,000. For this purpose, the Fair Market Value of the shares of Common Stock shall be determined as of the date of grant
and each Incentive Stock Option shall be taken into account in the order granted.
(ii)
Ten Percent Stockholders. An Incentive Stock Option granted to a Participant who is the holder of record
of more than ten percent (10%) of the combined voting power of all classes of stock of the Company shall have an exercise price at
least equal to 110% of the Fair Market Value of a share of Common Stock on the date of grant and the term of the Option shall not
exceed five (5) years.
5
(iii)
Notification of Disqualifying Disposition. If any Participant shall make any disposition of shares of
Common Stock acquired pursuant to the exercise of an Incentive Stock Option under the circumstances described in Section 421(b) of
the Code (relating to certain disqualifying dispositions), the Participant shall notify the Company of such disposition within ten (10)
days thereof.
7.
STOCK APPRECIATION RIGHTS
(a)
Grant of Stock Appreciation Rights. The Committee is hereby authorized to grant Stock Appreciation Rights to
Participants. Subject to the terms of the Plan and any applicable Award Agreement, a Stock Appreciation Right granted under the Plan
shall confer on the holder thereof a right to receive, upon exercise thereof, the excess of (i) the Fair Market Value of a share of
Common Stock on the date of exercise over (ii) the grant price of the Stock Appreciation Right as specified by the Committee.
(b)
Agreement.
Award Agreement. Each Stock Appreciation Right granted under the Plan shall be evidenced by an Award
(i)
Grant Price. The grant price shall be determined by the Committee; provided, however, and except as
provided in Section 14, that such price shall not be less than 100% of the Fair Market Value of one share of Common Stock on the
date of grant, except that if a Stock Appreciation Right is at any time granted in tandem with an Option, the grant price of the Stock
Appreciation Right shall not be less than the exercise price of such Option.
(ii)
(iii)
Term. The term of each Stock Appreciation Right shall not exceed ten (10) years from the date of grant.
Time and Method of Exercise. The Committee shall establish in the applicable Award Agreement the time
or times at which a Stock Appreciation Right may be exercised in whole or in part. At the discretion of the Committee, the payment
upon exercise may be in cash, shares of Common Stock or any combination thereof, or in any other manner approved by the
Committee in its sole discretion. The Committee’s determination as to the form of settlement shall be set forth in the Award
Agreement.
(iv)
Termination of Continuous Service. Each Award Agreement shall set forth the extent, if any, to which the
Participant shall have the right to exercise the Stock Appreciation Right following termination of the Participant’s Continuous Service.
Such provisions shall be determined in the sole discretion of the Committee, need not be uniform among all Stock Appreciation Rights
issued pursuant to the Plan, and may reflect distinctions based on the reasons for termination of Continuous Service.
8.
RESTRICTED STOCK AND RESTRICTED STOCK UNITS
(a)
Grant of Restricted Stock or Restricted Stock Units. The Committee is hereby authorized to grant Awards of
Restricted Stock and Restricted Stock Units to Participants.
(b)
Agreement.
Award Agreement. Each grant of Restricted Stock or Restricted Stock Units shall be evidenced by an Award
(i)
Restrictions on Transfer. Shares of Restricted Stock and Restricted Stock Units shall be subject to such
restrictions as the Committee may establish in the applicable Award Agreement (including, without limitation, any limitation on the
right to vote a share of Restricted Stock or the right to receive any dividend or other right), which restrictions may lapse separately or
in combination at such time or times, in such installments or otherwise, as the Committee may deem appropriate. Unrestricted shares
of Common Stock, evidenced in such manner as the Committee shall deem appropriate, shall be delivered to the holder of Restricted
Stock promptly after such restrictions have lapsed.
(ii)
Share Registration. Any Restricted Stock granted under the Plan may be evidenced in such manner as the
Committee may deem appropriate, including, without limitation, book-entry registration or issuance of a stock certificate or
certificates. In the event any stock certificate is issued in respect of shares of Restricted Stock granted under the Plan, such certificate
shall be registered in the name of the Participant and shall bear an appropriate legend referring to the terms, conditions, and
restrictions applicable to such Restricted Stock.
(iii)
Forfeiture. Upon termination of Continuous Service during the restriction period, except as determined
otherwise by the Committee, all shares of Restricted Stock and all Restricted Stock Units that are then subject to restrictions shall be
forfeited and reacquired by the Company.
9.
PERFORMANCE AWARDS
(a)
Grant of Performance Awards. The Committee is hereby authorized to grant Performance Awards to Participants.
Performance Awards include arrangements under which the grant, issuance, retention, vesting and/or transferability of any Award is
subject to such Performance Criteria and such additional conditions or terms as the Committee may designate.
6
(b)
Award Agreement. Each grant of a Performance Award shall be evidenced by an Award Agreement. Subject to the
terms of the Plan and any applicable Award Agreement, a Performance Award granted under the Plan:
(i)
may be denominated or payable in cash, shares of Common Stock (including, without limitation, Restricted
Stock), other securities, or other Awards; and
(ii)
shall confer on the holder thereof rights valued as determined by the Committee and payable to, or
exercisable by, the holder of the Performance Award, in whole or in part, upon the achievement of such performance goals during
such Performance Periods as the Committee shall establish.
(c)
Covered Employee. The Committee may from time to time grant Awards to Covered Employees that are intended to
satisfy the performance-based compensation requirements of Section 162(m) of the Code. For purposes of such Awards, the
Committee shall consider all of the requirements of Section 162(m), including the Qualifying Performance Criteria, approvals and
certification by solely outside directors, the individual Award limits and any other requirements under Section 162(m) of the Code.
10.
OTHER STOCK-BASED AWARDS
The Committee is hereby authorized to grant to Participants such other Awards that are denominated or payable in, valued in whole or
in part by reference to, or otherwise based on or related to, shares of Common Stock, as are deemed by the Committee to be consistent
with the purposes of the Plan; provided, however, that such grants must comply with applicable law. Subject to the terms of the Plan
and any applicable Award Agreement, the Committee shall determine the terms and conditions of such Awards. Shares of Common
Stock or other securities delivered pursuant to a purchase right granted under this Section 10 shall be purchased for such
consideration, which may be paid by such method or methods and in such form or forms, including, without limitation, cash, shares of
Common Stock, other securities, or other Awards, or any combination thereof, as the Committee shall determine.
11.
DIVIDEND EQUIVALENTS
The Committee is hereby authorized to grant to Participants the right, if so determined by the Committee, to receive, currently, or on a
deferred basis, dividends or Dividend Equivalents, with respect to the shares of Common Stock covered by the Award. The
Committee may provide that any dividends paid on shares of Common Stock subject to an Award must be reinvested in additional
shares of Common Stock, which may or may not be subject to the same vesting conditions and restrictions applicable to the Award.
Notwithstanding the award of Dividend Equivalents or dividends, a Participant shall not be entitled to receive a special or
extraordinary dividend or distribution unless the Committee shall have expressly authorized such receipt. All distributions, if any,
received by a Participant with respect to an Award as a result of any split, Common Stock dividend, combination of shares of
Common Stock, or other similar transaction shall be subject to the restrictions applicable to the original Award.
12.
TAX WITHHOLDING
The Company or any Affiliate shall be authorized to withhold from any Award granted or any payment due or transfer made under
any Award or under the Plan the amount (in cash, shares of Common Stock, other securities, or other Awards) of withholding taxes
due in respect of an Award, its exercise, or any payment or transfer under such Award or under the Plan and to take such other action
as may be necessary in the opinion of the Company or Affiliate to satisfy statutory withholding obligations for the payment of such
taxes.
13.
CANCELLATION AND RE-GRANT OF OPTIONS
(a)
Subject to subsection (b) of this Article 13, the Board shall have the authority to effect, at any time and from time to
time (i) the repricing of any outstanding Options under the Plan and/or (ii) with the consent of the affected holders of Options, the
cancellation of any outstanding Options and the grant in substitution of new Options under the Plan covering the same or different
numbers of shares of Common Stock, but having an exercise price per share not less than 100% of the Fair Market Value, or, in the
case of a ten percent (10%) stockholder (as defined in subsection 6(c)), not less than 110% of the Fair Market Value) per share of
Common Stock on the new grant date.
(b)
Prior to the implementation of any such repricing or cancellation of one or more outstanding Options as described in
Section 13(c), the Board shall obtain the approval of the stockholders of the Company to the extent required by the New York Stock
Exchange, Nasdaq or other securities exchange listing requirements applicable to the Company, or applicable law.
(c)
To the extent required by Section 162(m) of the Code, shares subject to an Option canceled under this Section 13
shall continue to be counted against the maximum award of Options permitted to be granted during any calendar year to an individual
Participant pursuant to Section 4(b) of the Plan. The repricing of an Option hereunder resulting in a reduction of the exercise price
shall be deemed to be a cancellation of the original Option and the grant of a new Option; in the event of such repricing, both the
7
original and the new Options shall be counted against the maximum awards of Options permitted to be granted during any calendar
year to an individual Participant pursuant to Section 4(b) of the Plan. The provisions of this Section 13(c) shall be applicable only to
the extent required by Section 162(m) of the Code.
14.
ADJUSTMENTS UPON CHANGES IN STOCK
(a)
Changes in Capital. If any change is made in the Common Stock subject to the Plan, or subject to any Award,
without the receipt of consideration by the Company (through merger, consolidation, reorganization, recapitalization, reincorporation,
stock dividend, dividend in property other than cash, stock split, liquidating dividend, combination of shares, exchange of shares,
change in corporate structure or other transaction not involving the receipt of consideration by the Company), the Plan will be
appropriately adjusted in the class(es) and maximum number of shares subject to the Plan and the maximum number of shares subject
to award to any person during any calendar year, and the outstanding Awards will be appropriately adjusted in the class(es) and
number of shares and price per share of stock subject to such outstanding Awards. Such adjustments shall be made by the Committee
proportionately, so as to put the Participant in the same economic position both prior to and after the change in capital. The
determination of the Committee shall be final, binding and conclusive. (The conversion of any convertible securities of the Company
shall not be treated as a "transaction not involving the receipt of consideration by the Company.")
(b)
Change of Control. In the event of a Change of Control, to the extent permitted by applicable law: (i) any surviving
corporation (or an Affiliate thereof) shall assume any Awards outstanding under the Plan or shall substitute similar Awards for those
outstanding under the Plan and (ii) such Awards shall continue in full force and effect. In the event any surviving corporation (or an
Affiliate) refuses to assume or continue such Awards, or to substitute similar Awards for those outstanding under the Plan, then
vesting (or release from the repurchase option) shall accelerate such that such Awards are fully vested at such event and shall be
exercisable for a period of 15 days after notice from the Company. If not so exercised within the 15 day period, then such Awards
shall be terminated.
15.
GENERAL PROVISIONS
(a)
Forms of Payment for Awards. Subject to the terms of the Plan and any applicable Award Agreement, payments or
transfers to be made by the Company or an Affiliate upon the grant, exercise, or payment of an Award may be made in such form or
forms as the Committee shall determine, including, without limitation, cash, shares of Common Stock, rights in or shares issuable
under the Award or other Awards, other securities, or other Awards or any combination thereof, and may be in a single payment or
transfer, in installments, or on a deferred basis, in each case in accordance with the rules and procedures established by the
Committee. Such rules and procedures may include, without limitation, provisions for the payment or crediting of reasonable interest
on installment or deferred payments or the grant or crediting of Dividend Equivalents in respect of installment or deferred payments.
(b)
Limits on Transfer of Awards. Except as provided by the Committee, no Award, and no right under any such Award,
shall be assignable, alienable, saleable, or transferable by a Participant otherwise than by will or by the laws of descent and
distribution; provided, however, that, if so determined by the Committee, a Participant may, in the manner established by the
Committee, designate a beneficiary or beneficiaries to exercise the rights of the Participant with respect to any Award upon the death
of a Participant. Each Award, and each right under any Award, shall be exercisable, during the Participant’s lifetime, only by the
Participant or, if permissible under applicable law, by the Participant’s guardian or legal representative. No Award, and no right under
any such Award, may be pledged, alienated, attached, or otherwise encumbered, and any purported pledge, alienation, attachment, or
encumbrance thereof shall be void and unenforceable against the Company or any Affiliate.
(c)
Conditions and Restrictions Upon Securities Subject to Awards. The Committee may provide that the shares of
Common Stock issued upon exercise of an Option or Stock Appreciation Right or otherwise subject to or issued under an Award shall
be subject to such further agreements, restrictions, conditions or limitations as the Committee in its discretion may specify prior to the
exercise of such Option or Stock Appreciation Right or the grant, vesting or settlement of such Award, including without limitation,
conditions on vesting or transferability and forfeiture or repurchase provisions or provisions on payment of taxes arising in connection
with an Award. Without limiting the foregoing, such restrictions may address the timing and manner of any resales by the Participant
or other subsequent transfers by the Participant of any shares of Common Stock issued under an Award, including without limitation:
(i) restrictions under an insider trading policy or pursuant to applicable law; (ii) restrictions designed to delay and/or coordinate the
timing and manner of sales by Participant and holders of other Company equity compensation arrangements; (iii) restrictions as to the
use of a specified brokerage firm for such resales or other transfers; and (iv) provisions requiring shares to be sold on the open market
or to the Company in order to satisfy tax withholding or other obligations.
8
(d)
Share Certificates. All shares or other securities delivered under the Plan pursuant to any Award or the exercise
thereof shall be subject to such stop transfer orders and other restrictions as the Committee may deem advisable under the Plan or the
rules, regulations, and other requirements of the Securities and Exchange Commission, any stock exchange upon which such shares of
Common Stock or other securities are then listed, and any applicable Federal, state, or local securities laws, and the Committee may
cause a legend or legends to be put on any such certificates to make appropriate reference to such restrictions. Notwithstanding any
other provision of this Plan to the contrary, the Company may elect to satisfy any requirement under this Plan for the registration or
delivery of stock certificates through the use of book-entry registration.
(e)
Changes in Accounting or Tax Rules. Except as provided otherwise at the time an Award is granted,
notwithstanding any other provision of the Plan to the contrary, if, during the term of the Plan, any changes in the financial or tax
accounting rules applicable to any Award shall occur which, in the sole judgment of the Committee, may have a material adverse
effect on the reported earnings, assets or liabilities of the Company, the Committee shall have the right and power to modify, as
necessary, any then outstanding and unexercised Options, Stock Appreciation Rights and other outstanding Awards as to which the
applicable services or other restrictions have not been satisfied.
(f)
Non-exclusivity of the Plan. The adoption of the Plan shall not be construed as creating any limitations upon the
right and authority of the Committee to adopt such other incentive compensation arrangements (which arrangements may be
applicable either generally to a class or classes of individuals or specifically to a particular individual or particular individuals) as the
Committee in its discretion determines desirable.
(g)
Other Award Agreement Provisions. Each Award Agreement may contain such other terms and conditions not
inconsistent with the Plan as may be determined by the Committee, in its sole discretion.
(h)
Other Employee Benefits. The amount of any compensation deemed to be received by a Participant as a result of the
exercise of an Option or Stock Appreciation Right, the sale of shares received upon such exercise, the vesting of any Restricted Stock,
receipt of Performance Shares, distributions with respect to Restricted Stock Units, Performance Awards, or Other Stock-Based
Awards shall not constitute "earnings" or "compensation" with respect to which any other employee benefits of such employee are
determined, including without limitation, benefits under any pension, profit sharing, 401(k), life insurance or salary continuation plan.
Severability. If any provision of the Plan or any Award Agreement shall be determined to be illegal or unenforceable
by any court of law in any jurisdiction, the remaining provisions hereof and thereof shall be severable and enforceable in accordance
with their terms, and all provisions shall remain enforceable in any other jurisdiction.
(i)
(j)
Governing Law. The validity and construction of this Plan and the Award Agreements shall be construed in
accordance with and governed by the laws of the State of Delaware other than any conflicts or choice of law rule or principle that
might otherwise refer construction or interpretation of this Plan and the Award Agreements to the substantive laws of any other
jurisdiction.
(k)
Section 409A. Notwithstanding anything in this Plan to the contrary, the Plan and Awards made under the Plan are
intended to comply with the requirements imposed by Section 409A of the Code. If any Plan provision or Award under the Plan
would result in the imposition of an additional tax under Section 409A of the Code, the Company and the Participant intend that the
Plan provision or Award will be reformed to avoid imposition, to the extent possible, of the applicable tax and no action taken to
comply with Section 409A of the Code shall be deemed to adversely affect the Participant’s rights to an Award. The Participant
further agrees that the Committee, in the exercise of its sole discretion and without the consent of the Participant, may amend or
modify an Award in any manner and delay the payment of any amounts payable pursuant to an Award to the minimum extent
necessary to meet the requirements of Section 409A of the Code as the Committee deems appropriate or desirable.
(l)
Stockholder Rights. No Participant nor any other holder of an Award granted under the Plan shall be deemed to be
the holder of, or to have any of the rights of a holder with respect to, any shares subject to such Award unless and until such person
has satisfied all requirements for exercise of the Award or lapse of restrictions pursuant to its terms.
16.
AMENDMENT, MODIFICATION AND TERMINATION
(a)
Amendment, Modification, and Termination. Subject to Sections 3, 15(k) and 16(b), and only upon unanimous
approval of the entire Board, the Board may at any time terminate, and from time to time may amend or modify the Plan; provided,
however, that no amendment or modification may become effective without approval of the stockholders of the Company if
stockholder approval is required to enable the Plan to satisfy any applicable statutory or regulatory requirements, or if the Company,
on the advice of counsel, determines that stockholder approval is otherwise necessary or desirable.
9
(b)
Awards Previously Granted. Except as otherwise may be required under Section 15(k), notwithstanding
Section 16(a), to the contrary, no amendment, modification or termination of the Plan or Award Agreement shall adversely affect in
any material way any previously granted Award, without the written consent of the Participant holding such Award.
17.
STOCKHOLDER APPROVAL; EFFECTIVE DATE OF PLAN
The Plan shall be effective immediately upon approval by the stockholders. Unless sooner terminated by the Board, this Plan shall
terminate automatically on March 8, 2026. After the Plan is terminated, no Awards may be granted. Awards outstanding at the time
the Plan is terminated shall remain outstanding in accordance with the terms and conditions of the Plan and the Award Agreement.
10
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
FORM 10-K
For the fiscal year ended December 31, 2016
OR
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from to
Commission File Number: 001-34261
EVOLVING SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
9777 Pyramid Court, Suite 100, Englewood, Colorado
(Address of principal executive offices)
84-1010843
(I.R.S. Employer
Identification Number)
80112
(Zip Code)
(303) 802-1000
(Registrant’s telephone number, including area code)
Securities registered under Section 12(b) of the Act:
Common Stock, Par Value $0.001 Per Share
(Title of Class)
Securities registered under Section 12(g) of the Act: None
The Nasdaq Capital Market
(Name of exchange on which registered)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes
No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes No
Indicate by check mark whether the registrant has submitted electronically 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 No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.
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
Non-accelerated filer
Accelerated filer
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 No
The aggregate market value of the Common Stock held by non-affiliates of the registrant, based upon the last sale price of the Common Stock
reported on the Nasdaq Capital Market, was approximately $43.9 million as of June 30, 2016.
The number of shares of Common Stock outstanding was 12,462,692 as of March 23, 2017.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III (Items 10, 11, 12, 13 and 14) is incorporated by reference to portions of the registrant’s definitive proxy
statement for the 2017 Annual Meeting of Stockholders, which will be filed with the Securities and Exchange Commission within 120 days after the
close of the 2016 year. Except as expressly incorporated by reference, the Proxy Statement shall not be deemed to be a part of this report on
Form 10-K.
EVOLVING SYSTEMS, INC.
Annual Report on Form 10-K
For the year ended December 31, 2016
Table of Contents
PART I
Item 1
Item 1A
Item 1B
Item 2
Item 3
Item 4
Item 5
Item 6
Item 7
Item 7A
Item 8
Item 9
Item 9A
Item 9B
Item 10
Item 11
Item 12
Item 13
Item 14
Item 15
Item 16
Business ..........................................................................................................................................................
Risk Factors ....................................................................................................................................................
Unresolved Staff Comments ..........................................................................................................................
Properties ........................................................................................................................................................
Legal Proceedings ..........................................................................................................................................
Mine Safety Disclosures .................................................................................................................................
PART II
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities ........................................................................................................................................................
Selected Financial Data ..................................................................................................................................
Management’s Discussion and Analysis of Financial Condition and Results of Operations .........................
Quantitative and Qualitative Disclosures About Market Risk ........................................................................
Financial Statements and Supplementary Data ..............................................................................................
Reports of Independent Registered Public Accounting Firm .........................................................................
Consolidated Balance Sheets ..........................................................................................................................
Consolidated Statements of Income ...............................................................................................................
Consolidated Statements of Comprehensive Income (Loss) .........................................................................
Consolidated Statements of Changes in Stockholders’ Equity .......................................................................
Consolidated Statements of Cash Flows ........................................................................................................
Notes to Consolidated Financial Statements ..................................................................................................
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure .........................
Controls and Procedures .................................................................................................................................
Other Information ...........................................................................................................................................
PART III
Directors, Executive Officers and Corporate Governance .............................................................................
Executive Compensation ................................................................................................................................
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters .......
Certain Relationships and Related Transactions, and Director Independence ...............................................
Principal Accounting Fees and Services ........................................................................................................
Exhibits, Financial Statement Schedules ........................................................................................................
Form 10-K Summary .....................................................................................................................................
Signatures .......................................................................................................................................................
PART IV
Page
1
5
13
14
14
14
14
16
17
26
27
27
28
29
30
31
32
33
51
51
52
52
52
52
52
52
53
54
55
FORWARD-LOOKING STATEMENTS
Except for the historical information contained in this document, this report contains forward-looking statements that have been made
pursuant to the provisions of the Private Securities Litigation Reform Act of 1995, including estimates, projections, statements relating
to our business plans, objectives and expected operating results and assumptions. These forward-looking statements generally are
identified by the words “believes,” “goals,” “projects,” “expects,” “anticipates,” “estimates,” “intends,” “strategy,” “plan,”
variations of these words and similar expressions. Forward-looking statements are based on current expectations, estimates,
projections and assumptions regarding product, services, and customer support revenue; our expectations associated with Evolving
Systems Labs, Evolving Systems India, Evolving Systems U.K. and Evolving Systems NC, Inc., and short- and long-term cash needs,
and are subject to risks and uncertainties which may cause our actual results to differ materially from those discussed here. Factors
that could cause or contribute to such differences include, but are not limited to those discussed in the sections entitled “Business,”
“Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Risk Factors.” We undertake no
obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or
otherwise.
ITEM 1.
BUSINESS
INTRODUCTION
PART I
Evolving Systems is a leader in real-time analytics, activation and consumer engagement marketing. The company’s
software solutions and managed services are deployed at over 75 mobile service providers in 50 countries worldwide where they
accelerate customer acquisition and activation, upsell services, improve subscriber loyalty and monetize consumer information
throughout their lifecycle.
The acquisition of RateIntegration, Inc. d/b/a Sixth Sense Media (“SSM”) in 2015 accelerated the company’s entry into the
high value mobile marketing space and also initiated the transition from a traditional software license model to a recurring revenue
model based on managed services.
The company has moved from selling technology to offering business solutions. The value proposition likewise has moved
away from cost savings to a focus on revenue increases for the carrier and our business model has moved from classic capex license
and services to opex models based on managed services with performance fees.
We offer managed services and solutions in the following core areas:
•
Subscriber Acquisition and Activation solutions used to sign up new subscribers and to activate complex bundles of
voice, video and data services for traditional and next generation wireless, wireline and cable networks;
• Mobile Analytics, Engagement and Upsell enables carrier marketing departments to innovate, execute and manage
highly-personalized and contextually-relevant, interactive campaigns that engage consumers in real time;
• Retention, Loyalty and Fulfilment solutions that reduce subscriber churn, encourage service usage, and reward
subscribers with value from the carrier and from loyalty program partners;
• Consumer Information Monetization enables mobile service providers to monetize their consumer information and
context through the up-selling of digital services like games and apps and mobile advertising.
We previously reported the operations of our business as two operating segments based on revenue type: license and services
revenue and customer support revenue. In order to report results consistent with our new business solutions model, we now report our
operations as one segment since we are packaging multiple products and services into offerings for carriers. We report geographic
information based upon revenue and long-lived assets in the United States, United Kingdom and all other foreign countries as a group.
Further information regarding our operating segments and geographical information is contained in Note 12 to our Consolidated
Financial Statements included in Item 8 of this Annual Report on Form 10-K.
COMPANY BACKGROUND
Evolving Systems was founded in 1985 to provide software and services to the U.S. telecommunications industry. During
our early years our product focus was on solutions that supported number management and number porting. In November 2004, we
expanded our product set and geographical reach with the acquisition of Tertio Telecoms Ltd. (“Evolving Systems U.K.”), a supplier
of Operations Support Systems (“OSS”) software solutions for service activation and mediation to communication carriers throughout
Europe, the Middle East, Africa and Asia. With this acquisition we not only expanded our markets beyond North America, we also
added service activation and billing mediation solutions to our product portfolio. The acquisition significantly expanded our product
and service capabilities, allowing us to address a larger portion of our customers’ OSS application needs with a balanced mix of
products as well as services. We currently focus primarily on the wireless markets in the areas of mobile marketing analytics,
1
subscriber activation, SIM card management and activation, self—service mobile applications, data enablement solutions, connected
device activation and management of services.
On October 24, 2013 we acquired privately held Telespree Communications (“Telespree”), now known as Evolving Systems
Labs, Inc. (“Evolving Systems Labs”), for an initial payment of approximately $1.6 million, comprised of approximately $0.8 million
in cash and approximately $0.8 million in stock. There was an earn-out provision whereby we potentially would have made additional
payments in cash on the achievement of certain financial targets for the period from October 25, 2013 through October 24, 2016. This
provision was not achieved and was recognized as other income in 2016. In addition, there is a final payment of $0.5 million to be
made subject to reduction for certain claims. The final payment has not been made as of the date this Form 10-K was filed. The
acquisition included technology used in the delivery and management of mobile data services and a portfolio of SaaS based solutions.
On September 30, 2015, we acquired privately held SSM, now known as Evolving Systems NC, Inc. (“Evolving Systems
NC”) for an initial cash payment totaling approximately $9.75 million, plus customary working capital adjustments, and we agreed to
make a payment of $250,000 on the one year anniversary of the transaction, with such payment being available to secure SSM’s
representations and warranties under the acquisition agreement. The acquisition included SSM’s software solution, RLM, a platform
which enables carrier marketing departments to innovate, execute and manage highly-personalized and contextually-relevant,
interactive campaigns that engage consumers in real time as well as a platform for Customer Loyalty and Retention. The final
payment has not been made as of the date this Form 10-K was filed due to pending resolution of outstanding claims.
INDUSTRY DYNAMICS
The market for mobile marketing analytics, communications activation and provisioning solutions is constantly changing.
Several key factors are driving carrier demand for next generation solutions, supporting growth for specific products within the sector:
•
•
•
•
•
Carriers seeking to further monetize their customer relationships and associated demographic, behavioral, location and
contextual information to up-sell their network services and open new channels for optimized and personalized third-
party service revenues;
Rapid adoption of smart phones and network-attached devices, driving increased usage of mobile data;
On-going network investment to provide vastly improved delivery speeds and capacity (Long Term Evolution, or
“LTE”/4G);
Pricing pressure within the telecom industry driven by relatively flat subscriber growth, network upgrade costs,
subscriber churn, and increased competition from traditional and new market entrants such as Over-the-Top (“OTT”)
services both in the developed and emerging markets; and
Adoption of the connected device and M2M markets.
Today, carriers are compelled to offer a growing array of services to deliver personalized and differentiated user experiences,
reduce subscriber churn and maintain or grow market share. These value-added services have to be delivered to the market in ever
shorter windows as competitive pressure has increased the velocity at which carriers deliver new products and services. To achieve
these objectives, operators are increasingly reliant on flexible service enablement solutions that offer a myriad of options for their
subscribers.
As network migrations to 4G/LTE accelerate and subscribers continue to drive growth in mobile solutions, the SIM card has
emerged as a vital link in the telecom value chain. Capability, such as that provided by Evolving Systems’ Subscriber Activation
solution for dynamically activating and managing the SIM card, is becoming an important component in the operators’ infrastructure,
both to reduce operating costs associated with the provisioning of SIM cards, as well as to improve the end-user experience.
We are a pioneer and leader in this market and believe we are well-positioned to maintain our leadership role in this growth
segment. To date our Subscriber Activation solution has activated over half a billion SIM cards, providing enhanced functionality and
significant operator savings. Our Mobile Analytics, Engagement, Upsell and Retention solutions are connecting with over 300 million
subscribers around the world.
SOLUTIONS PORTFOLIO
Acquisition and Activation
Our Subscriber Acquisition and Activation solutions support carriers in adding new subscribers to their network, from the
sales and contract process through to the allocation of network and service resources and the activation of services to the mobile
device.
•
Smart Dealer provides SIM retailers with a tool set that enables them to sell SIM cards efficiently and effectively. With
Smart Dealer, the operator is able to communicate and guide dealers towards using the latest promotions, enabling
instant reactions to competitor activities. Smart Dealer captures subscriber details for “Know Your Customer” prepaid
registration, including biometric data, using standard, low cost devices.
2
• Dynamic SIM Allocation™ is a SIM Activation solution which is integrated into the carrier’s signaling network,
enabling new SIM cards that have not been pre-provisioned to be detected on first use. This triggers an efficient,
dynamic provisioning process and eliminates the need for pre-provisioning, thus lowering the operator’s costs of
subscriber acquisition. The SIM activation occurs only when a SIM card is first used. During the activation process, the
solution enables an on-device interaction with the end-user, delivering a differentiated user-experience, reducing
customer churn and boosting revenue for the carrier.
Tertio® Service Activation is used by carriers to activate a new subscriber or to add a new service to an existing
subscriber. Our solution provides a flexible operating environment for carriers to manage their voice, data, and content
service needs for both their traditional and broadband IP networks. It provides a point of flexibility in the carrier’s
OSS/BSS architecture, allowing fast introduction of new network technologies and easing the burden of integration with
existing devices and systems. Service providers who use our Tertio solution can better plan, manage and execute the
introduction of new services.
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• Number Inventory and Management is a scalable and fully automated solution that enables operators to reliably and
efficiently manage their telephone numbers (i.e., SIMs, MSISDNs, IMSIs, Integrated Circuit Card Identifiers (“ICCIDs”)
as well as other communication identifiers such as Uniform Resource Locators or (“URLs”) and email addresses. Our
solution focuses on the automation of all number resource management processes, allowing operators to adhere to
regulatory requirements and effectively manage the lifecycle of telephone numbers, as well as benefit from time savings
and reduced costs.
Analytics, Engagement and Upsell
Our Analytics, Engagement and Upsell solutions empower marketing departments to create and deploy highly personalized,
location and contextually relevant, interactive customer engagement campaigns. The platform monitors customer events and
behavioral patterns in real-time, building a profile of each subscriber. When the right conditions are met, the platform pushes the best
match or a personalized offer or ad to the customer.
Compared with many other marketing campaign management systems, our solution more accurately targets marketing
messages and campaigns that drive incremental revenue more quickly.
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The Profiling Engine supports static as well as ongoing dynamic profiling of subscribers. It fully supports any real-time
or micro segmentation requirements as needed by the business. The Profiling Engine is a rules-driven flexible aggregator
of subscriber baseline and usage data. It has been designed to handle any data model, including any data representation
that may be available within the carrier’s legacy billing and Customer Relationship Management (“CRM”) environment.
The Campaign Engine is used to configure and deliver marketing campaigns and offers to subscribers. It includes a
business friendly dashboard that enables rapid configuration, testing and launching of new business campaigns. Through
the dashboard the business user can target specific subscribers, define offers and rewards, and create personalized
messages per campaign, interaction and subscriber. The dashboard provides a real-time view on each campaign’s
effectiveness and impact.
• Campaign Modules provide predefined templates for specific types of real-time mobile marketing tactics, including
marketing and loyalty for digital services such as mobile money and content, data package upsell and top-up
accelerators.
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Social Media Integration enables carriers to expand their engagement with subscribers beyond simple network usage
and direct channels, and can support social marketing campaigns that leverage the subscribers as a part of the marketing
network.
• App Promotion engages subscribers when they are first configuring new services or when they are upgrading to mobile
devices with new capabilities. It enables carriers to promote the use of their own mobile applications for subscriber care,
and also those of third party app publishers, opening possibilities for new revenue streams.
Retention and Loyalty
Our subscriber Retention and Loyalty solutions help reduce churn and generate more revenue from existing subscribers by
using the latest innovative programs. Strong subscriber loyalty is created by rewarding subscribers via schemes that offer additional
carrier services or the services and products of participating partners.
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Loyalty Points and Programs are used to reward mobile subscribers for use of the carrier’s services. Credit is earned in
the forms of status points and bonus points. Gamification can be used to encourage the collection of rewards by
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subscribers and comparison with others in their social group. Loyalty Credit is then exchanged for services or discounts
from the carrier, or for digital and physical goods from third party businesses and retail partners.
• Coupon Management covers the whole lifecycle of coupons as a medium for delivering rewards. Our solution manages
the interface with coupon partners, the delivery of coupons to subscribers, redemption for digital or physical goods, and
settlement between carrier and partner.
PROFESSIONAL AND MANAGED SERVICES
Our Professional Services team provides expert and vastly experienced consulting services for the customization, integration
and deployment of our solutions. Our services cover all aspects of the project lifecycle, including system architecture, design,
software development and customization, system integration, testing, live deployment and production support, program and project
level management, post-implementation maintenance and domain and product expertise.
Our Managed Services can be delivered on-site at a carrier or remotely. Services range from operational support of our
software solutions, through technical services to expand those solutions with new modules and functionality to support new business
value, to marketing and customer engagement consultancy that directly drives marketing campaigns for our customers and helps them
achieve their business objectives. The Managed Services teams also offer their expertise and experience to create the maximum
financial impact to the carrier from using our solutions.
Our teams work closely with customers and integration partners and have established long-term relationships with operators
in the Americas, Europe, the Middle East, Africa and Asia Pacific regions.
PRODUCT DEVELOPMENT
We develop our software solutions internally and using third party development organizations where specialist technical
expertise is required. We conduct research to identify specific industry and customer business needs as well as market requirements
and we use that information to determine our investment in product development (“PD”). We evaluate the market for new products
and we leverage our existing product capabilities with enhancements of existing products. We build investment plans for our principal
product areas and we make other investments in tools and product extensions to accelerate the development, implementation and
integration process for customer solutions.
PD is expensed as incurred. For the years ended December 31, 2016, 2015 and 2014, we expensed $3.0 million, $3.8 million
and $3.6 million, respectively, in PD costs. The majority of PD investments in 2016 went into the further development and
enhancement of our RLM and DSA solutions.
SALES AND MARKETING
Our sales force is primarily a field organization structured to focus on specific geographical territories around the world: The
Americas (North, Central and South), Europe, Middle East and Africa, the Commonwealth of Independent States (comprised of
Russia and other former Soviet Republics) South Asia and Asia Pacific. Our sales activities cover both direct sales to carrier
customers as well as sales through partners such as Gemalto, Oberthur, and Ericsson, who include our products as part of their wider
solution offerings, and systems integrators such as Accenture and IBM, who license our technology to customers as part of their
delivery engagements.
Our solutions and our customers’ infrastructures are complex, and require a high degree of consultative selling which often
results in a long sales cycle in excess of twelve months. In addition, our business relies on incremental revenue from existing
customers, which requires regular interaction with customers to discuss enhancements to our existing solutions as well as the
introduction of new features and functionality. The sales team is also responsible for making proactive proposals to prospects, as well
as managing and delivering responses to competitive tenders. This complex, highly interactive approach, typically results in a long
sales cycle, requiring us to invest a considerable amount of time developing business opportunities without guaranteed sales.
Our marketing organization supports our sales activities by identifying markets for our products and establishing an
awareness of our offerings in those markets through a combination of direct marketing, web marketing, and participation in shows,
conferences, and industry bodies. The marketing organization is responsible for maintaining our web site and creating electronic and
print-based sales collateral to support our sales activities.
COMPETITION
The market for telecommunications OSS products and mobile analytics and advertising is competitive and subject to rapid
technological change, changing industry standards, regulatory developments and consolidation. We face increasing demand for
improved product performance, enhanced functionality, rapid integration capabilities; all in the context of continuing pricing pressure.
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Our existing and potential competitors include many large domestic and international companies that often have substantially greater
financial, technological, marketing, distribution and other resources, larger installed customer bases and longer-standing relationships
with telecommunications customers. The market for telecommunications OSS software and services is extremely large and we
currently hold only a small portion of total market share. Nonetheless, we believe our work to establish the Subscriber Acquisition
and Activation area has resulted in our achieving a measurable and reasonable market share in those areas.
Our principal competitors for Subscriber Acquisition and Activation are vendors such as Comptel-Nokia, Amdocs and
Oracle, as well as billing vendors and vendors such as Ericsson. In the area of Subscriber Acquisition and Activation, we believe we
hold a significant leadership position; however, we see occasional competition from Giesecke & Devrient GmbH and HP, as well as a
few other smaller regional competitors. Competitors for Analytics, Engagement & Upsell, and for Retention and Loyalty, include
specialist vendors such as Knowesis, Pontis and Business Logic Systems, as well as some products in general CRM suites from
vendors such as SAS and Oracle.
For all of our products, our ability to compete successfully depends on a wide range of factors. First and foremost is our
ability to deliver a managed service based on our solutions platform, which offers a cost effective way for our customers to benefit
from our many years of experience and product investment. We deliver value by offering competitively priced quality solutions,
tailored specifically to our customers’ network topography. After a customer implements our products, we often receive subsequent
orders for enhancements to add functionality or increase capacity. Complex solutions tailored to customers’ needs are expensive and
time consuming to replace, thus providing us with an incumbent advantage. Furthermore, many of our customer relationships span
five years or more. We believe all of these factors give us a competitive advantage and can be a barrier to entry for potential
competitors.
SIGNIFICANT CUSTOMERS
For the years ended December 31, 2016 and 2015, no significant customer exceeded the threshold (defined as contributing at
least 10%) of revenue from continuing operations. For the year ended December 31, 2014, two significant customers accounted for
24% (13% and 11%) of revenue from continuing operations. These customers are large telecommunications operators in Europe and
Mexico.
INTELLECTUAL PROPERTY
We rely on a combination of patents, copyright, trademark and trade secret laws, as well as confidentiality agreements and
licensing arrangements, to establish and protect our proprietary rights. We have 16 patents in the U.S. on elements of our DSA and
mobile broadband enablement products and patents pending in other countries on elements of our DSA and other products.
EMPLOYEES
As of December 31, 2016, we employed 197 people including 27 in the United States, 34 in the United Kingdom and 136 in
India. Of our worldwide staff, 81% are involved in product delivery, development, support and professional services, 11% in sales
and marketing, and 8% in general administration.
AVAILABLE INFORMATION
You can find out more information about us at our Internet website located at www.evolving.com. The information on or
accessible through our website is not incorporated into this Annual Report on Form 10-K. Our Annual Reports on Form 10-K, our
Quarterly Reports on Form 10-Q, and our Current Reports on Form 8-K and any amendments to those reports are available free of
charge on our Internet website as soon as reasonably practicable after we electronically file or furnish such material with the SEC.
Additionally, these reports are available at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549 or on the
SEC’s website at www.sec.gov. Information on the operation of the Public Reference Room can be obtained by calling the SEC at
1-800-SEC-0330.
ITEM 1A. RISK FACTORS
General Risk Statement
Our operations and financial results are subject to various risks and uncertainties, many of which are driven by factors we
cannot control or predict. An investment in our common stock involves a high degree of risk. The risks that we have highlighted
here represent the material risks known to us, but they are not the only ones that we face. If any of the risks actually occur, our
business, financial condition, results of operation and cash flows could be negatively affected. You should carefully consider these
risks and uncertainties before investing in our securities.
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Risks Related to Our Business and Industry
We operate a global business that exposes us to currency, economic, regulatory and tax risks.
Our revenue comes primarily from sales outside the U.S. and our growth strategy is largely focused on emerging markets.
Our success delivering solutions and competing in international markets is subject to our ability to manage various risks and
difficulties, including, but not limited to:
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our ability to effectively staff, provide technical support and manage operations in multiple countries;
fluctuations in currency exchange rates;
timely collecting of accounts receivable from customers and resellers located outside of the U.S.;
our ability to repatriate cash from foreign locations and manage potential adverse tax consequences in connection with
repatriating funds;
trade restrictions, political instability, disruptions in financial markets, and deterioration of economic conditions;
compliance with the U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act and other anti-bribery laws and
regulations;
variations and changes in laws applicable to our operations in different jurisdictions, including enforceability of
intellectual property and contract rights; and
compliance with export regulations, tariffs and other regulatory barriers.
Approximately 40% of our revenue is transacted in currencies other than the U.S. dollar (e.g. British Pound Sterling, Swiss
Franc and Euro). As a result, when the U.S. dollar strengthens, our revenue, when converted to U.S. dollars, is reduced. At the same
time, approximately 60% of our operating expenses are incurred overseas. The strengthening dollar, conversely, lowers expenses
outside of the U.S. Although this has provided some defense against currency fluctuations for our bottom line results, we may not be
able to maintain this ratio of revenue to expense in the future. In addition, we may not be able to repatriate cash without incurring
substantial risks involving floating currency exchange rates, or to recover or apply withholding taxes remitted to foreign governments.
Any of the foregoing factors may have a material adverse impact on our business, financial condition and results of operations. In
addition, there have been proposals to change U.S. tax laws that would significantly impact how U.S. multinational corporations are
taxed on foreign earnings. Although we cannot predict whether or in what form any proposed legislation may pass, if enacted it could
have a material adverse impact on our tax expense and cash flow.
Our revenue, earnings and profitability are affected by the length of our sales cycle, and a longer sales cycle could
adversely affect our results of operations and financial condition.
Our business is impacted by the length of our sales cycles. Our customers have relatively complex businesses and the
purchase of large communications solutions used for enterprise-wide, mission-critical purposes, involve significant capital
expenditures and lengthy implementation plans. Prospective customers often take a long period of time to evaluate our products and
services and require us to spend substantial time, effort and money educating them about our solutions. The purchase of the types of
products and services we offer typically also requires coordination and agreement across many departments within a customer’s
organization. This process often results in a lengthy sales cycle, typically ranging between three and twelve months. Mergers and
acquisitions of large communications companies, as well as the formation of new alliances, have also resulted in a purchasing delays.
Further lengthening of our sales cycle could hinder growth in our revenue and result in increased cost of sales, thereby reducing our
profitability.
We depend on a limited number of significant customers for a substantial portion of our revenue, and the loss of one or
more of these customers, or a delay in a large order, could adversely affect our business.
We earn a significant portion of our revenue from a small number of customers in the communications industry. The loss of
any significant customer, delays in delivery or acceptance of any of our products by a customer, delays in performing services for a
customer, or delays in collection of customer receivables could harm our business and operating results to a greater degree than other
companies with a broader customer base.
Customers’ budgetary constraints and internal acceptance reviews may cause potential customers to delay or forego a
purchase, making it difficult for us to forecast the timing and size of our contracts. In addition, our sales opportunities in any given
quarter and year typically include a few high value opportunities. The delay or failure to close one or more large orders could have a
material adverse effect on our results of operations and financial condition and cause our results to vary significantly from quarter to
quarter and year to year.
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Our managed services offerings and our cloud strategy, or Software as a Service (SaaS), may not be successful.
We offer some of our products as a managed service or a SaaS implementation and we intend to offer more of our solutions
in this manner in the future. While we believe the demand for managed services and cloud-based solutions is strong, there are no
guarantees that we will be able to compete effectively, generate significant revenues or maintain profitability. Whether we are
successful in providing our solutions as managed services or solutions as cloud solutions depends on our execution in a number of
areas, including continuing to innovate and bring to market compelling managed services and cloud-based offerings and ensuring that
our services meet the reliability expectations of our customers and maintain the security of customer data. Our managed and cloud-
based services strategies also may fail to achieve success if other companies offering managed services and cloud-based solutions
experience data loss, security breaches or service reliability issues that cause consumers to become less willing to accept managed
services and cloud-based solutions in general.
We incurred debt in connection with our recent acquisition of SSM which could adversely affect our financial condition
and restrict our operating flexibility.
In connection with our acquisition of SSM in September 2015, we increased our revolving credit facility with East West
Bank from $5.0 million to $10.0 million (the “Revolving Facility”) and we used the full amount of the Revolving Facility to fund the
acquisition. The Revolving Facility was secured by substantially all of the Company’s assets, including a pledge, subject to certain
limitations with respect to stock of foreign subsidiaries, of the stock of the existing and future direct subsidiaries of the Company. The
Revolving Facility required the Company to pay monthly payments of interest, with the unpaid balance due on October 22, 2016.
On February 29, 2016, we entered into a term loan agreement with East West Bank (“Term Loan”) for $6.0 million. The
Term Loan bears interest at a floating rate equal to the U.S. Prime Rate plus 1.0%, and is secured by substantially all of the
Company’s assets, including a pledge, subject to certain limitations with respect to stock of foreign subsidiaries, of the stock of the
existing and future direct subsidiaries of the Company. Interest accrues and is payable monthly. We are required to repay the Term
Loan in 36 equal monthly installments, commencing on January 1, 2017. We must maintain a minimum current ratio, a specified ratio
of Total Liabilities to EBITDA and a minimum fixed charge coverage ratio, as defined in the Term Loan. The Term Loan requires us
to pay two annual credit facility fees of $18,750. We were required to use the $6 million Term Loan proceeds, plus $4.0 million from
our cash reserves, to pay off the Revolving Facility. The Term Loan matures on January 1, 2020.
The Term Loan includes negative covenants that place restrictions on the Company’s ability to, among other things: incur
additional indebtedness; create liens or other encumbrances on assets; make loans, enter into letters of credit, guarantees, investments
and acquisitions; sell or otherwise dispose of assets; cause or permit a change of control; merge or consolidate with another entity;
make negative pledges; enter into affiliate transactions; limits the amount of cash distributions to our shareholders; and change the
nature of our business materially. Outstanding amounts under the Term Loan may be accelerated by East West Bank upon the
occurrence and continuance of certain events of default, including without limitation: payment defaults, breach of covenants beyond
applicable grace periods, breach of representations and warranties, bankruptcy and insolvency defaults, and the occurrence of a
material adverse effect (as defined). Acceleration is automatic upon the occurrence of certain bankruptcy and insolvency defaults.
Our debt and related obligations, including interest payments, covenants and restrictions, could have important consequences,
including the following:
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reserving cash in order to satisfy the obligations relating to our debt could adversely affect the amount or timing of
investments to grow our business, impairing our ability to invest in and successfully grow our business;
our existing debt could limit our ability to obtain additional financing on satisfactory terms to fund our working capital
requirements, capital expenditures, acquisitions, debt obligations and other general corporate requirements;
our debt may increase our vulnerability to general economic downturns, competition and industry conditions and we may
be unable to take advantage of opportunities that our leverage prevents us from exploiting, placing us at a disadvantage to
our competitors that are less leveraged; and
the Term Loan imposes restrictions on the manner in which we conduct our business, including restrictions on our ability
to pay dividends, incur additional debt and sell assets.
The obligations under the Term Loan could have an adverse effect on our business, financial condition, operating results or
cash flows. In addition, our failure to comply with the covenants under the Term Loan could result in an event of default and
acceleration of the outstanding balance, which could significantly harm our business and cause our stock price to decline.
Acquisitions present many risks and we may not realize the financial and strategic goals that were contemplated at the
time of a transaction.
In September of 2015 we acquired SSM and we expect to continue making acquisitions or entering into strategic alliances as
part of our long-term business strategy. We cannot be sure that these transactions will ultimately enhance our products or strengthen
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our competitive position. These transactions involve significant challenges and risks: they may not advance our business strategy, we
may not get a satisfactory return on our investment, we may have difficulty integrating operations, new technologies, products and
employees, and they may distract management and employees from our other businesses. Furthermore, we may fail to identify or
assess the magnitude of certain liabilities, shortcomings or other circumstances prior to acquiring a company or technology, which
could result in unexpected litigation or regulatory exposure, unfavorable accounting treatment, unexpected increases in taxes due, a
loss of anticipated tax benefits or other adverse effects on our business, operating results or financial condition. The success of these
transactions will depend in part on our ability to leverage them to enhance our existing products and services or develop compelling
new ones. It may take longer than expected to realize the full benefits from these transactions, such as increased revenue, enhanced
efficiencies, or increased market share, or the benefits may ultimately be smaller than we expected. In addition, future acquisitions
could result in dilutive issuances of equity securities, reduce our cash available for operations and increase our debt. The occurrence of
any of these risks could have a material adverse effect on our business, results of operations, financial condition or cash flows,
particularly in the case of a large acquisition or several concurrent acquisitions.
Our periodic workforce restructurings can be disruptive.
We have in the past restructured our workforce in response to management changes, acquisitions, product changes,
performance issues or other considerations. These types of restructurings have resulted in increased restructuring costs and temporary
reduced productivity while our staff adjusted to new roles and responsibilities. We may choose to implement additional restructuring,
particularly in connection with future acquisitions. There is no certainty that we will achieve the expected cost savings or other
benefits of these restructurings, or do so within the expected timeframe. As a result, our business, revenues and other results of
operations could be negatively affected.
Our products are complex and have a lengthy implementation process; unanticipated difficulties or delays in the customer
acceptance process could result in higher costs and delayed payments.
Implementing our solutions can be a relatively complex and lengthy process since we typically customize these solutions for
each customer’s unique environment. Often our customers also require rapid deployment of our software solutions, resulting in
pressure on us to meet demanding delivery and implementation schedules. Inability to meet these demanding schedules, or quality
issues resulting from accelerated delivery schedules, may result in customer dissatisfaction and/or damage our reputation, which could
materially harm our business.
The majority of our existing contracts provide for acceptance testing by the customer, which can be a lengthy process.
Unanticipated difficulties or delays in the customer acceptance process could result in higher costs, delayed payments, and deferral of
revenue recognition. In addition, if our software contains defects or we otherwise fail to satisfy acceptance criteria within prescribed
times, the customer may be entitled to liquidated damages, to cancel its contract and receive a refund of all or a portion of amounts
paid or to seek other monetary damages. These could exceed related contract revenue and result in a future charge to earnings. Any
failure or delay in achieving final acceptance of our software and services could harm our business, financial condition, results of
operations and cash flows.
We face risks associated with doing business through local partners.
In some countries, because of local customs and regulations or for language reasons, we do business through local partners
who resell our products and services, with or without value-added services. This can cause delays in closing contracts because of the
increased complexity of having another party involved in negotiations. In addition, where the local partner provides additional
software, hardware and/or services to the end-user customer, our products and services may only be a small portion of the total
solution. As a result, conditions surrounding acceptance and payments owed to us may be impacted by factors that are out of our
control. Resellers may also delay paying us even when they have been paid by the end-user customer. We have experienced delays in
closing contracts through partners and collecting from resellers and this situation may arise again in the future, negatively impacting
our cash flows. Doing business through local partners may also increase our risks under anti-bribery regulations, discussed below.
The success of our business depends on continued growth in the wireless services industry and demand for connected
devices, mobile advertising and other usage of mobile data.
The future success of our business depends upon continued new subscriber growth and carrier demand for next generation
solutions. If there is a slowdown in subscriber growth in the wireless services industry or the demand for connected devices and usage
of mobile data were to stabilize or decline, our business and results of operations may be adversely affected.
We are a relatively small company with a limited number of products and staff. Sales fluctuations and employee turnover
may adversely affect our business.
We are a relatively small company. Consequently, compared to larger companies, sales fluctuations could have a greater
impact on our revenue and profitability on a quarter-to-quarter and year-to-year basis and a delayed contract could cause our operating
results to vary significantly from quarter to quarter and year-to-year. In addition, as a small company we have limited staff and are
heavily reliant on certain key personnel to operate our business. If a key employee were to leave the company it could have a material
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impact on our business and results of operations as we might not have sufficient depth in our staffing to fill the role that was
previously being performed. A delay in filling the vacated position could put a strain on existing personnel or result in a failure to
satisfy our contractual obligations or to effectively implement our internal controls, and materially harm our business.
Because our quarterly and annual operating results are difficult to predict and may fluctuate, the market price for our
stock may be volatile.
Our operating results have fluctuated significantly in the past and may continue to fluctuate significantly in the future from
quarter-to-quarter and year-to-year. These quarterly and annual fluctuations may result from a number of factors, including:
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the size of new contracts, rate of progress under our contracts and when we are able to recognize the related revenue;
foreign exchange fluctuations;
budgeting cycles of our customers;
changes in the terms and rates related to the renewal of support agreements;
the mix of products and services sold;
the timing of delivery of software and hardware by third parties;
level and timing of operating expenses and capital investments;
changes in our strategy; and
general economic conditions.
As a result, quarter-to-quarter and year-to-year comparisons of operating results are not necessarily meaningful nor do they
indicate what our future performance will be. Furthermore, we base our operating expenses and capital investment budgets on
expected sales and revenue and many of our expenses, such as lease expenses and personnel costs, are relatively fixed in the short
term. Variations in the rate and timing of conversion of our sales prospects into actual revenue could cause us to plan or budget
inaccurately and we may be unable to adjust spending quickly enough to compensate for an unexpected shortfall in revenue. Any
significant shortfall in anticipated levels of demand for our products and services could adversely affect our business, financial
condition, results of operations and cash flows and the market price of our common stock.
The markets for our service activation and number management products are mature and the markets for our DSA and
RLM products are evolving. The industry in which we compete is subject to rapid technological change and if we do not
adapt to rapid technological change, we could lose customers or market share.
Our industry is characterized by rapid technological change, evolving industry standards, changes in carrier requirements and
preferences and frequent new service offerings. The introduction of products that incorporate new technologies and the emergence of
new industry standards can make existing products obsolete and unmarketable. To compete successfully, we must continue to design,
develop and sell new products and enhancements to existing products that provide higher levels of performance and reliability, take
advantage of technological advancements and changes in industry standards and respond to new customer requirements. Developing
new products and services is complex and time-consuming. It can require long development and testing periods. Significant delays in
new releases or significant problems in creating new products or services could adversely affect our revenue.
If we are unable to properly supervise our software development staff in India, or if political or other uncertainties
interfere, we may be unable to satisfactorily perform our customer contracts.
In 2004, we formed Evolving Systems India, a wholly owned subsidiary of Evolving Systems, Inc. and as a result of our
2015 acquisition of SSM, we acquired two additional Indian subsidiaries. We have experienced a high level of turnover with our
Indian development staff as a result of strong competition for technology-based personnel in India. In addition, salary levels in India
are steadily increasing, reducing the competitive advantages associated with offshore labor. If we are unable to effectively manage our
India-based development staff and/or we continue to experience high levels of staff turnover, we may fail to provide quality software
in a timely fashion. Furthermore, political changes and uncertainties in India could negatively impact the business climate there. As a
result, we may be unable to satisfactorily perform our customer contracts and our business, financial condition and results of
operations could be materially harmed.
Changes or challenges to the regulations of the communication industry could hurt the market for our products and
services.
Our customers may require, or we may find it necessary or advisable, to modify our products or services to address actual or
anticipated changes in regulations affecting our customers. This could increase our costs, delay adoption of our products and increase
our sales cycle, which could materially harm our business, financial condition, results of operations, and cash flows. We are also
subject to numerous regulatory requirements of foreign jurisdictions, which are often complex and changing. Any failure to comply
with such regulations could, likewise, materially harm our business, financial condition, results of operations and cash flows.
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Consolidation in the communications industry may impact our financial performance.
The global communications industry has experienced and continues to experience significant consolidation. These
consolidations have caused us to lose customers and may result in fewer potential customers. In addition, combining companies often
re-evaluate their solutions and their capital expenditures, choosing to consolidate with one solution; there is no guarantee our solution
will be selected in this process. As our customers become larger, they generally have longer sales cycles and stronger purchasing
power, which can result in delays in securing contracts and pressure to reduce our prices. All of these factors can have a negative
impact on our financial performance, particularly in any fiscal quarter.
Many of our products and services are sold on a fixed-price basis. If we incur budget overruns this may reduce our
profitability.
A large portion of our revenue currently is, and historically has been, derived from fixed-price contracts and we expect this
will continue. These contracts specify certain obligations and deliverables we must meet regardless of the actual costs we incur.
Projects done on a fixed-price basis are subject to budget overruns. On occasion, we have experienced budget overruns, resulting in
lower than anticipated margins. We may incur similar budget overruns in the future, including overruns that result in losses on these
contracts. If we incur budget overruns, our margins may be harmed, thereby affecting our overall profitability.
Percentage-of-completion accounting used for most of our projects can result in overstated or understated profits or
losses.
The revenue for our license fee/services and fixed-price services contracts is accounted for on the percentage-of-completion
method of accounting. Under this method we recognize revenue and profits for each project based on the percentage of the project
that is completed, which requires us to estimate the total cost to complete the project, project schedule and completion date, and
probable change orders. Our failure to accurately estimate these often subjective factors could result in overstated or understated
revenue, profits or losses.
The communications industry is highly competitive and if our products do not satisfy customer demand for performance
or price, our customers could purchase products and services from our competitors.
Our primary markets are intensely competitive and we face continuous demand to release new products, new features and
product enhancements, to improve product performance and to reduce prices. Our competitors include many large domestic and
international companies who have substantially greater resources, larger installed customer bases and longer-standing relationships
with customers. In addition, some companies who would not typically compete with us, such as network equipment
manufacturers,offer next generation solutions that address some of the benefits provided by our DSA solution.
Our customers are not precluded from competing with us and also may offer competitive products or services. Many
telecommunications companies have large internal development organizations, which develop software solutions and provide services
similar to the products and services we provide.
We believe that our ability to compete successfully depends on numerous factors, including the quality and price of our
products and services compared to those of our competitors, the emergence of new industry standards and technical innovations and
our ability to respond to those changes. Some of these factors are within our control, and others are not. A variety of potential actions
by our competitors, including price reductions or increased marketing and promotion, accelerated introduction of new or enhanced
products, or cooperative relationships among competitors and their strategic partners, could negatively impact the sale of our products.
We may have to reduce the prices we charge for our products, resulting in lower revenue and operating margins. We may not be able
to compete successfully or to properly identify and address the demands of new markets. This is particularly true in new markets
where standards are not yet established. Our failure to adapt to emerging market demands, respond to regulatory and technological
changes or compete successfully with existing and new competitors would materially harm our business, financial condition, results of
operations and cash flows.
Our business depends largely on our ability to attract and retain talented employees.
Attracting and retaining talented employees is key to our success. The market for skilled workers in our industry is very
competitive. We may not be able to retain personnel or to hire additional personnel on a timely basis, if at all. Because of the
complexity of our software solutions, a significant time lag exists between the hiring date of technical and sales personnel and the time
when they become fully productive. We have at times experienced high employee turnover and difficulty in recruiting and retaining
technical personnel. Our failure to retain personnel or to hire qualified personnel on a timely basis could adversely affect our business
by impacting our ability to develop new products, to complete our projects and secure new contracts.
Our products are complex and may have errors that are not detected until deployment. Resolving warranty and product
liability claims could be expensive and could negatively affect our reputation and profitability.
The provisions of our agreements with customers are designed to limit our exposure to potential liability for damages arising
out of the use of, or defects in, our products. We cannot guarantee that these limitations will be effective. Although we carry errors
and omissions insurance, to the extent that any successful product liability claim is not covered by our errors and omissions insurance
or exceeds the coverage under our policy, we may be required to incur legal fees and pay for a claim. This could be expensive,
particularly since our software products may be used in critical business applications. On occasion, we also engage subcontractors to
10
provide deliverables under customer contracts; we could be required to indemnify customers for work performed by our
subcontractors. We may be able to recover these damages from a subcontractor, but there is no guarantee that we will be able to do so.
Defending against a product liability claim, regardless of its merits, could be expensive and require the time and attention of key
management personnel, either of which could materially harm our business, financial condition and results of operations. In addition,
our business reputation could be harmed by product liability claims, regardless of their merit or the eventual outcome of these claims.
Our business practices with respect to handling personally identifiable information could give rise to liabilities.
During the course of providing our products and services we may collect names, addresses, telephone numbers and other
personally identifiable information, or “PII”. This may subject us to complex regulatory requirements related to data collection and
risks of improper use or disclosure. We strive to limit the amount of PII we collect and/or store and we have implemented steps
designed to protect against unauthorized access to such information but because of the inherent risks and complexities involved in
protecting this information, particularly if we store such information in a cloud implementation, the steps we have taken may not be
sufficient to prevent the misappropriation or improper disclosure of such PII. In addition, third party vendors that we engage to
perform services for us may unintentionally release PII or otherwise fail to comply with applicable laws and regulations. Some
countries have passed or are considering passing legislation that requires personal data to remain localized in their boundaries and are
also imposing monetary fines for privacy violations. We will incur additional costs if we are required to implement special
operational processes and store data in jurisdictions not of our choosing. Any failure by us to comply with laws and regulations
regulating privacy, data security, or consumer protection could result in lost or restricted business, actions or fines brought against us
or levied by governmental entities or others, and could adversely affect our business and harm our reputation.
Our measures to protect our intellectual property may not be adequate.
Our success and ability to compete are dependent to a significant degree on our proprietary technology. Protecting our global
intellectual property rights is difficult. We rely on a combination of patent, copyright, trademark and trade secret laws, as well as
confidentiality agreements and licensing arrangements, to establish and protect our proprietary rights. We have 16 patents in the U.S.
on elements of our DSA and mobile broadband enablement products and patents pending in other countries on elements of our DSA
and Intelligent M2M Controller™ (“IMC”) products. In addition, we have registered or filed for registration of certain of our
trademarks. Our patent portfolio is relatively small and given the cost of obtaining additional patent protection, we may choose not to
patent certain inventions that later become important. There is also the possibility that our means of protecting our proprietary rights
may not be adequate; a third party may copy or otherwise obtain and use our products or technology without authorization or may
develop similar technology independently or design around our patents. In addition, the laws of some foreign countries may not
adequately protect our proprietary rights.
Source code, the detailed program commands for our software programs, is critical to our business. While we take steps to
limit access to our source code and to protect it as a trade secret, we may not be able to protect our source code from copying if there
is an unauthorized disclosure. Trade secret protection for that source code could be jeopardized, making it easier for third parties to
develop competing products.
If our intellectual property protection proves inadequate, we may lose our competitive advantage and our future financial
results may suffer.
Third parties may claim we are infringing their intellectual property rights, or that we have not complied with their license
requirements and we may incur significant expenses in resolving these claims.
It is possible that our business activities may infringe upon the proprietary rights of others, or that other parties may assert
infringement claims against us. Those claims may involve patent holding companies or other adverse patent owners who have no
relevant product revenue of their own, and against whom our own patents may provide little or no deterrence. We could incur
substantial costs in defending against any infringement claim and we could be required to develop non-infringing technology, obtain
licenses, or cease selling the applications that contain the infringing intellectual property. Adverse publicity related to any intellectual
property litigation also could harm the sale of our products and damage our competitive position.
Certain software we develop or use may include so called “open source” software made available under a license which may
impose obligations on us in the event we distribute derivative works based on the open source software. Certain licenses impose
obligations that could require us to make source code for a derivative work available to the public or license the derivative work under
a particular type of open source software license, rather than the license terms we customarily use to protect our software.
There is little or no legal precedent for interpreting the terms of certain of these open source licenses, including the terms
addressing the extent to which software incorporating open source software may be considered a derivative work subject to these
licenses. We believe we have complied with our obligations under the various applicable open source licenses. However, if the
owner of any open source software were to successfully establish that we had not complied with the terms of an open source license
for a particular product that includes such open source software, we may be forced to release the source code for that derivative work
to the public or cease distribution of that work.
11
Cyber-attacks and security vulnerabilities could lead to reduced revenue, increased costs, liability claims, or harm to our
competitive position.
Increased sophistication and activities of perpetrators of cyber-attacks have resulted in an increase in information security
risks in recent years. Hackers develop and deploy viruses, worms, and other malicious software programs that attack products and
services and gain access to networks and data centers. A substantial portion of our software development and customer support is
provided from our India facility, which may be subject to increased risk of power loss, telecommunications failure, terrorist attacks
and similar events. If we were to experience difficulties maintaining existing systems or implementing new systems, we could incur
significant losses due to disruptions in our operations. Additionally, these systems contain valuable proprietary and confidential
information and may contain personal data of our customers’ subscribers. A security breach could result in disruptions of our internal
systems and business applications, impairment of our ability to provide services to our customers, product development delays, harm
to our competitive position from the compromise of confidential business information, or subject us to liability under laws that protect
personal data. Although we believe that we have robust information security procedures and other safeguards in place, many of our
services do not have fully redundant systems or a formal disaster recovery plan, and we may not have adequate business interruption
insurance to compensate us for losses that occur from a system outage. As cyber threats continue to evolve, we may be required to
expend additional resources to continue to enhance our information security measures and/or to investigate and remediate any
information security vulnerabilities. Any of these consequences would adversely affect our revenue and margins.
Disruptions from terrorist activities, geopolitical conditions or military actions may disrupt our business.
The continued threat of terrorism and acts of war may cause significant disruption to commerce throughout the world. Abrupt
political changes and armed conflict pose a risk of economic disruption in affected countries, which may increase our operating costs
and add uncertainty to the timing and budget for technology investment decisions by our customers. Our business and results of
operations could be materially and adversely affected to the extent that such disruptions result in delays or cancellations of customer
orders, delays in collecting cash, a general decrease in corporate spending on information technology, or our inability to effectively
market, manufacture or ship our products. We are unable to predict whether war, political unrest and the threat of terrorism will result
in any long-term commercial disruptions or if such activities will have any long-term material adverse effect on our business, results
of operations, financial condition or cash flows.
Our international operations subject us to potential liability under anti-corruption laws and regulations.
Our international business operations are subject to the Foreign Corrupt Practices Act (“FCPA”), which generally prohibits
U.S. companies and their intermediaries from paying or offering anything of value to foreign government officials for the purpose of
obtaining or keeping business, or otherwise receiving discretionary favorable treatment of any kind. To the extent we do business
through Evolving Systems U.K., we are also subject to the U.K. Bribery Act of 2010. In addition, many countries in which we do
business have their own anti-bribery rules and regulations. Under these regulations, we may be held liable for actions taken by our
local partners and agents, even if such parties act without our knowledge. Any determination that we have violated the FCPA or the
Bribery Act of 2010 (whether directly or through acts of others, intentionally or through inadvertence) or other anti-bribery legislation
could result in sanctions that could have a material adverse effect on our business. While we have procedures and controls in place to
monitor compliance, situations outside of our control may arise that could put us in violation of anti-bribery legislation inadvertently
and thus negatively impact our business.
As a result of operating as a smaller public company, our management is required to devote a substantial amount of time
to comply with regulatory matters; our relatively small staff can make compliance challenging.
Because our common stock is publicly traded, we are subject to certain rules and regulations of federal, state and financial
market exchange entities charged with the protection of investors and the oversight of companies whose securities are publicly traded.
These entities, including the Public Company Accounting Oversight Board, the SEC and NASDAQ, have issued requirements and
regulations and continue to adopt additional regulations and requirements in response to laws enacted by Congress. Establishment of
effective internal controls is further complicated because we are a relatively small company with global operations, and multiple
locations and IT systems. Our management and other personnel have, and will continue to devote a substantial amount of time to these
compliance initiatives.
Changes in, or interpretations of, accounting principles or tax rules and regulations, could adversely affect our results of
operations.
We prepare our consolidated financial statements in conformity with U.S. generally accepted accounting principles
(“GAAP”). It is possible that future requirements could change our current application of U.S. GAAP, resulting in a material adverse
impact on our financial positions or results of operation. In addition, our future effective tax rates could be unfavorably affected by
changes in tax laws or the interpretation of tax laws or by changes in the valuation of our deferred tax assets and liabilities. We
regularly assess our implementation of applicable accounting principles and the adequacy of our provision for income taxes, but we
are a relatively small company and our business is complex; the final determination of any tax authority, upon examination of our
income tax returns, could have an adverse effect on our operating results and financial position.
12
Sales of large blocks of our stock may result in the reduction in the market price of our stock and make it more difficult to
raise funds in the future.
If our stockholders sell substantial amounts of our common stock in the public market, the market price of our common stock
could fall. The perception among investors that such sales will occur could also produce this effect. We currently have several
stockholders who own large percentages of our stock. To the extent we continue to have one or more stockholders who own a large
percentage of our stock and those stockholders chose to liquidate their holdings, it may have a dramatic impact on the market price of
our stock. These factors also could make it more difficult to raise funds through future offerings of common stock.
Certain provisions of our charter documents, employment arrangements and Delaware law may discourage, delay or
prevent an acquisition of us, even if an acquisition would be beneficial to our stockholders, and may prevent attempts by
our stockholders to replace or remove our current management.
Provisions of our amended and restated certificate of incorporation and bylaws, as well as provisions of Delaware law, could
make it difficult for a third party to acquire us, even if doing so would benefit our stockholders. In addition, these provisions, which
make it more difficult for stockholders to replace members of our board of directors, may frustrate or prevent attempts by our
stockholders to replace or remove our current management because our board of directors is responsible for appointing the members
of our management team. These provisions include the following:
•
our stockholders cannot take action by written consent;
• we have advance notice requirements for nominations for election to the Board of Directors or for proposing matters that can
be acted upon at stockholder meetings;
•
•
our stockholders can only remove directors without cause by supermajority vote; and
our stockholders can only amend our bylaws or certain Board of Directors-related provisions of our amended and restated
certificate of incorporation by a supermajority vote.
In addition, we are subject to the anti-takeover provisions of Section 203 of Delaware General Corporation Law, which
prohibit us from engaging in a “business combination” with an “interested stockholder” for a period of three years after the date of the
transaction in which the person became an interested stockholder, unless the business combination is approved in the prescribed
manner. The application of Section 203 and certain provisions of our restated certificate of incorporation may have the effect of
delaying or preventing changes in control of our management, which could adversely affect the market price of our common stock by
discouraging or preventing takeover attempts that might result in the payment of a premium price to our stockholders.
Our named executive officers have entered into agreements with us that contain a change in control provision. These
agreements generally provide for acceleration on vesting of stock awards. The acceleration of vesting of stock awards upon a change
in control may be viewed as an anti-takeover measure and may have the effect of discouraging a merger proposal, tender offer or other
attempt to gain control of us.
Our Stock Incentive Plans provide for acceleration of vesting of stock awards under certain changes in control. As noted
above, the acceleration on vesting of stock awards upon a change in control may be viewed as an anti-takeover measure.
All of the above factors could adversely affect the market price of our common stock by discouraging or preventing takeover
attempts that might result in the payment of a premium price to our stockholders.
We suspended our dividends in 2016 and we may not pay dividends in the future.
In June, 2016, our Board of Directors suspended our quarterly dividends. Any decision to pay dividends in the future and the
amount of any dividend we may declare will depend on general business conditions, the impact of such payment on our financial
condition and other factors our Board of Directors may consider to be relevant. In addition, our term loan facility limits our ability to
pay dividends by establishing a maximum amount that can be paid per quarter and prohibiting payment of dividends when an event of
default has occurred. If we elect to pay future dividends, this could reduce our cash reserves to levels that may be inadequate to fund
expansions to our business plan or unanticipated contingent liabilities.
Our stock price could become more volatile and your investment could lose value.
All of the factors discussed in this section, as well as general economic and market conditions, could affect our stock price. A
significant drop in our stock price could also expose us to the risk of securities class actions lawsuits, which could result in substantial
costs and divert management’s attention and resources, which could adversely affect our business.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
13
ITEM 2.
PROPERTIES
We lease office space at various locations which are shown below.
Location
Englewood, Colorado (Headquarters) ......................................
Durham, North Carolina ...........................................................
London, England ......................................................................
Bangalore, India .......................................................................
Kolkata, India ...........................................................................
Kolkata, India ...........................................................................
Kuala Lumpur, Malaysia ..........................................................
Bucharest, Romania ..................................................................
Square
Footage
Lease
Expiration
5,092
2,860
2,200
12,300
1,575
2,708
1,042
215
11/30/17
7/31/18
3/02/20
8/18/18
10/31/18
11/14/18
7/14/17
9/30/17
We believe that our facilities are adequate for our current and near-term needs, and that we will be able to locate additional
facilities as needed.
ITEM 3.
LEGAL PROCEEDINGS
From time to time, we are involved in various legal matters arising in the normal course of business. We do not believe that
any such matters, either individually or in the aggregate, will have a material impact on our results of operations and financial
position.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is traded on the Nasdaq Capital Market under the symbol “EVOL.” The following table sets forth the
high and low sale prices of our common stock for the periods indicated.
First Quarter ...............................................................
Second Quarter ..........................................................
Third Quarter .............................................................
Fourth Quarter ............................................................
$
$
$
$
5.92
5.82
5.53
4.45
$
$
$
$
4.99
5.02
3.99
3.85
$
$
$
$
9.45
9.98
9.27
6.17
$
$
$
$
8.01
8.44
5.30
5.32
For the Years Ended December 31,
2016
2015
High
Low
High
Low
As of March 23, 2017, there were approximately 64 holders of record of our common stock.
Dividends
Our Board of Directors declared a cash dividend of $0.11 per share in the first and second quarters of 2016. In 2015, our
Board of Directors declared a cash dividend of $0.11 per share during each of the four quarters of 2015. In June 2016, our Board of
Directors suspended our quarterly dividends and there can be no guarantee that we will resume paying dividends. Any decision to
declare dividends in the future and the amount of any dividend we may declare will depend on general business conditions, the impact
of such payment on our financial condition and other factors our Board of Directors may consider to be relevant. In addition, our term
loan facility limits our ability to pay dividends by establishing a maximum amount that can be paid per quarter and prohibiting
payment of dividends when an event of default has occurred. Payment of future dividends can also affect our business as this could
reduce our cash reserves to levels that may be inadequate to fund expansions to our business plan or unanticipated contingent
liabilities.
14
Stock Performance Graph
The following graph compares the cumulative 5-year total return provided to shareholders on Evolving Systems, Inc.’s
common stock relative to the cumulative total returns of the NASDAQ Composite index, the RDG Software Composite index and the
DJ US MicroCap Total Stock Market Software index. An investment of $100 (with reinvestment of all dividends) is assumed to have
been made in our common stock and in each index on 12/31/2011 and its relative performance is tracked through 12/31/2016.
Evolving Systems, Inc. ..................................................
NASDAQ Composite ....................................................
RDG Software Composite .............................................
DJ US MicroCap Total Stock Market Software
12/11
12/12
12/13
12/14
12/15
12/16
100.00
100.00
100.00
148.10
116.41
114.89
253.45
165.47
153.74
255.08
188.69
179.96
159.44
200.32
199.43
123.70
216.54
210.40
Index ..........................................................................
100.00
116.50
154.88
181.44
198.46
215.89
15
ITEM 6.
SELECTED FINANCIAL DATA
The selected financial data set forth below for each of the years in the five-year period ended December 31, 2016, has been
derived from our consolidated financial statements. The following selected financial data should be read in conjunction with “Item 7
Management’s Discussion and Analysis of Financial Condition and Results of Operations,” the consolidated financial statements and
the notes thereto and other financial information included elsewhere in this Annual Report on Form 10-K.
2016
For the Years Ended December 31,
2013
2014
2015
(in thousands, except per share amounts)
2012
Revenue ........................................................................................
Costs of Revenue and Operating Expenses:
Costs of revenue, excluding depreciation and amortization ..........
Sales and marketing ..................................................................
General and administrative .......................................................
Product development ................................................................
Depreciation ..............................................................................
Amortization .............................................................................
Restructuring and other expense ...............................................
Income (loss) from operations ......................................................
Interest and other income (expense), net .......................................
Interest and other income, related parties, net ...............................
Income tax expense (benefit) ........................................................
Net income ....................................................................................
Basic income per common share - net income ..............................
Diluted income per common share - net income...........................
Weighted average basic shares outstanding ..................................
Weighted average diluted shares outstanding ...............................
Cash dividend declared per common share (1) (3) .......................
$
24,778 $
25,576 $
29,680 $
25,093 $
26,247
5,297
4,965
3,855
3,014
259
783
1,010
5,595
(703)
—
1,457
3,435 $
6,449
5,844
4,003
3,847
314
266
533
4,320
(109)
—
915
3,296 $
7,648
5,734
3,638
3,643
246
95
237
8,439
(34)
—
2,797
5,608 $
7,164
5,364
3,644
2,956
155
211
558
5,041
39
—
1,274
3,806 $
0.29 $
0.29 $
0.28 $
0.28 $
0.48 $
0.47 $
0.33 $
0.32 $
11,845
11,961
11,693
11,935
11,642
11,926
11,459
11,756
$
$
$
$
0.22 $
0.44 $
0.42 $
0.36 $
8,236
5,070
3,613
3,069
268
400
—
5,591
842
532
1,401
5,564
0.49
0.48
11,278
11,529
2.00
Working capital (2) .......................................................................
Total assets ....................................................................................
Stockholders’ equity .....................................................................
$
$
7,989 $
43,755
29,334 $
3,478 $
50,429
32,162 $
15,794 $
44,232
34,052 $
14,699 $
43,184
32,735 $
13,894
36,593
30,836
(1) During 2012, our Board of Directors declared and paid a first, third and fourth quarter cash dividend of $0.05 per share each and a
second and fourth quarter special cash dividend of $1.70 and $0.15 per share, respectively. There were no accrued dividends as of
December 31, 2012. In addition, the special cash dividend declared in the fourth quarter 2011 of $2.00 per share was paid in
January 2012.
(2) On September 30, 2015, we completed the acquisition of SSM for an initial cash payment totaling approximately $9.75 million,
plus customary working capital adjustments, and we agreed to make a payment of $250,000 on the one year anniversary of the
transaction, with such payment being available to secure SSM’s representations and warranties under the acquisition agreement.
The initial payment was financed through our revolving line of credit, which required monthly payments of interest, with the
unpaid balance due on October 22, 2016. As this debt was due in twelve months, it reduced our working capital as of
December 31, 2015 by $10.0 million. On February 29, 2016, we entered into the Fifth Amendment to the Loan and Security
Agreement to enter into a Term Loan for $6.0 million. Interest shall accrue from the date the Term Loan is made and shall be
payable monthly. The Term Loan shall be repaid in 36 equal monthly installments of principal, plus accrued but unpaid interest,
commencing on January 1, 2017 and continuing on the first day of each month thereafter through and including January 1, 2020.
The Term Loan agreement required us to use the term loan proceeds and $4.0 million from our cash balances to pay off the
existing Revolving Facility totaling $10.0 million. The Term Loan matures on January 1, 2020. Due to the Term Loan, our
working capital balances increased in 2016 as a result of paying off the existing Revolving Facility totaling $10.0 million.
(3) On June 30, 2016, our Board of Directors suspended the quarterly dividends. Prior to suspending the dividend, our Board of
Directors declared a first quarter cash dividend of $0.11 per share on March 15, 2016, which was paid April 1, 2016, to
stockholders of record March 28, 2016 and a second quarter cash dividend of $0.11 per share, on May 3, 2016, which was paid on
July 1, 2016, to stockholders of record June 3, 2016.
16
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
FORWARD-LOOKING STATEMENTS
This Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking
statements that have been made pursuant to the provisions of the Private Securities Litigation Reform Act of 1995. These forward-
looking statements are based on current expectations, estimates, and projections about Evolving Systems’ industry, management’s
beliefs, and certain assumptions made by management. Forward-looking statements include our expectations regarding product,
services, and customer support revenue; our expectations associated with Evolving Systems India, Evolving Systems U.K. and
Evolving Systems NC and short- and long-term cash needs. In some cases, words such as “anticipates,” “expects,” “intends,”
“plans,” “believes,” “estimates,” variations of these words, and similar expressions are intended to identify forward-looking
statements. The following discussion should be read in conjunction with, and is qualified in its entirety by, the consolidated financial
statements and the notes thereto included elsewhere in this Annual Report on Form 10-K. Our actual results could differ materially
from those anticipated in these forward-looking statements as a result of certain factors, including those set forth in this section and in
“Item 1A - Risk Factors.”
OVERVIEW
Evolving Systems, Inc. is a leading provider of software solutions and services to the wireless, wireline and cable markets.
We maintain long-standing relationships with many of the largest wireline, wireless and cable companies worldwide. Our customers
rely on us to develop, deploy, enhance, maintain and integrate complex, reliable software solutions for a range of Operations Support
Systems (“OSS”). Our activation solution is the leading packaged solution for activation in the wireless industry.
We recognize revenue in accordance with the prescribed accounting standards for software revenue recognition under
generally accepted accounting principles. As a result, our license fees and services revenue fluctuate from period to period as a result
of the timing of revenue recognition on existing projects.
RECENT DEVELOPMENTS
We reported net income of $3.4 million, $3.3 million and $5.6 million for the years ended December 31, 2016, 2015 and
2014, respectively.
On September 30, 2015 we acquired privately held SSM, now known as Evolving Systems NC, Inc., a provider of real time
analytics and marketing solutions to wireless carriers, 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 SSM’s representations and warranties in the agreement. SSM’s software solution platform, RLM,
enables carriers’ marketing departments to innovate, execute and manage highly-personalized and contextually-relevant, interactive
campaigns that engage consumers in real time. RLM is included as a component of our Mobile Marketing Solutions (“MMS”)
product suite in license fees and service revenue and customer support revenue. The final payment has not been made as of the date
this Form 10-K was filed due to pending resolution of outstanding claims.
We declared and paid a $0.11 cash dividend per share in the first and second quarters of 2016.
We have operations in foreign countries where the local currency is used to prepare the financial statements which are
translated into our reporting currency, U.S. dollars. Changes in the exchange rates between these currencies and our reporting currency
are partially responsible for some of the changes from period to period in our financial statement amounts. The majority of the
changes in 2016 and 2015 are a result of the U.S. dollar strengthening on average versus the British Pound Sterling. The chart below
summarizes what the effects on our revenue and expenses would be on a constant currency basis. The constant currency basis assumes
that the exchange rate was constant for the periods presented (in thousands).
Revenue ...................................................................................................................................
Costs of revenue and operating expenses .................................................................................
Operating gain ..........................................................................................................................
$
$
(753) $
(1,318)
565
$
(954)
(1,219)
265
The net effect of our foreign currency translations for the year ended December 31, 2016 was a $0.8 million decrease in
revenue and a $1.3 million decrease in operating expenses versus the year ended December 31, 2015 due to a stronger U.S. dollar on
average during the year 2016. The net effect of our foreign currency translations for the year ended December 31, 2015 was a $1.0
million decrease in revenue and a $1.2 million decrease in operating expenses versus the year ended December 31, 2014 due to a
stronger U.S. dollar on average during the year 2015.
For the Years ended December 31,
2015 vs. 2014
2016 vs. 2015
17
RESULTS OF OPERATIONS
The following table presents our consolidated statements of operations in comparative format.
For the Years Ended December 31
,
2015
Change
2016
For the Years Ended December 31
,
2014
Change
2015
REVENUE
License fees .......................................................................
Services .............................................................................
Total revenue .........................................................................
$
2,873 $
21,905
24,778
3,161 $
22,415
25,576
(288) $
(510)
(798)
3,161 $
5,027 $
22,415
25,576
24,653
29,680
(1,866)
(2,238)
(4,104)
COSTS OF REVENUE AND OPERATING EXPENSES
Costs of revenue, excluding depreciation and amortization
......................................................................................
Sales and marketing ..........................................................
General and administrative ...............................................
Product development .........................................................
Depreciation ......................................................................
Amortization .....................................................................
Restructuring .....................................................................
Total costs of revenue and operating expenses ......................
Income (loss) from operations ...............................................
Interest income ..................................................................
Interest expense .................................................................
Other income (expense) ....................................................
Foreign currency exchange loss ........................................
Other (expense) income, net ..................................................
5,297
4,965
3,855
3,014
259
783
1,010
19,183
5,595
6
(340)
183
(552)
(703)
6,449
5,844
4,003
3,847
314
266
533
21,256
4,320
18
(121)
—
(6)
(109)
(1,152)
(879)
(148)
(833)
(55)
517
477
(2,073)
1,275
(12)
(219)
183
(546)
(594)
6,449
5,844
4,003
3,847
314
266
533
21,256
4,320
18
(121)
—
(6)
(109)
7,648
5,734
3,638
3,643
246
95
237
21,241
8,439
19
(17)
(27)
(9)
(34)
(1,199)
110
365
204
68
171
296
15
(4,119)
(1)
(104)
27
3
(75)
Income before income taxes ..................................................
Income tax expense ...........................................................
Net income ............................................................................
$
4,892
1,457
3,435 $
4,211
915
3,296 $
681
542
139 $
4,211
915
3,296 $
8,405
2,797
5,608 $
(4,194)
(1,882)
(2,312)
The following table presents our consolidated statements of operations reflected as a percentage of total revenue.
For the Years Ended December 31,
2015
2016
2014
REVENUE
License fees.........................................................................................................
Services ...............................................................................................................
Total revenue ..........................................................................................................
12%
88%
100%
12%
88%
100%
17%
83%
100%
COSTS OF REVENUE AND OPERATING EXPENSES
Costs of revenue, excluding depreciation and amortization ................................
Sales and marketing ............................................................................................
General and administrative .................................................................................
Product development ..........................................................................................
Depreciation ........................................................................................................
Amortization .......................................................................................................
Restructuring and other recovery ........................................................................
Total costs of revenue and operating expenses .......................................................
Income from operations ..........................................................................................
Other income (expense) ..........................................................................................
Interest income ....................................................................................................
Interest expense ...................................................................................................
Other (expense) income ......................................................................................
Foreign currency exchange loss ..........................................................................
Other (expense) income, net ...................................................................................
Income before income taxes ...................................................................................
Income tax expense .............................................................................................
Net income ..............................................................................................................
18
21%
20%
16%
12%
1%
3%
4%
77%
23%
0%
(2)%
1%
(2)%
(3)%
20%
6%
14%
25%
23%
16%
15%
1%
1%
2%
83%
17%
0%
(1)%
—%
(0)%
(1)%
16%
3%
13%
25%
19%
12%
12%
1%
0%
1%
70%
30%
0%
(0)%
(1)%
(0)%
(1)%
29%
10%
19%
Revenue
Revenue is comprised of license fees and services. License fees represent the fees we receive from the licensing of our
software products. Services revenue are services directly related to the delivery of the licensed product as well as integration services,
managed services, SaaS services, time and materials work and customer support services. Customer support services includes annual
support fees, recurring maintenance fees, minor product upgrades and warranty fees. Warranty fees are typically bundled with a
license sale and the related revenue, based on Vendor Specific Objective Evidence (“VSOE”), is deferred and recognized ratably over
the warranty period.
License Fees
License fees revenue decreased 9%, or $0.3 million to $2.9 million for the year ended December 31, 2016 compared
to $3.2 million for the year ended December 31, 2015. The decrease in license fee revenue is primarily related to lower First
User Activations (“FUAs”) offset by an increase of initial license sales.
License fees revenue decreased 37%, or $1.8 million to $3.2 million for the year ended December 31, 2015
compared to $5.0 million for the year ended December 31, 2014. The decrease in license fee revenue is primarily due to
lower FUAs and the initial licensing of our software products.
Services
Services revenue decreased 2%, or $0.5 million, to $21.9 million for the year ended December 31, 2016 from
$22.4 million for the year ended December 31, 2015. The decrease in services revenue is due to a decline in fixed-price
services from customization required of our software products offset by an increase of our customer support and managed
services revenue due to Evolving Systems NC, which was acquired on September 30, 2015.
Services revenue decreased 9%, or $2.2 million, to $22.4 million for the year ended December 31, 2015 from
$24.6 million for the year ended December 31, 2014. The decrease in services revenue is primarily due to a decline in our
fixed-price services due to fewer customizations our software products and SaaS services.
Costs of Revenue, excluding depreciation and amortization
Costs of revenue consist primarily of personnel costs, facilities costs, the costs of third-party software and all other direct
costs associated with these personnel. Costs of revenue, excluding depreciation and amortization were $5.3 million, $6.4 million and
$7.6 million for the years ended December 31, 2016, 2015 and 2014, respectively.
Costs of revenue decreased 18%, or $1.1 million, to $5.3 million for the year ended December 31, 2016 from $6.4 million for
the year ended December 31, 2015. The decrease in costs was primarily the result of lower embedded software expense, reduced
headcount, and travel, due to lower revenue during the period partially offset by increased expenses related to the operations of
Evolving Systems NC. As a percentage of revenue, costs of revenue, excluding depreciation and amortization, decreased to 21% for
the year ended December 31, 2016 from 25% for the year ended December 31, 2015. The decrease in costs as a percentage of revenue
is primarily related to the aforementioned reduction in costs of revenue which exceeded the decrease in revenue during the period.
Costs of revenue decreased 16%, or $1.2 million, to $6.4 million for the year ended December 31, 2015 from $7.6 million for
the year ended December 31, 2014. The decrease in costs was primarily the result of lower embedded software expense, fewer service
project hours, incentive compensation and travel, due to lower revenue in the period partially offset by increased expenses related to
the operations of Evolving Systems NC. As a percentage of revenue, costs of revenue, excluding depreciation and amortization,
remained at 25% for the years ended December 31, 2015 and 2014.
Sales and Marketing
Sales and marketing expenses primarily consist of compensation costs, including incentive compensation and commissions,
other employee related costs, travel expenses, advertising and occupancy expenses. Sales and marketing expenses decreased 15%, or
$0.9 million, to $5.0 million for the year ended December 31, 2016 from $5.8 million for the year ended December 31, 2015. The
decrease in costs is primarily related to partner fees, reduced employees and lower travel expenses offset by increased sales operations
expenses related to Evolving Systems NC. As a percentage of total revenue, sales and marketing expenses for the year ended
December 31, 2016 decreased to 20% from 23% for the year ended December 31, 2015. The decrease as a percentage of revenue is
due to the aforementioned reduction in expenses.
Sales and marketing expenses increased 2%, or $0.1 million, to $5.8 million for the year ended December 31, 2015 from
$5.7 million for the year ended December 31, 2014. The increase in costs is primarily related to partner fees and Evolving Systems
NC sales and marketing costs, offset by lower travel expenses due to more regional sales representatives. As a percentage of total
revenue, sales and marketing expenses for the year ended December 31, 2015 increased to 23% from 19% for the year ended
December 31, 2014. The increase as a percentage of revenue is due to the aforementioned increased expenses and lower revenue.
19
General and Administrative
General and administrative expenses consist principally of employee related costs, professional fees and occupancy costs for
the following departments: facilities, finance, legal, human resources and executive management. General and administrative
expenses decreased 4%, or $0.1 million, to $3.9 million for the year ended December 31, 2016 from $4.0 million for the year ended
December 31, 2015. The decrease for the period was primarily due to a decline of professional fees related to merger and acquisition
activities and lower travel expense, offset by increased general and administrative expenses related to Evolving Systems NC and an
allowance placed on uncollectible accounts receivables. As a percentage of total revenue, general and administrative expenses
remained at 16% for the years ended December 31, 2016 and 2015.
General and administrative expenses increased 10%, or $0.4 million, to $4.0 million for the year ended December 31, 2015
from $3.6 million for the year ended December 31, 2014. The increase for the year ended December 31, 2015 was due primarily to
higher professional fees and additional general and administrative costs relating to the acquisition of Evolving Systems NC offset by
lower incentive compensation. As a percentage of total revenue, general and administrative expenses increased to 16% for the year
ended December 31, 2015 from 12% for the year ended December 31, 2014. The increase in expenses as a percentage of revenue is
related to the aforementioned increase of expenses and lower revenue during the period.
Product Development
Product development expenses consist primarily of employee-related costs for product development. Product development
expenses decreased 22%, or $0.8 million, to $3.0 million for the year ended December 31, 2016 from $3.8 million for the year ended
December 31, 2015. The decrease in costs was related to reduced headcount partially offset by expenses from Evolving Systems NC
product development department. As a percentage of total revenue, product development expenses decreased to 12% for the year
ended December 31, 2016 from 15% for the year ended December 31, 2015. The decrease in expenses as a percentage of revenue is
related to the aforementioned decrease of expenses during the period.
Product development expenses increased 6%, or $0.2 million, to $3.8 million for the year ended December 31, 2015 from
$3.6 million for the year ended December 31, 2014. The increase in costs was related to additional hours spent on research and
development projects and Evolving Systems NC product development expenses offset by lower incentive compensation. As a
percentage of total revenue, product development expenses increased to 15% for the year ended December 31, 2015 from 12% for the
year ended December 31, 2014. The increase in expenses as a percentage of revenue is related to the aforementioned increase of
expenses and lower revenue during the period.
Depreciation
Depreciation expense consists of depreciation of long-lived property and equipment. Depreciation expenses decreased 18%,
or $0.1 million, to $0.2 million for the year ended December 31, 2016 from $0.3 million for the year ended December 31, 2015. The
decrease of expense was due to lower capital purchases in the current period and older assets becoming fully depreciated. As a
percentage of revenue, depreciation expense remained at 1% for the years ended December 31, 2016 and 2015.
Depreciation expenses increased 28%, or $0.1 million, to $0.3 million for the year ended December 31, 2015 from
$0.2 million for the year ended December 31, 2014. The increase of expense was due to capital improvements on internal systems in
2015. As a percentage of revenue, depreciation expense remained at 1% for the years ended December 31, 2015 and 2014.
Amortization
Amortization expense consists of amortization of identifiable intangibles related to our acquisitions of Evolving Systems
U.K., Evolving Systems Labs and Evolving Systems NC. Amortization expense increased 194%, or $0.5 million to $0.8 million for
the year ended December 31, 2016 from $0.3 million for the year ended December 31, 2015. The increase in amortization expense
was due to the amortization expense of the intangible assets relating to the acquisition of Evolving Systems NC on September 30,
2015. As a percentage of revenue, amortization expense increased to 3% for the year ended December 31, 2016 from 1% for the year
ended December 31, 2015. The increase of amortization expense as a percentage of total revenue is due to the aforementioned
increase of expense.
Amortization expense increased 180%, to $0.3 million for the year ended December 31, 2015 from $0.1 million for the year
ended December 31, 2014. The increase in amortization expense was due to the amortization expense of the intangible assets relating
to the acquisition of Evolving Systems NC. As a percentage of revenue, amortization expense increased to 1% for the year ended
December 31, 2015 from less than 1% for the year ended December 31, 2014. The increase of amortization expense as a percentage
of total revenue is due to the aforementioned increase of expense.
Restructuring
Restructuring expense includes the costs associated with a reduction in workforce involving the termination of employees.
Restructuring increased 90%, or $0.5 million, to $1.0 million for the year ended December 31, 2016 from $0.5 million for the year
20
ended December 31, 2015. Restructuring expense for the years ended December 31, 2016 and 2015 related to the acquisition of
Evolving Systems NC. As a percentage of revenue, restructuring expense increased to 4% for the year ended December 31, 2016
from 2% for the year ended December 31, 2015. The increase of restructuring expense as a percentage of total revenue is due to the
aforementioned increase of expense and lower revenue.
Restructuring expense increased to $0.5 million for the year ended December 31, 2015 from $0.2 million for the year ended
December 31, 2014. Restructuring expense for the year ended December 31, 2015 related to the acquisition of Evolving Systems NC
and for the year ended December 31, 2014 was a result of the acquisition of Evolving Systems, Labs. As a percentage of revenue,
restructuring expense increased to 2% for the year ended December 31, 2015 from 1% for the year ended December 31, 2014. The
increase of restructuring expense as a percentage of total revenue is due to the aforementioned increase of expense and lower revenue.
Interest Income
Interest income includes interest income earned on cash, cash equivalents and long-term investments. Interest income
decreased 67%, or $12,000, to $6,000 for the year ended December 31, 2016 from $18,000 for the year ended December 31, 2015.
Interest income decreased 5%, or $1,000, to $18,000 for the year ended December 31, 2015 from $19,000 for the year ended
December 31, 2014.
Interest Expense
Interest expense includes interest expense on our term loan, revolving line of credit and capital lease obligations as well as
amortization of debt issuance costs. Interest expense for the year ended December 31, 2016 increased 181%, or $0.2 million, to
$0.3 million as compared to $0.1 million for the year ended December 31, 2015. This increase in interest expense was due to a larger
principal balance from our term loan and revolving line of credit related to the acquisition of Evolving Systems NC. Refer to Note 5,
Long-Term Debt, of our Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K for more
information regarding the Term loan.
Interest expense for the year ended December 31, 2015 increased 612%, or $0.1 million, to $0.1 million as compared to
$17,000 for the year ended December 31, 2014. This increase was due to the interest expense from our revolving line of credit for the
initial payment of the acquisition of Evolving Systems NC.
Loss on Foreign Exchange Transactions
Loss on foreign exchange transactions consists of realized and unrealized foreign currency transaction gains and losses.
Foreign currency transaction gains and losses result from transactions denominated in a currency other than the functional currency of
the respective subsidiary. The foreign currency transaction loss increased 9,100%, or $0.6 million, to $0.6 million for the year ended
December 31, 2016 compared to a $6,000 loss for the year ended December 31, 2015. The net loss was generated through the
re-measurement of certain non-functional currency denominated financial assets and liabilities of our Evolving Systems U.K. and
India subsidiaries of which the loss was primarily related to Evolving Systems U.K. contract receivables.
The foreign currency transaction loss of $6,000 for the year ended December 31, 2015 compared to a $9,000 loss for the year
ended December 31, 2014 resulted in a year over year gain of 33% or $3,000. The net loss was generated through the re-measurement
of certain non-functional currency denominated financial assets and liabilities of our Evolving Systems U.K. and India subsidiaries.
Income Tax Expense
We recorded income tax expense of $1.5 million, $0.9 million and $2.8 million for the years ended December 31, 2016, 2015
and 2014, respectively. The net expense during year ended December 31, 2016 consisted of current income tax expense of
$1.5 million and a net deferred tax benefit of ($24,000). The current tax expense consists primarily of income tax from our U.K. and
India based operations. The deferred tax benefit was related primarily to the reduction of deferred tax liabilities related to intangible
assets incurred due to the acquisition of Evolving Systems NC. Refer to Note 6, Income Taxes, of our Consolidated Financial
Statements included elsewhere in this Annual Report on Form 10-K for more information regarding the foreign tax credit.
The net expense during year ended December 31, 2015 consisted of current income tax expense of $2.0 million and a net
deferred tax benefit of ($1.1) million. The current tax expense consists primarily of income tax from our U.S., U.K. and India based
operations and unrecoverable foreign withholding tax in the U.K. U.S. income taxes payable of $0.8 million were offset due to
realization of Net Operating Losses (“NOL”) comprised of windfall tax benefits related to stock-based compensation. Unused windfall
tax benefits may not be recorded as an asset on our Consolidated Balance Sheets but are recorded as a reduction to our taxes payable
when realized, with a corresponding credit to additional paid in capital. The deferred tax benefit was related primarily to foreign tax
credits incurred for the years 2012 through 2014 which we recorded as a deferred tax asset in the amount of $3.7 million offset by a
partial valuation allowance.
21
The net expense during year ended December 31, 2014 consisted of current income tax expense of $3.1 million and a net
deferred tax benefit of ($0.3) million. The current tax expense consists primarily of income tax from our U.S., U.K. and India based
operations, Alternative Minimum Tax (“AMT”) and unrecoverable foreign withholding tax in the U.S. U.S. income taxes payable of
$1.4 million were offset due to realization of NOL comprised of windfall tax benefits related to stock-based compensation. Unused
windfall tax benefits may not be recorded as an asset on our Consolidated Balance Sheets but are recorded as a reduction to our taxes
payable when realized, with a corresponding credit to additional paid in capital. The deferred tax benefit was related primarily to the
increase of certain net deferred tax assets in the U.S. In addition, we had a deferred tax expense from our U.K.-based operations and
Evolving Systems Labs related to a decrease in net deferred tax assets including intangible assets.
Our effective tax rates for the years ended December 31, 2016, 2015 and 2014 were 30%, 22% and 33%, respectively. The
effective tax rate increased in 2016 compared to 2015 due to aforementioned foreign tax credits utilized in 2015. The effective tax
rate decreased during 2015 due to the aforementioned foreign tax credits and lower profits. The effective tax rate increased in 2014
primarily attributable to higher profits from our U.K. subsidiary.
In conjunction with the acquisition of Evolving Systems Labs in October 2013, we recorded certain identifiable intangible
assets of $0.7 million. These assets are amortizable for both book and tax purposes. Identifiable intangible assets in the amount of
$4.6 million were recorded in conjunction with the acquisition of Evolving Systems NC. These assets are amortizable for book
purposes but not tax purposes.
The Company has the intent and current ability to indefinitely reinvest profits of Evolving Systems India for the year ended
December 31, 2016. Undistributed foreign earnings for the year ended December 31, 2016 are approximately $1.0 million.
Repatriation to the U.S. in the form of dividend distributions from the India controlled foreign subsidiary would give rise to taxation.
We use a recognition threshold and a measurement attribute for the financial statement recognition and measurement of tax
positions taken or expected to be taken in a tax return. For those benefits to be recognized, a tax position must be more-likely-than-
not to be sustained upon examination by taxing authorities. As of December 31, 2016 and 2015, we had no liability for unrecognized
tax benefits. We do not believe there will be any material changes to our unrecognized tax positions over the next twelve months.
FINANCIAL CONDITION
Our working capital position of $8.0 million at December 31, 2016 reflects an increase of $4.5 million from our working
capital position of $3.5 million at December 31, 2015. The increase is primarily related to the $10.0 million borrowed on our short
term revolving line of credit to fund the initial payment of the acquisition of Evolving Systems NC, which was converted to a long-
term loan in 2016, and decreases in our accounts receivable and unbilled work-in-progress offset by an increase in our current term
loan balance, deferred revenue and tax liabilities.
LIQUIDITY AND CAPITAL RESOURCES
We have historically financed operations through cash flows from operations as well as debt and equity transactions. At
December 31, 2016, our principal sources of liquidity were $7.6 million in cash and cash equivalents and $5.9 million in contract
receivables, net of allowances. On February 29, 2016, we entered into the Fifth Amendment to the Loan and Security Agreement with
East West Bank which provides for a Term Loan (the “Term Loan”) for $6.0 million. The $6.0 million loan bears interest at a floating
rate equal to the U.S.A. Prime Rate plus 1.0%. As of December 31, 2016, the U.S.A. Prime Rate was 3.75%. The Term Loan is
secured by substantially all of the assets of Evolving Systems, including a pledge, subject to certain limitations with respect to stock of
foreign subsidiaries, of the stock of the existing and future direct subsidiaries of Evolving Systems. Interest accrues from the date the
Term Loan was made at the aforementioned rate and is payable monthly. The Term Loan shall be repaid in 36 equal monthly
installments of principal, plus accrued but unpaid interest, commencing on January 1, 2017 and continuing on the first day of each
month thereafter through and including January 1, 2020. On the Term Loan maturity date, the outstanding principal amount of the
Term Loan and all accrued and unpaid interest thereon shall be immediately due and payable. The Term Loan, once repaid, may not
be reborrowed. We must maintain a minimum current ratio, a specified ratio of Total Liabilities to EBITDA and a minimum fixed
charge coverage ratio which are as defined in the Term Loan. The Term Loan requires us to pay two annual credit facility fees of
$18,750 and legal fee equal to $1,000. The Term Loan agreement required us to use the term loan’s proceeds and $4.0 million from
our cash balances to pay off and terminate a Revolving Facilities Loan and Security Agreement with East West Bank totaling
$10.0 million. The Term Loan matures on January 1, 2020. As of the date this Form 10-K was filed, we are in compliance with our
covenants.
Net cash provided by (used in) operating activities for the year ended December 31, 2016, 2015 and 2014 was $6.9 million,
$2.2 million and ($0.4) million, respectively. The increase in cash provided by operating activities for the year ended December 31,
2016 was primarily due to higher collections of contract receivables and decreased unbilled work-in-progress as-well-as increases in
accounts payable and accrued liabilities and unearned revenue.
22
The increase in cash provided by operating activities for the year ended December 31, 2015 was primarily due to higher
billings and collections of contract receivables partially offset by decreases in accounts payable and accrued liabilities and unearned
revenue.
Net cash used in investing activities was $0.1 million, $9.2 million and $0.6 million for the years ended December 31, 2016,
2015 and 2014, respectively. Cash used in investing activities for the year ended December 31, 2016 was related to the purchase of
property and equipment. During 2016, 2015 and 2014, we purchased $0.1 million, $0.2 million and $0.6 million in property and
equipment to support operations, respectively. Historically, capital expenditures have been financed by cash from operating activities.
Cash used in investing activities for the year ended December 31, 2015 was related to the acquisition of Evolving Systems
NC and purchase of property and equipment. Refer to Note 2, Acquisition, of our Consolidated Financial Statements included
elsewhere in this Annual Report on Form 10-K for more information regarding the acquisition.
Net cash provided by (used in) financing activities was ($6.6) million, $5.9 million and ($3.2) million for the years ended
December 31, 2016, 2015 and 2014, respectively. The net cash used by financing activities as of December 31, 2016 is due to
proceeds from the term loan of $6.0 million, which was used along with $4.0 million of cash-on-hand to pay off the revolving line of
credit of $10.0 million and $2.6 million paid for dividends.
The net cash provided by financing activities as of December 31, 2015 is due to proceeds from the revolving line of credit of
$10.0 million for the initial payment of the acquisition of Evolving Systems NC, $0.8 million in windfall tax benefits from stock-
based compensation and $0.3 million in proceeds from the exercise of stock options offset by payments of $5.1 million for dividends.
We believe that our current cash and cash equivalents, together with anticipated cash flow from operations will be sufficient
to meet our working capital, debt extinguishment and capital expenditure requirements for at least the next twelve months. In making
this assessment, we considered the following:
• Our cash and cash equivalents balance at December 31, 2016 of $7.6 million;
• Our working capital balance of $8.0 million;
• Our ability to historically generate positive operating cash flows;
• Our planned capital expenditures of less than $1.0 million during 2017.
We are exposed to foreign currency rate risks which impact the carrying amount of our foreign subsidiaries and our
consolidated equity, as well as our consolidated cash position due to translation adjustments. For the years ended December 31, 2016,
2015 and 2014, the effect of exchange rate changes resulted in a ($1.1) million decrease, ($0.3) million decrease and a $0.2 million
increase to consolidated cash, respectively. We do not currently hedge our foreign currency exposure, but we closely monitor the rate
changes and may hedge our exposures in the future.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that have a material current effect, or that are reasonably likely to have a material
future effect, on our financial condition, changes in financial condition, revenue or expenses, results of operations, liquidity, capital
expenditures, or capital resources.
Contractual Obligations and Commercial Commitments
The following summarizes our significant contractual obligations as of December 31, 2016, which are comprised of a capital
lease and operating leases (in thousands).
Total
2017
Payments due by period
2018
2019
2020
2021
Capital lease ..........................................................
Operating leases ....................................................
Total commitments ...............................................
$
$
1 $
1,011
1,012 $
1 $
544
545 $
— $
325
325 $
— $
142
142 $
— $
—
— $
—
—
—
CRITICAL ACCOUNTING POLICIES
Our significant accounting policies are disclosed in Note 1 of our Consolidated Financial Statements included elsewhere in
this Annual Report on Form 10-K. The following discussion addresses our most critical accounting policies, which are those that are
both important to the portrayal of our financial condition and results of operations and that require significant judgment or use of
complex estimates.
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. The majority of our license fees and services revenue is
23
generated from fixed-price contracts, which provide for licenses to our software products and services to customize such software to
meet our customers’ use. When the customization services are determined to be essential to the functionality of the delivered
software, we recognize revenue using the percentage-of-completion method of accounting. In these types of arrangements, we do not
typically have vendor specific objective evidence (“VSOE”) of fair value on the license fee/services portion (services are related to
customizing the software) of the arrangement due to the large amount of customization required by our customers; however, we do
have VSOE for the warranty/maintenance services based on the renewal rate of the first year of maintenance in the arrangement. The
license/services portion is recognized using the percentage-of-completion method of accounting and the warranty/maintenance
services are separated based on the renewal rate in the contract and recognized ratably over the warranty or maintenance period. We
estimate the percentage-of-completion for each contract based on the ratio of direct labor hours incurred to total estimated direct labor
hours and recognize revenue based on the percent complete multiplied by the contract amount allocated to the license fee/services.
Since estimated direct labor hours, and changes thereto, can have a significant impact on revenue recognition, these estimates are
critical and we review them regularly. If the arrangement includes a customer acceptance provision, the hours to complete the
acceptance testing are included in the total estimated direct labor hours; therefore, the related revenue is recognized as the acceptance
testing is performed. Revenue is not recognized in full until the customer has provided proof of acceptance on the arrangement.
Generally, our contracts are accounted for individually. However, when certain criteria are met, it may be necessary to account for two
or more contracts as one to reflect the substance of the group of contracts. We record amounts billed in advance of services being
performed as unearned revenue. Unbilled work-in-progress represents revenue earned but not yet billable under the terms of the fixed-
price contracts. All such amounts are expected to be billed and collected within 12 months.
We may encounter budget and schedule overruns on fixed-price contracts caused by increased labor or overhead costs. We
make adjustments to cost estimates in the period in which the facts requiring such revisions become known. We record estimated
losses, if any, in the period in which current estimates of total contract revenue and contract costs indicate a loss. If revisions to cost
estimates are obtained after the balance sheet date but before the issuance of the interim or annual financial statements, we make
adjustments to the interim or annual financial statements accordingly.
In arrangements where the services are not essential to the functionality of the delivered software, we recognize license
revenue when a license agreement has been signed, delivery and acceptance have occurred, the fee is fixed or determinable and
collectability is reasonably assured. Where applicable, we unbundle and record as revenue fees from multiple element arrangements as
the elements are delivered to the extent that VSOE of fair value of the undelivered elements exist. If VSOE for the undelivered
elements does not exist, we defer fees from such arrangements until the earlier of the date that VSOE does exist on the undelivered
elements or all of the elements have been delivered.
We recognize revenue from fixed-price service contracts using the proportional performance method of accounting, which is
similar to the percentage-of-completion method described above. We recognize revenue from professional services provided pursuant
to time-and-materials based contracts and training services as the services are performed, as that is when our obligation to our
customers under such arrangements is fulfilled.
We recognize revenue from our managed services contracts primarily ratably 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 proportional performance method of accounting.
We recognize revenue from our Mobile Data Enablement (“MDE”) contracts based on the number of transactions per month
multiplied by a factor based on a unique table for transaction volumes relating to each account at a rate for the particular Tier level
attained.
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.
Allowance for Doubtful Accounts
We make judgments related to our ability to collect outstanding accounts receivable and unbilled work-in-progress. We
provide allowances for receivables when their collection becomes doubtful by recording an expense. We determine the allowance
based on our assessment of the realization of receivables using historical information and current economic trends, including assessing
the probability of collection from customers. If the financial condition of our customers were to deteriorate, resulting in an impairment
of their ability to make payments owed to us, an increase in the allowance for doubtful accounts would be required. We evaluate the
adequacy of the allowance regularly and make adjustments accordingly. Adjustments to the allowance for doubtful accounts could
materially affect our results of operations.
Income Taxes
Significant judgment is required in determining our provision for income taxes. We assess the likelihood that our deferred tax
asset will be recovered from future taxable income, and to the extent we believe that recovery is not likely, we establish a valuation
24
allowance. We consider future taxable income projections, historical results and ongoing tax planning strategies in assessing the
recoverability of deferred tax assets. However, adjustments could be required in the future if we determine that the amount to be
realized is less or greater than the amount that we recorded. Such adjustments, if any, could have a material impact on our results of
our operations.
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. The Company uses the incremental approach to recognizing excess tax
benefits associated with equity compensation.
Goodwill
Goodwill is the excess of acquisition cost of an acquired entity over the fair value of the identifiable net assets acquired.
Goodwill is not amortized, but tested for impairment annually or whenever indicators of impairment exist. These indicators may
include a significant change in the business climate, legal factors, operating performance indicators, competition, sale or disposition of
a significant portion of the business or other factors. Application of the goodwill impairment test requires judgment, including the
identification of reporting units, assignment of assets and liabilities to reporting units, assignment of goodwill to reporting units, and
determination of the fair value of each reporting unit.
We performed our annual goodwill impairment test as of July 31, 2016, at which time we had $21.5 million of goodwill
included in the following reporting units, License and Services (“L&S”) — U.S. of $6.3 million, U.K. of $6.1 million, India of
$0.2 million and Customer Support (“CS”) — U.S. of $1.5 million and U.K. of $7.4 million. The fair value of each reporting unit was
estimated using both market and income based approaches. Specifically, we incorporated observed market multiple data from selected
guideline public companies and values arrived at through the application of discounted cash flow analyses which in turn were based
upon our financial projections as of the valuation date. We believe that a market participant would weigh both possibilities without a
bias to one or the other. Consequently, we gave equal consideration to both. This analysis requires significant judgments, including
estimation of future cash flows, which is dependent on internal forecasts, estimation of the long-term rate of growth for our business,
estimation of the useful life over which cash flows will occur, and determination of our weighted average cost of capital. Changes in
these estimates and assumptions could materially affect the determination of fair value and goodwill impairment for each reporting
unit. If the carrying value of a reporting unit were to exceed its fair value, we would then compare the fair value of the reporting unit’s
goodwill to its carrying amount, and any excess of the carrying amount over the fair value would be charged to operations as an
impairment loss. If the projected future performance of 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 2016 goodwill impairment analysis, the fair value of each reporting unit exceeded its carrying value. Therefore the
second step was not necessary. Due to our transition of packaging our products and services into a single managed service offering,
we have determined we have one reporting unit. We do not believe the aggregation of our reporting units impacts the value of our
goodwill nor are there any events through the date this Form 10K was filed which impacts our assumptions on the determination of the
fair value of our goodwill.
Intangible Assets
Amortizable intangible assets consist primarily of purchased software and licenses, customer contracts and relationships,
trademarks and tradenames, and business partnerships acquired in conjunction with our acquisition of Evolving Systems U.K.,
Evolving Systems Labs and Evolving Systems NC. These definite life 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.
Capitalization of Internal Software Development Costs
We expend amounts on product development, particularly for new products and/or for enhancements of existing products. For
internal development of software products that are to be licensed by us, we expense the cost of developing software prior to
establishing technological feasibility and those costs are capitalized once technological feasibility has been established. Capitalization
ceases upon general release of the software. The determination of whether internal software development costs are subject to
capitalization is, by its nature, highly subjective and involves significant judgments. This decision could significantly affect earnings
during the development period. Further, once capitalized, the software costs are generally amortized on a straight-line basis over the
25
estimated economic life of the product. The determination of the expected useful life of a product is highly judgmental. Finally,
capitalized software costs must be assessed for impairment if facts and circumstances warrant such a review.
We did not capitalize any internal software development costs during the years ended December 31, 2016, 2015, or 2014. In
addition, we did not have any capitalized internal software development costs included in our December 31, 2016 and 2015
Consolidated Balance Sheets. We believe that during these periods no material internal software development costs were required to
be capitalized. Our conclusion is primarily based on the fact that the feature-rich, pre-integrated, and highly-scalable nature of our
products requires that our development efforts include complex design, coding and testing methodologies, which include next
generation software languages and development tools. Development projects of this nature carry a high degree of development risk.
Substantially all of our internal software development efforts are of this nature, and therefore, we believe the period between
achieving technological feasibility and the general release of the software to operations is so short that any costs incurred during this
period are not material.
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 and record compensation cost for all stock awards granted after January 1, 2006
and awards modified, repurchased, or cancelled after that date. 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the ordinary course of business, we are exposed to certain market risks, including changes in foreign currency exchange
rates and interest rates. Uncertainties that are either non-financial or non-quantifiable such as political, economic, tax, other regulatory,
or credit risks are not included in the following assessment of market risks.
Interest Rate Risks
Our cash balances are subject to interest rate fluctuations and as a result, interest income amounts may fluctuate from current
levels. As of December 31, 2016 we had $6.0 million outstanding under our term loan, which under the loan bears interest at variable
rates. Refer to Note 5, Long-Term Debt, of our Consolidated Financial Statements included elsewhere in this Annual Report on
Form 10-K for more information regarding the Term loan.
Foreign Currency Risk
We are exposed to fluctuations of the U.S. dollar (our functional currency) against the currencies of our operating
subsidiaries. Any increase (decrease) in the value of the U.S. dollar against any foreign currency that is the functional currency of one
of our operating subsidiaries will cause the parent company to experience unrealized foreign currency translation losses (gains) with
respect to amounts already invested in such foreign currencies. In addition, we and our operating subsidiaries are exposed to foreign
currency risk to the extent that we enter into transactions denominated in currencies other than our respective functional currencies,
such as revenue and related accounts receivable (including intercompany amounts) that are denominated in a currency other than their
own functional currency. Changes in exchange rates with respect to these items will result in unrealized (based upon period-end
exchange rates) or realized foreign currency transaction gains and losses upon settlement of the transactions. In addition, we are
exposed to foreign exchange rate fluctuations related to our operating subsidiaries’ monetary assets and liabilities and the financial
results of foreign subsidiaries and affiliates when their respective financial statements are translated into U.S. dollars for inclusion in
our consolidated financial statements. We record cumulative translation adjustments in accumulated other comprehensive income
(loss) as a separate component of equity. As a result of foreign currency risk, we may experience economic loss and a negative impact
on earnings and equity with respect to our holdings solely as a result of foreign currency exchange rate fluctuations.
The relationship between the British Pound Sterling, Indian rupee and the U.S. dollar, which is our functional currency, is
shown below, per one U.S. dollar:
Spot rates:
British pound sterling ...............................................................................................................
Indian rupee .............................................................................................................................
December 31,
2016
December 31,
2015
0.81103
67.95500
0.67495
66.15844
Average rates:
British pound sterling ................................................................................
Indian rupee ..............................................................................................
For the Years Ended December 31,
2015
2016
2014
0.74067
67.19148
0.65442
64.14862
0.60724
61.14301
26
At the present time, we do not hedge our foreign currency exposure or use derivative financial instruments that are designed
to reduce our long-term exposure to foreign currency exchange risk. We continually monitor our foreign currency exchange risk and
we may consider various options to reduce this risk in the future.
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Evolving Systems, Inc.
We have audited the accompanying consolidated balance sheets of Evolving Systems, Inc. (a Delaware corporation, the “Company”)
as of December 31, 2016 and 2015, and the related consolidated statements of income, comprehensive income (loss), changes in
stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2016. Evolving Systems, Inc.’s
management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of
material misstatement. The company is not required to have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the
company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Evolving
Systems, Inc. as of December 31, 2016, and 2015, and the results of its operations and its cash flows for each of the three years in the
period ended December 31, 2016 in conformity with accounting principles generally accepted in the United States of America.
/s/ FRIEDMAN LLP
East Hanover, New Jersey
March 28, 2017
27
EVOLVING SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands except share data)
December 31,
December 31,
2016
2015
Current assets:
ASSETS
Cash and cash equivalents ...........................................................................................................
$
7,614 $
8,400
Contract receivables, net of allowance for doubtful accounts of $221 and $83 at
December 31, 2016 and December 31, 2015, respectively ..................................................
Unbilled work-in-progress ...........................................................................................................
Prepaid and other current assets ...................................................................................................
Total current assets ..............................................................................................................
Property and equipment, net ............................................................................................................
Amortizable intangible assets, net ...................................................................................................
Goodwill ..........................................................................................................................................
Total assets ...........................................................................................................................
$
5,867
3,376
1,553
18,410
546
4,200
20,599
43,755 $
Current liabilities:
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current portion of capital lease obligations .............................................................................
Revolving Line of credit ..............................................................................................................
Term Loan - Current ....................................................................................................................
Accounts payable and accrued liabilities .....................................................................................
Income taxes payable ...................................................................................................................
Unearned revenue ........................................................................................................................
Total current liabilities .........................................................................................................
Long-term liabilities:
Capital lease obligations, net of current portion ......................................................................
Term Loan, net of current portion ................................................................................................
Total liabilities .....................................................................................................................
$
1 $
—
1,997
4,274
617
3,532
10,421
—
4,000
14,421
7,727
4,158
1,459
21,744
560
4,983
23,142
50,429
5
10,000
—
4,607
324
3,330
18,266
1
—
18,267
Commitments and contingencies:
Stockholders’ equity:
Preferred stock, $0.001 par value; 2,000,000 shares authorized; no shares issued and
outstanding as of December 31, 2016 and December 31, 2015 ...................................................
—
—
Common stock, $0.001 par value; 40,000,000 shares authorized;
12,086,280 shares issued and 11,907,391 outstanding as of December 31, 2016 and
11,970,731 shares issued and 11,791,842 outstanding as of December 31, 2015 ........................
Additional paid-in capital ............................................................................................................
Treasury stock 178,889 shares, at December 31, 2016 and December 31, 2015, at cost .............
Accumulated other comprehensive loss .......................................................................................
Accumulated deficit .....................................................................................................................
Total stockholders’ equity ....................................................................................................
Total liabilities and stockholders’ equity .............................................................................
$
12
97,744
(1,253)
(9,992)
(57,177)
29,334
43,755 $
12
97,418
(1,253)
(5,999)
(58,016)
32,162
50,429
The accompanying notes are an integral part of these consolidated financial statements.
28
EVOLVING SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands except per share data)
For the Years Ended December 31,
2015
2014
2016
REVENUE
License fees.......................................................................................................
Services .............................................................................................................
Total revenue ........................................................................................................
$
2,873 $
21,905
24,778
3,161 $
22,415
25,576
COSTS OF REVENUE AND OPERATING EXPENSES
Costs of revenue, excluding depreciation and amortization ..............................
Sales and marketing ..........................................................................................
General and administrative ...............................................................................
Product development ........................................................................................
Depreciation ......................................................................................................
Amortization .....................................................................................................
Restructuring .....................................................................................................
Total costs of revenue and operating expenses .....................................................
5,297
4,965
3,855
3,014
259
783
1,010
19,183
6,449
5,844
4,003
3,847
314
266
533
21,256
Income from operations ........................................................................................
5,595
4,320
Other income (expense)
Interest income ..................................................................................................
Interest expense .................................................................................................
Other (expense) income ....................................................................................
Foreign currency exchange loss ........................................................................
Other (expense) income, net .................................................................................
6
(340)
183
(552)
(703)
18
(121)
—
(6)
(109)
Income before income taxes .................................................................................
Income tax expense ...........................................................................................
Net income ............................................................................................................
$
4,892
1,457
3,435 $
4,211
915
3,296 $
Basic income per common share - net income ......................................................
$
0.29 $
0.28 $
Diluted income per common share - net income...................................................
$
0.29 $
0.28 $
Cash dividends declared per common share .........................................................
$
0.22 $
0.44 $
5,027
24,653
29,680
7,648
5,734
3,638
3,643
246
95
237
21,241
8,439
19
(17)
(27)
(9)
(34)
8,405
2,797
5,608
0.48
0.47
0.42
Weighted average basic shares outstanding ..........................................................
Weighted average diluted shares outstanding .......................................................
11,845
11,961
11,693
11,935
11,642
11,926
The accompanying notes are an integral part of these consolidated financial statements.
29
EVOLVING SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
For the Years Ended December 31,
2015
2014
2016
Net income ...............................................................................................
$
3,435
$
3,296
$
5,608
Other comprehensive income:
Foreign currency translation loss ..........................................................
(3,993)
(1,465)
(1,518)
Comprehensive (loss) income ...................................................................
$
(558) $
1,831
$
4,090
The accompanying notes are an integral part of these consolidated financial statements.
30
EVOLVING SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(in thousands, except share data)
Common Stock
Shares
Amount
Additional
Paid-in
Capital
Treasury
Stock
Accumulated
Other
Comprehensive
Income (Loss)
Total
Accumulated Stockholders’
(Deficit)
Equity
Balance at December 31, 2013 ..
Stock option exercises..................
Common Stock issued pursuant
to the Employee Stock
Purchase Plan ...........................
Stock-based compensation
expense ....................................
Issuance of common stock
11,600,618 $
56,186
7,352
—
related to acquisition ................
1,832
Excess tax benefits from stock-
based compensation .................
Restricted stock issuance, net
of cancellations ........................
Common stock cash dividends .....
Net income ...............................
Foreign currency translation
adjustment ............................
Balance at December 31, 2014 ..
Stock option exercises..................
Common Stock issued pursuant
to the Employee Stock
Purchase Plan ...........................
Stock-based compensation
expense ....................................
Excess tax benefits from stock-
based compensation .................
Restricted stock issuance, net
of cancellations ........................
Common stock cash dividends .....
Net income ...............................
Foreign currency translation
adjustment ............................
Balance at December 31, 2015 ..
Stock option exercises..................
Common Stock issued
pursuant to the Employee
Stock Purchase Plan .................
Stock-based compensation
expense ....................................
Common stock cash dividends .....
Net income ...............................
Foreign currency translation
adjustment ............................
Balance at December 31, 2016 ..
—
(1,313)
—
—
—
11,664,675 $
99,897
8,302
—
—
18,968
—
—
—
11,791,842 $
112,185
3,364
—
—
—
—
11,907,391 $
12 $ 93,895 $ (1,253) $
—
245
—
—
—
—
—
—
—
—
55
401
19
1,390
—
—
—
—
—
—
—
—
—
—
—
—
12 $ 96,005 $ (1,253) $
—
243
—
—
—
—
—
—
—
—
57
317
796
—
—
—
—
—
—
—
—
—
—
—
12 $ 97,418 $ (1,253) $
51
—
—
—
(3,016) $
—
(56,903) $
—
32,735
245
—
—
—
—
—
—
—
—
—
—
—
—
(4,883)
5,608
(1,518)
(4,534) $
—
—
(56,178) $
—
—
—
—
—
—
—
—
—
—
—
(5,134)
3,296
(1,465)
(5,999) $
—
—
(58,016) $
—
55
401
19
1,390
—
(4,883)
5,608
(1,518)
34,052
243
57
317
796
—
(5,134)
3,296
(1,465)
32,162
51
—
—
—
—
16
259
—
—
—
—
—
—
—
—
—
—
—
16
—
(2,596)
3,435
259
(2,596)
3,435
—
—
12 $ 97,744 $ (1,253) $
—
(3,993)
(9,992) $
—
(57,177) $
(3,993)
29,334
The accompanying notes are an integral part of these consolidated financial statements.
31
EVOLVING SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the Years Ended December 31,
2015
2014
2016
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .........................................................................................................
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation ...................................................................................................
Amortization of intangible assets ...................................................................
Amortization of debt issuance costs ...............................................................
Stock based compensation .............................................................................
Gain on earn-out from acquisition of Telespree .............................................
Unrealized foreign currency transaction losses, net .......................................
Provision for doubtful accounts .....................................................................
Benefit from deferred income taxes ...............................................................
Change in operating assets and liabilities:
Contract receivables ...................................................................................
Unbilled work-in-progress .........................................................................
Prepaid and other assets .............................................................................
Accounts payable and accrued liabilities ...................................................
Unearned revenue ......................................................................................
Net cash provided by (used in) operating activities ...............................
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment ..................................................................
Business combinations, net of cash ....................................................................
Restricted cash ...................................................................................................
Net cash used in investing activities ......................................................
CASH FLOWS FROM FINANCING ACTIVITIES:
Capital lease payments .......................................................................................
Proceeds from revolving line of credit ...............................................................
Payments of the revolving line of credit ............................................................
Proceeds from the term loan ..............................................................................
Payments for debt issuance costs .......................................................................
Common stock cash dividends ...........................................................................
Excess tax benefits from stock-based compensation .........................................
Proceeds from the issuance of stock ..................................................................
Net cash provided by (used in) financing activities ...............................
$
3,435
$
3,296
$
5,608
259
783
32
259
(178)
552
150
(24)
643
204
(182)
276
687
6,896
(61)
—
—
(61)
(5)
—
(10,000)
6,000
(20)
(2,596)
—
67
(6,554)
314
266
14
317
—
6
41
(1,123)
2,202
721
(120)
(2,305)
(1,404)
2,225
(198)
(9,014)
—
(9,212)
(5)
10,000
—
—
—
(5,143)
797
300
5,949
246
95
15
401
—
9
—
(282)
(3,398)
(2,977)
(214)
985
(888)
(400)
(588)
—
24
(564)
(8)
—
—
—
—
(4,883)
1,390
300
(3,201)
Effect of exchange rate changes on cash ................................................................
(1,067)
(343)
161
Net decrease in cash and cash equivalents .............................................................
Cash and cash equivalents at beginning of year .....................................................
Cash and cash equivalents at end of year ...............................................................
Supplemental disclosure of cash and non-cash investing and financing
transactions:
Interest paid............................................................................................................
Income taxes paid ..................................................................................................
Common stock dividends declared ........................................................................
Property and equipment purchased and included in accounts payable ..................
Issuance of common stock related to acquisition ...................................................
$
$
$
$
(786)
8,400
7,614
312
1,270
2,636
244
—
$
$
(1,381)
9,781
8,400
107
2,089
5,221
1
—
(4,004)
13,785
9,781
1
182
4,966
191
19
The accompanying notes are an integral part of these consolidated financial statements.
32
EVOLVING SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 — ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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. 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 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™ (“DSA”) is used to dynamically allocate and assign resources to Mobile Network Operators (“MNOs”)
devices that rely on SIM cards; our Mobile Data Enablement™ (“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”).
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 and
streaming video as well as social media based campaigns.
Business Combination — On September 30, 2015 we acquired SSM, now known as Evolving Systems NC. This business
combination is reflected in these consolidated financial statements since the acquisition date. Refer to Note 2, Acquisition, for more
information regarding the acquisition.
We account for business combinations in accordance with the acquisition method. The acquisition method of accounting
requires that assets acquired and liabilities assumed be recorded at their fair values on the date of a business acquisition. The excess of
the purchase price over the fair value of assets acquired is recognized as goodwill. Certain adjustments to the assessed fair values of
the assets and liabilities made subsequent to the acquisition date, but within the measurement period, which is up to one year, are
recorded as adjustments to goodwill. Any adjustments subsequent to the measurement period are recorded in income. Our
consolidated financial statements and results of operations reflect an acquired business from the completion date of an acquisition.
The judgments that we make in determining the estimated fair value assigned to each class of assets acquired and liabilities
assumed, as well as asset lives, can materially impact net income in periods following a business combination. We generally use either
the income, cost or market approach to aid in our conclusions of such fair values and asset lives. The income approach presumes that
the value of an asset can be estimated by the net economic benefit to be received over the life of the asset, discounted to present value.
The cost approach presumes that an investor would pay no more for an asset than its replacement or reproduction cost. The market
approach estimates value based on what other participants in the market have paid for reasonably similar assets. Although each
valuation approach is considered in valuing the assets acquired, the approach ultimately selected is based on the characteristics of the
asset and the availability of information.
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.
Reclassifications — Certain reclassifications have been made to the 2015 and 2014 financial statements to conform to the
consolidated 2016 financial statement presentation. These reclassifications had no effect on net earnings or cash flows as previously
reported.
33
Use of Estimates — The preparation of financial statements in conformity with accounting principles generally accepted in
the U.S. 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,
generally, is the respective local currency for each foreign subsidiary. Assets and liabilities of foreign operations denominated in local
currencies are translated at the spot rate in effect at the applicable reporting date. Our consolidated balance sheets are translated at the
spot rate of exchange during the applicable period. Our consolidated statements of operations are translated at the weighted average
rate of exchange during the applicable period. The resulting unrealized cumulative translation adjustment is recorded as a component
of accumulated other comprehensive income (loss) in stockholders’ equity. Realized and unrealized transaction gains and losses
generated by transactions denominated in a currency different from the functional currency of the applicable entity are recorded in
other income (loss) in the period in which they occur.
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. For purposes of the goodwill evaluation, we compare the fair value
of each of our reporting units to its respective carrying amount. 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.
Intangible Assets — Amortizable intangible assets consist primarily of purchased software and licenses, customer contracts
and relationships, trademarks and tradenames, and business partnerships acquired in conjunction with our purchase of Evolving
Systems Labs and Evolving Systems NC. 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. 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
34
of arrangements, we do not typically have vendor specific objective evidence (“VSOE”) of fair value on the license fee/services
portion (services are related to customizing the software) of the arrangement due to the large amount of customization required by our
customers; however, we do have VSOE for the warranty/maintenance services based on the renewal rate of the first year of
maintenance in the arrangement. The license/services portion is recognized using the percentage-of-completion method of accounting
and the warranty/maintenance services are separated based on the renewal rate in the contract and recognized ratably over the
warranty or maintenance period. We estimate the percentage-of-completion for each contract based on the ratio of direct labor hours
incurred to total estimated direct labor hours and recognize revenue based on the percent complete multiplied by the contract amount
allocated to the license fee/services. Since estimated direct labor hours, and changes thereto, can have a significant impact on revenue
recognition, these estimates are critical and we review them regularly. If the arrangement includes a customer acceptance provision,
the hours to complete the acceptance testing are included in the total estimated direct labor hours; therefore, the related revenue is
recognized as the acceptance testing is performed. Revenue is not recognized in full until the customer has provided proof of
acceptance on the arrangement. Generally, our contracts are accounted for individually. However, when certain criteria are met, it
may be necessary to account for two or more contracts as one to reflect the substance of the group of contracts. We record amounts
billed in advance of services being performed as unearned revenue. Unbilled work-in-progress represents revenue earned but not yet
billable under the terms of the fixed-price contracts. All such amounts are expected to be billed and collected within 12 months.
We may encounter budget and schedule overruns on fixed-price contracts caused by increased labor or overhead costs. We
make adjustments to cost estimates in the period in which the facts requiring such revisions become known. We record estimated
losses, if any, in the period in which current estimates of total contract revenue and contract costs indicate a loss. If revisions to cost
estimates are obtained after the balance sheet date but before the issuance of the interim or annual financial statements, we make
adjustments to the interim or annual financial statements accordingly.
In arrangements where the services are not essential to the functionality of the delivered software, we recognize license
revenue when a license agreement has been signed, delivery and acceptance have occurred, the fee is fixed or determinable and
collectability is reasonably assured. Where applicable, we unbundle and record as revenue fees from multiple element arrangements as
the elements are delivered to the extent that VSOE of fair value of the undelivered elements exist. If VSOE for the undelivered
elements does not exist, we defer fees from such arrangements until the earlier of the date that VSOE does exist on the undelivered
elements or all of the elements have been delivered.
We recognize revenue from fixed-price service contracts using the proportional performance method of accounting, which is
similar to the percentage-of-completion method described above. We recognize revenue from professional services provided pursuant
to time-and-materials based contracts and training services as the services are performed, as that is when our obligation to our
customers under such arrangements is fulfilled.
We recognize revenue from our managed services contracts primarily ratably 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 proportional performance method of accounting.
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 consists of two components, net income and other
comprehensive income (loss). Other comprehensive income refers to revenue, expenses, gains, and losses that under GAAP are
recorded as an element of shareholders’ equity but are excluded from net income. Other comprehensive income (loss) consists of
foreign currency translation adjustments from those subsidiaries not using the U.S. dollar as their functional currency and unrealized
gains and losses on marketable securities categorized as available-for-sale.
Contract Receivables, Unbilled Work-in-Progress and Allowance for Doubtful Accounts — 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
35
condition and collateral is not required. Unbilled work in progress is revenue which has been earned but not invoiced. An allowance
is placed against accounts receivable or unbilled work in progress for our best estimate of the amount of probable credit losses. We
determine the allowance based on historical write-off experience and information received during collection efforts. We review our
allowances monthly and past due balances over 90 days are reviewed individually for collectability. Account balances are charged
against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. We do not
have any off-balance-sheet credit exposure related to our customers.
The following table reflects the activity in the allowance for doubtful accounts:
Fiscal
Year
2016 ............................. Allowance for doubtful accounts
2015 ............................. Allowance for doubtful accounts
2014 ............................. Allowance for doubtful accounts
Description
Balance at
Beginning
of Period
Bad Debt
Expense/
(Recovery)
Write-Offs
Charged
to
Effects of
Foreign
Currency
Exchange
Allowance
Rates
Balance at
End of
Period
$
$
$
83 $
43 $
73 $
150 $
41 $
— $
— $
— $
(25) $
(12) $
(1) $
(5) $
221
83
43
The following table reflects the activity in the allowance for unbilled work-in-progress:
Fiscal
Year
2016 .............................
2015 .............................
2014 .............................
Description
Allowance for unbilled work-in-
progress
Allowance for unbilled work-in-
progress
Allowance for unbilled work-in-
progress
Unbilled
Work-in-
Progress
Allowance/
(Recovery)
Write-Offs
Charged
to
Effects of
Foreign
Currency
Exchange
Allowance
Rates
Balance at
Beginning
of Period
Balance at
End of
Period
$
$
$
— $
— $
— $
— $
306 $
— $
(306) $
— $
—
—
317 $
— $
— $
(11) $
306
Concentration of Credit Risk — Financial instruments that potentially subject us to concentrations of credit risk consist
primarily of contract receivables and unbilled work-in-progress. We perform on-going evaluations of customers’ financial condition
and, generally, require no collateral from customers.
A substantial portion of our revenue is from a limited number of customers, all in the telecommunications industry.
For the years ended December 31, 2016 and 2015, no significant customer exceeded the threshold (defined as contributing at
least 10%) of revenue from continuing operations. For the year ended December 31, 2014, two significant customers accounted for
24% (13% and 11%) of revenue from continuing operations. These customers are large telecommunications operators in Europe and
Mexico.
As of December 31, 2016 no customers accounted for 10% of contract receivables and unbilled work-in-progress. As of
December 31, 2015, two significant customers accounted for approximately 36% (25% and 11%) of contract receivables and unbilled
work-in-progress. These customers are large telecommunications operators in Africa and Europe.
We are subject to concentration of credit risk with respect to our cash and cash equivalents, which we attempt to minimize by
maintaining our cash and cash equivalents with institutions of sound financial quality. At times, cash balances may exceed limits
federally insured by the Federal Deposit Insurance Corporation (“FDIC”).
Our funds not under any FDIC program were $6.3 million and $7.3 million as of December 31, 2016 and 2015, respectively.
Sales, Use and Other Value Added Tax — Revenue is recorded net of applicable state, use and other value added taxes.
Advertising and Promotion Costs — Advertising and promotion costs are expensed as incurred. Advertising costs totaled
approximately $0.1 million, $0.1 million and $0.2 million for the years ended December 31, 2016, 2015 and 2014.
Capitalization of Internal Software Development Costs — We expend amounts on product development, particularly for
new products and/or for enhancements of existing products. For internal development of software products that are to be licensed by
us, we expense the cost of developing software prior to establishing technological feasibility and those costs are capitalized once
technological feasibility has been established. Capitalization ceases upon general release of the software. The determination of
whether internal software development costs are subject to capitalization is, by its nature, highly subjective and involves significant
judgments. This decision could significantly affect earnings during the development period. Further, once capitalized, the software
36
costs are generally amortized on a straight-line basis over the estimated economic life of the product. The determination of the
expected useful life of a product is highly judgmental. Finally, capitalized software costs must be assessed for impairment if facts and
circumstances warrant such a review. We did not capitalize any internal software development costs during the three years ended
December 31, 2016. In addition, we did not have any capitalized internal software development costs included in our December 31,
2016 and 2015 Consolidated Balance Sheets. We believe that during these periods no material internal software development costs
were required to be capitalized. Our conclusion is primarily based on the fact that the feature-rich, pre−integrated, and highly-scalable
nature of our products requires that our development efforts include complex design, coding and testing methodologies, which include
next generation software languages and development tools. Development projects of this nature carry a high degree of development
risk. Substantially all of our internal software development efforts are of this nature, and therefore, we believe the period between
achieving technological feasibility and the general release of the software to operations is so short that any costs incurred during this
period are not material.
Property and Equipment and Long-Lived Assets — Property and equipment are stated at cost or estimated fair value if
acquired in an acquisition, less accumulated depreciation, and are depreciated over their estimated useful lives, or the lease term, if
shorter, using the straight-line method. Leasehold improvements are stated at cost, less accumulated amortization, and are amortized
over the shorter of the lease term or estimated useful life of the asset. Maintenance and repair costs are expensed as incurred.
We review our long-lived assets, such as property and equipment and purchased intangible assets subject to amortization, for
impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be
recoverable. We evaluate the recoverability of an asset or asset group by comparing its carrying amount to the estimated undiscounted
future cash flows expected to be generated by the asset or asset group. If the carrying amount of an asset or asset group exceeds its
estimated future cash flows, we recognize an impairment charge as the amount by which the carrying amount of the asset exceeds the
estimated fair value of the asset.
Income Taxes — We record deferred tax assets and liabilities for the estimated future tax effects of temporary differences
between the tax bases of assets and liabilities and amounts reported in the accompanying consolidated balance sheets, as well as
operating 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. In April 2016, the FASB issued ASU No. 2016-10, “Revenue from Contracts with Customers,” Topic 606: “Identifying
Performance Obligations and Licensing. ” This Update clarifies guidance related to identifying performance obligations and licensing
implementation guidance contained in the new revenue recognition standard. The Update includes targeted improvements based on
input the Board received from the Transition Resource Group for Revenue Recognition and other stakeholders. The update seeks to
proactively address areas in which diversity in practice potentially could arise, as well as to reduce the cost and complexity of
applying certain aspects of the guidance both at implementation and on an ongoing basis. In May 2016, the FASB issued ASU
No. 2016-12, “Revenue from Contracts with Customers,” Topic 606: “Narrow-Scope Improvements and Practical Expedients.” The
amendments in this Update address narrow-scope improvements to the guidance on collectability, noncash consideration, and
completed contracts at transition. Additionally, the amendments in this Update provide a practical expedient for contract modifications
at transition and an accounting policy election related to the presentation of sales taxes and other similar taxes collected from
customers. This ASU is the final version of Proposed Accounting Standards Update 2015-320, “Revenue from Contracts with
Customers,” (Topic 606): “Narrow-Scope Improvements and Practical Expedients,” which has been deleted. In December 2016, the
FASB issued ASU No. 2016-20, “Revenue from Contracts with Customers,” Topic 606: “Technical Corrections and Improvements to
Topic 606, Revenue from Contracts with Customers”. The amendments in this Update address narrow-scope improvements to the
guidance on loan guarantee fees, contract cost-impairment testing, contract costs-interaction of impairment testing with guidance in
other topics, provision for losses on construction-type and production-type contracts, scope of Topic 606 to exclude all contracts that
37
are within the scope of Topic 944, disclosure of remaining performance obligations, disclosure of prior-period performance
obligations, contract modifications, contract asset versus receivable, refund liability, advertising costs, fixed-odds wagering contracts
in the casino industry and cost capitalization for advisors to private funds and public funds. The Board decided to issue a separate
Update for technical corrections and improvements to Topic 606 and other Topics amended by Update 2014-09 to increase
stakeholders’ awareness of the proposals and to expedite improvements to Update 2014-09. This ASU is effective retrospectively for
fiscal years, and interim periods within those years beginning after December 15, 2017 for public companies and 2018 for non-public
entities. We do not expect the adoption of this standard to have a significant impact on our financial position and results of operations.
In February 2016, the FASB issued 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. 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 March 2016, the FASB issued ASU No. 2016-09, Stock Compensation (Topic 718), which includes provisions intended to
simplify various aspects related to how share-based payments are accounted for and presented in the financial statements. The
standard is effective for annual periods beginning after December 15, 2016, with early adoption permitted. We do not expect the
adoption of this standard to have a significant impact on our financial position and results of operations.
In January 2017, the FASB issued ASU No. 2017-04, Intangibles-Goodwill and Other (Topic 350), which includes
provisions, intended to simplify the test for goodwill impairment. The standard is effective for annual periods beginning after
December 15, 2019, with early adoption permitted for interim or annual goodwill impairment tests performed on testing dates after
January 1, 2017. We do not expect the adoption of this standard to have a significant impact on our financial position and results of
operations.
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, 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
SSM’s representations and warranties in the agreement. This payment has not been paid to date due to SSM’s representations and
warranties not as yet being fully satisfied.
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 results of SSM’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):
Cash Consideration .............................................................................
Initial Cash Purchase Price ..............................................................
Cash/Working Capital Adjustment ..................................................
Total Cash Consideration ....................................................................
Assumed Liabilities .............................................................................
Total purchase price ............................................................................
$
$
$
September 30, 2015
9,750
535
10,285
250
10,535
38
The following table summarizes the estimated fair values of the assets and liabilities assumed at the acquisition date (in
thousands):
September 30, 2015
Cash and cash equivalents ............................................................................................................................
Contract receivables ......................................................................................................................................
Unbilled work-in-progress ............................................................................................................................
Intangible assets ............................................................................................................................................
Prepaid and other current assets ....................................................................................................................
Deferred tax asset ..........................................................................................................................................
Other assets, non-current ..............................................................................................................................
Total identifiable assets acquired ..................................................................................................................
Accounts payable and accrued liabilities ......................................................................................................
Deferred tax liability .....................................................................................................................................
Deferred revenue ...........................................................................................................................................
Total identifiable liabilities acquired ............................................................................................................
Net identifiable assets acquired .....................................................................................................................
Goodwill .......................................................................................................................................................
Net assets acquired ........................................................................................................................................
$
$
$
$
$
1,521
1,057
89
4,642
68
—
32
7,409
1,506
1,760
557
3,823
3,586
6,949
10,535
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. We recorded $0.9 million of amortization expense related to the
acquired intangible assets during the period from September 30, 2015 through December 31, 2016.
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’s acquisition as of December 31, 2016 were as follows (in thousands):
Gross Amount
Accumulated
Amortization
Net Carrying
Amount
December 31, 2016
Purchased software ...................................
Trademarks and tradenames .....................
Non-competition .......................................
Customer relationships..............................
$
$
1,679
122
33
2,808
4,642
$
$
262
76
21
502
861
$
$
1,417
46
12
2,306
3,781
Weighted-Average
Amortization
Period
8 yrs
2 yrs
2 yrs
7 yrs
7.19 yrs
Pro Forma
Evolving Systems NC, Inc. contributed revenues of $5.1 million and net income of $1.2 million for the twelve months ended
December 31, 2016 and revenue of $1.4 million and net income of $0.3 million from the acquisition date of September 30, 2015
through December 31, 2015. 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, 2016 and 2015. The pro forma information includes adjustments for the
amortization of intangible assets. The following unaudited 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).
Revenue ..........................................................................................
Earnings ..........................................................................................
$
24,778
3,435
$
30,190
3,645
SSM did not have any material, nonrecurring pro forma adjustments directly attributable to the business combination
included in the reported pro forma revenue and earnings.
Year Ended December 31,
2016
2015
(unaudited)
39
NOTE 3 — GOODWILL AND INTANGIBLE ASSETS
Changes in the carrying amount of goodwill by reporting unit were as follows (in thousands):
Balance as of December 31, 2014 ..........................................................................................................
Goodwill acquired during the year .....................................................................................................
Acquired goodwill adjusted during the year ......................................................................................
Effects of changes in foreign currency exchange rates (1) ................................................................
Balance as of December 31, 2015 ..........................................................................................................
Effects of changes in foreign currency exchange rates (1) ................................................................
Balance as of December 31, 2016 ..........................................................................................................
$
$
$
Total Goodwill
17,010
6,949
(32)
(785)
23,142
(2,543)
20,599
(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, 2016, at which time we had $21.5 million of goodwill
included in the following reporting units, License and Services (“L&S”) - U.S. of $6.3 million, U.K. of $6.1 million, India of
$0.2 million and Customer Support (“CS”) — U.S. of $1.5 million and U.K. of $7.4 million. The fair value of each reporting unit was
estimated using both market and income based approaches. Specifically, we incorporated observed market multiple data from selected
guideline public companies and values arrived at through the application of discounted cash flow analyses which in turn were based
upon our financial projections as of the valuation date. We believe that a market participant would weigh both possibilities without a
bias to one or the other. Consequently, we gave equal consideration to both. This analysis requires significant judgments, including
estimation of future cash flows, which is dependent on internal forecasts, estimation of the long-term rate of growth for our business,
estimation of the useful life over which cash flows will occur, and determination of our weighted average cost of capital. Changes in
these estimates and assumptions could materially affect the determination of fair value and goodwill impairment for each reporting
unit. If the carrying value of a reporting unit were to exceed its fair value, we would then compare the fair value of the reporting unit’s
goodwill to its carrying amount, and any excess of the carrying amount over the fair value would be charged to operations as an
impairment loss. If the projected future performance of 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 2016 goodwill impairment analysis, the fair value of each reporting unit exceeded its carrying value. Therefore the
second step was not necessary. Due to our transition of packaging our products and services into a single managed service offering,
we have determined we have one reporting unit. We do not believe the aggregation of our reporting units impacts the value of our
goodwill nor are there any events through the date this Form 10-K was filed which impacts our assumptions on the determination of
the fair value of our goodwill.
We amortized identifiable intangible assets for Evolving Systems Labs and Evolving Systems NC on a straight-line basis
over their estimated lives ranging from one to eight years. As of December 31, 2016 and December 31, 2015, identifiable intangibles
were as follows (in thousands):
December 31, 2016
December 31, 2015
Net
Weighted-
Average
Net
Purchased software .................................
Trademarks and tradenames ...................
Non-competition .....................................
Customer relationships............................
Gross
Amount
$ 2,118 $
Accumulated Carrying
Amortization Amount
436 $
116
21
587
1,160 $
Gross
Amount
1,682 $ 2,118 $
69
12
2,437
4,200 $ 5,360 $
185
33
3,024
185
33
3,024
$ 5,360 $
Accumulated
Amortization
Carrying Amortization
Amount
171 $ 1,947
142
43
4
29
2,865
159
377 $ 4,983
Period
7.3 yrs
2.6 yrs
2.0 yrs
6.8 yrs
6.8 yrs
Amortization expense of identifiable intangible assets was $0.8 million, $0.3 million and $0.1 million for the years ended
December 31, 2016, 2015 and 2014, respectively. Expected future amortization expense related to identifiable intangibles based on
our carrying amount as of December 31, 2016 was as follows (in thousands):
Year ending December 31,
2017 ........................................
2018 ........................................
2019 ........................................
2020 ........................................
2021 ........................................
Thereafter ...............................
$
$
764
703
693
693
679
668
4,200
40
NOTE 4 — BALANCE SHEET COMPONENTS
The components of certain balance sheet line items are as follows (in thousands):
Property and equipment:
Computer equipment and purchased software .........................................................
Furniture, fixtures and leasehold improvements ......................................................
Less accumulated depreciation ................................................................................
Assets acquired under capital lease:
Original book value..................................................................................................
Accumulated amortization .......................................................................................
Net book value .........................................................................................................
December 31,
2016
2015
4,781
1,107
5,888
(5,342)
546
$
$
December 31,
2016
2015
24
(23)
1
$
$
4,814
1,155
5,969
(5,409)
560
24
(18)
6
$
$
$
$
Depreciation expense was $0.3 million, $0.3 million and $0.2 million for the years ended December 31, 2016, 2015 and
2014, respectively.
Included in computer equipment and purchased software at December 31, 2016 and 2015 are assets under capital lease.
Depreciation expense related to assets under capital leases was $5,000 for the years ended December 31, 2016, 2015 and 2014,
respectively.
Accounts payable and accrued liabilities:
Accounts payable .....................................................................................................
Accrued liabilities ....................................................................................................
Accrued compensation and related expenses ...........................................................
December 31,
2016
2015
$
$
628
2,649
997
4,274
$
$
716
2,698
1,193
4,607
NOTE 5 — LONG-TERM DEBT
On February 29, 2016, we entered into the Fifth Amendment to the Loan and Security Agreement with East West Bank
which provides for a Term Loan (the “Term Loan”) for $6.0 million. The $6.0 million loan bears interest at a floating rate equal to the
U.S.A. Prime Rate plus 1.0%. As of December 31, 2016, the U.S.A. Prime Rate was 3.75%. The Term Loan is secured by
substantially all of the assets of Evolving Systems, including a pledge, subject to certain limitations with respect to stock of foreign
subsidiaries, of the stock of the existing and future direct subsidiaries of Evolving Systems. Interest accrues from the date the Term
Loan was made at the aforementioned rate and is payable monthly. The Term Loan shall be repaid in 36 equal monthly installments
of principal, plus accrued but unpaid interest, commencing on January 1, 2017 and continuing on the first day of each month thereafter
through and including January 1, 2020. On the Term Loan maturity date, the outstanding principal amount of the Term Loan and all
accrued and unpaid interest thereon shall be immediately due and payable. The Term Loan, once repaid, may not be reborrowed. We
must maintain a minimum current ratio, a specified ratio of Total Liabilities to EBITDA and a minimum fixed charge coverage ratio
which are as defined in the Term Loan. The Term Loan requires us to pay two annual credit facility fees of $18,750 and legal fee
equal to $1,000. The Term Loan agreement required us to use the term loan’s proceeds and $4.0 million from our cash balances to pay
off and terminate a Revolving Facilities Loan and Security Agreement with East West Bank totaling $10.0 million. The Term Loan
matures on January 1, 2020.
The Term Loan includes negative covenants that place restrictions on the Company’s ability to, among other things: incur
additional indebtedness; create liens or other encumbrances on assets; make loans, enter into letters of credit, guarantees, investments
and acquisitions; sell or otherwise dispose of assets; cause or permit a change of control; merge or consolidate with another entity;
make negative pledges; enter into affiliate transactions; limits the amount of cash distributions to our shareholders; and change the
nature of our business materially. Outstanding amounts under the Term Loan may be accelerated by East West Bank upon the
occurrence and continuance of certain events of default, including without limitation: payment defaults, breach of covenants beyond
applicable grace periods, breach of representations and warranties, bankruptcy and insolvency defaults, and the occurrence of a
material adverse effect (as defined). Acceleration is automatic upon the occurrence of certain bankruptcy and insolvency defaults.
41
As of December 31, 2016, we are in compliance with the covenants and have a $6.0 million balance under the Term Loan net
of approximately $3,000 debt issuance costs. The proceeds from the borrowings against the facilities were used for the initial payment
for the SSM acquisition agreement on September 30, 2015.
NOTE 6 — INCOME TAXES
The pre-tax income from continuing operations on which the provision for income taxes was computed is as follows (in
thousands):
2016
For the Years Ended December 31,
2015
2014
Domestic ................................................................................
Foreign ...................................................................................
Total .......................................................................................
$
$
(2,928) $
7,820
4,892
$
(2,948) $
7,159
4,211
$
(1,274)
9,679
8,405
The expense (benefit) from continuing operations for income taxes consists of the following (in thousands):
Current:
Federal ...............................................................................
Foreign ...............................................................................
State ...................................................................................
Total current ...........................................................................
Deferred:
Federal ...............................................................................
Foreign ...............................................................................
State ...................................................................................
Total deferred .........................................................................
Total .......................................................................................
$
$
2016
For the Years Ended December 31,
2015
2014
(112) $
1,483
110
1,481
(60)
43
(7)
(24)
1,457
$
789
1,174
76
2,039
(1,023)
16
(117)
(1,124)
915
$
$
1,468
1,637
(26)
3,079
(301)
19
0
(282)
2,797
As of December 31, 2014, we had federal Net Operating Loss (“NOL”) carryforwards of approximately $2.3 million. As of
December 31, 2016 and 2015 we had no Federal NOL carryforwards remaining. As of December 31, 2016 and 2015, we had state
NOL’s of approximately $17.5 million and $17.4 million, respectively. The state NOL carryforwards expire at various times
beginning in 2018 and ending in 2036. In addition, we have research and experimentation credit carryforwards of approximately $0.3
million which may expire in 2018 and Alternative Minimum Tax (“AMT”) credits of $0.8 million which may expire at various times
beginning in 2028 and ending in 2034.
In our U.S. Federal income tax returns we historically deducted income taxes paid to various countries. In our 2014 U.S.
Federal income tax return we had $2.3 million of NOL carryforwards. Our income tax calculations have historically been under the
regular and AMT regimes found in U.S. tax laws. The U.S. tax system contains rules to alleviate the burden of double taxation on
income generated in foreign countries and subject to tax in such countries. The U.S. allows for either a deduction or credit of such
foreign taxes against U.S. taxable income. An election to either claim a deduction or credit on such foreign income taxes can be made
each tax year, independent from elections made in other years. A credit reduces a company’s actual U.S. income tax on a dollar-for-
dollar basis, while a deduction reduces only the company’s income subject to tax. We made a comparison of our foreign dividends
paid by our foreign subsidiary for which we deducted foreign taxes claimed versus claiming a Foreign Tax Credit (“FTC”) on the
dividend paid by the foreign subsidiary. The dividends received were grossed-up with its corresponding foreign taxes. The U.S. law
requires the offset of taxable income with NOL prior to applying the FTC rules. We determined it was beneficial for the company to
gross-up the foreign dividends paid by the foreign subsidiary for the years 2012 through 2014 and make the election to claim an FTC.
By doing so we fully utilized our December 31, 2014, $2.3 million balance of the federal NOL. As a result, the company had
approximately $2.8 million of FTC’s to carryforward into 2015 and subsequent years as a deferred tax asset. As of December 31,
2016, our FTC deferred tax asset balance was approximately $4.4 million.
The Company uses the incremental approach to recognizing excess tax benefits associated with equity compensation. Our
$2.3 million of federal NOL’s are primarily windfall excess tax benefit related to stock compensation expense, the benefit of which, if
realized, will be an increase to Additional Paid-in Capital (“APIC”) as opposed to a reduction in tax expense. Due to the afore-
mentioned election to claim an FTC, during the year 2015 $0.8 million of the federal NOL was realized, with a corresponding increase
in additional paid-in capital.
42
Deferred tax assets and liabilities reflect the net tax effects of temporary differences between the carrying amount of assets
and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of our deferred
tax assets and liabilities are as follows (in thousands):
Deferred tax assets:
Foreign tax credits carryforwards ............................................................................
Net operating loss carryforwards – State .................................................................
Research and development credits ...........................................................................
Equity compensation ................................................................................................
AMT credit ..............................................................................................................
Depreciable assets ....................................................................................................
Accrued liabilities and reserves ...............................................................................
Total deferred tax assets ...............................................................................................
$
Deferred tax liabilities:
Intangibles ................................................................................................................
Undistributed foreign earnings .................................................................................
Accrued liabilities and reserves ...............................................................................
Total deferred tax liability ...........................................................................................
Net deferred tax assets, before valuation allowance ....................................................
Valuation allowance.................................................................................................
Net deferred tax asset ...................................................................................................
$
As of December 31,
2016
2015
$
4,360
544
303
561
770
71
124
6,733
(1,339)
(662)
—
(2,001)
4,732
(4,732)
—
$
3,667
540
303
686
770
110
340
6,416
(1,512)
(666)
(23)
(2,201)
4,215
(4,215)
—
In conjunction with the acquisition of Evolving Systems Labs in October 2013, we recorded certain identifiable intangible
assets. We established a deferred tax asset of $0.1 million at the acquisition date for the expected difference between what would be
expensed for financial reporting purposes and what would be deductible for income tax purposes. In September 2015, we established
a deferred tax liability of $1.8 million as a result of the acquisition of Evolving Systems NC. As of December 31, 2016 and 2015, there
was a net deferred tax liability of ($1.3) million and a net deferred tax liability of ($1.5) million, respectively. This net deferred tax
liability will be recognized as the identifiable intangibles are amortized.
We continue to maintain a full valuation allowance on the domestic net deferred tax asset, as we have determined it is more
likely than not that we will not realize our domestic deferred tax assets. Such assets primarily consist of certain net state operating loss
carryforwards, AMT credits and research and development credits. We assessed the realizability of our domestic deferred tax assets
using all available evidence. In particular, we considered both historical results and projections of profitability for the reasonably
foreseeable future periods. We are required to reassess our conclusions regarding the realization of our deferred tax assets at each
financial reporting date. A future evaluation could result in a conclusion that all or a portion of the valuation allowance is no longer
necessary which could have a material impact on our results of operations and financial position.
The benefit for income taxes differs from the amount computed by applying the U.S. federal income tax rate of 34% to
income before income taxes as follows (in thousands):
For the Years Ended December 31,
2015
2014
2016
U.S. federal income tax expense at statutory rates ....................................
State income tax expense, net of federal impact .......................................
Foreign Tax Credit ....................................................................................
Foreign rate differential ............................................................................
Foreign deemed dividends ........................................................................
Undistributed foreign earnings..................................................................
Change in valuation allowance .................................................................
Research and development expenses ........................................................
Foreign taxes .............................................................................................
Section 78 Gross-up ..................................................................................
Permanent differences and other, net ........................................................
Total tax expense ..................................................................................
$
$
1,854
54
(874)
(1,331)
1,515
0
517
(604)
0
457
(131)
1,457
$
$
2,392
—
(3,667)
(449)
939
(221)
2,415
(1,096)
314
371
(83)
915
$
$
4,595
542
—
(1,452)
1,783
—
(1,971)
(867)
53
—
114
2,797
43
The Company recognizes the tax benefit from an uncertain tax position when it determines that it is more likely than not that
the position would be sustained upon examination by taxing authorities.
As of December 31, 2016 and 2015, we had no liability for unrecognized tax benefits. We do not believe there will be any
material changes to our unrecognized tax positions over the next twelve months. Interest and penalties related to income tax liabilities
are included as a component of income tax expense (benefit) in the accompanying statements of operations.
Our income taxes payable may be reduced by the AMT tax benefits from employee stock plan awards. We had no net excess
tax benefits from employee stock plan awards for the years ended December 31, 2016 and 2015, which would be reflected as an
increase to additional paid-in capital.
We conduct business globally and, as a result, Evolving Systems Inc. or one or more of our subsidiaries file income tax
returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. In the normal course of business, we are subject to
examination by taxing authorities throughout the world, namely the United Kingdom, Germany and India. Although carryovers can
always be subject to review by taxing authorities, we are no longer subject to U.S. federal, state and local, or non-U.S. income tax
examinations for years before 2013.
During 2004, we formed Evolving Systems India, a wholly owned subsidiary of Evolving Systems which is used primarily
for product development and customer service and support. The Company has the intent and current ability to indefinitely reinvest
profits of Evolving Systems India for the year ended December 31, 2016. Undistributed foreign earnings for the year ended
December 31, 2016 are approximately $1.0 million. Repatriation to the U.S. in the form of dividend distributions from the India
controlled foreign subsidiary would give rise to taxation.
Two Indian subsidiaries of SSM were acquired pursuant to the terms of the Agreement and Plan of Merger dated
September 30, 2015. We have reason to believe there is uncertainty related to the lack of historical US International reporting for
these two foreign subsidiaries, and are in the process of determining whether either or both of these subsidiaries are controlled foreign
corporations (“CFCs”) within the meaning of the Internal Revenue Code and related Regulations, or if a “check-the-box” election has
taken place to effectively treat one or both of these subsidiaries as disregarded entities for U.S. federal tax reporting purposes. The
Company is in the process of obtaining pertinent information to assess the degree of uncertainty and to quantify related costs or
liabilities.
NOTE 7 — STOCKHOLDERS’ EQUITY
Common Stock Dividends
Our Board of Directors declared a first quarter cash dividend of $0.11 per share on March 15, 2016, which was paid April 1,
2016, to stockholders of record March 28, 2016. On May 3, 2016, our Board of Directors declared a second quarter cash dividend of
$0.11 per share, which was paid on July 1, 2016, to stockholders of record June 3, 2016. There were no accrued dividends as of
December 31, 2016.
Any determination to declare a future quarterly dividend, as well as the amount of any cash dividend which may be declared,
will be based on our financial position, earnings, earnings outlook and other relevant factors at that time, including applicable limits
under our term loan facility or any other credit facility then in effect.
Treasury Stock
Beginning on May 20, 2011, and continuing through December 31, 2014, we had the ability through our stock purchase
program to re-purchase our common stock at prevailing market prices either in the open market or through privately negotiated
transactions up to $5.0 million. The size and timing of such purchases, if any, was based on market and business conditions as well as
other factors. We were not obligated to purchase any shares. The re-purchase program expired on December 31, 2014.
From the inception of the plan through December 31, 2014, we purchased 178,889 shares of our common stock for
$1.3 million or an average price of $6.97 per share.
Certain Anti-Takeover Provisions/Agreements with Stockholders
Our restated certificate of incorporation allows the board of directors to issue up to 2,000,000 shares of preferred stock and to
determine the price, rights, preferences and privileges of those shares without any further vote or action by our stockholders. The
rights of the holders of our common stock will be subject to, and may be adversely affected by, the rights of the holders of any
preferred stock that may be issued in the future. Issuance of preferred stock, while providing desired flexibility in connection with
possible acquisitions and other corporate purposes could make it more difficult for a third party to acquire a majority of our
outstanding voting stock. As of December 31, 2016 and December 31, 2015, no shares of preferred stock were outstanding.
44
In addition, we are subject to the anti-takeover provisions of Section 203 of Delaware General Corporation Law which
prohibit us from engaging in a “business combination” with an “interested stockholder” for a period of three years after the date of the
transaction in which the person became an interested stockholder, unless the business combination is approved in the prescribed
manner. The application of Section 203 may have the effect of delaying or preventing changes in control of our management, which
could adversely affect the market price of our common stock by discouraging or preventing takeover attempts that might result in the
payment of a premium price to our stockholders.
NOTE 8 — 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 $0.3 million,
$0.3 million and $0.4 million for the years ended December 31, 2016, 2015 and 2014, respectively, of compensation expense in the
consolidated statements of operations, with respect to our stock-based compensation plans. The following table summarizes stock-
based compensation expenses recorded in the statement of operations (in thousands):
For the Years Ended December 31,
2015
2014
2016
Cost of revenue, excluding depreciation and amortization .......................
Sales and marketing ..................................................................................
General and administrative .......................................................................
Product development ................................................................................
Total share based compensation ...............................................................
$
$
39
28
119
73
259
$
$
82
36
112
87
317
$
$
81
31
181
108
401
Stock Option/Incentive Plans
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,
with respect to stock option grants, expire no more than ten years from the date of grant. At December 31, 2016 and 2015, there were
approximately 0.3 million shares available for grant under the 2007 Stock Plan. Of the shares available as of December 31, 2016 and
2015, 0.2 million shares were reserved for acquisitions. At December 31, 2016 and 2015, 0.7 million and 0.8 million options were
issued and outstanding under the 2007 Stock Plan, respectively.
In June 2016, our stockholders approved the 2016 Stock Incentive Plan (the “2016 Stock Plan”) with a maximum of 250,000
shares reserved for issuance. Awards permitted under the 2016 Stock Plan include: Stock Options, Stock Appreciation Rights,
Restricted Stock, Restricted Stock Units, Performance Awards and Other Stock-Based Awards. Awards issued under the 2016 Stock
Plan are at the discretion of the Board of Directors. As applicable, awards are granted with an exercise price equal to the closing price
of our common stock on the date of grant, generally vest over four years for employees and three years for an initial grant and one
year for subsequent grants for directors and expire no more than ten years from the date of grant. At December 31, 2016, no awards
have been granted under the 2016 Stock Plan.
During the year ended December 31, 2015 we awarded a total of 20,000 shares of restricted stock to members of our senior
management. No shares of restricted stock were awarded during the year ended December 31, 2016. During the years ended
December 31, 2016 and 2015, approximately 5,000 and 94 shares of restricted stock vested, respectively. There were forfeitures of
approximately 1,000 shares of restricted stock during year ended December 31, 2015 and no forfeitures during the year ended
December 31, 2016. The fair market value for stock-based compensation expense is equal to the closing price of our common stock on
the date of grant. The restrictions on the stock award are released generally over four years for senior management and over one year
for board members. Stock-based compensation expense includes $30,000, $8,000 and $0.1 million for the years ended December 31,
2016, 2015 and 2014, respectively for restricted stock. In March 2017, we awarded 542,000 shares of restricted stock to our Board of
Directors and senior management team which includes 216,800 shares subject to achievement of annual performance goals established
by our Board of Directors. The options vest over four years. These shares are included in the March 23, 2017 number of Common
Stock outstanding shares referenced on the cover of this Annual Report on Form 10-K.
45
The weighted-average assumptions used in the fair value calculations are as follows:
Expected term (years) ...............................................................................
Risk-free interest rate ................................................................................
Expected volatility ....................................................................................
Expected dividend yield ............................................................................
For the Years Ended December 31,
2016
2015
2014
6.0
1.32%
36.81%
7.2%
6.0
1.37%
42.01%
6.4%
5.9
1.69%
55.88%
4.0%
The following is a summary of stock option activity under the stock option plans for the years ended December 31, 2016 and 2015:
Options outstanding at December 31, 2014 ..............................
Options granted .....................................................................
Less options forfeited ............................................................
Less options exercised ..........................................................
Options outstanding at December 31, 2015 ..............................
Options granted .....................................................................
Less options forfeited ............................................................
Less options exercised ..........................................................
Options outstanding at December 31, 2016 ..............................
Number of
Shares
(in thousands)
Weighted-
Average
Exercise
Price
$
630
331
$
(27) $
(100) $
834
$
$
158
(196) $
(112) $
$
684
4.94
7.13
9.39
2.43
5.97
5.31
7.47
1.14
6.17
Options exercisable at December 31, 2016 ...............................
369
$
6.12
The following is a summary of stock options outstanding under the plans as of December 31, 2016:
Stock Options Outstanding
Weighted Avg.
Weighted-
Average
Remaining
Contractual
Term
(Years)
Aggregate
Intrinsic
Value
(in thousands)
5.69
$
2,959
6.94
$
957
7.30
6.02
$
$
139
139
Stock Options
Exercisable
Range of
Exercise Prices
0.01 - $
2.80 - $
3.20 - $
4.09 - $
6.00 - $
7.70 - $
1.34
2.86
3.72
5.80
6.63
10.90
$
$
$
$
$
$
Number of
Shares
(in thousands)
Remaining
Weighted Avg.
Contractual Life
(years)
Exercise
Price
Number of
Shares
(in thousands)
Weighted Avg.
Exercise
Price
22
16
86
168
227
165
684
1.88
2.92
3.01
8.82
8.44
7.60
7.30
$
$
$
$
$
$
$
0.38
2.86
3.69
5.22
6.06
9.72
6.17
22 $
16 $
86 $
37 $
88 $
120 $
369 $
0.38
2.86
3.69
4.87
6.15
9.75
6.12
The weighted-average grant-date fair value of stock options granted during the years ended December 31, 2016, 2015 and
2014 was $0.84, $1.60 and $3.80 respectively.
As of December 31, 2016, there were approximately $0.4 million of total unrecognized compensation costs related to
unvested stock options and restricted stock. These costs are expected to be recognized over a weighted average period of 2.5 years.
The total intrinsic value of stock option exercises for the years ended December 31, 2016, 2015 and 2014 was $0.3 million,
$0.3 million and $0.4 million, respectively. The total fair value of stock awards vested during the years ended December 31, 2016,
2015 and 2014 was $0.3 million.
The deferred income tax benefits from stock options expense related to Evolving Systems U.K. totaled approximately
$11,000, $19,000 and $15,000 for the years ended December 31, 2016, 2015 and 2014, respectively.
Cash received from stock option exercises was $0.1 million, $0.2 million and $0.2 million for the years ended December 31,
2016, 2015 and 2014, respectively.
During the year ended December 31, 2016, we had net settlement exercises of stock options, whereby the optionee did not
pay cash for the options but instead received the number of shares equal to the difference between the exercise price and the market
price on the date of exercise. Net settlement exercises during the year ended December 31, 2016, resulted in approximately 93,782
shares issued and 32,502 options cancelled in settlement of shares issued.
46
Net settlement exercises during the year ended December 31, 2014, resulted in approximately 7,094 shares issued and 26,376
options cancelled in settlement of shares issued. There were no net settlement exercises during the year ended December 31, 2015.
Employee Stock Purchase Plan
Under the Employee Stock Purchase Plan (“ESPP”), we are authorized to issue up to 550,000 shares of our common stock to
full-time employees, nearly all of whom are eligible to participate. Under the terms of the ESPP, employees may elect to have up to
15% of their gross compensation withheld through payroll deduction to purchase our common stock, capped at $25,000 annually and
no more than 10,000 shares per offering period. The purchase price of the stock is 85% of the lower of the market price at the
beginning or end of each three-month participation period. As of December 31, 2016, there were approximately 51,000 shares
available for purchase. For the years ended December 31, 2016, 2015 and 2014, we recorded compensation expense of $2,000,
$13,000 and $17,000, respectively, associated with grants under the ESPP which includes the fair value of the look-back feature of
each grant as well as the 15% discount on the purchase price. This expense fluctuates each period primarily based on the level of
employee participation.
Expected term (years) ...............................................................................
Risk-free interest rate ................................................................................
Expected volatility ....................................................................................
Expected dividend yield ............................................................................
For the Years Ended December 31,
2016
2015
2014
0.25
0.26%
41.65%
6.7%
0.25
0.07%
39.58%
6.3%
0.25
0.03%
40.92%
4.5%
Cash received from employee stock plan purchases was approximately $7,000, $53,000 and $68,000 for the years ended
December 31, 2016, 2015 and 2014, respectively. We issued shares related to the ESPP of approximately 2,000, 9,000 and 9,000 for
the years ended December 31, 2016, 2015 and 2014, respectively.
NOTE 9 — BENEFIT PLANS
We have established a defined contribution retirement plan for our employees under section 401(k) of the Internal Revenue
Code (the “401(k) Plan”) that is available to all U.S. employees 21 years of age or older with a month of service. Beginning in 2012,
we adopted a Safe Harbor 401(k) requiring us to contribute 3% of the employee’s compensation for each eligible employee, regardless
of whether the employee chooses to participate in the plan. All employee contributions are fully vested immediately and employer
contributions vest over a period of three years. Evolving Systems U.K. has established a defined contribution pension scheme that is
available to all employees in their first full month of employment. Employees may contribute a percentage of their earnings, the
amount of which is dependent upon the age of the employee, not to exceed the maximum statutory contribution amount. We match
5% of employee contributions. All contributions are immediately vested in their entirety.
During 2016, 2015 and 2014, we recorded a consolidated expense of $0.3 million, $0.4 million and $0.4 million, under the
aforementioned plans, respectively.
NOTE 10 — EARNINGS PER SHARE
Basic earnings per share (“EPS”) is computed by dividing net income or loss available to common stockholders by the
weighted average number of shares of common stock outstanding during the period. Diluted EPS is computed using the weighted
average number of shares of common stock outstanding, plus all potentially dilutive common stock equivalents using the treasury
stock method. Common stock equivalents consist of stock options. The following is the reconciliation of the numerators and
denominators of the basic and diluted EPS computations (in thousands except per share data):
Basic income per share:
Net income ..................................................................................................
Basic weighted average shares outstanding .....................................................
Basic income per share:
Net Income ..................................................................................................
Diluted income per share:
Net income ..................................................................................................
Weighted average shares outstanding .............................................................
Effect of dilutive securities - options ..........................................................
Diluted weighted average shares outstanding .............................................
$
$
$
Diluted income per share:
For the Years Ended December 31,
2015
2014
2016
3,435
$
3,296
$
11,845
11,693
0.29
$
0.28
3,435
$
11,845
116
11,961
3,296
11,693
242
11,935
$
$
5,608
11,642
0.48
5,608
11,642
284
11,926
Net Income ..................................................................................................
$
0.29
$
0.28
$
0.47
47
Weighted average options to purchase approximately 0.5 million, 0.3 million and 0.1 million shares of common stock
equivalents were excluded from the computation of diluted weighted average shares outstanding for the years ended December 31,
2016, 2015 and 2014, respectively, because the effect would have been anti-dilutive since their exercise prices were greater than the
average market value of our common stock for the period.
NOTE 11 — COMMITMENTS AND CONTINGENCIES
(a)
Lease Commitments
We lease office and operating facilities and equipment under non-cancelable operating leases. Current facility leases include
our headquarters in Englewood, Colorado, Durham, North Carolina, London, England, Bangalore and Kolkata, India, Kuala Lumpur,
Malaysia and Bucharest, Romania. Rent expense was $0.6 million for the years ended December 31, 2016, 2015 and 2014,
respectively. Rent expense is net of sublease rental income. There were was no sublease rental income for the years ended
December 31, 2016, 2015 and 2014.
Our headquarters facility lease extends for the term through November 30, 2017. The lease contains a clause that adjusts the
lease rate every year. The lease rate increases annually as of December 1. Our London, England facility contains a clause which gives
us six months free rent over the five year term. We account for the effect of such escalating lease payments as if the lease rate were
consistent over the lease term. Future minimum commitments under non-cancelable operating leases and capital leases gross of
sublease payments as of December 31, 2016 are as follows (in thousands):
2017 .........................................................................................................................................
2018 .........................................................................................................................................
2019 .........................................................................................................................................
Total minimum lease payments ...............................................................................................
Less: Amount representing interest ..........................................................................................
Principal balance of capital lease obligations ..........................................................................
Less: Current portion of capital lease obligations ....................................................................
Long-term portion of capital lease obligations ........................................................................
$
Operating Leases
544
325
142
1,011
$
Capital Leases
1
—
—
1
—
1
(1)
—
$
$
(b)
Other Commitments
As permitted under Delaware law, we have agreements with officers and directors under which we agree to indemnify them
for certain events or occurrences while the officer or director is, or was, serving at our request in this capacity. The term of the
indemnification period is indefinite. There is no limit on the amount of future payments we could be required to make under these
indemnification agreements; however, we maintain Director and Officer insurance policies, as well as an Employment Practices
Liability Insurance Policy, that may enable us to recover a portion of any amounts paid. Accordingly, we did not record any liabilities
for these agreements as of December 31, 2016 and 2015.
We enter into standard indemnification terms with customers and suppliers, as discussed below, in the ordinary course of
business. As we may subcontract the development of deliverables under customer contracts, we could be required to indemnify
customers for work performed by subcontractors. Depending upon the nature of the customer indemnification, the potential amount of
future payments we could be required to make under these indemnification agreements may be unlimited. We may be able to recover
damages from a subcontractor if the indemnification to customers results from the subcontractor’s failure to perform. To the extent we
are unable to recover damages from a subcontractor, we could be required to reimburse the indemnified party for the full amount. We
have never incurred costs to defend lawsuits or settle claims relating to indemnification arising out of subcontractors’ failure to
perform. We did not record any liabilities for these agreements as of December 31, 2016 and 2015.
Our standard license agreements contain product warranties that the software will be free of material defects and will operate
in accordance with the stated requirements for a limited period of time. The product warranty provisions require us to cure any
defects through any reasonable means. We believe the estimated fair value of the product warranty provisions in the license
agreements in place with our customers is minimal. Accordingly, we did not record any liabilities for these product warranty
provisions as of December 31, 2016 and 2015.
Our software arrangements generally include a product indemnification provision whereby we will indemnify and defend a
customer in actions brought against the customer for claims that our products infringe upon a copyright, trade secret, or valid patent.
We have not historically incurred any significant costs related to product indemnification claims. Accordingly, we did not record any
liabilities for these indemnification provisions as of December 31, 2016 and 2015.
48
In connection with our acquisition of Telespree on October 24, 2013, we agreed to make a cash payment of $0.5 million on
the one year anniversary of the closing. This payment was subject to reduction for certain claims and has not been paid to date. We
have made claims against this payment which are currently under dispute. Once settled the final payment will be released.
In connection with our acquisition of SSM on September 30, 2015, we agreed to make a cash payment of $0.3 million on the
one year anniversary of the closing. This payment is subject to reduction for certain claims and has not been paid to date. Once
settled the final payment will be released.
(c)
Litigation
From time to time, we are involved in various legal matters arising in the normal course of business. We do not expect the
outcome of such proceedings, either individually or in the aggregate, to have a material effect on our financial position, cash flows or
results of operations.
NOTE 12 — 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 Chief Financial Officer decision-makers (“CODM”). These chief operating decision makers review revenue by
segment and review overall results of operations.
We currently operate our business as one operating segment which includes two revenue types: license fees revenue and
services revenue (as shown on the consolidated statements of operations). License fees revenue represents the fees received from the
license of software products. Services revenue includes services directly related to the delivery of the licensed products, such as fees
for custom development, integration services, SaaS service, managed services, annual support fees, recurring maintenance fees, fees
for maintenance upgrades and warranty services. Warranty services that are similar to software maintenance services are typically
bundled with a license sale. Total assets by segment have not been disclosed as the information is not available to the chief operating
decision-makers.
Revenue information by segment was as follows (in thousands):
For the Years Ended December 31,
2015
2014
2016
Revenue
License fees...........................................................................................
Services .................................................................................................
Total revenue ............................................................................................
$
$
2,873
21,905
24,778
$
3,161
22,415
25,576
Revenue less costs of revenue, excluding depreciation and
amortization
License fees and services ......................................................................
Unallocated Costs
Other operating expenses ......................................................................
Depreciation and amortization ..............................................................
Restructuring .........................................................................................
Interest income ......................................................................................
Interest expense .....................................................................................
Other (expense) income ........................................................................
Foreign currency exchange (gain) loss .................................................
19,481
19,481
11,834
1,042
1,010
(6)
340
(183)
552
19,127
19,127
13,694
580
533
(18)
121
—
6
Income from operations before income taxes .......................................
$
4,892
$
4,211
$
5,027
24,653
29,680
22,032
22,032
13,015
341
237
(19)
17
27
9
8,405
Geographic Regions
We are headquartered in Englewood, a suburb of Denver, Colorado. We use customer locations as the basis for attributing
revenue to individual countries. We provide products and services on a global basis through our offices in Colorado, North Carolina
and our U.K.-based Evolving Systems U.K. subsidiary. Additionally, personnel in Bangalore and Kolkata, India, provide software
development services to our global operations. Financial information relating to operations by geographic region is as follows (in
thousands):
49
Revenue
United Kingdom ...................................................................................
Switzerland ...........................................................................................
Other .....................................................................................................
Total revenues ...........................................................................................
Revenue
United Kingdom ...................................................................................
Other .....................................................................................................
Total revenues ...........................................................................................
Revenue
United Kingdom ...................................................................................
Nigeria ..................................................................................................
Mexico ..................................................................................................
Other .....................................................................................................
Total revenues ...........................................................................................
$
$
$
$
$
$
For the Year Ended December 31, 2016
Services
Total
License
49
89
2,735
2,873
$
$
3,825
2,794
15,286
21,905
$
$
3,874
2,883
18,021
24,778
For the Year Ended December 31, 2015
Services
Total
License
306
2,855
3,161
$
$
3,650
18,765
22,415
$
$
3,956
21,620
25,576
For the Year Ended December 31, 2014
Services
Total
License
134
1,297
368
3,228
5,027
$
$
$
$
5,434
2,130
2,832
14,257
24,653
December 31,
2016
12,347
12,680
318
25,345
$
$
$
$
5,568
3,427
3,200
17,485
29,680
December 31,
2015
13,026
15,318
341
28,685
Long-lived assets, net
United States ........................................................................................................................
United Kingdom ..................................................................................................................
Other ....................................................................................................................................
NOTE 13 — RESTRUCTURING
During the first and second quarters of 2016, we undertook a reduction in workforce involving the termination of employees
resulting in an expense of $0.9 million and $0.1 million, respectively, primarily related to severance for the affected employees. The
reduction in workforce was related to the consolidation of duplicative functions and alignment of staff with ongoing business activity
as a result of the acquisition of Evolving Systems NC in the third quarter of 2015. Restructuring expense of $0.5 million and $0.2
million was recorded for the years ending December 31, 2015 and 2014, respectively, due to severance for a reduction in workforce.
The reduction in workforce was related to the acquisition of Evolving Systems NC in the third quarter of 2015 and Evolving Systems
Labs in the fourth quarter of 2013.
The restructuring liability was $0 and $25,000 as of December 31, 2016 and 2015, respectively.
NOTE 14 — QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Quarterly financial information is as follows (in thousands, except per share data):
Year Ended December 31, 2016
Total revenue ...........................................................................
Less: cost of revenue and operating expenses ......................
Income from operations ...........................................................
Income before income taxes ....................................................
Net income ...............................................................................
Net income per common share:
Basic income per common share - net income .....................
Diluted income per common share - net income ..................
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
6,480
5,966
514
597
427
0.04
0.04
$
$
$
$
6,078
4,470
1,608
1,090
780
0.07
0.07
$
$
$
$
6,103
4,400
1,703
1,369
941
0.08
0.08
$
$
$
$
6,117
4,347
1,770
1,836
1,287
0.11
0.11
$
$
$
$
50
Year Ended December 31, 2015
Total revenue ...........................................................................
Less: cost of revenue and operating expenses ......................
Income from operations ...........................................................
Income before income taxes ....................................................
Net income ...............................................................................
Net income per common share:
Basic income per common share - net income .....................
Diluted income per common share - net income ..................
Year Ended December 31, 2014
Total revenue ...........................................................................
Less: cost of revenue and operating expenses ......................
Income from operations ...........................................................
Income before income taxes ....................................................
Net income ...............................................................................
Net income per common share:
Basic income per common share - net income .....................
Diluted income per common share - net income ..................
$
$
$
$
$
$
$
$
6,660
5,238
1,422
1,299
860
0.07
0.07
6,582
5,555
1,027
929
651
0.06
0.05
$
$
$
$
$
$
$
$
6,071
5,130
941
1,093
780
0.07
0.07
7,939
5,322
2,617
2,514
1,676
0.14
0.14
$
$
$
$
$
$
$
$
5,773
4,819
954
712
570
0.05
0.05
7,560
5,241
2,319
2,506
1,679
0.14
0.14
$
$
$
$
$
$
$
$
7,072
6,069
1,003
1,107
1,086
0.09
0.09
7,599
5,123
2,476
2,456
1,602
0.14
0.13
ITEM 9.
DISCLOSURE
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures. We maintain “disclosure controls and procedures,” as such term is defined
in Rule 13a-15(e) and 15d-15(f) under the Securities Exchange Act of 1934 (the “Exchange Act”), that are designed to provide
reasonable assurance that information required to be disclosed by us in reports that we file or submit under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and
forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and
Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Our management, with the participation of the Chief Executive Officer and the Chief Financial Officer, has evaluated the
effectiveness of our disclosure controls and procedures as of the end of the period covered by this Annual Report on Form 10-K.
Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and
procedures were effective as of the end of such period.
In designing and evaluating our disclosure controls and procedures, management recognized that disclosure controls and
procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the
disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, we are required to apply
judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure
controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no
assurance that any design will succeed in achieving its stated goals under all potential future conditions.
Management’s report on internal control over financial reporting. Our management is responsible for establishing and
maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). All internal
control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can
provide only reasonable assurance with respect to financial statement preparation and presentation. Under the supervision and with
the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation
of the effectiveness of our internal control over financial reporting based on the 2013 framework set forth in the report entitled Internal
Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).
The COSO framework summarizes each of the components of a company’s internal control system, including (i) the control
environment, (ii) risk assessment, (iii) control activities, (iv) information and communication, and (v) monitoring.
Based on our evaluation under the framework in Internal Control — Integrated Framework, our management concluded that
our internal control over financial reporting was effective as of December 31, 2016.
51
This Annual Report on Form 10-K does not include an attestation report of our independent registered public accounting firm
regarding internal control over financial reporting. Management’s report was not subject to attestation by our independent registered
public accounting firm pursuant to rules of the Securities and Exchange Commission that permit us to provide only management’s
report in this Annual Report on Form 10-K.
Changes in internal control over financial reporting. During the quarter ended December 31, 2016, there was no change in
our internal control over financial reporting or in other factors that has materially affected, or is reasonably likely to materially affect,
our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Incorporated by reference to the sections of Evolving Systems, Inc. 2017 Proxy Statement, anticipated to be filed within
120 days of December 31, 2016, entitled “Proposal No. 1-Election of Directors,” “Management” and “Information Regarding the
Board and Its Committees.”
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference to the section of Evolving Systems, Inc. 2017 Proxy Statement, anticipated to be filed within
120 days of December 31, 2016, entitled “Executive Compensation.”
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
Incorporated by reference to the section of the Evolving Systems, Inc. 2017 Proxy Statement, anticipated to be filed within
120 days of December 31, 2016, entitled “Information Regarding Beneficial Ownership of Principal Stockholders, Directors, and
Management.”
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Incorporated by reference to the sections of the Evolving Systems, Inc. 2017 Proxy Statement, anticipated to be filed within
120 days of December 31, 2016, entitled “Certain Relationships and Related Transactions” and “Information Regarding the Board and
Its Committees.”
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Incorporated by reference to the section of the Evolving Systems, Inc. 2017 Proxy Statement, anticipated to be filed within
120 days of December 31, 2016, entitled “Proposal No. 3-Ratification of Selection of Independent Registered Public Accounting
Firm.”
52
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following documents are filed as part of this Annual Report on Form 10-K:
Consolidated Financial Statements.
PART IV
Consolidated Financial Statement Schedules have been omitted because the required information is not present, or not
present in amounts sufficient to require submission of the schedules or because the required information is provided in the
Consolidated Financial Statements or Notes thereto.
EXHIBIT INDEX
Exhibit No.
2.1
2.2
2.3
3.1†
3.1(a)
3.1(b)
3.1(c)
3.1(d)
3.1(e)
3.2†
3(ii)(1)
4.1†
4.1(a)*
4.1(b)
4.2†
10.1 *
10.2† *
10.2(a)
10.3† *
10.4
10.5
10.6†
Description of Document
Asset Purchase Agreement, dated as of April 21, 2011, by and between Evolving Systems, Inc. and NeuStar, Inc.,
as filed as Exhibit 2.1 to the Registrant’s Form 8-K filed on April 21, 2011 and incorporated herein by reference.
Agreement and Plan of Merger by and among Evolving Systems, Inc., Topaz Merger Sub, Inc., Telespree
Communications and Gill Cogan as the exclusive representative of the Effective Time Shareholders and Change
in Control Payment Recipients, as filed as Exhibit 2.1 to the Registrant’s Form 8-K filed on October 25, 2013 and
incorporated herein by reference.
Merger Agreement dated as of September 30, 2015, by and among Evolving Systems, Inc., Evolving Systems
NC, Inc., a wholly owned subsidiary of Evolving Systems, RateIntegration, Inc. and a representative of the
stockholders and change in control payment recipients of RateIntegration, Inc., as filed as Exhibit 2.1 to the
Registrant’s Form 8-K
filed September 30, 2015 and incorporated herein by reference.
Restated Certificate of Incorporation.
Certificate of Designation for the Series B Convertible Preferred Stock, as filed as Exhibit 3.1 to the Registrant’s
Form 8-K filed November 11, 2004 and incorporated herein by reference.
Certificate of Amendment to Certificate of Designation of Series B Convertible Preferred Stock filed as
Exhibit 3.1(c) to the Registrant’s Form 8-K filed November 17, 2005 and incorporated herein by reference.
Certificate of Amendment to Certificate of Designation of Series B Convertible Preferred Stock filed as
Exhibit 3.01 to the Registrant’s Form 8-K filed May 4, 2007 and incorporated herein by reference.
Certificate of Amendment to the Restated Certificate of Incorporation of Evolving Systems, Inc., as filed as
Exhibit 3.1 to the Registrant’s Form 8-K filed on July 21, 2009 and incorporated herein by reference.
Certificate of Amendment to Amended and Restated Certificate of Incorporation of Evolving Systems, Inc. as
filed as Exhibit 3(i) to the Registrant’s Form 8-K filed on June 16, 2011 and incorporated herein by reference.
Amended and Restated Bylaws.
Amended and Restated Bylaws of Evolving Systems, Inc., as filed as Exhibit 3(ii) to the Registrant’s Form 8-K
filed on July 31, 2014 and incorporated herein by reference.
Reference is made to Exhibits 3.1 and 3.2.
James E. King Equity Incentive Plan, as filed as Exhibit 4.1 to the Registrant’s Form S-8 filed March 22, 2007
and incorporated herein by reference.
Evolving Systems, Inc. Amended and Restated 2007 Stock Incentive Plan, as filed as Appendix A to the
Registrant’s Definitive Proxy Statement on Schedule 14A filed with the Commission on April 30, 2015 and
incorporated herein by reference.
Specimen stock certificate representing shares of Common Stock.
Form of Indemnification Agreement, entered into by the Registrant and each of its directors and executive
officers, as filed as Exhibit 10.2 to the Registrant’s Form 8-K filed on July 31, 2014 and incorporated herein by
reference.
Amended and Restated Stock Option Plan.
Standstill Agreement between Evolving Systems, Inc. and Karen Singer, Trustee of the Singer Children’s
Management Trust, as filed as Exhibit 10.2 to the Registrant’s Form 8-K filed February 27, 2008 and incorporated
herein by reference.
Employee Stock Purchase Plan.
Form of Change in Control Agreement, as filed as Exhibit 10.3 to the Registrant’s Form 8-K filed January 3, 2008
and incorporated herein by reference.
Letter from Singer Children’s Management Trust, as filed as Exhibit 10.1 to the Registrant’s Form 8-K filed
December 14, 2010 and incorporated herein by reference.
Software Development Agreement, by and between the Registrant and American Telephone and Telegraph
Company, dated as of May 1, 1993. (The division of American Telephone & Telegraph Company responsible for
this Agreement has split off from AT&T and is now known as Lucent Technologies, Inc.).
53
Exhibit No.
Description of Document
10.7*
10.8
10.9
10.10*
10.11*
10.12
10.13
10.14
10.15
10.16
10.17*
10.18*
10.19*
10.20*
21(a)
23.1
24.1
31.1
31.2
32.1
32.2
Exhibit 101
Amendment to Management Change in Control Agreement — Thaddeus Dupper, as filed as Exhibit 10.20(a) to
the Registrant’s Form 10-Q filed May 11, 2007 and incorporated herein by reference.
Fifth Amendment to Office Building Lease Agreement, as filed as Exhibit 10.21 to the Registrant’s Form 10-Q
filed May 11, 2007 and incorporated herein by reference.
Agreement entered into with Singer Children’s Management Trust, as filed as Exhibit 10.1 to the Company’s
Form 8-K filed April 20, 2011 and incorporated herein by reference.
Employment Agreement entered into between Evolving Systems, Inc. and Thaddeus Dupper, as filed as
Exhibit 99.1 to the Registrant’s Form 8-K filed on May 19, 2011 and incorporated herein by reference.
Consulting Agreement between Evolving Systems, Inc. and Anita T. Moseley, as filed as Exhibit 99.1 to the
Registrant’s Form 8-K filed on July 1, 2011 and incorporated herein by reference.
Loan and Security Agreement between Evolving Systems, Inc. and East West Bank, as filed as Exhibit 10.1(a) to
the Registrant’s Form 8-K filed on October 25, 2012 and incorporated herein by reference.
Amendment to Loan and Security Agreement between Evolving Systems, Inc. and East West Bank, as filed as
Exhibit 10.1 to the Registrant’s Form 8-K filed on November 6, 2014 and incorporated herein by reference.
Third Amendment to Loan and Security Agreement between Evolving Systems, Inc. and East West Bank, as filed
as Exhibit 10.1 to the Registrant’s Form 8-K filed on September 30, 2015 and incorporated herein by reference.
Fourth Amendment to Loan and Security Agreement between Evolving Systems, Inc. and East West Bank, as
filed as Exhibit 10.1 to the Registrant’s Form 8-K filed on November 10, 2015 and incorporated herein by
reference.
Fifth Amendment to Loan and Security Agreement between Evolving Systems, Inc. and East West Bank, as filed
as Exhibit 10.1 to the Registrant’s Form 8-K filed on March 3, 2016 and incorporated herein by reference.
Employment Agreement dated September 30, 2015, entered into between Evolving Systems, Inc. and Thomas
Thekkethala, as filed as Exhibit 10.2 to the Registrant’s Form 8-K filed on September 30, 2015 and incorporated
herein by reference.
Consulting Services Agreement dated January 1, 2016, entered into between Evolving Systems, Inc. and
Thaddeus Dupper, as filed as Exhibit 10.1 to the Registrant’s Form 8-K filed on January 5, 2016 and incorporated
herein by reference.
Employment Agreement dated January 1, 2016, entered into between Evolving Systems, Inc. and Daniel J.
Moorhead, as filed as Exhibit 10.2 to the Registrant’s Form 8-K filed on January 5, 2016 and incorporated herein
by reference.
Evolving Systems, Inc. 2016 Stock Incentive Plan, as filed as Appendix A to the Registrant’s Definitive Proxy
Statement on Schedule 14A filed with the Commission on April 29, 2016 and incorporated herein by reference.
Subsidiaries of the Registrant (filed herewith).
Consent of Friedman LLP, Independent Registered Public Accounting Firm related to Registration Statements on
Forms S-8 (filed herewith).
Power of Attorney (included on signature page)
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed
herewith).
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed
herewith).
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002 (furnished herewith).
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 (furnished herewith).
The following financial information from the annual report on Form 10-K of Evolving Systems, Inc. for the year
ended December 31, 2016, formatted in XBRL (eXtensible Business Reporting Language): (i) Consolidated
Balance Sheets as of December 31, 2016 and 2014 (ii) Consolidated Statements of Operations for the years ended
December 31, 2016, 2015 and 2014 (iii) Consolidated Statements of Other Comprehensive Income for the years
ended December 31, 2016, 2015 and 2014 (iv) Consolidated Statements of Changes in Stockholders’ Equity for
the years ended December 31, 2016, 2015 and 2014 (v) Consolidated Statements of Cash Flows for the years
ended December 31, 2016, 2015 and 2014 and (vi) Notes to the Consolidated Financial Statements.
†
*
Incorporated by reference to the Registrant’s Registration Statement on Form S-1 No. 333-43973.
Identifies each management contract or compensatory plan or arrangement.
ITEM 16. FORM 10-K SUMMARY
Not applicable.
54
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
EVOLVING SYSTEMS, INC.
By:
/s/ THOMAS THEKKETHALA
Thomas Thekkethala
Chief Executive Officer, President and Director
March 28, 2017
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints
Thomas Thekkethala, his attorney-in-fact, each with the power of substitution, for him in any and all capacities, to sign any
amendments to this Report, and to file the same, with exhibits thereto and other documents in connections therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that each of said attorneys-in-fact, or his or her substitute or
substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the dates indicated.
By:
By:
By:
By:
By:
By:
By:
Signature
Title
Date
/s/ THOMAS THEKKETHALA
Thomas Thekkethala
President and Chief Executive Officer and Director
(Principal Executive Officer)
March 28, 2017
/s/ DANIEL J. MOORHEAD
Daniel J. Moorhead
Chief Financial Officer
(Principal Financial and Accounting Officer)
March 28, 2017
/s/ MATTHEW STECKER
Matthew Stecker
/s/ DAVID J. NICOL
David J. Nicol
/s/ RICHARD R. RAMLALL
Richard R. Ramlall
/s/ DAVID S. OROS
David S. Oros
/s/ JULIAN D. SINGER
Julian D. Singer
Chairman and Director
March 28, 2017
March 28, 2017
March 28, 2017
March 28, 2017
March 28, 2017
Director
Director
Director
Director
55
SUBSIDIARIES OF THE REGISTRANT
Evolving Systems Networks India Private Limited
Evolving Systems Holdings Limited (formerly Tertio Telecoms Holdings Limited)
Evolving Systems Limited (formerly Tertio Telecoms Limited)
Evolving Systems GmbH (formerly Tertio Telecoms Limited GmbH)
Evolving Systems Labs, Inc. (formerly Telespree Communications)
Evolving Systems NC, Inc. (formerly RateIntegration, Inc. d/b/a Sixth Sense Media)
RateIntegration Software Technologies PVT LTD
Exhibit 21(a)
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration Statements of Evolving Systems, Inc. on Forms S-8 (File
No. 333-212538, File No. 333-205795, File No. 333-191046, File No. 333-167858, and File No. 333-116085) of our report dated
March 28, 2017, with respect to the consolidated financial statements of Evolving Systems, Inc. included in this Annual Report
(Form 10-K) for the year ended December 31, 2016.
Exhibit 23.1
/s/ FRIEDMAN LLP
East Hanover, New Jersey
March 28, 2017
Exhibit 31.1
CERTIFICATION
I, Thomas Thekkethala, certify that:
1.
I have reviewed this Annual Report on Form 10-K of Evolving Systems, Inc.;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with
respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
3.
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in
this report;
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and
4.
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in
Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based
on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected,
or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over
5.
financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the
equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information;
and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Date: March 28, 2017
/s/ Thomas Thekkethala
Thomas Thekkethala
President and Chief Executive Officer
Exhibit 31.2
I, Daniel J. Moorhead, certify that:
1.
I have reviewed this Annual Report on Form 10-K of Evolving Systems, Inc.;
CERTIFICATION
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with
respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
3.
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in
this report;
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and
4.
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in
Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under
our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based
on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected,
or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over
5.
financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the
equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information;
and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
Date: March 28, 2017
/s/ Daniel J. Moorhead
Daniel J. Moorhead
Chief Financial Officer
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Thomas Thekkethala, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002, that, to the best of my knowledge, the Annual Report of Evolving Systems, Inc. on Form 10-K for the annual
period ended December 31, 2016 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of
1934 and that the information contained in such Form 10-K fairly presents in all material respects the financial condition and results of
operations of Evolving Systems, Inc.
Exhibit 32.1
/s/ Thomas Thekkethala
Thomas Thekkethala
President and Chief Executive Officer
March 28, 2017
This certification is furnished with this Annual Report on Form 10-K pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and
shall not, except to the extent required by such Act, be deemed filed for purposes of Section 18 of the Securities Exchange Act of
1934, as amended (the “Exchange Act”). Such certification will not be deemed to be incorporated by reference into any filing under
the Securities Act of 1933, as amended, or the Exchange Act, except to the extent that we specifically incorporate it by reference.
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Daniel J. Moorhead, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, that, to the best of my knowledge, the Annual Report of Evolving Systems, Inc. on Form 10-K for the annual period
ended December 31, 2016 fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and
that the information contained in such Form 10-K fairly presents in all material respects the financial condition and results of
operations of Evolving Systems, Inc.
Exhibit 32.2
/s/ Daniel J. Moorhead
Daniel J. Moorhead
Chief Financial Officer
March 28, 2017
This certification is furnished with this Annual Report on Form 10-K pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and
shall not, except to the extent required by such Act, be deemed filed for purposes of Section 18 of the Securities Exchange Act of
1934, as amended (the “Exchange Act”). Such certification will not be deemed to be incorporated by reference into any filing under
the Securities Act of 1933, as amended, or the Exchange Act, except to the extent that we specifically incorporate it by reference.
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