201(cid:28) ANNUAL REPORT
NOTICE OF 20(cid:21)(cid:19) 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:
April 30, 2020
We are pleased to present Evolving Systems’ 2019 annual report and proxy.
2020 to date has been a year of dramatic change everywhere we look. Thankfully, Evolving Systems is a company that
sells tools to wireless operators that help them navigate and manage change. While the Coronavirus pandemic has
forced us to work differently, and has forced us to adapt to our customers working differently, fundamentally our
customers are working and we’re working to serve them. Probably the largest challenge to our business lies not in our
work with existing customers but in how we find and grow new customers. Traditionally, these sales efforts have
focused around travel and physical visits to operator’s campuses. Obviously, these kinds of trips have been on hold, but
I’ve been incredibly encouraged to see both our sales personnel and our buyers beginning to reach out to forge new
ways of communicating and conversing. When the last travel restriction is lifted, I would bet that we continue to use
some of the new ways of working we’ve found, as in some cases they are more efficient and scalable than traditional
business travel.
How do we help with change? Our provisioning and management systems help operators make efficient use of both
physical (SIM) and network (numbers, infrastructure) resources. In a world of changing subscriber patterns, this
efficiency is key. Our marketing solutions leverage our twenty years of expertise to digitally offer end user subscribers
the right programs and promotions to maximize the value of each customer to the carrier. When carriers work with us,
whichever services they choose, they make more money. We have a datasheet that describes the specific ways that
Evolving Systems’ services and products directly help address changes coming as a result of the global pandemic,
which you can find on our website, www.evolving.com.
Here, we feel like we are closing one phase of our journey and gearing up for the next. Between 2015 and 2017,
Evolving Systems purchased three leading companies in the digital marketing space, thereby entering a new market for
the company. We built on the best of the features in those companies’ software platforms and created a new system
called Evolution that provides both a market-leading solution as well as an upgrade path for clients of the former BLS,
Lumata, and SSM. Evolution is now in-market at its first customers and we’re proud parents.
The remainder of 2020 will likely continue to test our agility and speed. We have the products, we know how to service
our existing customers and – while finding new customers in the traditional manner is difficult – we’re confidently on
the leading edge of the tools and techniques to do so in a more virtual world. The rest is a matter of dedication, hard
work, and agility displayed by hundreds of Evolving Systems’ professionals around the world. I’m honored to help
support them.
I’ll let the finances in the annual report, as prepared by our finance team, speak for themselves. As always, we
appreciate the support of our stockholders and look forward to communicating our progress throughout the year. Should
you have questions, there is an investor hotline form on our website.
Sincerely,
Matthew Stecker
Matthew Stecker
CEO and Chairman of the Board
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON JUNE 17, 2020
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 9800 Pyramid Court, Suite 400, Englewood, CO 80112 Englewood, Colorado 80112, on June 17, 2020.
At the meeting, you will be asked to act on the following matters:
1.
2.
3.
to elect the four nominees named in this Proxy Statement as directors, each for a one-year term;
to ratify the selection of Marcum LLP as our independent registered public accounting firm to audit the consolidated
financial statements of Evolving Systems, Inc. for our fiscal year ending December 31, 2020; 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, Inc common stock at the close of business on April 20, 2020 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 29, 2020
Mark P. Szynkowski
Senior Vice President of Finance & Secretary
IMPORTANT NOTICE REGARDING THE INTERNET AVAILABILITY OF PROXY MATERIALS FOR THE ANNUAL
MEETING TO BE HELD ON JUNE 17, 2020:
The Company’s proxy statement, form of proxy card and 2019 Annual Report on Form 10-K are available at
https://www.evolving.com/investors.
9800 Pyramid Court, Suite 400
Englewood, Colorado 80112
PROXY STATEMENT
FOR ANNUAL MEETING OF STOCKHOLDERS
June 17, 2020
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 9800 Pyramid Court, Suite 400, Englewood, Colorado 80112, on June 17, 2020, 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 8, 2020. 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.
We are sending a Notice of Internet Availability of Proxy Materials (the “Notice”) to all stockholders of record on April 20,
2020. All stockholders of record will have the ability to access the proxy materials on a website referred to in the Notice
(https://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
vote is counted. You may vote in person at the Annual Meeting only if you bring a form of personal picture identification with you.
1
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 16, 2020 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 two matters scheduled for a vote of the stockholders:
Election of Directors. Election of David J. Nicol, David S. Oros, Julian D. Singer and Matthew Stecker as members to
the Company’s Board of Directors to serve until the 2021 annual meeting of stockholders or until their successors have
been duly elected and qualified;
Ratification of the Appointment of Independent Registered Public Accounting Firm. Ratification of the appointment
of Marcum LLP as the Company’s independent registered public accounting firm for its fiscal year ending December 31,
2020.
You may either vote “For” the nominee to the Board of Directors or you may “Withhold” your vote for the nominee you
specify. For the other matter 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 20, 2020, 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 12,313,582 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
voting instructions from the beneficial owner of the shares; as a result, the broker or other nominee 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.
2
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 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
Votes Required for
Approval
Abstentions
Uninstructed Shares
Election of Directors
Nominees receiving
Not voted
Not voted
highest number of votes
2
Ratification of
Majority of votes cast
Not voted
Independent Registered
Public Accounting Firm
Recommendation of Board of Directors
Discretionary vote —
brokers may vote
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 four nominees for director; and
FOR the ratification of the selection of Marcum LLP as our independent registered public accounting firm to audit
the consolidated financial statements of Evolving Systems for our fiscal year ending December 31, 2020.
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., Mark P. Szynkowski, Secretary,
9800 Pyramid Court, Suite 400, Englewood, Colorado 80112, or contact Mark P. Szynkowski 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.
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.
3
PROPOSAL 1
ELECTION OF DIRECTORS
Our Board of Directors is currently composed of 4 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 three of our directors (Messrs. Nicol, Oros and Singer) 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. Stecker, our President and Chief Executive Officer (CEO), is not considered independent.
The Board has nominated Messrs. Nicol, Oros, Singer and Stecker 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
2021 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 30, 2020.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR” EACH NOMINEE.
Nominees for Election for a One-Year Term Expiring at the 2021 Annual Meeting
David J. Nicol
David J. Nicol, 74, became a member of the Board of Directors in March 2004. Since February 2018, Mr. Nicol has served
on the board of CCUR Holdings, Inc. (OTCQB: CCUR), where he is a member of the Nominating/Governance Committee and the
Compensation Committee, and serves as Chair of the Audit Committee. In July 2019, he was appointed a member of the board of
Nanoveu Limited (NVU), listed on the Australian Stock Exchange (ASX). Mr. Nicol also serves as an independent board member of a
privately-held provider of facilities management SaaS services.
A member of the National Association of Corporate Directors (since 2004) and Financial Executives International, since
August 2015 he has served on the faculty in the Finance Department and as Executive-in-Residence at the Bloch School of
Management at UMKC. From February 2012 through March 2014, Mr. Nicol was President/COO of Strongwatch Corporation, a
security innovation company since acquired. In prior assignments, Mr. Nicol held senior-level executive positions with both public
companies (Verisign, Illuminet, and Sprint/United Telecom), as well as early-stage, private companies: Solutionary (IT network
security), Sipera (VOIP security), ITN (network signaling), International Micronet (LAN/WAN systems) and iLAN (LAN systems &
consulting). Beyond P&L responsibilities, his leadership roles have included strategic planning, business development, acquisitions,
business planning, operations planning, product management, product development/support, financial planning, and fund raising/IR.
With his years of executive experience at Sprint/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
4
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, 60, 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 and the Board of Directors for Health Care
for the Homeless.
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.
Julian D. Singer
Julian D. Singer, 36, 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. 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, 51, joined our Board of Directors in March 2016, was named Chairman of the Board in August 2016,
Executive Chairman in April 2018 and President & CEO on July 16, 2018. He became a full-time employee of the Company in July
2019. He served as a Senior Policy Advisor to the United States Department of Commerce from 2014 to 2017. In that capacity,
Mr. Stecker was part of the senior team that launched FirstNet. Mr. Stecker 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 Evolving Systems over twenty 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.
5
Board Leadership Structure
INFORMATION REGARDING THE BOARD AND ITS COMMITTEES
Our Board believes it is important to retain flexibility in allocating the responsibilities of the 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 Executive
Chairman of the Board with Mr. Stecker serving in that role as well as the CEO.
We do not have a separate Lead Independent Director.
The Board’s Role in Risk Oversight
Our Board and its committees work closely with management to provide oversight, review, and counsel related to long-term
strategy, risks and opportunities, and feedback from shareholders. The Board looks to its committees to provide expertise in their areas
of focus. 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 5 times in 2019 in addition to conference calls throughout the
year. In fiscal year 2019 each director, excepting Mr. Thekkethala who was a member of the Board until June 19, 2019, 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, a Nominating and Governance Committee and a Strategic
Initiatives Committee. Below is a table that provides membership and meeting information for each of the Board committees as of
December 31, 2019. In fiscal year 2019 each committee member attended at least 75% of the meetings of each applicable committee.
Name
Mr. Nicol .....................................
Mr. Oros .......................................
Mr. Singer ....................................
Mr. Stecker ..................................
Total meetings in fiscal year 2019
Audit
X*
X
X
5
Compensation
X*
X
X
**
Nominating & Governance
X*
X
**
Strategic
Initiatives
X
X*
X
**
* Denotes Committee Chair as of December 31, 2019.
** 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 the Audit Committee, Compensation Committee and Nominating & Governance Committee meet 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
6
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
“Investor Relations — Corporate Governance.” The Audit Committee currently consists of Messrs. Nicol, Oros and Singer, 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 currently
consists of Messrs. Nicol, Oros and Singer, all of whom are independent 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.
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 “Investor Relations — 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.
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.
7
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.
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 “Investor Relations — Corporate
Governance.” The current members of the Nominating and Governance Committee are Messrs. Oros and Singer, both of whom are
independent directors under NASDAQ listing standards.
Strategic Initiatives Committee. In March of 2017 the Board formed a Strategic Initiatives Committee for the purpose of
assisting the Board in fulfilling its strategic planning duties such as:
Overseeing the implementation of the strategic plan and related initiatives
Identifying and evaluating corporate development opportunities
Developing criteria for use in evaluating potential strategic investment
Assisting management to identify critical strategic issues facing the organization
Assessing potential mergers and acquisitions
The Committee assists management in developing and refining a strategic plan which identifies specific long-term goals and
business objectives determined to be in the Company’s best interest. This includes providing assistance to management in evaluating,
planning & executing on selected merger and acquisition candidates, joint ventures, new markets or products lines, acquisition or
disposition of capital assets, equity and debt funding and modifications of existing capital structure and stock offerings, repurchase
programs and reverse splits. Additionally, the Committee evaluates the progress and effectiveness of the strategic plan, recommends
changes to the plan where necessary or advisable and evaluates other issues or opportunities. Messrs. Singer, Nicol and Stecker are
currently members of the Committee.
8
DIRECTOR COMPENSATION
The 2019 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 .....................
$
$
$
20,000 $
0 $
0 $
5,000
5,000
Annual retainer
(payable in quarterly
increments)
Additional annual cash
compensation for
non-employee Chairperson
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. Annual equity awards to Directors are discretionary at the determination of the Compensation
Committee.
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,
2019.
2019 Director Compensation Table
(a)
Name (1)
(b)
Fees Paid
in Cash
($)
(c)
Option Awards
($)(2)
(d)
Total
($)
David J. Nicol ......................... $
David S. Oros ......................... $
Richard R. Ramlall (3) .......... $
Julian D. Singer ..................... $
Thomas Thekkethala (4) ......... $
30,000
20,000
10,000
20,000
0
$
$
$
$
0 $
0 $
0 $
0 $
0 $
30,000
20,000
10,000
20,000
0
(1) See the Summary Compensation Table on page 16 for information on compensation earned by Mr. Stecker during fiscal year 2019.
(2) No stock options were granted to the non-employee directors in 2019. As of December 31, 2019, each director, other than
Mr. Stecker, held outstanding options to purchase the following number of shares: Mr. Nicol: 23,200; Mr. Oros: 16,175; and
Mr. Singer: 15,000. See the Outstanding Equity Awards at December 31, 2019 on page 17 for information on stock options held by
Mr. Stecker.
(3) Mr. Ramlall served on the Board until June 19, 2019.
(4) Mr. Thekkethala served on the Board until June 19, 2019 but was not paid any compensation or awarded any equity awards in
2019.
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., 9800 Pyramid Court,
Suite 400, 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. One member of the Board
participated in the 2019 Annual Stockholders’ Meeting.
9
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 “Investor Relations — 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 “Investor Relations — 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.
PROPOSAL 2
RATIFICATION OF SELECTION OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors has selected Marcum LLP as the Company’s independent registered public accounting firm for the
fiscal year ending December 31, 2020 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 Marcum LLP, the Company’s auditors for the fiscal year ending December 31, 2019, are expected to be
present at the Annual Meeting, will have an opportunity to make a statement if they so desire, and will be available to respond to
appropriate questions from stockholders present at the meeting.
Stockholder ratification of the selection of Marcum 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 Marcum 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
10
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 Marcum LLP as Evolving Systems’ independent registered public accounting firm is a routine matter for
brokers that hold their clients’ shares in “street name.” 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 Marcum 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, no broker non-votes will likely result
from this proposal.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR” PROPOSAL NO. 2,
RATIFICATION OF MARCUM LLP AS THE COMPANY’S INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM FOR THE FISCAL YEAR ENDING DECEMBER 31, 2020.
Information Regarding Change In Accountants
On April 18, 2019, the Company advised Friedman LLP, its independent registered public accountant, that the Company had
determined not to reappoint Friedman LLP for 2019. The audit committee of the Company’s Board of Directors participated in and
approved the decision to change the Company’s independent registered public accounting firm.
The report of Friedman LLP on the Company’s balance sheets as of December 31, 2018 and 2017, and the related statements
of operations, stockholders’ equity and cash flows for the years then ended did not contain an adverse opinion or disclaimer of
opinion.
Except as disclosed in the following sentence, during the Company’s fiscal years ended December 31, 2017 and
December 31, 2018, and through April 18, 2019, there were no disagreements with Friedman LLP on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the
satisfaction of Friedman LLP would have caused Friedman LLP to make reference to the subject matter of the disagreements in
connection with its report on the financial statements for such year or to affect the review of interim period financial information. The
Company disagreed with Friedman LLP with respect to the recognition of a goodwill impairment charge in the fourth quarter of 2018,
and the matter was discussed by the Company’s audit committee and Friedman LLP prior to the filing of the Form 10-K for the year
ended December 31, 2018. The disagreement was resolved to the satisfaction of Friedman LLP by the Company agreeing to follow the
accounting treatment recommended by Friedman LLP. The Company has authorized Friedman LLP to respond fully to any inquiries
by a successor auditor concerning the subject matter of the disagreement. In addition, there were no “reportable events,” as described
in paragraph (a)(1)(v) of Item 304 of Regulation S-K, that occurred within the Company’s two most recent fiscal years and the
subsequent interim period preceding Friedman LLP’s dismissal.
In connection with the Company’s Form 8-K, filed with the SEC on April 24, 2019, the Company provided Friedman LLP
with a copy of the foregoing disclosures. Friedman LLP furnished the Company with a letter addressed to the Securities and Exchange
Commission stating that Friedman LLP agreed with the above statements.
Effective April 18, 2019, the accounting firm of Marcum LLP was engaged to serve as the new independent principal
accountant to audit the Company’s financial statements for the fiscal year ended December 31, 2019. During the Company’s two most
recent fiscal years, and the subsequent interim period prior to engaging that accountant, neither the Company (nor someone on its
behalf) consulted Marcum LLP regarding either:
1.
the application of accounting principles to any specified transaction, either completed or proposed; or the type of
audit opinion that might be rendered on the Company’s financial statements, and neither a written report was provided to the
Company nor oral advice was provided that Marcum LLP concluded was an important factor considered by the Company in reaching
a decision as to the accounting, auditing, or financial reporting issue; or
2.
any matter that was either the subject of a disagreement (as defined in paragraph (a)(1)(iv) of Item 304 of
Regulation S-K and the related instructions thereto) or a reportable event (as described in paragraph (a)(1)(v) of Item 304 of
Regulation S-K). The Company has provided Marcum LLP with a copy of the foregoing disclosures prior to the filing of this Proxy
Statement with the SEC.
11
Fees Billed by Independent Registered Public Accounting Firm
The following table sets forth information regarding fees for services rendered by Marcum LLP related to the fiscal year
ended December 31, 2019 and Friedman LLP related to the fiscal year ended December 31, 2018:
Types of Fees
Fees for 2019
Fees for 2018
Audit Fees (Friedman LLP) ..................
Audit Fees (Marcum LLP) .....................
$
$
35,000
180,553
$
$
389,213
0
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.
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 Senior Vice President of Finance. 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 Senior Vice President
of Finance and approved requests are subsequently ratified by the Committee as a whole. All of the services provided by the
independent registered public accounting firm in 2019 and 2018 were pre-approved by the Audit Committee.
The Audit Committee engaged Marcum LLP to perform an annual audit of the Company’s consolidated financial statements
for the fiscal year ended December 31, 2019. Our Audit Committee entered into an engagement agreement with Marcum LLP which
sets forth the terms by which Marcum LLP performed audit services for the Company.
MANAGEMENT
As of April 29, 2020, the Company’s named executive officers are as follows:
Name
Matthew Stecker ........................................
Mark P. Szynkowski ..................................
Age
51
52
Chief Executive Officer and President
Senior Vice President of Finance and Secretary
Position
Matthew Stecker. For biographical information on Mr. Stecker, please see Proposal No. 1, “Election of Directors.”
Mark P. Szynkowski, 52, joined the Company as Senior Vice President of Finance on December 4, 2017. He brings with
him over twenty years of finance and accounting experience, an extensive background in mergers and acquisitions, budgeting and
forecasting, and a broad knowledge of the software technology industry. Previously, from December 2014 to November 2017 he
served as Chief Financial Officer of 6D Global Technologies, Inc., a Digital Marketing technology company where he was responsible
for overseeing financial operations including SEC filings, SOX compliance and reporting. Earlier in his career, Mr. Szynkowski
served in a variety of financial positions with Epiq Systems, a global technology, Software as a Service and professional services
provider to the legal industry. Over nearly 10 years at Epiq, Mr. Szynkowski held senior positions including Vice President of
Finance, Electronic Discovery Segment; Corporate Controller; and Subsidiary Controller. Prior to that, he served as Controller for
Tradeware Global LLC, Vice President of Finance and Operations for Integro Staffing Services and was a Senior Auditor with
Ernst & Young. Mr. Szynkowski has a B.A. in Accounting from Alfred University and was a member of the American Institute of
Certified Public Accountants (AICPA) and the National Accounting Association.
12
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
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 2019, the Compensation Committee did not engage compensation consultants. We received
96% say-on-pay vote support at our 2019 Annual Meeting. Our Compensation Committee believes the vote indicates support for our
program. We hold our say-on-pay vote every two years.
Mr. Stecker’s annual base salary for 2019 was $300,000. Mr. Szynkowski’s annual base salary in 2019 was $185,000.
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 2019, on an annual basis, the potential incentive compensation percentages were 20% to 50% of the executive’s base
salary (for our CEO) and 40% (for our Sr. Vice President of Finance) (as specifically noted in the “Grants of Plan-Based Awards”
table on page 17), 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 2019, the Compensation Committee
13
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.”
Our CEO’s employment contract, signed in July 2019, provided for a minimum incentive payment of 20% of annual base salary.
Based on mutual agreement between the CEO and the Board, this amount was reduced and was paid as a $45,000 bonus in
February 2020. Concurrently, a discretionary bonus of $10,000 was paid to the Senior Vice President of Finance, Mark Szynkowski.
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 2018 and 2017.
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 Amended 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
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, our
executive officers to 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.
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 24.
14
Employment and Severance Agreements
Our named executive officers are employed “at-will,” although they have severance provisions in their employment
agreement providing for payments to each of them upon termination of employment, subject to certain limitations. Information
regarding potential payments and benefits under Mr. Stecker’s and Mr. Szynkowski’s employment agreements is provided under the
heading “Potential Payments Upon Termination or Change of Control” on page 18.
Change of Control Arrangements
The compensation agreements we have entered into with Mr. Stecker and Mr. Szynkowski 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 this arrangement will protect stockholders’ interests in the event of a change of
control by enabling the executive to consider corporate transactions that are in the best 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 Mr. Stecker’s and Mr. Szynkowski’s arrangements is provided under the
heading “Potential Payments Upon Termination or Change of Control” on page 18.
Compensation of Chief Executive Officer
Prior to July 17, 2019, Mr. Stecker’s annual base salary was $240,000 and his potential incentive compensation percentage is
50% of his base salary. In addition, Mr. Stecker, who previously served as a non-employee Chairman of the Board, continued to
receive quarterly compensation in the amount of $5,000 for serving on the Board.
On July 17, 2019, Mr. Stecker entered into an employment agreement to be Chief Executive Officer. His annual base salary
is now $300,000 and his potential incentive compensation percentage is between 20% and 50% of his base salary, based upon
achievement of quarterly and annual incentive compensation targets established by the Board. Mr. Stecker, at the time of this
announcement, no longer continues to receive quarterly compensation for serving on the Board.
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, 2019.
THE COMPENSATION COMMITTEE
David J. Nicol, Chairman
David S. Oros
Julian D. Singer
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 Singer served as members of the Compensation Committee of the Board of Directors during fiscal
2019. None of the members of the Compensation Committee were, at any time during fiscal 2019, 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.
15
2019 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, 2019, December 31, 2018 and December 31, 2017.
(a)
Name and
Principal Position (1)
(b)
Year
(c)
Salary
($)
(d)
Stock
Awards
($) (2)
(e)
Option
Awards
($) (3)
(f)
Non-Equity
Incentive Plan
Compensation
($) (4)
(g)
All Other
Compensation
($) (5)(6)
(h)
Total
($)
Matthew Stecker
Chief Executive Officer .............
Mark P. Szynkowski
Sr. Vice President of Finance
and Secretary ..........................
2019
2018
$ 295,000 $
$ 180,000 $
— $
— $
— $
— $
45,000 $
— $
60,000 $ 400,000
15,000 $ 195,000
2019
2018
2017
$ 185,000 $
$ 185,000 $
13,875 $
$
— $
— $
34,500 $
— $
— $
96,245 $
— $
— $
— $
27,500 $ 212,500
— $ 185,000
— $ 144,620
(1) Mr. Stecker was named Executive Chairman in April 2018 and President and CEO of the Company in July 2018. Compensation
in this table for 2018 reflects amounts paid or awarded to him after he became Executive Chairman in April 2018. In 2018 prior to
being named the CEO, he received additional compensation of $55,000 for serving as a director. Mr. Szynkowski joined the
Company as Senior Vice President of Finance on December 4, 2017.
(2) The amounts in column (d) reflect the grant date fair value of restricted stock awards granted under the Company’s Amended
2016 Stock Incentive Plan during the fiscal year noted, computed in accordance with FASB ASC Topic 718. For further
information on these awards, see Note 8, “Share Based Compensation” of our consolidated financial statements included in
Form 10-K for the year ended December 31, 2019, filed with the SEC on March 30, 2020.
(3) The amounts in column (e) reflect the grant date fair value of stock options granted in the associated fiscal year pursuant to the
Company’s Amended 2016 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 17 of this proxy statement and Note 8, “Share Based
Compensation” of our consolidated financial statements included in Form 10-K for the year ended December 31, 2019, filed with
the SEC on March 30, 2020.
(4) The amounts shown in column (f) represent incentive compensation earned for 2019, 2018 and 2017, some of which was paid in
the subsequent calendar year. Our CEO’s employment contract, signed in July 2019, provided for a minimum incentive payment
of 20% of annual base salary. Based on mutual agreement between the CEO and the Board, this amount was reduced and was
paid as a $45,000 bonus. In 2018 the Company did not achieve any of its incentive compensation targets. In 2017: first
quarter: 0%; second quarter: 50%; third quarter: 0%; fourth quarter: 0%; annual: 0%; and full year: 4%.
(5) Column (g) reflects amounts paid for each named executive officer and former named executive officers as follows. Mr. Stecker
continues to receive $5,000 as compensation for serving on the Board. Mr. Stecker received $15,000 in 2018 and $10,000 in
2019 related to serving on the Board. Excluded from these amounts are premiums paid by the Company for group life and
medical insurance also available to non-executive employees:
(6) The Compensation Committee approved a discretionary bonus for the Executives of the Company related to their efforts to
support the on-going transformation of the business to provide enhanced and new products as well as the integration of the
acquired companies.
Named Executive Officer and
former Named Executive Officers
Matthew Stecker ........................
Mark P. Szynkowski ..................
Year
2019
2018
2019
2018
2017
Retirement Plan
Matching
Contributions
Unused Paid
Time Off
Other
Payments
—
—
5,550
—
—
$
$
$
$
$
—
—
—
—
—
$
$
$
$
$
—
—
—
—
—
$
$
$
$
$
16
2019 GRANTS OF PLAN-BASED AWARDS
(a)
Name
Estimated future payouts under
non-equity incentive plan awards
(b)
Grant Date
(c)
Threshold
($)
(d)
Target
($) (1)
(e)
Maximum
($)
(f)
All other
stock
awards;
Number of
shares of
stock
(#) (2)
(g)
All other
option
awards:
number of
securities
underlying
options
(#)
(h)
Exercise
price of
option
awards
($/share)
(i)
Grant date
fair value of
stock and
option
awards
($)
Matthew Stecker (3) ............
Mark P. Szynkowski (4) .......
$
$
— $
— $
150,000 $ 300,000
74,000 $ 148,000
—
—
—
—
—
—
—
—
(1) Columns (c), (d) and (e) reflect the amounts that would have been earned by the named executive officers had we achieved our
2019 performance objectives established by the Compensation Committee (see “Compensation Discussion and Analysis”
discussion on page 13). 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 Amended 2016 Stock Incentive Plan during fiscal year 2019, computed in accordance with FASB ASC Topic 718.
For further information on awards, see Note 8, “Share Based Compensation” of our consolidated financial statements included in
Form 10-K for the year ended December 31, 2019, filed with the SEC on March 30, 2020.
(3) Mr. Stecker’s 2019 compensation plan provided for target incentive pay ranging from 20% to 50% of his base salary.
(4) Mr. Szynkowski’s 2019 compensation plan provided for target incentive pay equal to 40% of his base salary.
OUTSTANDING EQUITY AWARDS AT DECEMBER 31, 2019
(b)
Number of
Securities
Underlying
Unexercised
Options
(#) Exercisable
Option Awards (1)
(c)
Number of
Securities
Underlying
Unexercised
Options
(#) Unexercisable
(d)
Option
Exercise Price
($/share)
Stock Awards
(e)
Option
Expiration
Date
(f)
Number of
shares of stock
that have not
vested
(#)(2)
(g)
Market value of
shares of stock
that have not
vested
($)(3)
(a)
Name
Matthew Stecker ....................
Mark P. Szynkowski .............
15,000
25,000
0 $ 5.80
4.60
25,000 $
3/16/2026
12/03/2027
15,000 $
3,750 $
13,350
3,338
(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. Mr. Stecker’s options granted to
him as a non-employee director prior to July 16, 2018, vested over a one-year period.
(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, 2021.
(3) Market value was calculated by multiplying the number of shares shown in the table by $0.89, which was the closing price per
share on December 31, 2019, the last day of our fiscal year.
17
The table below reflects vesting of restricted stock awards during fiscal year 2019. No options were exercised in 2019.
2019 OPTION EXERCISES AND STOCK VESTED
Name
Matthew Stecker ...................................
Mark P. Szynkowski ............................
Stock Awards (1)
Number of shares
acquired on vesting (#)
Value realized
on vesting ($)
3,000 $
1,875 $
3,990
1,934
(1) 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
General Overview
COMPENSATION AGREEMENTS
Our compensation arrangements with our executive officers provide for base salary and incentive compensation. In 2019,
potential incentive compensation of our named executive officers was between 20% and 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 17 for more information about the “stretch” amounts, as
well as the “Executive Compensation, Quarterly and Annual Performance-Based Incentive Compensation” section on page 13 for
percentages achieved in 2018 and 2017.
The Company has entered into employment agreements with our named executive officers. The agreements generally
provide that in the event the Company terminates the executive’s employment, other than for cause, death or disability, the executive
will be paid severance pay. The amount of severance is described below under the heading “Potential Payments Upon Termination or
Change of Control.” In exchange for severance, each named executive 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. Stecker’s or Mr. Szynkowski’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, 2019 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
actual payments to Mr. Stecker or Mr. Szynkowski 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, and irrespective of whether the
executive has entered into an employment agreement, 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 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.
18
Involuntary Not-for-Cause Termination
Mr. Stecker’s employment agreement provides that if his employment is terminated for reasons other than cause, or he
resigns for “Good Reason,” he will receive severance pay equal to 12 months of base pay and 100% of his target incentive
compensation. The Company will also pay Mr. Stecker a proportionate amount of his health and dental insurance premiums, based
upon the same proportion the Company paid at the time his employment was terminated, for a period of 12 months or until he obtains
substitute insurance. Severance and insurance premium payments will be made in equal installments over the 12-month period, based
upon the Company’s normal payroll practices.
Mr. Szynkowski’s employment agreement provides that if his employment is terminated for reasons other than cause, or he
resigns for “Good Reason,” he will receive severance pay equal to 6 months of base pay.
“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 an agreed number of 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) Mr. Stecker 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 150% of his 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.
Upon a Change or Control and a “Qualified Termination” (described below), Mr. Szynkowski will receive the following
severance benefits:
an amount equal to 12 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 his 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 $2,500; 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
19
resignation by the executive for “Good Reason” during the same period.
None of the executives will receive severance payments solely upon the occurrence of a change of control, except that 50%
of each executive’s outstanding equity awards (options and restricted stock) will automatically vest upon a change of control even if
his 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, Mr. Stecker and Mr. Szynkowski will each be required, respectively, 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 applicable Severance Period.
Matthew Stecker
The following table shows the potential payments upon termination or a change of control of the Company for Matthew
Stecker, our CEO.
Executive Benefits and Payments
Upon Separation
Cash Compensation ........................
Base Salary ............................
Incentive Compensation ........
Equity Compensation .....................
Stock Options (1) ...................
Unvested and accelerated .....
Restricted Stock (2) ...............
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
300,000
150,000
0
0
0
0
0
450,000
$
$
$
$
$
$
$
$
0
0
0
6,675
0
0
0
6,675
$
$
$
$
$
$
$
$
450,000
225,000
0
13,350
0
0
7,500
695,850
(1) The payments relating to stock options represent the value as of December 31, 2019, 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,
2019 ($0.89). Mr. Stecker had no unvested options at December 31, 2019.
(2) Mr. Stecker had 15,000 shares of unvested restricted stock on December 31, 2019. The amount reflected is based on the
closing price of our common stock on December 31, 2019 ($0.89).
20
Mark P. Szynkowski
The following table shows the potential payments upon termination or a change of control of the Company for Mark P.
Szynkowski, our Sr. Vice President of Finance.
Executive Benefits and Payments
Upon Separation
Cash Compensation ........................
Base Salary ............................
Incentive Compensation ........
Equity Compensation .....................
Stock Options (1) ...................
Unvested and accelerated .....
Restricted Stock (2) ...............
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
92,500
0
$
$
0
0
$
$
185,000
74,000
0
0
0
0
92,500
$
$
$
$
$
$
46,375
1,669
0
0
0
48,044
$
$
$
$
$
$
92,750
3,338
0
2,500
357,588
(1) The payments relating to stock options represent the value as of December 31, 2019, 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,
2019 ($0.89). All of Mr. Szynkowski’s unvested stock options had an exercise price of $4.60 per share.
(2) Mr. Szynkowski had 3,750 shares of unvested restricted stock on December 31, 2019. The amount reflected is based on the
closing price of our common stock on December 31, 2019 ($0.89).
(3) Mr. Szynkowski does not participate in the Company’s health plan.
TABLE OF EQUITY COMPENSATION PLANS
The following table contains summary information as of December 31, 2019 concerning the Company’s Employee Stock
Purchase Plan, 2007 Amended and Restated Stock Incentive Plan and 2016 Amended 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
2007 Amended Stock Incentive Plan .............
2016 Amended Stock Incentive Plan .............
Employee Stock Purchase Plan .....................
Number of shares
to be issued upon
exercise
of outstanding
options,
warrants and rights
214,401
108,750
Weighted-average
exercise price of
outstanding options,
warrants and rights
$ 7.18
$ 4.29
Number of shares
remaining available
for future issuance
under equity
compensation plan
0 (1)
454,740 (2)
(1) As of April 20, 2020, the record date, the 2007 Amended Stock Incentive Plan had expired.
(2) As of April 20, 2020, 702,866 shares have been issued from the 2016 Stock Incentive Plan.
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 20,
2020 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.
21
This table is based upon information supplied by officers, directors and principal stockholders and Schedules 13D and 13G
filed with 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 20, 2020, adjusted as
required by rules promulgated by the SEC.
Name and Address of Beneficial Owner
David J. Nicol (2)
c/o Evolving Systems, Inc.
9800 Pyramid Ct, Suite 400
Englewood, CO 80112 .......................................................
David S. Oros (3)
c/o Evolving Systems, Inc.
9800 Pyramid Ct., Suite 400
Englewood, CO 80112 .......................................................
Julian D. Singer (4)
c/o Evolving Systems, Inc.
9800 Pyramid Ct., Suite 400
Englewood, CO 80112 .......................................................
Matthew Stecker (5)
c/o Evolving Systems, Inc.
9800 Pyramid Ct., Suite 400
Englewood, CO 80112 .......................................................
Mark P. Szynkowski (6)
c/o Evolving Systems, Inc.
9800 Pyramid Ct., Suite 400
Englewood, CO 80112 .......................................................
Shares of Common Stock
Beneficially Owned (1)
Number of
Shares
Percentage
Ownership
200,844
1.6%
227,095
1.8%
440,138
3.6%
42,000
*%
All current executive officers and directors as a group
(5 persons) (7) ....................................................................
948,827
38,750
*%
7.7%
Piton Capital Partners LLC (8)
c/o Kokino LLC
201 Tresser Boulevard, 3rd Floor
Stamford, CT 06901 ..........................................................
Kokino LLC (9)
c/o Kokino LLC
201 Tresser Boulevard, 3rd Floor
Stamford, CT 06901 ..........................................................
Karen Singer, Trustee of the
Singer Children’s Management Trust (10)
212 Vaccaro Drive
Cresskill, NJ 07626 ............................................................
Renaissance Technologies LLC (11)
800 Third Avenue
New York, NY 10022 ........................................................
*
Less than one percent (1.0%).
1,250,000
10.2%
1,250,000
10.2%
2,645,638
21.5%
753,215
6.1%
(1) Percentage of common stock beneficially owned is based on 12,313,582 shares of common stock outstanding on April 20,
2020.
22
(2)
(3)
(4)
(5)
(6)
(7)
Includes approximately 140,000 shares purchased on the open market and 23,200 shares subject to stock options exercisable
within 60 days of April 20, 2020. Mr. Nicol holds his shares in a brokerage account which permits borrowing on margin.
Includes approximately 172,000 shares purchased on the open market and 16,175 shares subject to stock options exercisable
within 60 days of April 20, 2020.
Includes approximately 245,000 shares purchased on the open market and 15,000 shares subject to stock options exercisable
within 60 days of April 20, 2020.
Includes 15,000 shares subject to stock options exercisable within 60 days of April 20, 2020.
Includes 31,250 shares subject to stock options exercisable within 60 days of April 20, 2020.
Includes approximately 557,000 shares purchased on the open market and 100,625 shares subject to stock options
exercisable within 60 days of April 20, 2020.
(8) Based solely upon the Schedule 13D/A information filed with the SEC by Piton Capital Partners LLC on November 28,
2017.
(9) Based solely upon the Schedule 13F information filed with the SEC by Kokino LLC on February 13, 2019.
(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.
(11) Based solely upon the Schedule 13G information filed with the SEC by Renaissance Technologies LLC on February 13,
2020.
DELINQUENT SECTION 16(A) REPORTS
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, 2019, all Section 16(a) filing requirements applicable to our
officers, directors and greater than ten percent beneficial owners were complied with, except for the following: David J. Nicol filed
one Form 4 including 13 late purchase transactions ranging from one day late to two weeks late, one Form 4 reporting one purchase
transaction two days late, and one Form 4 reporting one purchase transaction one day late.
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 2019, Messrs. Nicol, Oros and Singer, 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 “Investor Relations — 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,
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)
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;
23
(3)
(4)
(5)
(6)
(7)
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;
review financial press releases with management;
review consolidated financial statements and disclosures;
pre-approve all audit and permitted non-audit services; and
develop procedures for receiving, on an anonymous basis, and responding to concerns about our accounting and
auditing practices.
Review of Fiscal Year 2019 Consolidated Financial Statements
In connection with its review of our Fiscal Year 2019 Consolidated Financial Statements, the Audit Committee has:
(1)
reviewed and discussed the audited consolidated financial statements with management;
(2)
(3)
discussed with Marcum LLP, our independent registered public accounting firm, the matters required to be discussed
by the applicable requirements of the Public Company Accounting Oversight Board and the SEC; and
received from Marcum LLP the written disclosures and letter required by applicable requirements of the Public
Company Accounting Oversight Board and discussed with Marcum 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, 2019 be included in the Company’s 2019 Annual
Report on Form 10-K.
BY THE AUDIT COMMITTEE OF THE BOARD OF DIRECTORS:
David J. Nicol, Chairman
David S. Oros
Julian D. Singer
Change of Control Provisions with Matthew Stecker and Mark P. Szynkowski
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
We have entered into Employment Agreements with Matthew Stecker and Mark P. Szynkowski, our CEO and Senior Vice
President of Finance, respectively, which contain Change of Control provisions. 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
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.
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.
24
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. 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 and Nominating and Governance 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.
This proxy statement has been preceded by the Annual Report for fiscal year ended December 31, 2019. 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.
9800 Pyramid Court, Suite 400
Englewood, CO 80112
Attn: Mark P. Szynkowski, Sr. Vice President of Finance & Secretary
1-844-SEC-EVOL (1-844-732-3865)
STOCKHOLDER PROPOSALS FOR THE 2021 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 2021 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 8, 2021. A stockholder
proposal or nomination for director for consideration at the 2021 annual meeting but not included in the proxy statement and proxy
must be received by the Secretary of Evolving Systems no earlier than March 19, 2021 and no later than April 18, 2021. 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.
25
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,
Mark P. Szynkowski
Senior Vice President of Finance & Secretary
26
venue
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
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For fiscal year ended December 31, 2019
OR
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)
9800 Pyramid Court, Suite 400
Englewood, Colorado
(Address of principal executive offices)
84-1010843
(I.R.S. Employer Identification No.)
80112
(Zip Code)
(303) 802-1000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act.
Title of each class
Common Stock, par value $0.001 per share
Trading Symbol(s)
EVOL
Name of each exchange on which registered
Nasdaq Capital Market
Securities registered under Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x
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 x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the
past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of
Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging
growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of
the Exchange Act.
Large accelerated filer ¨
Non-accelerated filer x
Accelerated filer ¨
Smaller reporting company x
Emerging growth company ¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or
revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
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 $4,461,548 as of June 30, 2019.
The number of shares of Common Stock outstanding was 12,163,834 as of March 26, 2020.
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
2020 Annual Meeting of Stockholders, which will be filed with the Securities and Exchange Commission within 120 days after the close of the 2019 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.
DOCUMENTS INCORPORATED BY REFERENCE
EVOLVING SYSTEMS, INC.
Annual Report on Form 10-K
For the year ended December 31, 2019
Table of Contents
PART I
Page
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 Firms
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Comprehensive 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
1
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22
23
23
23
24
24
24
36
36
36
38
39
40
41
42
43
64
64
65
66
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70
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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,” or “plan,” and 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; the expectations associated with our
business, our subsidiaries’ operations and our 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.” Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of
the date they are made. We undertake no obligation to update or revise publicly any forward-looking statements,
whether as a result of new information, future events or otherwise.
PART I
ITEM 1. BUSINESS
INTRODUCTION
Evolving Systems provides real-time digital engagement solutions and services to more than 100 customers
in over 65 countries worldwide. We have acquired multiple companies in the past few years that have ushered the
company into the high value digital engagement space. Expanding our portfolio to now feature market-leading
solutions and services for real-time analytics, customer acquisition and activation, customer value management and
loyalty for the telecom industry promoting partnerships into retail and financial services.
We have transitioned from offering traditional software technology licensing, focused on cost savings, to
offering business solutions focused on revenue growth and efficiency gains for the carrier. Our business model has
moved from classic capital expenditure license and services to operating expense models based on managed
services, including transaction and performance fees, thus creating recurring revenue relationships and providing
opportunity to continually engage with our clients.
We offer real-time, interactive digital engagement solutions and services that drive increases in customer
lifetime value for our enterprise clients:
Acquisition and Activation Solutions that increase new subscriber enrollments through multiple
channels and dealer networks, electronically authenticate customer identity and activate complex
bundles of traditional telecom services (voice, messaging and data) and value-added network
services;
Retention and Loyalty Solutions that extend the duration of customer contracts by engaging them
with the brand, interacting and rewarding them with personalized offers through loyalty and
partner programs; and
Analytics and Value Management Solutions that analyze consumer behavior in real-time and
enable marketing departments to innovate, create and manage highly-personalized and
contextually-relevant interactive campaigns that engage consumers with event-triggered offers that
result in higher take-rates and increased customer revenue.
The combination of these offerings increases customer activations and activity, extends their lifecycle and
increases customer spend resulting in increased customer lifetime value.
1
COMPANY BACKGROUND
Evolving Systems was founded in 1985 to provide software and services to the U.S. telecommunications
industry. During our early years we focused on providing 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 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 focused primarily on the wireless markets in the areas of subscriber activation, SIM
card management and activation, self–service mobile applications, data enablement solutions, connected device
activation and management of services.
Through continued investment in developing the next generation of these products, we maintain our status
in these markets and strengthen our client relationships.
Acquisitions of BLS Limited (“EVOL BLS”), four Lumata Holdings subsidiaries, Lumata France SAS,
Lumata Spain S.L., Lumata UK Ltd and Lumata Deutschland GmbH (collectively, “Lumata Entities”) in 2017,
along with the acquisition of RateIntegration d/b/a Sixth Sense Media (“SSM”) in 2015, expanded our footprint in
the digital marketing space. Each of these acquisitions had their own platform which we still maintain today.
Through the extensive work of our product development team, we have launched the Evolution platform featuring
the best of these legacy platforms on cutting edge technology. Evolution will be used to operate the most innovative
large-scale loyalty programs, as well as to provide unique mechanics enabling gamification, optimization and
personalization across a variety of channels. It enables our clients to engage with their customers at all stage of their
lifecycle, providing interactive dialogue and smart recommendations through all available traditional and digital
channels. The platform seamlessly integrates within the service provider’s IT infrastructure, either on-premise or on
a private cloud. It can be operated or managed as a service depending on the market needs.
We are now a leading supplier of real-time digital engagement solutions and services that drive growth in
customer acquisition and activation, extend customer lifetime and increase customer value and revenue in the
converging mobile, entertainment, financial and retail services eco-system. Our platforms, together with our team of
experienced industry experts, help service providers increase their customer lifetime value (“CLV”) over the course
the customer lifecycle.
INDUSTRY DYNAMICS
The market for digital engagement to increase customer lifetime value is growing. Several key factors are
driving carrier demand for next generation solutions, supporting growth for specific products within the sector:
Carriers are 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 has resulted in increased usage of
mobile data;
On-going network investment in 5G and Internet of Things (“IoT”) networks is driving increased
demand for digital engagement solutions;
Carriers are experiencing pricing pressure 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 Enterprise Mobility and Machine to Machine (“M2M”) requirements are driving
further demand.
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
2
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 5G, IoT and M2M accelerate, the SIM card and embedded SIM (eSIM) have
emerged as vital links in the end-to-end value chain. Evolving Systems’ full life cycle management of SIMs and
eSIMs from ordering, dynamically activating and managing the SIM card is becoming an important component in
the service provider’s 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 700 million SIM cards, providing enhanced functionality and significant operator savings.
In a market where consumers perceive their telecom services as a commodity, maintaining or growing
customer value and retaining valuable customers is a persistent challenge. Customers are demanding ever greater
incentives for their loyalty, attracted by disruptive OTT alternatives and competitive offers on data, airtime, and
SMS. This can lead to a spiral of price-driven value destruction unless a truly differentiated approach is used to
stand out from the crowd and deliver superior value.
The digital revolution offers unparalleled opportunities to generate new revenue streams, create highly
relevant and differentiated offerings, and deliver more engaging customer experiences to the growing universe of
connected consumers. But a digital environment requires a whole new way of interacting with consumers in real-
time, via multiple channels such as apps, web, email, as well as traditional SMS, in a highly contextual manner.
Having a deep understanding of customer preferences and behavior is critical in this digital environment full of
demanding customers.
Mobile service is ubiquitous and mobile operators are the digital enablers between consumers and brands,
the trusted processors of customer data, uniquely able to bridge the digital and physical world through their
technology infrastructure. The mobile industry is going through a transition period. Traditional voice and messaging
revenues are in decline due to several factors including the “over-the-top” OTT players. Mobile data demand is
growing. Service providers are focused on building upon their brand and their “last mile” connectivity to more
actively engage their customers and to increase the customer wallet-share through digital and non-digital
partnerships.
We help service providers navigate through the digital marketing jungle of fragmented technologies,
converging communication channels and managing the data overload through our portfolio of digital engagement
solutions. We combine big ideas and a deep understanding of mobile customer behavior with powerful software
capabilities and expertise to create digital engagement & loyalty experiences that stand out from the crowd.
We sit at the intersection of technology and marketing. Our solutions leverage mechanics such as digital
vouchering, digital badges, in-app engagement, etc. to drive a two-sided business model, where we generate value
from 3rd party brands, as well as retail customers. It is a continuous circle where customers increase spending and
extend tenure in return for perceived high value rewards and experiences, which brands provide in order to access a
highly targeted mobile customer base.
Connecting brands and consumers, via a digital platform, positions the mobile operator at the center of
commerce, content and communication flows in the connected world. Using our solutions, mobile operators have
access to accurate data on customer preferences, behavior, spending, etc. While it is critical to ensure customer opt-
in for data use, industry research confirms that consumers will allow a trusted mobile operator to use their
information in return for highly relevant and attractive incentives.
DIGITAL ENGAGEMENT SOLUTIONS PORTFOLIO
Acquisition and Activation
Our Subscriber Acquisition and Activation solutions support carriers in adding new subscribers to their
network, beginning with the sales and contract process through 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
3
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.
Dynamic SIM AllocationTM is a SIM/eSIM Activation solution which is integrated into the carrier’s
signaling network, enabling new SIM cards or eSIMs that have not been pre-provisioned to be
detected on first use in consumer and IoT Markets. This triggers an efficient, dynamic provisioning
process and eliminates the need for pre-provisioning, thus lowering the operator’s costs of subscriber
acquisition and eSIM bootstrapping. The SIM/eSIM activation occurs only when a SIM/eSIM 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.
Number Inventory and Management is a scalable and fully automated solution that enables operators
to reliably and efficiently manage their telephone numbers (i.e. eSIMs and eSIM profiles, 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.
Customer Analytics and Value Management
Our Customer Analytics and Value Management solutions empower marketing departments to create and
deploy highly personalized, location and contextually relevant, interactive customer engagement campaigns. Our
most recent version of our cutting-edge Evolution platform launched in the first quarter of 2019 enables us to
deliver a full-service solution at the client’s site or hosted in our cloud and provided as SaaS subscription. The
platform monitors customer events and behavioural 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.
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.
4
Campaign Modules provide predefined templates for specific types of real-time mobile marketing
tactics, including marketing for data bundles, digital services such as music, video, movies, gaming,
entertainment, and mobile money as well as non-digital services including retail offers.
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.
Customer Retention and Loyalty
Our Customer Retention and Loyalty solutions help reduce churn, extend the customer lifecycle and
generate more revenue from existing subscribers by using the latest innovative programs. Strong subscriber loyalty
is created by rewarding subscribers via programs that offer additional carrier services or the services and products of
participating partners.
Brand partnerships are the true differentiators given the commoditization of typical carrier offers in the
market. Some of the examples of digital engagement concepts we have created include the first digital badges
concept in the telecom sector with Orange, the largest and most successful film vouchering programs with Orange,
& Everything Everywhere, innovative Recharge & Instant Win mechanics in prepaid markets, and two of the most
successful loyalty programs in the tough African market. These concepts were designed with specific mechanics that
work within the local market in conjunction with brand partners. They are successful solutions which endure,
because of key ingredients such as simple customer journeys, perceived high value rewards and innovative
engagement mechanics in conjunction with strategic brand partnerships.
The key modules include:
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 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, Voucher and Badges Management covers the whole lifecycle of coupons, vouchers and
badges as a medium for delivering rewards. Our solution manages the interface with partners, the
delivery of coupons to subscribers, redemption for digital or physical goods, and settlement between
carrier and partner.
Digital Engagement Engine includes several solution components:
o
o
o
o
o
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Proprietary framework for engagement concept design and partner selection;
Flexible business rules to define tiers to earn, burn or transfer credits;
Multi-variable definition to calculate loyalty, including spend, tenure, social advocacy, brand
engagement, digital maturity, etc.;
Intelligent predictive analytics engine and segmentation capability;
Channel agnostic redemption capability with standard partner APIs to connect into Point of Sale
retail systems and other redemption networks; and,
Tier 1 carrier grade data capture and configurable provisioning engine.
5
Marketing Expert Services
Our Marketing Services team works through a five-stage approach to assist our clients’ marketing
departments in growing their customer base and engaging and retaining their valuable customers:
Engage: We design engagement plans that map against specific segments based on ‘propensity to
participate’ and lifetime value indicators.
Interact: We design the push and real-time trigger-based interactions with customers to attract them
into the program and keep them engaged.
Reward: We define a broad range of trigger events and a variety of engagement mechanics (points,
badges, instant wins, vouchers, etc.).
Redeem: We work with partners to stitch together a redemption network online and offline, so
customers have highly relevant, branded rewards (a key source of differentiation and program
longevity) from which to choose.
Optimise/Learn: We use program data, overlay program results from our global customer base, and
apply an iterative process to reach the right customers with meaningful incentives.
MANAGED SERVICES (EXPERT IT SERVICES)
We deliver our Managed Services both on-site at a carrier’s facilities or remotely. Services range from
operational support of our software solutions, technical services to expand those solutions with new modules and
functionality to support new business value, 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 experienced IT Services team provides expert 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 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 most of our products and services internally in our innovation labs in North Carolina, France,
Romania and India. Internal development allows us to maintain competitive advantages that come from product
differentiation and closer technical control over our products and services. It also allows us to decide which
modifications and enhancements are most important and when they should be implemented. Generally, we also
create product documentation internally. We conduct research to identify specific industry and client business needs
as well as market requirements and we use that information to determine our investment in product development.
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.
We continue to invest in our Evolution platform, a combination of software capabilities achieved through
each of our acquisitions. Evolution provides a powerful environment to configure and operate rich Customer
Lifecycle Journeys from acquisition to retention through a variety of engagement models, offer and loyalty
programs. Primarily designed to address integrated mobile digital engagement needs it can accommodate any type
of customer and any type of use case. The platform’s Customer Journey Manager is responsible for profiling
individual engagements to enable better insights and more automation. This approach produces more relevant and
engaging predictions and offers for us to present to customers.
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The Evolution platform will provide service providers with unmatched artificial intelligence based on smart
data and operational predictive analytics functions enabling to improve efficiency and to maximize revenues, all the
while reducing time and effort to execute hundreds of micro-segmented engagements and offers. We intend to take
our digital engagement readiness solution for carriers beyond just enabling clients to use their traditional data. The
new platform will move beyond its current SQL engine to using a Kafka-engine-powered big data platform. This
will enable the real-time processing of multiple data-streams for unlimited flexibility and scalability.
Our Evolution platform will be used to operate the most innovative large-scale loyalty programs, as well as
to provide unique mechanics enabling gamification, optimization and personalization across a variety of channels. It
will enable our clients to engage with their customers at all stage of their lifecycle, providing interactive dialogue
and smart recommendations through all available traditional and digital channels. The platform will seamlessly
integrate within the service provider’s IT infrastructure, either on-premise or on a private cloud. It will be operated
or managed as a service depending on the market needs.
SALES AND MARKETING
Our sales force is primarily a field organization structured to focus on specific geographical territories
around the world including North America, Latin America, Europe, Middle East, Africa, the Commonwealth of
Independent States (comprised of Russia and other former Soviet Republics), South Asia and Asia Pacific. Our sales
activities cover direct sales to enterprise customers as well as sales through partners and resellers. Partners include
Ericsson, Gemalto and Idemia who include our products as part of their wider solution offerings and systems
integrators such as IBM, Amdocs and Atos, who license our technology to customers as part of their delivery
engagements. The resellers include regional or country specific companies that manage our customer relationships
in countries where English is not the primary language.
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
and lead generation.
COMPETITION
The market for telecommunications OSS products and mobile analytics and advertising is highly
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. 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
in subscriber acquisition and activation and Digital Engagement Customer Value Management, Retention and
Loyalty 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 Nokia, Amdocs and
Huawei, as well as billing vendors and other vendors such as Ericsson, 6D, HP and a few other smaller regional
competitors.
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Competitors for Digital Engagement Customer Value Management, Retention and Loyalty, include
specialist vendors such as Pontis (acquired by Amdocs), CRM software from vendors such as Amdocs Limited,
Analytics software from vendors like SAS and a few independent software companies like FlyTxt and Pelatro.
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 both marketing services and expert services 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
and IT infra-structure. 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, 2019 and 2018, one significant customer accounted for 11% of revenue
from operations, respectively. This customer is a large telecommunications operator in Europe.
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 7 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, 2019, we employed 261 people including 14 in the United States, 113 in the United
Kingdom and European Union, 133 in India and 1 in South Africa. Of our worldwide staff, 77% are involved in
product delivery, development, support and professional services, 8% in sales and marketing, and 15% in general
administration. The number and mix of our staff has remained stable, however changes may occur in the coming
year related to changes in the business and our market strategies. We also engage with multiple contractors in
various countries to allow us to service our global clients.
AVAILABLE INFORMATION
You can find out more information about us at www.evolving.com. In addition, we use social media to
communicate to the public. It is possible that the information we post on social media could be deemed to be
material to investors. We encourage investors, the media, and others interested in Evolving Systems to review the
information we post on the social media channels listed on our website. The information on or accessible through
our website or on social media 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 on the SEC’s
website at ww.sec.gov.
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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 operations and cash flows could
be negatively affected. You should carefully consider these risks and uncertainties before investing in our securities.
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:
our ability to effectively staff, provide technical support and manage operations in multiple countries;
fluctuations in currency exchange rates;
timely collection 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 51% 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 94% 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.
There is additionally considerable uncertainty about the economic and regulatory effects of the United
Kingdom’s exit from the European Union (commonly referred to as “Brexit”), as discussed further in “Our
performance may be adversely affected by economic and political conditions in the United Kingdom where we do
business” below. The UK is one of our largest markets in Europe, but we also presently provide services to UK
customers from EU countries and services to customers in EU countries from the UK. Brexit may result in greater
regulatory complexity surrounding the services we provide to our UK or EU customers and financial results could
be negatively impacted.
Any of the foregoing factors may have a material adverse impact on our business, financial condition and
results of operations. 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.
Throughout the world, in the normal course of business, we are subject to examination by taxing authorities up until,
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two years in the U.K. and Europe and four years in India, following the end of the accounting period. As of the date
of this report, two of our income tax returns in India are under review for a hearing for potential refunds and we do
not expect the results of the examination will have a material effect on our financial statements.
We face intense competition for our products and services, which may lead to lower revenue or operating
margins.
Our competitors range in size from diversified global companies with significant research and development
resources to small, specialized firms. Many of the areas in which we compete evolve rapidly with changing and
disruptive technologies, shifting user needs, and frequent introductions of new products and services. Our ability to
remain competitive depends on our success in making innovative products, devices, and services that appeal to
businesses and their customers.
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 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 incurred debt in connection with our acquisitions of Lumata and SSM which could adversely affect
our financial condition and restrict our operating flexibility.
In connection with our acquisition of “Lumata Entities” completed on September 4, 2017, we entered into a
Term Loan Facility Agreement with East West Bank as lender in the amount of $4.7 million (the “Lumata Facility”)
and we used the full amount of the Lumata Facility to fund the acquisition. The Lumata Facility requires us to make
monthly principal payments of approximately $0.1 million, which commenced July 31, 2018, plus interest at the
greater of (a) 3.5% or (b) the variable rate of interest that appears in the Wall Street Journal on a monthly
measurement date, plus in either case 1.5%. The Lumata Facility is secured by substantially all of our assets.
The Lumata Facility includes negative covenants that restrict our 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; make cash
distributions to our stockholders in excess of specific limits; and change the nature of our business materially.
On October 4, 2019 we entered into the First Amendment to the Lumata Facility that replaced previous
financial covenants with new covenants requiring a minimum consolidated cash balance of no less than the total
bank debt outstanding and a monthly minimum trailing three month consolidated EBITDA fixed dollar amount
mutually agreed to by the Company and East West Bank in the amendment.
Outstanding amounts under the Lumata Facility 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.
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The Lumata Facility and related obligations, including interest payments, covenants and restrictions, could
have important consequences, including the following:
reserving cash in order to satisfy the obligations relating to the Lumata Facility could adversely affect
the amount or timing of investments to grow our business, impairing our ability to invest in and
successfully grow our business;
the Lumata Facility 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;
the Lumata Facility 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 Lumata Facility impose 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 Lumata Facility 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 Lumata
Facility 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. The First Amendment included a waiver of any prior non-
compliance from East West Bank; however, we may be unable to obtain similar waivers or amendments in the event
of any future non-compliance.
We recently completed a number of acquisitions in support of our new strategy based on recurring
managed services. Acquisitions present many risks and we cannot guarantee that we will realize the
financial and strategic goals that were contemplated at the time of a transaction.
We have in prior years entered into acquisitions that we believe have accelerated and will continue to
accelerate our pivot to the customer acquisition and customer value management domains. 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 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. 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.
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 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. In addition, future acquisitions could result in dilutive
issuances of equity securities, impact employee stock options, reduce our cash available for operations and increase
our debt. All of these factors associated with acquisitions could result in unexpected litigation from employees and
stockholders. 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.
Impairments of the carrying value of goodwill or other indefinite-lived intangible assets have negatively
affected our consolidated operating results and could so again in the future.
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 an other than temporary decline in our market capitalization that is calculated as
our common stock’s market price multiplied by the number of shares of common stock outstanding, a significant
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change in the business climate, legal factors, operating performance indicators, competition, sale or disposition of a
significant portion of the business or other factors. Application of the goodwill impairment test requires judgment,
including the identification of reporting units, assignment of assets and liabilities to reporting units, assignment of
goodwill to the reporting unit, and determination of the fair value of the reporting unit. In 2018, the Company
adopted ASU 2017-04, Intangibles – Goodwill and Other (Topic 350), Simplifying the Test for Goodwill
Impairment, which simplifies the subsequent measurement of goodwill by eliminating the second step from the
quantitative goodwill impairment test. Under this guidance, annual or interim goodwill impairment testing will be
performed by comparing the fair value of a reporting unit with its carrying amount. An impairment charge will then
be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value, not to exceed the
carrying value of goodwill.
Fair value determinations require considerable judgment and are sensitive to changes in underlying
assumptions, estimates and market factors. Estimating the fair value of our business and indefinite-lived intangible
assets requires us to make assumptions and estimates regarding our future plans, as well as industry and economic
conditions. These assumptions and estimates include projected revenues and income growth rates, terminal growth
rates, competitive and consumer trends, market-based discount rates, and other market factors. If current
expectations of future growth rates are not met or market factors outside of our control, such as discount rates,
change significantly, then goodwill or intangible assets might become impaired. For example, we recorded charges
for the impairment of goodwill of $6.7 million and $17.8 million for the years ended December 31, 2019 and 2018,
respectively. As goodwill and intangible assets associated with recently acquired businesses are recorded on the
balance sheet at their estimated acquisition date fair values, those amounts are more susceptible to an impairment
risk if business operating results or macroeconomic conditions deteriorate. Additionally, recently impaired
intangible assets can also be more susceptible to future impairment as they are recorded on the balance sheet at their
recently estimated fair values. Additional impairment of the carrying value of other indefinite-lived intangible assets
in the future could negatively affect our operating results or net worth.
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 clients 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.
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. Even as we transition more of our business software-as-a-service
business model and managed services, the license-based proprietary software model generates a substantial portion
of our software revenue. 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.
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Our products are complex and have a lengthy implementation process; unanticipated difficulties or
delays in obtaining customer acceptance 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.
A pandemic, epidemic, or outbreak of infectious disease such as the current coronavirus (COVID-19)
pandemic could have an adverse effect on our business, operating results or financial condition.
Our business could be adversely impacted by the effects of a pandemic, epidemic, or outbreak of an
infectious disease, such as the recent and ongoing COVID-19 outbreak in various parts of the world in which we
operate, which has now been declared a global pandemic by the World Health Organization. This outbreak could
adversely impact our operations, the operations of our customers and the global economy. Disruptions to our
business could include restrictions on our ability to travel and distribute our products, suspension or government-
mandated shutdown of operations by us or our customers, or the delay of projects in impacted areas. Travel
restrictions or operational problems where we or our customers operate may cause a reduction in the demand for our
services. For example, the governors of both Colorado (where our corporate headquarters is located) and New York
(where several of our executive officers are based) have issued stay-at-home orders which urge residents to work
from home and mandate the closures of businesses that are considered non-essential. Similar orders have been
issued in the United Kingdom and India, where we have subsidiaries and significant numbers of employees. Any of
these events could negatively impact our business, operating results or financial condition.
The COVID-19 Pandemic is having an adverse effect on our business.
The ongoing COVID-19 pandemic crisis has already caused several instances where meetings and other
interactions relevant to our business progress have been postponed or delayed. Our customers are wireless carriers
who have, in many instances, begun adopting policies that limit the accessibility of their campuses to external
personnel. In addition, government-mandated stay-at-home orders have recently been issued in many of the
jurisdictions where we or our customers do business, which will prevent us from conducting in-person meetings
with customers while those orders are in effect. Although most of these government mandates are effective for
limited periods of time, they may be extended indefinitely depending on ongoing developments related to COVID-
19. At the time of this filing, this sporadic lack of access has resulted in only slight delays that are not quantitatively
detrimental to operating results, but as the situation and its response continue, this could change. If this current
situation continues or extends, because of either our customers’ policies and practices or government-mandated stay-
at-home orders, restrictions on travel or gatherings of people, our results will be negatively impacted. In addition,
the financial covenants under our debt facilities are related to cash balances and trailing three month operational
results which may be adversely affected by project delays related to customer interactions being postponed or our
customer’s ability to make timely payments.
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, 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
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delay paying us even when they have been paid by the end-user. We have in the past 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, as discussed further in “Our international operations subject us to potential liability under anti-
corruption laws and regulations” below.
The success of our business depends on continued growth in the wireless services industry and demand
for connected devices, and other usage of mobile data.
Our primary market, wireless telecommunications, is fairly mature and saturated, which may result in lower
budgets and margins for our solutions and services. The future success of our business depends upon continued new
subscriber growth, consumer adoption of new types of connected devices like IoT and consequently mobile operator
demand for next generation software solutions and services. 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.
The success of our business also depends on our ability to renew our support and managed services
offerings. The quality of our support and managed services offerings is important to our customers. If
we fail to meet our service level obligations under our agreements, we could incur penalties and could
lose customers.
Providing a high level of support for our solutions is critical to our business. Our customers expect us to
resolve issues relating to the use of our solutions and if we are unable to meet or exceed the expectations of our
customers, we could experience loss of customers and difficulty attracting new customers. In addition, we have
service level agreements with many of our customers under which we guarantee specified levels of service
availability and service credits for failing to achieve our agreed service levels, which could result in higher than
expected costs, decreased revenues and decreased operating margins. Any of the above results would likely have a
material adverse impact on our business, revenue, results of operations, financial condition and reputation.
Compliance with changing European privacy laws could require us to incur significant costs and failure
to comply could give rise to liabilities. Disclosure and misuse of personal data could result in liability
and harm our reputation.
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. In addition, we have offices and
clients in the EU where new more stringent regulations, known as the General Data Protection Regulation or
“GDPR,” took effect in May 2018. The GDPR imposes significant new obligations and compliance with these
obligations depends in part on how particular regulators apply and interpret them. If we fail to comply with the
GDPR, or if regulators assert we have failed to comply with the GDPR, it may lead to regulatory enforcement
actions, which can result in monetary penalties of up to 4% of worldwide revenue, private lawsuits, or reputational
damage.
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 Despite our
efforts to improve our security controls, it is possible our security controls over personal data, our training of
employees and vendors on data security, and other practices we follow may not prevent the improper disclosure of
customer or user data we store and manage. 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. We may also
experience hesitancy, reluctance or refusal by European or multi-national customers to continue to use our services
due to the potential risk exposure that these customers might face as a result of the current data protection
obligations imposed on them by certain data protection authorities. These customers may require us to accept
increased liability, decide not to do business with us or may require that their personal data remains in certain
locations. 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 damage claims from our customers, 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.
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Cyberattacks and security vulnerabilities could lead to reduced revenue, increased costs, liability claims,
or harm to our competitive position.
The security of our products and services is important in our customers’ decisions to purchase or use our
products or services. Increased sophistication and activities of perpetrators of cyberattacks 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 cyberattacks, 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 business continuity or 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.
System security risks, data protection breaches, cyberattacks and systems integration issues could disrupt
our internal operations or IT services provided to customers, and any such disruption could reduce our
revenue, increase our expenses, damage our reputation and adversely affect our stock price.
As a technology services business, we are exposed to attacks from criminals, nation state actors and activist
hackers (collectively, “malicious parties”) who may be able to circumvent or bypass our cyber security measures
and misappropriate, maliciously alter or destroy our confidential information or that of third parties, create system
disruptions or cause shutdowns. Malicious parties also may be able to develop and deploy viruses, worms,
ransomware and other malicious software programs that attack our products or otherwise exploit any security
vulnerabilities of our products. Threats to our own IT infrastructure can also affect our customers. Customers using
our cloud-based services rely on the security of our infrastructure, including hardware and other elements provided
by third parties, to ensure the reliability of our services and the protection of their data. Sophisticated hardware and
operating system software and applications that we procure from third parties may contain defects in design or
manufacture, including flaws that could unexpectedly interfere with the operation of the system. The costs to us to
eliminate or alleviate cyber or other security problems, including bugs, viruses, worms, malicious software programs
and other security vulnerabilities, could be significant and could reduce our operating margins. Our efforts to
address these problems may not be successful and could result in interruptions, delays, cessation of service and loss
of existing or potential customers that may impede our sales, manufacturing, distribution or other critical functions.
We manage and store various proprietary information and sensitive or confidential data relating to our
business. In addition, our business may process, store and transmit data relevant to our clients, including
commercially sensitive and personally identifiable information, including the personal information of European
citizens covered by the GDPR. Breaches of our cyber or physical security measures or the accidental loss,
inadvertent disclosure or unapproved dissemination of proprietary information or sensitive or confidential data about
us, our clients or their customers, including the potential loss or disclosure of such information or data, could expose
us, our customer or the individuals affected to a risk of loss or misuse of this information, result in litigation and
potential liability for us, damage our brand and reputation or otherwise harm our business. We also could lose
existing or potential customers or incur significant expenses in connection with our customers’ system failures or
any actual or perceived security vulnerabilities in our products and services. In addition, the cost and operational
consequences of implementing further data protection measures could be significant.
Portions of our IT infrastructure also may experience interruptions, delays or cessations of service or
produce errors in connection with systems integration or migration work that takes place from time to time. We may
not be successful in implementing new systems and transitioning data, which could cause business disruptions and
be more expensive, time-consuming, disruptive and resource intensive. Such disruptions could adversely impact our
ability to fulfill orders and respond to customer requests and interrupt other processes. Delayed sales, lower margins
15
or lost customers resulting from these disruptions could reduce our revenue, increase our expenses, damage our
reputation and adversely affect our stock price.
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 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 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:
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;
impairment in the value of our long-lived assets;
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,
expenses associated with our debt 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.
16
The markets for our service activation and number management products are mature and the markets
for our next generation loyalty and customer lifecycle management software and services 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 and investment in new technologies is speculative. 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 customers do not perceive our latest offerings as providing
significant new functionality or other value, they may reduce their purchases of new offerings or upgrades,
unfavorably affecting revenue. We may not achieve significant revenue from new products and services for several
years, if at all. New products and services may not be profitable, and even if they are profitable, operating margins
for some new products and businesses will not be as high as the margins we have experienced historically.
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 which have now been merged
into Evolving Systems India. 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 under our
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.
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.
17
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.
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 solutions.
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 and services. We may have
to reduce the prices we charge for our products and services, 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 solutions 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 solutions may be
used in critical business applications. On occasion, we also engage subcontractors to provide deliverables under
18
customer contracts; we could be required to indemnify customers for work performed by our subcontractors. We
may not be able to recover these damages from a subcontractor. 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 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 in the future. 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 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 7 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
19
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.
Our performance may be adversely affected by economic and political conditions in the United Kingdom
where we do business.
Our performance has been in the past and may continue in the future to be impacted by economic and
political conditions in the United Kingdom where we do business and have operations. Economic and financial
uncertainties in our international markets, including uncertainties surrounding the United Kingdom's withdrawal
from the European Union (commonly referred to as “Brexit”) and changes to major international trade
arrangements, could negatively impact our operations and sales. The UK is one of our largest markets in Europe, but
we also presently provide services to UK customers from EU countries and services to customers in EU countries
from the UK. Brexit may result in greater regulatory complexity surrounding the services we provide to our UK or
EU customers and financial results could be negatively impacted. .
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 UK, 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.
In order to operate internationally and comply with local government regulations and customer
requirements, we maintain bank accounts at non-U.S. banks located in Asian and African countries and
in local currencies. Certain countries such as India and Nigeria require that we pay withholding taxes
should we transfer our cash from a non-U.S. bank account to our U.S. bank accounts.
As of December 31, 2019, of our $3.1 million cash balance, $0.3 million is on deposit in the U.S., the U.S.
dollar equivalents of $1.1 million is on deposit in the U.K. and Europe, $1.1 million is on deposit in India, $0.4
million is on deposit in Nigeria and $0.2 million is on deposit in South Africa. Should we choose to transfer cash out
of our bank accounts in India and Nigeria, we may be required to pay the local tax authorities a withholding tax
ranging from 10% to 20% of the amount transferred. Local regulations may take longer to execute than transfers
from our U.S., U.K. and European bank accounts and the withholding tax we pay may not be refundable. The longer
execution times and the withholding taxes means we may be subject to delays in executing our operations and our
available cash is reduced by the withholding taxes.
20
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.
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 unrelated to
the performance of our company or industry, could affect our stock price. In particular, stock markets have
experienced extreme volatility in the first quarter of 2020 due to the ongoing COVID-19 pandemic and investor
concerns and uncertainty related to the impact of the pandemic on the economies of countries worldwide. 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.
The input method of accounting used for most of our projects can result in overstated or understated
profits or losses.
Our services and managed services revenue under fixed-price services contracts is accounted for using the
input method of accounting. Under this method, we recognize revenue and profits for each fixed-price service
project-based efforts or inputs toward satisfying a performance obligation, which is a promise in a contract to
transfer a distinct service to the customer. The input method requires us to estimate the total transaction price
allocated based on each distinct performance obligation of a contract. Our failure to accurately estimate these often-
subjective factors could result in overstated or understated revenue, profits or losses.
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 (“US GAAP”). It is possible that future requirements could change our current application of US GAAP,
resulting in a material adverse impact on our financial positions or results of operations. 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.
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.
21
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.
Certain of 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 Lumata 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.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
22
ITEM 2. PROPERTIES
We lease office space at various locations which are shown below.
Location
Englewood, Colorado ....................................................................
New York, New York ...................................................................
Durham, North Carolina ................................................................
London, England ...........................................................................
Bangalore, India ............................................................................
Kolkata, India ................................................................................
Delhi, India ....................................................................................
Johannesburg, South Africa ..........................................................
Kuala Lumpur, Malaysia ...............................................................
Mexico City, Mexico .....................................................................
Grenoble, France ...........................................................................
Cluj-Napoca, Romania ..................................................................
Madrid, Spain ................................................................................
Square
Footage
400
391
1453
376
12429
5638
322
130
1042
89
3767
7793
215
Lease
Expiration
month-to-month
01/31/20
08/31/20
09/30/20
08/18/23
07/31/20
03/09/20
09/30/20
07/14/20
02/29/20
03/21/21
12/31/22
month-to-month
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
also receive letters from former employees claiming that upon exiting their final compensation was not properly
calculated. One such complaint from the Company’s former Chief Executive Officer has been lodged, claiming he
was not properly compensated upon termination along with additional allegations. The Company has engaged legal
counsel through our insurance carrier and intends to defend rigorously. The ultimate outcome of this matter is not
estimable or determinable at this time.
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.”
As of March 26, 2020, there were approximately 74 holders of record of our common stock.
Dividends
Our Lumata 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. 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.
ITEM 6. SELECTED FINANCIAL DATA
Not applicable.
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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., Evolving Systems NC Evolving
Systems BLS LTD, Lumata UK LTD, Lumata France SAS, Lumata Deutschland GmbH, and Lumata Spain SL and
short- and long-term cash needs. In some cases, words such as “anticipates”, “expects”, “intends”, “plans”,
“believes” or “estimates” and 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 provider of real-time digital engagement solutions and services to the wireless
carrier and consumer financial services markets. We operate a managed services business model through which we
maintain long-standing relationships with many of the largest wireless companies worldwide. We have acquired
multiple companies in the past few years to expand our offerings. The Company’s portfolio includes market-leading
solutions and services for real-time analytics, customer acquisition and activation, customer value management and
loyalty for the telecom industry promoting partnerships into retail and financial services. 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 capital
expenditure license and services to operating expense models based on managed services.
RECENT DEVELOPMENTS
In 2019, we released Evolution, the new platform that supersedes and provides an upgrade path to the
former loyalty and CVM platforms from both Evolving and its acquired companies — BLS, Lumata and SSM.
Evolution was built by combining, integrating, and improving upon the best components and features of those
previous platforms. We believe that Evolution provides a unique capability, and we expect to continue our focus on
selling and promoting this significant new product. Our experienced team and the new technology provide
actionable insights and relevant offers based on customer data, all of which greatly complements our software
portfolio and 25 years of expertise in customer acquisition, activation and retention. Enhancements to our
technology further expands our managed services platform for delivering on-tap strategic and tactical solutions.
We reported a net loss of $9.7 million and of $14.8 million for the years ended December 31, 2019 and
2018, respectively.
In 2018, the Company adopted ASU 2017-04, Intangibles – Goodwill and Other (Topic 350), Simplifying
the Test for Goodwill Impairment, which simplifies the subsequent measurement of goodwill by eliminating the
second step from the quantitative goodwill impairment test. Under this guidance, annual or interim goodwill
impairment testing will be performed by comparing the fair value of a reporting unit with its carrying amount. An
impairment charge will then be recognized for the amount by which the carrying amount exceeds the reporting
unit’s fair value, not to exceed the carrying value of goodwill. Due to a sustained decline in the market capitalization
of our common stock during the second quarter of 2019 and in fourth quarter of 2018, we performed an interim
goodwill impairment test in each quarter. Management considered that, along with other possible factors affecting
the assessment of the Company’s reporting unit for the purposes of performing a goodwill impairment assessment,
including management assumptions about expected future revenue forecasts and discount rates, changes in the
overall economy, trends in the stock price, estimated control premium, other operating conditions, and the effect of
changes in estimates and assumptions could materially affect the determination of fair value and goodwill. As a
24
result of the significant decline in the current market capitalization despite any of the other positive factors
contemplated and relatively little change in our ongoing business operations, the outcome of this goodwill
impairment test resulted in a charge for the impairment of goodwill of $6.7 million and $17.8 million recorded in the
consolidated financial statements for the years ended December 31, 2019 and 2018, respectively.
We have operations in foreign countries where the local currency is used to prepare the consolidated
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 2019 and 2018 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):
For the Years
Ended December 31,
2019 vs. 2018
Changes in:
Revenue ............................................................................................
Costs of revenue and operating expenses ..........................................
Income from operations ....................................................................
$
$
(493)
1,626
1,133
The net effect of our foreign currency exchange rate changes for the year ended December 31, 2019 was a
$0.5 million decrease in revenue and a $1.6 million increase in operating expenses versus the year ended December
31, 2018 was due to a stronger US dollar on average during the year 2019.
25
RESULTS OF OPERATIONS
The following table presents our consolidated statements of operations in comparative format:
For the Years Ended December 31,
2019
2018
Change
% Change
(in thousands)
REVENUE
License fees ................................................................. $
Services .......................................................................
Total revenue ...............................................................
1,245 $
24,505
25,750
1,433 $
29,203
30,636
(188)
(4,698)
(4,886)
(13)%
(16)%
(16)%
COSTS OF REVENUE AND OPERATING
EXPENSES
Costs of revenue, excluding depreciation and
amortization.................................................................
Sales and marketing ....................................................
General and administrative ..........................................
Product development ...................................................
Depreciation ................................................................
Amortization ...............................................................
Goodwill impairment loss ...........................................
Total costs of revenue and operating expenses ............
8,685
7,459
5,091
4,594
190
938
6,687
33,644
10,349
6,592
6,677
4,170
121
970
17,760
46,639
(1,664)
867
(1,586)
424
69
(32)
(11,073)
(12,995)
(16)%
13%
(24)%
10%
57%
(3)%
(62)%
(28)%
Loss from operations ...................................................
(7,894)
(16,003)
8,109
(51)%
Other (expense) income
Interest income ............................................................
Interest expense ...........................................................
Other income ...............................................................
Foreign currency exchange (loss) income ...................
Other (expense) income, net ........................................
15
(314)
56
(455)
(698)
65
(478)
393
810
790
Loss from operations before income taxes ..................
Income tax expense (benefit) ......................................
$
Net loss ........................................................................
(8,592)
1,103
(9,695) $
(15,213)
(426)
(14,787) $
(50)
164
(337)
(1,265)
(1,488)
6,621
1,529
5,092
(77)%
(34)%
(86)%
(156)%
(188)%
(44)%
(359)%
(34)%
The following table presents our consolidated statements of operations reflected as a percentage of total
revenue:
REVENUE
For the Years Ended
December 31,
2019
2018
License fees .................................................................................................................
Services .......................................................................................................................
Total revenue ..............................................................................................................
5%
95%
100%
5%
95%
100%
COSTS OF REVENUE AND OPERATING EXPENSES
Costs of revenue, excluding depreciation and amortization ........................................
Sales and marketing ....................................................................................................
General and administrative ..........................................................................................
Product development ...................................................................................................
Depreciation ................................................................................................................
Amortization ...............................................................................................................
34%
29%
20%
18%
1%
4%
34%
22%
22%
14%
–
3%
26
For the Years Ended
December 31,
2019
2018
Goodwill impairment loss ...........................................................................................
Total costs of revenue and operating expenses ...........................................................
26%
132%
58%
153%
Loss from operations ..................................................................................................
(32)%
(53)%
Other (expense) income ..............................................................................................
Interest income ............................................................................................................
Interest expense ...........................................................................................................
Other income ...............................................................................................................
Foreign currency exchange (loss) income ...................................................................
Other (expense) income, net .......................................................................................
–
(1)%
–
(2)%
(3)%
–
(2)%
1%
3%
2%
Loss from operations before income taxes .................................................................
(35)%
(51)%
Income tax expense (benefit) ......................................................................................
4%
(1)%
Net Loss ......................................................................................................................
(39)%
(50)%
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 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 include annual support fees, recurring maintenance fees, minor product
upgrades and warranty fees. Warranty fees are typically deferred and recognized over the warranty period.
License Fees
License fees revenue decreased 13%, or $0.2 million to $1.2 million for the year ended December 31, 2019
compared to $1.4 million for the year ended December 31, 2018. This change is related to the decrease of one-time
licensing fees of $0.8 million as the Company continues to transition to a managed service model with more reliable
recurring revenue, offset by an increase in incremental licensing to an existing client of $0.6 million.
Services
Services revenue decreased 16%, or $4.7 million, to $24.5 million for the year ended December 31, 2019
from $29.2 million for the year ended December 31, 2018. The decrease is related to ending of project work, support
reductions and pricing pressures of $3.1 million. Also, the ending of client relationships of $2.2 million and
significant project work carried over from acquisitions in 2018 of $1.6 million. This was partially offset by revenues
from new customers of $1.2 million and new projects and upgrades of $1.0 million.
Costs of Revenue, excluding depreciation and amortization
Costs of revenue, excluding depreciation and amortization, consist primarily of personnel costs and other
direct costs associated with these personnel, facilities costs, costs of third-party software and partner commissions.
Costs of revenue includes product development expenses related to software features requested in advance of their
scheduled availability which are funded by customers as part of a managed service offering. Costs of revenue,
excluding depreciation and amortization decreased $1.7 million, or 16%, to $8.7 million for the year ended
December 31, 2019 from $10.4 million for the year ended December 31, 2018. The decrease in revenues has
allowed for experienced resources to work on product development and other internal projects. This has caused a
decrease in costs of $1.1 million. Reduction in third party consultants and software charges from the prior year were
$0.4 million and reduction in incentive compensation and recognition programs were $0.2 million. As a percentage
of revenue, cost of revenue, excluding depreciation and amortization was 34% for the year ended December 31,
2019 and 2018. This was primarily due to the aforementioned reduction of costs.
27
Sales and Marketing
Sales and marketing expenses primarily consist of compensation costs, including incentive compensation
and commissions, travel expenses, advertising, marketing and facilities expenses. Sales and marketing expenses
increased 13%, or $0.9 million, to $7.5 million for the year ended December 31, 2019 from $6.6 million for the year
ended December 31, 2018. The increase in expenses is attributable to $0.5 million in costs from additional staff and
increased travel expense of $0.1 million to facilitate meeting existing and potential new customers, along with an
increase in marketing spend of $0.3 million. As a percentage of total revenue, sales and marketing expenses for the
year ended December 31, 2019 increased to 29% from 22% for the year ended December 31, 2018. The increase in
sales and marketing expenses as a percentage of revenue is primarily due to the aforementioned higher costs as
proportioned to the lower revenues.
General and Administrative
General and administrative expenses consist principally of employee-related costs for the following
departments: finance, human resources, and certain executive management; facilities costs; and professional and
legal fees. General and administrative expenses decreased 24%, or $1.6 million, to $5.1 million for the year ended
December 31, 2019 from $6.7 million for the year ended December 31, 2018. The decrease was primarily
attributable to lower professional fees of $0.7 million due to a reduction of legal fees associated with closure of an
employee matter in the prior year, a reduction in employee and equity compensation of $0.4 million, reduction of
incentive compensation and directors fees from the prior year $0.2 million, and reduction in travel and entertainment
costs of $0.1 million. In addition, the Company collected $0.2 million of funds previously determined to be
uncollectable. As a percentage of total revenue, general and administrative expenses decreased to 20% for the year
ended December 31, 2019 from 22% for the year ended December 31, 2018. The decrease in general and
administrative expenses as a percentage of revenue is primarily due to the aforementioned lower costs.
Product Development
Product development expenses consist primarily of labor-related costs. Product development expenses
increased 10%, or $0.4 million, to $4.6 million for the year ended December 31, 2019 from $4.2 million for the year
ended December 31, 2018. The increase is primarily related to $1.0 million of additional work by the technical staff
in building and enhancing our product offerings. This was partially offset by reduction in staff of $0.5 million and
incentive compensation of $0.1 million. As a percentage of total revenue, product development expenses increased
to 18% for the year ended December 31, 2019 from 14% for the year ended December 31, 2018. The increase in
product development expenses as a percentage of revenue is primarily due to the aforementioned higher costs.
Depreciation
Depreciation expense consists of depreciation of long-lived property and equipment. Depreciation expense
increased 57%, or $0.1 million, to $0.2 million for the year ended December 31, 2019 from $0.1 million for the year
ended December 31, 2018. The increase of expense was due to expenditures made to acquire additional computer
hardware. As a percentage of revenue, depreciation expense increased to 1% for the year ended December 31, 2019
from less than 1% for the year ended December 31, 2018. The increase is related to the cost as proportioned to the
lower revenues.
Amortization
Amortization expense consists of amortization of identifiable intangibles related to our acquisitions of
Evolving Systems Labs, Evolving Systems NC, EVOL BLS, and the Lumata Entities. Amortization expense
decreased 3%, or less than $0.1 million, to $1.0 million for the year ended December 31, 2019 from $1.0 million for
the year ended December 31, 2018. As a percentage of revenue, amortization expense increased to 4% for the year
ended December 31, 2019 from 3% for the year ended December 31, 2018. The increase is related to the cost as
proportioned to the lower revenues.
28
Goodwill Impairment Loss
Goodwill impairment losses were recorded as a result of goodwill impairment analysis conducted since our
market capitalization declined to a level that was less than the net book value of our stockholders’ equity. The
Company recorded a $6.7 million write-off of all goodwill in the fiscal year ended December 31, 2019. This is a
decrease from the $17.8 million goodwill impairment loss recorded in fiscal year ended December 31, 2018.
Interest Expense
Interest expense includes the amortization of debt issuance costs and interest expense from our term loans.
Interest expense for the year ended December 31, 2019 decreased 34%, or $0.2 million, to $0.3 million as compared
to $0.5 million for the year ended December 31, 2018. The decrease was related to the reduction of the outstanding
balance of term loans which included the retirement of the older note. The decrease in interest expense as a
percentage of revenue is primarily due to the aforementioned lower costs.
Other (Expense) Income
For the year ended December 31, 2019, we had $0.1 million in other income, net, which consisted of
mostly of the net proceeds from settlement of insurance claim after legal fees regarding coverage on the dispute
settled with a former SSM contractor. This was a decrease of $0.3 million in other income from year ended
December 31, 2018 which consisted of: (1) when we acquired Telespree on October 24, 2013, we agreed to make a
final cash payment on October 24, 2014 of $0.5 million. This payment was subject to reduction for certain claims
and we notified the seller’s representative that we were asserting claims against the final cash payment and the
contractually agreed time period has lapsed. Accordingly, we eliminated the liability as of June 30, 2018 and
recognized $0.5 million gain in other income; (2) at the end of the second quarter we agreed to a Mutual Release and
Settlement Agreement and a Contribution Agreement (the “SSM Agreements”) with certain parties related to our
September 30, 2015 acquisition of SSM. The SSM Agreements settled a dispute with a former SSM contractor, of
which $0.1 million was on the Company’s behalf and recorded as other expense; (3) When we acquired EVOL BLS
on July 3, 2017, we agreed to make up to three annual cash payments equal to 50% of the EVOL BLS revenue in
excess of $4.8 million for the 12-month periods ending July 3, 2018, 2019 and 2020. The Company also agreed to
guarantee the EVOL BLS obligations under the Purchase Agreement. As of June 30, 2018, EVOL BLS has
exceeded their projected revenues and we estimated the total annual cash payments for the three 12-month periods to
be $0.8 million, which is a $0.4 million increase. We recognized $0.4 million in interest expense as a result of our
increased obligation, and (4) $0.4 million in other income from eliminating certain allowances, unearned revenue
and accrued liabilities that primarily came from the BLS and Lumata entities at the time of our acquisition. Foreign
currency exchange losses resulting from transactions denominated in a currency other than the functional currency
of the respective subsidiary increased 156%, or $1.3 million, to a $0.5 million loss for the year ended December 31,
2019 compared to a $0.8 million gain for the year ended December 31, 2018 that was generated primarily through
the re-measurement of certain non-functional currency denominated financial assets and liabilities of our foreign
subsidiaries.
Income Tax Expense
We recorded net income tax expense of $1.1 million for the year ended December 31, 2019 and net income
tax benefit of $0.4 million for the year ended December 31, 2018. The net expense for the year ended December 31,
2019 consisted of current tax expense of $0.8 million related to $0.3 million income tax expense incurred by our
Indian based operations and $1.3 million of foreign taxes paid for with holdings of local taxes that could not be used
as a tax credit due to the current year losses offset by Research and Development credits from our U.K. based
operations of $0.5 million. Also offset by the AMT refund of $0.4 million. Deferred tax expense of $0.4 million
related to US tax refund of AMT credits. The net benefit during the year ended December 31, 2018 consisted of
current income tax expense of $0.5 million and a deferred tax benefit of $0.9 million. The current tax expense
consists of income tax primarily from our U.S. and U.K. based operations. The deferred tax benefit primarily
consists of benefits from establishing deferred tax assets of $0.5 million for our foreign tax credit (“FTC”)
carryforwards, $0.2 million for net operating losses from certain U.K. subsidiaries that are expected to be used by
another U.K. subsidiary and $0.2 million decrease in net deferred tax liabilities.
29
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,
2019, and 2018, 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 decreased 53%, or $4.3 million to $3.8 million at December 31, 2019 from
$8.1 million at December 31, 2018. The decrease in working capital is related to the decrease in cash and unbilled
work in progress partially offset by reduction in the short term portion of term loan and accounts payable.
LIQUIDITY AND CAPITAL RESOURCES
We have historically financed operations through cash flows from operations as well as debt and equity
transactions. At December 31, 2019, our principal sources of liquidity were $3.1 million in cash and cash
equivalents and $6.7 million in contract receivables, net of allowances. Our anticipated uses of cash in the future
will be to fund the expansion of our business through both organic growth as well as possible acquisition activities,
the expansion of our customer base internationally, and term loan payments. Other uses of cash may include capital
expenditures and technology expansion.
During 2017, in connection with the acquisition of the Lumata Entities , EVOL Holdings entered into a
Term Loan Facility Agreement, a Debenture and a Subordination Deed with East West Bank as lender in the amount
of $4.7 million (the “Lumata Facility”). We used the full amount of the Lumata Facility to fund the acquisition. The
Lumata Facility requires the Company to make monthly principal payments of approximately $131,400 that
commenced on July 31, 2018 and interest at the greater of (a) 3.5% or (b) the variable rate of interest that appears in
the Wall Street Journal on a monthly measurement date, plus in either case 1.5%. The Lumata Facility is secured by
substantially all of the assets of the Company.
On September 24, 2019 the Company agreed in principle to the terms of a new amendment and on
October 4, 2019, we entered into the First Amendment (“First Amendment”) to the Lumata Facility. The purpose of
the First Amendment was to waive certain events of non-compliance with respect to covenants not achieved in prior
periods and to amend future covenant requirements. The First Amendment also required Evolving Systems to make
an advance payment of principal of $666,666.66. The remaining terms and conditions of the Lumata Facility and
payment schedule remain unchanged. The Company also agreed to pay East West Bank’s legal fees in connection
with the transaction. The unpaid balance of the Lumata Facility is scheduled to be paid off on January 31, 2021.
On February 29, 2016, we retired our previous revolving credit facility and we entered into a term loan
agreement with East West Bank (“Term Loan”) for $6.0 million. The Term Loan bore interest at a floating rate
equal to the U.S. Prime Rate plus 1.0% and 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. Interest accrued and was payable monthly. We were required to repay the
Term Loan in 36 equal monthly installments, commencing on January 1, 2017. 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 was scheduled to mature on January 1, 2020.
On September 24, 2019, the Company agreed in principle to the terms of a new amendment and on October
4, 2019, we entered into the Sixth Amendment to the Loan and Security Agreement (“Sixth Amendment”) with East
West Bank to the Term Loan. The purpose of the Sixth Amendment was to waive certain events of non-compliance
with respect to covenants not achieved in prior periods and to amend future covenant requirements. The Sixth
Amendment also required Evolving Systems to make an advance payment of principal of $333,333.33. In addition,
the Sixth Amendment added any default under the Lumata Facility discussed above as an Event of Default under the
Term Loan. The remaining terms and conditions of the Term Loan and payment schedule remained unchanged. The
Company also agreed to pay East West Bank’s legal fees in connection with the transaction. The last payment of
principal and interest was made November 1, 2019.
30
Both the Lumata Facility and the Term Loan (collectively, “Loans”) include 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; make cash distributions to our stockholders in excess of specified
limits; and change the nature of our business materially. Financial covenants previously included in the credit
facilities have been replaced by a minimum consolidated cash balance of no less than the total bank debt outstanding
and a monthly minimum trailing three month consolidated EBITDA fixed dollar amount mutually agreed to by the
Company and East West bank in the amendments.
Evolving Systems provides software solutions and services throughout the world. The recent COVID-19
global outbreak has caused instability and volatility in multiple markets where our clients conduct business. At this
time, we have seen only limited disruptions to our ability to continue delivery to our clients. However, the financial
covenants under our debt facilities (see Note 4) are related to cash balances and trailing three month operational
results which may be adversely affected by project delays related to customer interactions being postponed.
Evolving Systems continually evaluates compliance with the new covenants as of December 31, 2019 and forward,
and reports to the East West Bank on a monthly basis.
Net cash provided by operating activities for the year ended December 31, 2019 and 2018 was $1.1 million
and $2.6 million, respectively. Cash provided by operating activities for the year ended December 31, 2019 was
primarily due to a net loss of $9.7 million offset by non-cash goodwill impairment loss of $6.7 million, amortization
and depreciation expense of $1.1 million, an unrealized foreign currency gain of $0.5 million ,$0.4 million related to
the Amortization of operating leases -- right of use assets and stock compensation of $0.3 million along with the
decrease in unbilled revenue of $1.8 million, a decrease in accounts receivable of $0.9 million and offset by an
increase in prepaid and other current assets of $0.2 million and a decrease in accounts payable and accrued liabilities
of $0.7 million.
The cash provided by operating activities for the year ended December 31, 2018 was a net loss of $14.8
million offset by a non-cash goodwill impairment loss of $17.8 million, and net decrease in operating assets and
liabilities of $0.4 million.
Net cash used in investing activities was $0.4 million and $0.2 million for the years ended December 31,
2019 and 2018, respectively. Cash used in investing activities for the years ended December 31, 2019 and 2018, was
due to the purchase of property and equipment, respectively.
Net cash used in by financing activities was $4.2 million and $3.2 million for the years ended December
31, 2019 and 2018, respectively. The cash used in 2019 financing activities was for principal payments on our
Loans. The cash used in 2018 financing activities was for principal payments on our Loans and payment of
contingent earn-out.
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 as of the date this Form 10-K is filed. In making this assessment, we considered the
following:
Our cash and cash equivalents balance at December 31, 2019 of $3.1 million;
Our working capital balance of $3.8 million; and
Our ability to historically generate positive operating cash flows.
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, 2019 and 2018, the effect of exchange rate changes resulted in a $0.1 million decrease and a
less than $0.1 million decrease 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.
31
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.
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.
Use of Estimates
The preparation of consolidated financial statements in conformity with US GAAP requires us to make
estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities, at the date of the consolidated financial statements, as well as the reported amounts of revenue
and expenses during the reporting period. We made estimates with respect to revenue recognition for progress
toward completion and direct profit or loss on contracts, allowance for doubtful accounts, income tax valuation
allowance, fair values of long-lived assets, valuation of intangible assets and goodwill, useful lives for property,
equipment and intangible assets, business combinations, capitalization of internal software development costs and
fair value of stock-based compensation amounts. Actual results could differ from these estimates.
Foreign Currency
Our functional currency is the U.S. dollar. The functional currency of our foreign operations, generally, is
the respective local currency for each foreign subsidiary. Assets and liabilities of foreign operations denominated in
local currencies are translated at the spot rate in effect at the applicable reporting date. Our 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 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 an other than temporary decline in our market capitalization that is calculated as
our common stock’s market price multiplied by the number of shares of common stock outstanding, a significant
change in the business climate, legal factors, operating performance indicators, competition, sale or disposition of a
significant portion of the business or other factors. Application of the goodwill impairment test requires judgment,
including the identification of reporting units, assignment of assets and liabilities to reporting units, assignment of
goodwill to the reporting unit, and determination of the fair value of the reporting unit. In 2018, the Company
adopted ASU 2017-04, Intangibles – Goodwill and Other (Topic 350), Simplifying the Test for Goodwill
Impairment, which simplifies the subsequent measurement of goodwill by eliminating the second step from the
quantitative goodwill impairment test. Under this guidance, annual or interim goodwill impairment testing will be
performed by comparing the fair value of a reporting unit with its carrying amount. An impairment charge will then
be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value, not to exceed the
carrying value of goodwill.
32
Intangible Assets
Amortizable intangible assets consist primarily of purchased software and licenses, customer relationships,
trademarks and tradenames, non-competition and purchased software acquired in conjunction with our purchase of
Telespree Communications (“Evolving Systems Labs”), Evolving Systems NC, Inc., EVOL BLS and the Lumata
Entities. These assets are amortized using the straight-line method over their estimated lives. We assess the
impairment of identifiable intangibles if events or changes in circumstances indicate that the carrying value of the
asset may not be recoverable.
If we determine that the carrying value of intangibles and/or long-lived assets may not be recoverable, we
compare the estimated undiscounted cash flows expected to result from the use of the asset group and its eventual
disposition to the asset group’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 group’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.
Revenue Recognition
The majority of our license fees and services revenue is generated from fixed-price contracts and provides
for licenses to our software products and services that customize such software to meet our customers’ needs. In
most instances, customization services are determined to be essential to the functionality of the delivered software.
Under Financial Accounting Standards Board (“FASB”) Topic 606, Revenue from Contacts with Customers (“ASC
606”), revenue is recognized when our customer obtains control of promised goods or services in an amount that
reflects the consideration we expect to receive in exchange for those goods or services. We measure revenue based
on consideration specified in a contract with a customer including any sales incentives. Furthermore, we recognize
revenue when we satisfy a performance obligation by transferring control over the service to our customer.
A performance obligation is a promise in a contract to transfer a distinct service to the customer. The
transaction price of a contract is allocated to each distinct performance obligation and recognized as revenue when
or as the customer receives the benefit of the performance obligation. Losses on fixed-price projects are recorded
when identified. Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific
revenue-producing transaction, that are collected by us from a customer, are excluded from revenue.
Nature of goods and services
The following is a description of our products and services from which we generate revenue, as well as the
nature, timing of satisfaction of performance obligations, and significant payment terms for each:
33
i. License Revenue
License fees represent the fees we receive from the licensing of our software products. In most instances,
customization services are determined to be essential to the functionality of the delivered software. The license
along with the customization services are transferred to our customers over time generally as a single performance
obligation. In arrangements where the services are not essential to the functionality of the delivered software, we
recognize license revenue when the license agreement has been approved and the software has been delivered. We
can identify each party’s rights, payment terms, and commercial substance of the content. Where applicable, we
identify multiple performance obligations and record as revenue as the performance obligations are fulfilled based
on their estimated allocated standalone selling price. The selection of the method to measure progress towards
completion requires judgment and is based on the extent of progress towards completion of the performance
obligation. We recognize revenue using the input method of accounting based on labor hours.
ii. Customer Support Revenue
Customer support services includes annual support fees, recurring maintenance fees, and minor product
upgrades generally as a single performance obligation. The Company also offers a warranty support fee which
represents a separate performance obligation that is provided for up to a year with initial license purchase. The
Company allocates the contract transaction price related to warranty support fees based on pricing consistent with
what we would offer to other market participants. Upon the conclusion of the warranty period, the customer can
choose to continue to receive support and maintenance services via our customer support offerings. We recognize
revenue from our support ratably over the service contract period.
iii. Services Revenue
We recognize revenue from fixed-price service contracts using the input method of accounting based on
labor hours. These contracts generally include a single performance obligation. Under the input method, revenue is
recognized revenue on the basis of an entity’s efforts or inputs toward satisfying a performance obligation. We
recognize revenue from professional services provided pursuant to time-and-materials based contracts and training
services as the services are performed, as that is when our performance obligation to our customers under such
arrangements is fulfilled.
iv. Managed Services
We recognize revenue from our managed services contracts primarily over the service contract period
generally as a single performance obligation. On occasion, our managed services contracts will contain a specified
number of hours to work over the term of the contract. Revenue for this type of managed service contract is
recognized using the input method of accounting, as previously described.
Contract balances
Contract receivables are recorded at the invoiced amount and do not bear interest. Credit is extended based
on the evaluation of a customer’s financial condition and collateral is not required. Unbilled work-in-progress is
revenue which has been earned but not invoiced. The contract assets are transferred to the receivables when
invoiced.
The contract liabilities primarily relate to unearned revenue. Amounts billed in advance of performance
obligations being satisfied are booked as unearned revenue.
Transaction price allocated to the remaining performance obligations
Remaining performance obligations represent the transaction price of firm orders for which work has not
been performed as of the period end date and excludes unexercised contract options and potential orders under
ordering-type contracts (e.g., indefinite-delivery, indefinite-quantity). As of December 31, 2019, the aggregate
amount of the transaction price allocated to remaining performance obligations with lives greater than one-year
34
totals $9.1 million. The Company expects approximately 47% of remaining performance obligations to be
recognized into revenue within the next twelve months, with the remaining 53% recognized thereafter.
We apply the practical expedient in paragraph ASC 606-10-50-14 and do not disclose information about
remaining performance obligations that have original expected durations of one-year or less. We apply the transition
practical expedient in paragraph ASC 606-10-65-1(f)(3) and do not disclose the amount of the transaction price
allocated to the remaining performance obligations and an explanation of when we expect to recognize that amount
as revenue. Additionally, applying the practical expedient in paragraph ASC 340-40-25-4, the Company recognizes
the incremental costs of obtaining contracts (i.e., commissions) as an expense when incurred if the amortization
period of the assets that the Company otherwise would have recognized is one-year or less.
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.
Leases
A lease is defined as a contract, or part of a contract, that conveys the right to control the use of identified
property, plant or equipment for a period of time in exchange for consideration. On January 1, 2019, the Company
adopted ASU No. 2016-02, “Leases (Topic 842)” and all subsequent ASUs that modified Leases (Topic 842). For
the Company, Leases (Topic 842) primarily affected the accounting treatment for operating lease agreements in
which the Company is the lessee.
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, non-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. We recognize forfeitures as they occur rather than
estimating them at the time of the grant.
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 losses and tax credit carry-forwards. We measure deferred tax assets and liabilities using
enacted tax rates expected to be applied to taxable income in the years in which those temporary differences are
expected to be recovered or settled. We reduce deferred tax assets by a valuation allowance if, based on available
evidence, it is more likely than not that these benefits will not be realized.
We use a recognition threshold and a measurement attribute for 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
35
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders of Evolving Systems, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Evolving Systems, Inc. (the “Company”) as of
December 31, 2019, and the related consolidated statements of operations, comprehensive loss, changes in
stockholders’ equity and cash flows for the year ended December 31, 2019, and the related notes (collectively
referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material
respects, the financial position of the Company as of December 31, 2019, and the results of its operations and its
cash flows for the year ended December 31, 2019, in conformity with accounting principles generally accepted in
the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an
opinion on the Company's financial statements based on our audit. We are a public accounting firm registered with
the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent
with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform,
an audit of its internal control over financial reporting. As part of our audit we are required to obtain an
understanding of internal control over financial reporting 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.
Our audit included performing procedures to assess the risks of material misstatement of the financial statements,
whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included
examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit
also included evaluating the accounting principles used and significant estimates made by management, as well as
evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis
for our opinion.
/s/ Marcum LLP
Marcum LLP
We have served as the Company’s auditor since 2019.
Philadelphia, Pennsylvania
March 30, 2020
36
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders of Evolving Systems, Inc.
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheet of Evolving Systems, Inc. (a Delaware corporation,
the “Company”) as of December 31, 2018, and the related consolidated statements of operations, comprehensive
loss, stockholders’ equity and cash flows for the year ended December 31, 2018, and the related notes (collectively
referred to as the financial statements). In our opinion, the financial statements present fairly, in all material respects,
the financial position of the Company as of December 31, 2018, and the results of its operations and its cash flows
for the year ended December 31, 2018, in conformity with accounting principles generally accepted in the United
States of America.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an
opinion on the Company’s financial statements based on our audit. We are a public accounting firm registered with
the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with
respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations
of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform,
an audit of its internal control over financial reporting. As part of our audit, we are required to obtain an
understanding of internal control over financial reporting, 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.
Our audit included performing procedures to assess the risks of material misstatement of the financial statements,
whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included
examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit
also included evaluating the accounting principles used and significant estimates made by management, as well as
evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis
for our opinion.
/s/ Friedman LLP
We have served as the Company’s auditor since 2012
East Hanover, NJ
April 4, 2019
37
EVOLVING SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
December
31,
2019
December
31,
2018
Current assets:
ASSETS
Cash and cash equivalents ........................................................................................... $
Contract receivables, net of allowance for doubtful accounts of $710 and $771 at
December 31, 2019 and 2018, respectively ................................................................
Unbilled work-in-progress, net of allowance for doubtful accounts of $0 and $552
at December 31, 2019 and 2018, respectively.............................................................
Prepaid and other current assets ..................................................................................
Income taxes receivable ..............................................................................................
Total current assets ..................................................................................................
Property and equipment, net ...........................................................................................
Amortizable intangible assets, net ..................................................................................
Operating leases - right of use assets, net .......................................................................
Goodwill .........................................................................................................................
Deferred income taxes ....................................................................................................
Total assets .............................................................................................................. $
1,105
1,594
953
13,460
482
3,665
1,205
–
1,000
19,812 $
3,076 $
6,732
6,732
7,757
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Term loans - current portion ....................................................................................... $
Accounts payable and accrued liabilities ....................................................................
Lease obligations — operating leases .........................................................................
Unearned revenue .......................................................................................................
Total current liabilities ............................................................................................
1,577 $
3,827
321
3,971
9,696
Long-term liabilities:
Term loans, net of current portion ...............................................................................
Lease obligations - operating leases, net of current portion ........................................
Total liabilities .........................................................................................................
122
876
10,694
Commitments and contingencies (Note 10) ....................................................................
–
Stockholders' equity:
Preferred stock, $0.001 par value; 2,000,000 shares authorized; no shares issued and
outstanding as of December 31, 2019 and 2018, respectively ........................................
Common stock, $0.001 par value; 40,000,000 shares authorized;
12,342,723 shares issued and 12,163,834 outstanding as of December 31, 2019 and
12,305,597 shares issued and 12,126,708 outstanding as of December 31, 2018 ..........
Additional paid-in capital ............................................................................................
Treasury stock, 178,889 shares as of December 31, 2019 and 2018, at cost ..............
Accumulated other comprehensive loss ......................................................................
Accumulated deficit ....................................................................................................
Total stockholders' equity ........................................................................................
Total liabilities and stockholders' equity ................................................................. $
–
12
99,555
(1,253)
(10,053)
(79,143)
9,118
19,812 $
12
99,224
(1,253)
(10,115)
(69,448)
18,420
32,752
3,044
1,351
1,137
20,021
303
4,550
–
6,738
1,140
32,752
3,573
4,483
–
3,911
11,967
2,365
–
14,332
–
–
The accompanying notes are an integral part of these consolidated financial statements.
38
EVOLVING SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
For the Years Ended
December 31,
2019
2018
REVENUE
License fees ................................................................................................................. $
Services .......................................................................................................................
Total revenue ...............................................................................................................
1,245 $
24,505
25,750
1,433
29,203
30,636
COSTS OF REVENUE AND OPERATING EXPENSES
Costs of revenue, excluding depreciation and amortization ........................................
Sales and marketing ....................................................................................................
General and administrative ..........................................................................................
Product development ...................................................................................................
Depreciation ................................................................................................................
Amortization ...............................................................................................................
Goodwill impairment loss ...........................................................................................
Total costs of revenue and operating expenses ............................................................
8,685
7,459
5,091
4,594
190
938
6,687
33,644
10,349
6,592
6,677
4,170
121
970
17,760
46,639
Loss from operations ...................................................................................................
(7,894)
(16,003)
Other (expense) income
Interest income ............................................................................................................
Interest expense ...........................................................................................................
Other income ...............................................................................................................
Foreign currency exchange (loss) income ...................................................................
Other (expense) income, net ........................................................................................
15
(314)
56
(455)
(698)
65
(478)
393
810
790
Loss from operations before income taxes ..................................................................
Income tax expense (benefit) .......................................................................................
Net Loss .......................................................................................................................
$
(8,592)
1,103
(9,695) $
(15,213)
(426)
(14,787)
Basic loss per common share - net loss .......................................................................
$
(0.80) $
(1.22)
Diluted loss per common share - net loss ....................................................................
$
(0.80) $
(1.22)
Weighted average basic shares outstanding .................................................................
Weighted average diluted shares outstanding ..............................................................
12,157
12,157
12,108
12,108
The accompanying notes are an integral part of these consolidated financial statements.
39
EVOLVING SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands)
For the Years Ended
December 31,
Net loss ........................................................................................................................
$
(9,695) $
2019
2018
(14,787)
Other comprehensive (loss) income
Foreign currency translation loss ................................................................................
62
(1,913)
Comprehensive loss .....................................................................................................
$
(9,633) $
(16,700)
The accompanying notes are an integral part of these consolidated financial statements.
40
EVOLVING SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(in thousands)
Common Stock
Additional
paid-in Treasury comprehensive Accumulated stockholders'
Total
Accumulated
other
Amount capital stock
Balance at January 1, 2018 ...................
Stock option exercises ............................
Common stock issued pursuant the
Employee Stock Purchase Plan ..............
Restricted stock vested ...........................
Share-based compensation expense .......
Net loss ...................................................
Foreign currency translation loss............
Balance at December 31, 2018 .............
Restricted stock vested ...........................
Share-based compensation expense .......
Net loss ...................................................
Foreign currency translation income ......
Balance at December 31, 2019 .............
Shares
11,941,072 $
9,676
85
175,875
-
-
-
12,126,708 $
37,126
-
-
-
12,163,834 $
12 $
-
98,517 $
4
(1,253 ) $
-
-
-
-
-
-
12 $
-
-
-
-
12 $
1
-
702
-
-
99,224 $
-
331
-
-
99,555 $
-
-
-
-
-
(1,253 ) $
-
-
-
-
(1,253 ) $
loss
deficit
equity
(8,202) $
-
(54,661) $
-
34,413
4
-
-
-
-
(1,913)
(10,115) $
-
-
-
62
(10,053) $
-
-
-
(14,787)
-
(69,448) $
-
-
(9,695)
-
(79,143) $
1
-
702
(14,787)
(1,913)
18,420
-
331
(9,695)
62
9,118
The accompanying notes are an integral part of these consolidated financial statements.
41
EVOLVING SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the Years Ended
December 31,
2019
2018
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ............................................................................................................................... $
(9,695 ) $
(14,787)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation ......................................................................................................................
Amortization of intangible assets ......................................................................................
Amortization of debt issuance costs ..................................................................................
Amortization of operating leases — right of use assets .....................................................
Share-based compensation expense ..................................................................................
Payment of contingent purchase consideration .................................................................
Foreign currency transaction loss (income), net ................................................................
Bad debt expense, net of recoveries ..................................................................................
Release of Telespree liability ............................................................................................
Change in fair value of contingent earn-out ......................................................................
Provision for deferred income taxes ..................................................................................
Goodwill impairment loss .................................................................................................
Change in operating assets and liabilities:
Contract receivables ........................................................................................................
Unbilled work-in-progress ..............................................................................................
Prepaid and other assets ..................................................................................................
Accounts payable and accrued liabilities ........................................................................
Income taxes receivable ..................................................................................................
Unearned revenue ...........................................................................................................
Lease obligations — operating leases .............................................................................
Net cash provided by operating activities ..........................................................................
190
938
6
414
331
—
455
100
—
—
330
6,687
858
1,839
(231 )
(700 )
12
(49 )
(406 )
1,079
121
970
9
—
702
(445)
(810)
431
(496)
413
(946)
17,760
2,473
1,803
(25)
(1,326)
(2,036)
(1,244)
—
2,567
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment .................................................................................
Net cash used in investing activities ..................................................................................
(383 )
(383 )
(185)
(185)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on notes payable ..................................................................................
Payment of contingent earn-out ..........................................................................................
Proceeds from the issuance of stock ...................................................................................
Net cash used in financing activities ..................................................................................
Effect of exchange rate changes on cash and cash equivalents ..........................................
Net decrease in cash and cash equivalents .........................................................................
Cash and cash equivalents at beginning of period ..............................................................
Cash and cash equivalents at end of period ........................................................................
$
Supplemental disclosure of cash and non-cash transactions:
Income taxes paid, net of refunds .......................................................................................
Interest paid ........................................................................................................................ $
$
Measurement period adjustment to goodwill and intangible assets ....................................
Supplemental non-cash amounts of lease liabilities arising from obtaining right of use
assets ..................................................................................................................................
$
(4,243 )
—
—
(4,243 )
(109 )
(3,656 )
6,732
3,076 $
327 $
995 $
— $
1,609 $
(2,788)
(380)
5
(3,163)
(49)
(830)
7,562
6,732
499
887
281
—
The accompanying notes are an integral part of these consolidated financial statements.
42
EVOLVING SYSTEMS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 — ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization — Evolving Systems, Inc. (the “Company”) is a provider of real-time digital engagement
solutions and services of software solutions and services to the wireless carrier and consumer financial services
markets. We maintain long-standing relationships with many of the largest wireless companies worldwide. The
Company’s portfolio includes market-leading solutions and services for real-time analytics, customer acquisition
and activation, customer value management and loyalty for the telecom industry promoting partnerships into retail
and financial services.
In 2016, we began a shift from selling technology to offering business solutions. The value proposition has
moved from cost savings to revenue increases for the carrier and our business model has moved from classic capital
expenditure license and services to operating expenditure models based on recurring managed services with
performance fees. Our software solution platforms enable carriers’ marketing departments to innovate, execute and
manage highly-personalized and contextually-relevant, interactive campaigns that engage consumers in real-time,
and enhance customer retention through deploying loyalty programs. Our service activation solution, Tertio®
(“TSA”) is used to activate bundles of voice, video and data services for wireless, wireline and cable network
operators; our SIM card activation solution, Dynamic SIM Allocation TM (“DSA”) is used to dynamically allocate
and assign resources to Mobile Network Operators (“MNOs”) devices that rely on SIM cards; our Mobile Data
Enablement TM (“MDE”) solution provides a data consumption and policy management solution for wireless carriers
and Mobile Virtual Network Operators (“MVNOs”) that monitor the usage and consumption of data services; our
Total Number Management™ (“TNM”) product is a scalable and fully automated database solution that enables
operators to reliably and efficiently manage their telephone numbers as well as other communication identifiers (i.e.
SIMs, MSISDNs, IMSIs, ICCIDs, IPs). Our solutions can be deployed on-premise or as a Software-as-a-Service
(“SaaS”).
In July 2017 we completed the acquisition of Business Logic Systems (“BLS”). BLS, headquartered in
Newbury, United Kingdom, specializes in data-driven customer value management and customer engagement
solutions that have been implemented in over 20 mobile operators in Europe, Africa, Asia-Pacific and the
Caribbean. BLS solutions turn customer data into actionable insights and personalized contextual offers. Customer
engagement occurs through in-bound and out-bound offers and is further extended through a suite of loyalty and
retention solutions.
In September 2017 we completed the acquisition of four business operating units of Lumata Holdings Ltd.
(“the Lumata Entities”). The Lumata Entities are a leading global provider of real-time, next generation loyalty and
customer lifecycle management software and services that helps businesses gain value from their customer data for
relevant and contextual insights and actions of value to both customers and enterprises. Its customers include mobile
operators including Orange, Telefonica and other Tier-1 and emerging operators in Europe and around the world.
These acquisitions of BLS and the Lumata Entities have further reinforced our commitment to the customer
acquisition and customer value management (“CVM”) domains that began with the acquisition of Sixth Sense
Media (“Evolving Systems NC, Inc.”). We now have a customer base of more than 100 customers spanning 65
countries across the world. In 2019, we released Evolution, the new platform that supersedes and provides an
upgrade path to the former loyalty and CVM platforms from both Evolving and its acquired companies — BLS,
Lumata and SSM. Evolution was built by combining, integrating, and improving upon the best components and
features of those previous platforms. We believe that Evolution provides a unique capability, and we expect to
continue our focus on selling and promoting this significant new product. Our experienced team and the new
technology provide actionable insights and relevant offers based on customer data. The next generation of CVM is
moving beyond traditional CRM and points-based loyalty systems to highly personalized and contextual, real-time,
omni-channel consumer engagement in multiple verticals.
43
Evolving Systems provides software solutions and services throughout the world. The recent COVID-19
global outbreak has caused instability and volatility in multiple markets where our clients conduct business. At this
time, we have seen only limited disruptions to our ability to continue delivery to our clients. However, the financial
covenants under our debt facilities (see Note 4) are related to cash balances and trailing three month operational
results which may be adversely affected by project delays related to customer interactions being postponed or our
customer’s ability to make timely payments. Failure to meet our covenants would provide East West Bank the right
to demand that we repay the loans sooner than scheduled upon the occurrence and continuance of certain events of
default, including the breach of covenants beyond applicable grace periods. There can be no assurance that we will
successfully renegotiate the loans’ terms in the event we did not meet the financial covenants, however we believe
our current liquidity and funds from our ongoing operations will be sufficient to fund operations and meet the
Company’s cash needs for future term loan payments, working capital and capital expenditure requirements for at
least the next twelve months from the date of issuance of these consolidated financial statements. In making this
assessment, we considered our $3.1 million in cash and cash equivalents and our $3.8 million in working capital at
December 31, 2019, along with our ability to generate positive cash flows from operations for the years ended
December 31, 2019 and 2018. Evolving Systems continually evaluates compliance with the new covenants as of
December 31, 2019 and forward, and reports to the East West Bank on a monthly basis.
Use of Estimates — The preparation of consolidated financial statements in conformity with Accounting
principles generally accepted in the United States of America (US GAAP), requires us to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and
liabilities, at the date of the consolidated financial statements, as well as the reported amounts of revenue and
expenses during the reporting period. We made estimates with respect to revenue recognition for progress toward
completion and direct profit or loss on contracts, allowance for doubtful accounts, income tax valuation allowance,
fair values of long-lived assets, valuation of intangible assets and goodwill, useful lives for property, equipment and
intangible assets, business combinations, capitalization of internal software development costs and fair value of
stock-based compensation amounts. Actual results could differ from these estimates.
Foreign Currency — Our functional currency is the U.S. dollar. The functional currency of our foreign
operations, generally, is the respective local currency for each foreign subsidiary. Assets and liabilities of foreign
operations denominated in local currencies are translated at the spot rate in effect at the applicable reporting date.
Our 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 loss in stockholders’ equity. Realized and unrealized transaction gains and losses
generated by transactions denominated in a currency different from the functional currency of the applicable entity
are recorded in other income (loss) in the period in which they occur.
Principles of Consolidation — The consolidated financial statements include the accounts of Evolving
Systems, Inc. and subsidiaries, all of which are wholly owned. All significant intercompany transactions and
balances have been eliminated in consolidation.
Goodwill — Goodwill is the excess of acquisition cost of an acquired entity over the fair value of the
identifiable net assets acquired. Goodwill is not amortized but tested for impairment annually or whenever indicators
of impairment exist. These indicators may include an other than temporary decline in our market capitalization that
is calculated as our common stock’s market price multiplied by the number of shares of common stock outstanding,
a significant change in the business climate, legal factors, operating performance indicators, competition, sale or
disposition of a significant portion of the business or other factors. Application of the goodwill impairment test
requires judgment, including the identification of reporting units, assignment of assets and liabilities to reporting
units, assignment of goodwill to the reporting unit, and determination of the fair value of the reporting unit. In 2018,
the Company adopted ASU 2017-04, Intangibles – Goodwill and Other (Topic 350), Simplifying the Test for
Goodwill Impairment, which simplifies the subsequent measurement of goodwill by eliminating the second step
from the quantitative goodwill impairment test. Under this guidance, annual or interim goodwill impairment testing
will be performed by comparing the fair value of a reporting unit with its carrying amount. An impairment charge
will then be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value, not to
exceed the carrying value of goodwill.
44
Due to a sustained decline in the market capitalization of our common stock during the second quarter of
2019 and in fourth quarter of 2018, we performed an interim goodwill impairment test in each quarter. Management
considered that, along with other possible factors affecting the assessment of the Company’s reporting unit for the
purposes of performing a goodwill impairment assessment, including management assumptions about expected
future revenue forecasts and discount rates, changes in the overall economy, trends in the stock price, estimated
control premium, other operating conditions, and the effect of changes in estimates and assumptions could
materially affect the determination of fair value and goodwill. As a result of the significant decline in the current
market capitalization despite any of the other positive factors contemplated and relatively little change in our
ongoing business operations, the outcome of this goodwill impairment test resulted in a charge for the impairment of
goodwill, see Note 2.
Intangible Assets — Amortizable intangible assets consist primarily of purchased software and licenses,
customer relationships, trademarks and tradenames, non-competition and purchased software acquired in
conjunction with our purchase of Telespree Communications (“Evolving Systems Labs”), Evolving Systems NC,
Inc., EVOL BLS and the Lumata Entities. These assets are amortized using the straight-line method over their
estimated lives.
We assess the impairment of identifiable intangibles if events or changes in circumstances indicate that the
carrying value of the asset may not be recoverable.
If we determine that the carrying value of intangibles and/or long-lived assets may not be recoverable, we
compare the estimated undiscounted cash flows expected to result from the use of the asset and its eventual
disposition to the asset’s carrying amount. If an amortizable intangible or long-lived asset is not deemed to be
recoverable, we recognize an impairment loss representing the excess of the asset’s carrying value over its estimated
fair value.
Fair Value Measurements — Fair value is the price that would be received from selling an asset or paid to
transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is
estimated by applying the following hierarchy, which prioritizes the inputs used to measure fair value into three
levels and bases the categorization within the hierarchy upon the lowest level of input that is available and
significant to the fair value measurement:
Level 1 — Quoted prices in active markets for identical assets or liabilities.
Level 2 — Observable inputs other than quoted prices in active markets for identical assets and liabilities,
quoted prices for identical or similar assets or liabilities in inactive markets, or other inputs that are
observable or can be corroborated by observable market data for substantially the full term of the assets or
liabilities.
Level 3 — Inputs that are generally unobservable and typically reflect management’s estimate of
assumptions that market participants would use in pricing the asset or liability.
Cash and Cash Equivalents — All highly liquid investments with maturities of three months or less at the
date of purchase are classified as cash equivalents.
Revenue Recognition — The majority of our license fees and services revenue is generated from fixed-
price contracts, this provides for licenses to our software products and services that customize such software to meet
our customers’ needs. In most instances, customization services are determined to be essential to the functionality of
the delivered software. Under Financial Accounting Standards Board (“FASB”) Topic 606, Revenue from Contacts
with Customers (“ASC 606”), revenue is recognized when our customer obtains control of promised goods or
services in an amount that reflects the consideration we expect to receive in exchange for those goods or services.
We measure revenue based on consideration specified in a contract with a customer and exclude any sales
incentives. Furthermore, we recognize revenue when we satisfy a performance obligation by transferring control
over the service to our customer.
45
A performance obligation is a promise in a contract to transfer a distinct service to the customer. The
transaction price of a contract is allocated to each distinct performance obligation and recognized as revenue when
or as the customer receives the benefit of the performance obligation. Losses on fixed-price projects are recorded
when identified. Taxes assessed by a governmental authority that are both imposed on and concurrent with a specific
revenue-producing transaction, that are collected by us from a customer, are excluded from revenue.
Nature of goods and services
The following is a description of our products and services from which we generate revenue, as well as the
nature, timing of satisfaction of performance obligations, and significant payment terms for each:
i. License Revenue
License fees represent the fees we receive from the licensing of our software products. In most instances,
customization services are determined to be essential to the functionality of the delivered software. The license
along with the customization services are transferred to our customers over time. In arrangements where the services
are not essential to the functionality of the delivered software, we recognize license revenue when the license
agreement has been approved and the software has been delivered. We can identify each party’s rights, payment
terms, and commercial substance of the content. Where applicable, we identify multiple performance obligations
and record as revenue as the performance obligations are fulfilled based on their estimated allocated standalone
selling price. The selection of the method to measure progress towards completion requires judgment and is based
on the extent of progress towards completion of the performance obligation. We recognize revenue using the input
method of accounting based on labor hours.
ii. Customer Support Revenue
Customer support services includes annual support fees, recurring maintenance fees, and minor product
upgrades generally as a single performance obligation. The warranty support fees represent a separate performance
obligation that is provided for up to a year with initial license purchase. The Company allocates the contract
transaction price related to warranty support fees based on pricing consistent with what we would offer to other
market participants. Upon the conclusion of the warranty period, the customer can choose to continue to receive
support and maintenance services via our customer support offerings. We recognize revenue from our support
ratably over the service contract period.
iii. Services Revenue
We recognize revenue from fixed-price service contracts using the input method of accounting based on
labor hours. These contracts generally include a single performance obligation. Under the input method, revenue is
recognized on the basis of an entity’s efforts or inputs toward satisfying a performance obligation. We recognize
revenue from professional services provided pursuant to time-and-materials based contracts and training services as
the services are performed, as that is when our performance obligation to our customers under such arrangements is
fulfilled.
iv. Managed Services
We recognize revenue from our managed services contracts primarily over the service contract period
generally as a single performance obligation. On occasion, our managed services contracts will contain a specified
number of hours to work over the term of the contract. Revenue for this type of managed service contract is
recognized using the input method of accounting, as previously described.
Disaggregation of revenue
In the following table, revenue is disaggregated by primary geographical market, major products/service
lines, and timing of revenue recognition (in thousands):
Primary geographical markets
United Kingdom ..........................................................................................................
Other ............................................................................................................................
For the Years Ended
December 31,
2019
2018
$
$
5,039 $
20,711
25,750 $
6,222
24,414
30,636
46
For the Years Ended
December 31,
2019
2018
Major products/service lines
Licensing fees ..............................................................................................................
Customer support, including warranty support fees ....................................................
Services .......................................................................................................................
Managed services ........................................................................................................
$
Total services ..............................................................................................................
$
1,245 $
9,070
7,211
8,224
24,505
25,750 $
1,433
9,984
8,880
10,339
29,203
30,636
Timing of revenue recognition
Products transferred at a point in time .........................................................................
Products and services transferred over time ................................................................
$
$
480 $
25,270
25,750 $
882
29,754
30,636
Contract balances
The following table provides information about receivables, assets, and liabilities from contracts with
customers (in thousands):
December
31,
2019
December
31,
2018
Assets
Contract receivables, net ..............................................................................................
Unbilled work-in-progress, net ....................................................................................
Liabilities
Unearned revenue ........................................................................................................
$
$
$
6,732 $
1,105 $
7,757
3,044
3,971 $
3,911
Contract receivables are recorded at the invoiced amount and do not bear interest. Credit is extended based
on the evaluation of a customer’s financial condition and collateral is not required. Unbilled work-in-progress is
revenue which has been earned but not invoiced. The contract assets are transferred to the receivables when
invoiced.
Management expects that incremental commission fees paid to employees and intermediaries as a result of
obtaining contracts are recoverable and therefore the Company capitalized them as contract costs in the amount of
$0.2 million at December 31, 2019 and less than $0.1 million at December 31, 2018.
Capitalized commission fees are amortized based on the transfer of services to which the assets relate
which may range from two to three years and are included in sales and marketing. During the years ended December
31, 2019 and 2018, the amount of amortization was $0.2 million and $0.1 million, respectively, and there was no
impairment loss in relation to the costs capitalized. Applying the practical expedient in ASC 606 paragraph 340-40-
25-4, the Company recognizes the incremental costs of obtaining contracts as an expense when incurred if the
amortization period of the assets that the Company otherwise would have recognized is one year or less. These costs
are included in sales and marketing.
The contract liabilities primarily relate to unearned revenue. Amounts billed in advance of performance
obligations being satisfied are recognized as unearned revenue.
For the years ended December 31, 2019 and 2018, we recognized revenue of $3.7 million and $5.4 million,
respectively, that was included in the corresponding contract liability balance at the beginning of the period.
47
Transaction price allocated to the remaining performance obligations
Remaining performance obligations represent the transaction price of firm orders for which work has not
been performed as of the period end date and excludes unexercised contract options and potential orders under
ordering-type contracts (e.g., indefinite-delivery, indefinite-quantity). As of December 31, 2019, the aggregate
amount of the transaction price allocated to remaining performance obligations with lives greater than one-year
totals $9.1 million. The Company expects approximately 47% of remaining performance obligations to be
recognized into revenue within the next twelve months, with the remaining 53% recognized thereafter.
We apply the practical expedient in paragraph ASC 606-10-50-14 and do not disclose information about
remaining performance obligations that have original expected durations of one-year or less. We apply the transition
practical expedient in paragraph ASC 606-10-65-1(f)(3) and do not disclose the amount of the transaction price
allocated to the remaining performance obligations and an explanation of when we expect to recognize that amount
as revenue.
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.
The following table reflects the activity in the allowance for doubtful accounts:
Effects of
Write-Offs Foreign
Fiscal
Year
2019 .... Allowance for doubtful accounts
2018 .... Allowance for doubtful accounts
Description
Balance at Bad Debt Charged Currency Balance at
Beginning Expense/
to
of Period (Recovery) Allowance Rates
(76) $
$
(86) $
$
Exchange End of
Period
19 $
(124) $
771 $
970 $
(4 ) $
11 $
710
771
The following table reflects the activity in the allowance for unbilled work-in-progress:
Fiscal
Year
Description
2019 .... Allowance for unbilled work-in-progress
2018 .... Allowance for unbilled work-in-progress
Unbilled
Effects of
Work-in- Write-Offs Foreign
Balance at Progress Charged Currency Balance at
Beginning Allowance/
to
of Period (Recovery) Allowance Rates
106 $
$
454 $
$
Exchange End of
Period
(643) $
2 $
552 $
107 $
(15 ) $
(11 ) $
–
552
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, non-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. We recognize forfeitures
as they occur rather than estimating them at the time of the grant.
48
Comprehensive Loss — Comprehensive loss consists of two components, net loss and other
comprehensive income (loss). Other comprehensive income (loss) refers to revenue, expenses, gains, and losses that
under US GAAP are recorded as an element of stockholders’ equity but are excluded from net loss. Other
comprehensive income (loss) consists of foreign currency translation adjustments from those subsidiaries not using
the U.S. dollar as their functional currency.
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, 2019 and 2018, one significant customer accounted for 11% of revenue
from operations, respectively. This customer is a large telecommunications operator in Europe.
As of December 31, 2019, one customer accounted for 12% of contract receivables and unbilled work-in-
progress. As of December 31, 2018, no customers accounted for 10% of contract receivables and unbilled work-in-
progress.
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 cash and cash equivalents not under any FDIC program were $2.7 million and $6.5 million as of
December 31, 2019 and 2018, respectively.
Sales, Use and Other Value Added Tax — Applicable revenue-based state, use and other value added
taxes are included in revenue.
Advertising and Promotion Costs — Advertising and promotion costs are expensed as incurred.
Advertising costs totaled approximately $0.3 million and $0.2 million for the years ended December 31, 2019 and
2018, respectively.
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 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, 2019 and 2018. In addition,
we did not have any capitalized internal software development costs included in our December 31, 2019 and 2018
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.
49
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 group by comparing its
carrying amount to the estimated undiscounted future cash flows expected to be generated by the asset group. If the
carrying amount of an asset group exceeds its estimated future cash flows, we recognize an impairment charge as the
amount by which the carrying amount of the asset group exceeds the estimated fair value of the asset group.
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 losses and tax credit carry-forwards. We measure deferred tax
assets and liabilities using enacted tax rates expected to be applied to taxable income in the years in which those
temporary differences are expected to be recovered or settled. We reduce deferred tax assets by a valuation
allowance if, based on available evidence, it is more likely than not that these benefits will not be realized.
We use a recognition threshold and a measurement attribute for 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.
Segment Information — We define operating segments as components of our enterprise for which
separate financial information is reviewed regularly by the chief operating decision-makers to evaluate performance
and to make operating decisions. We have identified our Chief Executive Officer and Senior Vice President of
Finance as our chief operating decision-makers. These chief operating decision makers review revenues by segment
and review overall results of operations.
We currently operate our business as one operating segment which includes two revenue types: license fees
revenue and services revenue (as shown on the 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.
Recently Adopted Accounting Pronouncements — In February 2016, the FASB established Topic 842,
Leases, by issuing Accounting Standards Update (“ASU”) 2016-02, which requires lessees to recognize leases on-
balance sheet and disclose key information about leasing arrangements. Topic 842 was subsequently amended by
ASU 2018-01, Land Easement Practical Expedient for Transition to Topic 842; ASU 2018-10, Codification
Improvements to Topic 842, Leases; and ASU 2018-11, Targeted Improvements. The new standard establishes a
right-of-use model (ROU) that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for
all leases with a term longer than 12 months. Leases are classified as finance or operating, with classification
affecting the pattern and classification of expense recognition in the condensed consolidated statements of
operations.
We adopted the new standard on January 1, 2019, its effective date. We used the optional transition method
approach with the effective date as the date of initial application. Consequently, prior periods will not be restated,
and the disclosures required under ASC 840 will continue to be provided for dates and periods before January 1,
2019.
The new standard provides several optional practical expedients in transition. We elected the ‘package of
practical expedients’, which permits us not to reassess under the new standard our prior conclusions about lease
identification, lease classification and initial direct costs.
50
The new standard also provides practical expedients for an entity’s ongoing accounting. We currently have
elected the short-term lease recognition exemption for all leases that qualify. This means, for those leases that
qualify, we will not recognize ROU assets or lease liabilities, and this includes not recognizing ROU assets or lease
liabilities for existing short-term leases of those assets in transition. We also have elected the practical expedient to
not separate lease and non-lease components for all our leases and will not reassess whether initial direct costs
qualify for capitalization (see Note 10).
The adoption of the standard resulted in the recognition of additional ROU assets and lease liabilities of
approximately $1.6 million as of January 1, 2019, that did not change previously reported net loss and did not result
in a cumulative effect adjustment to accumulated deficit and did not impact cash flows.
Recent Accounting Pronouncements — In June 2016, the FASB issued ASU 2016-13, Financial
Instruments – Credit Losses (Topic 326) — Measurement of Credit Losses on Financial Instruments (ASU 2016-
13). ASU 2016-13 requires entities to establish an allowance for credit losses for most financial assets. Prior US
GAAP was based on an incurred loss methodology for recognizing credit losses on financial assets measured at
amortized cost and available-for sale debt securities. The update is effective for fiscal years beginning after
December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted for fiscal years
beginning after December 31, 2018. Management does not believe there will be a significant impact.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (ASC 820) — Disclosure
Framework-Changes to the Disclosure Requirements for Fair Value Measurement. ASU 2018-13 removes certain
disclosures, modifies certain disclosures and adds additional disclosures. ASU 2018-13 is effective for annual
periods, including interim periods within those annual periods, beginning after December 15, 2019. Early adoption
is permitted. Management does not believe there will be a significant impact.
In December 2019, the FASB issued ASU 2019-12, Income Taxes (ASC 740) — Simplifying the
Accounting for Income Taxes. ASU 2019-12 which modifies ASC 740 to simplify the accounting for income taxes.
The ASU removes certain exceptions for recognizing deferred taxes for investments, performing intraperiod
allocation and calculating income taxes in interim periods. The ASU also adds guidance to reduce complexity in
certain areas, including recognizing deferred taxes for tax goodwill and allocating taxes to members of a
consolidated group. ASU 2019-12 is effective for annual periods, including interim periods within those annual
periods, beginning after December 15, 2020. We have not yet completed the full assessment of the impact on our
consolidated financial statements or related disclosures.
Management has evaluated other recently issued accounting pronouncements and does not believe that any
of these pronouncements will have a significant impact on our consolidated financial statements and related
disclosures.
NOTE 2 — GOODWILL AND INTANGIBLE ASSETS
Changes in the carrying amount of goodwill by reporting unit were as follows (in thousands):
Balance at January 1, 2018 ..................................................................................................................
Total
Goodwill
25,216
$
Measurement period adjustments .........................................................................................................
263
(17,760)
Goodwill impairment loss ....................................................................................................................
Effects of changes in foreign currency exchange rates (1) ....................................................................
(981)
6,738
$
(6,687)
Goodwill impairment loss ....................................................................................................................
Effects of changes in foreign currency exchange rates (1) ....................................................................
(51)
-
$
Balance at December 31, 2019 ............................................................................................................
Balance at December 31, 2018 ............................................................................................................
(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 (loss).
51
Due to a sustained decline in the market capitalization of our common stock during the second quarter of
2019, we performed an interim goodwill impairment test. Management considered that, along with other possible
factors affecting the assessment of the Company’s reporting unit for the purposes of performing a goodwill
impairment assessment, including management assumptions about expected future revenue forecasts and discount
rates, changes in the overall economy, trends in the stock price, estimated control premium, other operating
conditions, and the effect of changes in estimates and assumptions that could materially affect the determination of
fair value and goodwill. As a result of the significant decline in the current market capitalization despite any of the
other positive factors contemplated and relatively little change in our ongoing business operations, the outcome of
this goodwill impairment test resulted in a charge for the impairment of goodwill of $6.7 million and $17.8 million
recorded in the consolidated financial statements for the years ended December 31, 2019 and 2018, respectively.
We amortized identifiable intangible assets on a straight-line basis over their estimated useful lives. As of
December 31, 2019, and 2018, identifiable intangibles were as follows (in thousands):
December 31, 2019
Purchased software .................................................
Trademarks and tradenames ...................................
Non-competition .....................................................
Customer relationships ...........................................
Purchased software .................................................
Trademarks and tradenames ...................................
Non-competition .....................................................
Customer relationships ...........................................
$
$
$
$
Gross
Amount
Accumulated
Amortization
(1,508)
(247)
(39)
(2,136)
(3,930)(1) $
$
2,903 $
307
39
4,346
7,595 (1) $
Net
Carrying
Amount
Weighted-
Average
Amortization
Period
5.7 yrs.
1.7 yrs.
0.0 yrs.
6.7 yrs.
4.8 yrs.
1,395
60
-
2,210
3,665
December 31, 2018
Gross
Amount
Accumulated
Amortization
(1,121)
(223)
(38)
(1,590)
(2,972)(1) $
$
2,877 $
303
39
4,303
7,522 (1) $
Net
Carrying
Amount
Weighted-
Average
Amortization
Period
6.7 yrs.
2.7 yrs.
1.0 yrs.
7.7 yrs.
5.8 yrs.
1,756
80
1
2,713
4,550
(1)
Includes functional currency adjustment of less than $0.1 million.
Amortization expense of identifiable intangible assets was $0.9 million and $1.0 million for the years ended
December 31, 2019 and 2018, respectively. Expected future amortization expense related to identifiable intangibles
based on our carrying amount as of December 31, 2019 was as follows (in thousands):
Year ending December 31,
2020 .....................................................................................................................................................
2021 .....................................................................................................................................................
2022 .....................................................................................................................................................
2023 .....................................................................................................................................................
2024 .....................................................................................................................................................
Thereafter ............................................................................................................................................
$
$
945
932
745
367
166
510
3,665
NOTE 3 — BALANCE SHEET COMPONENTS
The components of accounts payable and accrued liabilities are as follows (in thousands):
52
Accounts payable and accrued liabilities:
Accounts payable ................................................................................................. $
Accrued compensation and related expenses .......................................................
Accrued liabilities ................................................................................................
$
889 $
1,755
1,183
3,827 $
1,276
1,863
1,344
4,483
December 31,
2019
December 31,
2018
NOTE 4 — LONG-TERM DEBT
On August 16, 2017, we entered into a Term Loan Facility Agreement with East West Bank as lender in the
amount of $4.7 million (the “Lumata Facility”). The Lumata Facility requires the Company to make monthly
principal payments of approximately $0.1 million that commenced on July 31, 2018 and interest at the greater of (a)
3.5% or (b) the variable rate of interest that appears in the Wall Street Journal on a monthly measurement date plus
in either case 1.5%. As of December 31, 2019, the U.S.A. Prime Rate was 4.75%. At December 31, 2019 the interest
rate was 6.25%. In the event of a default, the interest rate increases by 5% per annum. EVOL Inc. entered into the
Lumata Facility as the Parent Guarantor; Evolving Systems BLS LTD and Evolving Systems Limited entered the
Lumata Facility as Original Guarantors (the “Original Guarantors”). The Lumata Facility is secured by all of the
assets of EVOL Holdings and the Original Guarantors in accordance with the terms of a Debenture entered into by
EVOL Holdings and the Original Guarantors in favor of East West Bank. EVOL Holdings, EVOL Inc. and the
Original Guarantors also entered into a Subordination Deed whereby each of the parties agreed to subordinate all
loans by and among each other to East West Bank. Lumata France SAS and Lumata UK Ltd are also bound to
adhere to the finance documents as additional obligors.
The Lumata Facility required the Company to pay an Arrangement Fee (“Origination Fee”) of $23,650,
payable in four equal installments, with the first payment due on the date of the Lumata Facility and the remaining
three payments on the first, second and third anniversary thereof. The Company also agreed to pay East West
Bank’s legal fees in connection with the transaction. The Company may prepay the Lumata Facility at any time, in a
minimum amount of $250,000 and increments of $50,000, subject to a prepayment fee of 2% of the amount prepaid,
on any prepayment made before the second anniversary date of the Agreement.
On February 29, 2016, we entered into the Fifth Amendment to the Loan and Security Agreement with East
West Bank which provided for a Term Loan (the “Term Loan”) for $6.0 million. The $6.0 million Term Loan bore
interest at a floating rate equal to the U.S. Prime Rate plus 1.0%. In the event of a default, the interest rate was to
increase 5% per annum. The Term Loan was 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 accrued from the date the Term Loan was made
at the aforementioned rate and was payable monthly. The Term Loan was to 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 required the Company to
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 required us to pay two annual credit facility fees of
$18,750 and legal fees equal to $1,000.
On September 24, 2019 the Company agreed in principle to the terms of a new amendment and on October
4, 2019, we entered into the First Amendment (“First Amendment”) to the Lumata Facility. The purpose of the First
Amendment was to waive certain events of non-compliance with respect to covenants not achieved in prior periods
and to amend future covenant requirements. The First Amendment also required Evolving Systems to make an
advance payment of principal of $666,666.66. The remaining terms and conditions of the Lumata Facility and
payment schedule remain unchanged. The Company also agreed to pay East West Bank’s legal fees in connection
with the transaction. The last payment is scheduled to be made January 31, 2021.
On September 24, 2019, the Company agreed in principle to the terms of a new amendment and on
October 4, 2019, we entered into the Sixth Amendment to the Loan and Security Agreement (“Sixth Amendment”)
with East West Bank to the Term Loan. The purpose of the Sixth Amendment was to waive certain events of non-
compliance with respect to covenants not achieved in prior periods and to amend future covenant requirements. The
Sixth Amendment also required Evolving Systems to make an advance payment of principal of $333,333.33. In
53
addition, the Sixth Amendment added any default under the Lumata Facility discussed above as an Event of Default
under the Term Loan. The remaining terms and conditions of the Term Loan and payment schedule remained
unchanged. The Company also agreed to pay East West Bank’s legal fees in connection with the transaction. The
last payment of principal and interest was made November 1, 2019.
Financial covenants previously included in the credit facilities have been replaced by a minimum
consolidated cash balance of no less than the total bank debt outstanding and a minimum trailing three month
consolidated EBITDA fixed dollar amount mutually agreed to by the Company and East West Bank in the
amendments.
NOTE 5 − INCOME TAXES
We recorded net income tax expense of $1.1 million for the year ended December 31, 2019 and net income
tax benefit of $0.4 million for the year ended December 31, 2018. The net expense for the year ended December 31,
2019 consisted of current tax expense of $0.8 million related to $0.3 million income tax expense incurred by our
Indian based operations and $1.3 million of foreign taxes paid for with holdings of local taxes that could not be used
as a tax credit due to the current year losses offset by Research and Development credits from our U.K. based
operations of $0.5 million. Also offset by the AMT refund of $0.4 million. Deferred tax expense of $0.4 million
related to US tax refund of AMT credits. The net benefit during the year ended December 31, 2018 consisted of
current income tax expense of $0.5 million and a deferred tax benefit of $0.9 million. The current tax expense
consists of income tax primarily from our U.S. and U.K. based operations. The deferred tax benefit primarily
consists of benefits from establishing deferred tax assets of $0.5 million for our foreign tax credit (“FTC”)
carryforwards, $0.2 million for net operating losses from certain U.K. subsidiaries that are expected to be used by
another U.K. subsidiary and $0.2 million decrease in net deferred tax liabilities.
Global Intangible Low-taxed Income
We recognize the tax on global intangible low-taxed income (“GILTI”) as a period cost in the period the
tax is incurred. Under this policy, we have not provided deferred taxes related to temporary differences that upon
their reversal will affect the amount of income subject to GILTI in the period. There is no GILTI inclusion for the
years ended December 31, 2019 and 2018, respectively.
Transfer pricing adjustments, net
The Company's tax positions include the Company's intercompany transfer pricing policies and the
associated taxable income and deductions arising from intercompany charges between subsidiaries within the
consolidated group. During fiscal 2018, the Company finalized an Advance Pricing Arrangement ("APA") with
Evolving Systems, Inc. and its subsidiaries. This APA determined the amount of income which is taxable in each
respective jurisdiction. In accordance with the APA, the adjustments necessary to reflect the reduction in 2018 U.S.
pre-tax income resulted in an increase in domestic income before income tax expense of $5.5 million and a
corresponding decrease in foreign income before income tax expense in the year ended 2018.
The pre-tax (loss) income on which the provision for income taxes was computed is as follows (in
thousands):
Domestic .........................................................................................................
Foreign ............................................................................................................
Total ................................................................................................................
$
$
(290) $
(8,302)
(8,592) $
(17,820)
2,607
(15,213)
For the Years Ended December 31,
2019
2018
54
The expense (benefit) from continuing operations for income taxes consists of the following (in thousands):
For the Years Ended December 31,
2019
2018
Current:
Federal ............................................................................................................ $
Foreign ...........................................................................................................
State ................................................................................................................
Total Current ..................................................................................................
Deferred:
Federal ............................................................................................................
Foreign ...........................................................................................................
Total Deferred ................................................................................................
Total ................................................................................................................
$
(365) $
1,110
28
773
385
(55)
330
1,103 $
340
155
25
520
41
(987)
(946)
(426)
As of December 31, 2019, and 2018 we had no Federal NOL carryforwards remaining. As of December 31,
2019, and 2018, we had state NOLs of approximately $20.5 million and $27.5 million, respectively. The state NOL
carryforwards expire at various times beginning in 2020 and ending in 2037. As of December 31, 2019, and 2018,
we had foreign NOLs representing deferred tax assets of $5.9 million and $5.5 million, respectively. The foreign
NOL carryforwards expire at various times beginning in 2020 and ending in 2037. In addition, we had research and
experimentation credit carryforwards of approximately $0.3 million which expired in 2019 and Alternative
Minimum Tax (“AMT”) credits of $0.4 million. For tax years beginning after 2017 and before 2021, the AMT credit
is refundable in an amount equal to 50% of excess of the credit for the tax year over the amount of the credit
allowable for the year against regular tax liability and fully refunded by year 2021.
In our U.S. Federal income tax returns we historically deducted income taxes paid to various countries. Our
income tax calculations have historically been under the regular and AMT regulations 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 (“Foreign Tax Credit” or “FTC”). An election to either claim a deduction or FTC on such
foreign income taxes can be made each tax year, independent from elections made in other years. An FTC 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. As the election to claim the FTC or deduction is made on an annual basis, we intend to
compare benefits to either claim a deduction or FTC on an annual basis. We had approximately $4.7 million of FTC
deferred tax assets to carryforward into 2020 and subsequent years. As of December 31, 2019, our FTC deferred tax
asset balance was approximately $0.5 million, net of its valuation allowance.
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):
December 31, 2019 December 31, 2018
Deferred tax assets:
Foreign tax credits carryforwards ............................................................ $
Net operating loss carryforwards - Foreign .............................................
Net operating loss carryforwards - State .................................................
Research & development credits .............................................................
AMT credits ............................................................................................
Stock compensation ................................................................................
Depreciable assets ...................................................................................
Accrued liabilities and reserves ...............................................................
Total deferred tax assets ..........................................................................
4,650 $
5,911
753
–
385
552
54
127
12,432
4,788
5,531
887
303
770
559
38
67
12,943
Deferred tax liabilities:
Intangibles ...............................................................................................
(180)
(697)
55
Accrued liabilities and reserves ...............................................................
Total deferred tax liability .......................................................................
December 31, 2019 December 31, 2018
(174)
(871)
(170)
(350)
Net deferred tax assets, before valuation allowance ................................
Valuation allowance ................................................................................
$
Net deferred tax asset ..............................................................................
12,082
(11,082)
1,000 $
12,072
(10,932)
1,140
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. In September 2017, we established a deferred tax liability of $0.4 million as a
result of the acquisition of the Lumata Entities. As of December 31, 2019, and 2018, there was a net deferred tax
liability of $0.2 million and a net deferred tax liability of $0.7 million, respectively. This net deferred tax liability
will be recognized as the identifiable intangibles are amortized.
We maintain a valuation allowance on the domestic net deferred tax assets other than $0.4 million in AMT
credits and $0.5 million in FTC, and $0.3 million of foreign net deferred tax assets, offset by deferred tax liabilities
of $0.2 million. 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, research and development
credits and, Foreign Tax Credits. We assessed the realizability of our domestic deferred tax assets using all available
evidence. In particular, we considered both historical results and projections of profitability for the reasonably
foreseeable future periods. We are required to reassess our conclusions regarding the realization of our deferred tax
assets at each financial reporting date. A future evaluation could result in a conclusion that all or a portion of the
valuation allowance is no longer necessary which could have a material impact on our results of operations and
financial position.
The expense (benefit) for income taxes differs from the amount computed by applying the U.S. federal and
state combined income tax rate of 25.4% for 2019 and 25.6% for 2018 to loss before income tax expense (benefit) as
follows (in thousands):
For the Years Ended
December 31,
2019
2018
U.S. federal income tax benefit at statutory rates ........................................................
State income tax expense, net of federal impact ..........................................................
Foreign rate differential ...............................................................................................
Federal Refund ............................................................................................................
Change in valuation allowance ....................................................................................
Research and development expenses ...........................................................................
Foreign taxes ...............................................................................................................
Goodwill impairment loss ...........................................................................................
Permanent differences and other, net ...........................................................................
Total tax expense (benefit) ..........................................................................................
$
$
(1,804) $
28
244
(26)
468
(537)
1,216
1,404
110
1,103 $
(3,920)
23
540
–
(274)
(1,167)
–
4,188
184
(426)
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, 2019, and 2018, 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.
56
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, 2019 and 2018,
which would be reflected as income tax expense or benefit in the statement of operations.
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 U.K., France, 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 2014.
NOTE 6 − STOCKHOLDERS’ EQUITY
Common Stock Dividends
There were no accrued dividends as of December 31, 2019 and 2018, respectively.
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
As of December 31, 2019, and 2018, we hold 178,889, respectively, shares of our common stock that we
purchased prior to the expiration of our stock purchase program on December 31, 2014.
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, 2019, and 2018, no shares of preferred stock were outstanding.
In addition, we are subject to the anti-takeover provisions of Section 203 of Delaware General Corporation
Law which prohibit us from engaging in a “business combination” with an “interested stockholder” for a period of
three years after the date of the transaction in which the person became an interested stockholder, unless the business
combination is approved in the prescribed manner. The application of Section 203 may have the effect of delaying
or preventing changes in control of our management, which could adversely affect the market price of our common
stock by discouraging or preventing takeover attempts that might result in the payment of a premium price to our
stockholders.
NOTE 7 — SHARE-BASED COMPENSATION
We account for share-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 and $0.7 million for the years ended December 31,
2019 and 2018, respectively, of compensation expense in the consolidated statements of operations, with respect to
our share-based compensation plans.
57
The following table summarizes share-based compensation expenses recorded in the statement of
operations (in thousands):
For the Years Ended
December 31,
2019
2018
Cost of revenue, excluding depreciation and amortization ..........................................
Sales and marketing .....................................................................................................
General and administrative ..........................................................................................
Product development ...................................................................................................
Total share-based compensation ..................................................................................
$
$
42 $
23
239
27
331 $
52
39
590
21
702
Stock Incentive Plans
In June 2007, our stockholders approved the 2007 Stock Incentive Plan (the “2007 Stock Plan”) with a
maximum of 1.0 million 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 1.25 million. 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 1.5 million. 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 2.0 million. Awards
permitted under the 2007 Stock Plan included: 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 were granted with an exercise price equal
to the closing price of our common stock on the date of grant, generally vested over four years for employees and
one year for directors and, with respect to stock option grants, expired no more than ten years from the date of grant.
At December 31, 2019 and 2018, there were no shares available for grant under the 2007 Stock Plan. At December
31, 2019 and 2018, 0.3 million and 0.5 million options and restricted shares 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 0.25 million shares reserved for issuance. In June 2018, our stockholders approved an amendment to
the 2016 Stock Plan which increased the maximum shares that may be awarded under the plan to 0.85 million
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, 2019 and 2018, 0.3 million and 0.4 million options and restricted shares were issued
and outstanding under the 2016 Stock Plan, respectively. At December 31, 2019 and 2018, there were approximately
0.4 million shares available for grant under the 2016 Stock Plan, respectively.
Unvested restricted stock at January 1, 2018 ......................................................................................
Less restricted stock vested ................................................................................................................
Less restricted stock forfeited/expired ................................................................................................
Unvested restricted stock at December 31, 2018 ................................................................................
Less restricted stock vested ..............................................................................................................
Less restricted stock forfeited/expired..............................................................................................
Unvested restricted stock at December 31, 2019 ................................................................................
Restricted
Stock
Number of
Shares
(in thousands)
597
(181)
(67)
349
(37)
(153)
159
58
No grants were made during the year ending December 31, 2019 and 2018. During the years ended
December 31, 2019 and 2018, approximately 0.04 million and 0.18 million shares of restricted stock vested,
respectively. There were forfeitures of approximately 0.15 million shares and approximately 0.07 million shares of
restricted stock during the years ended December 31, 2019 and 2018, respectively.
The fair market value of restricted shares 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
$0.2 million and $0.5 million for the years ended December 31, 2019 and 2018, respectively for restricted stock. The
shares of restricted stock granted to our Board of Directors and senior management team in 2017 include 0.2 million
shares subject to achievement of annual performance goals established by our Board of Directors. The restricted
shares vest over four years.
Of the restrictions on the stock awards granted during the periods ended March 31, 2017 and June 30, 2017,
20% will be released in January 2018, and 10% annually beginning on the one-year anniversary of their offering
thereafter for four years. The remaining 40% will be released evenly over four years beginning in 2018 contingent
upon the attainment of annual performance goals established by our Board of Directors. Of the restrictions on the
stock awards granted during the third quarter, the fourth quarter and the period ended December 31, 2017,
respectively, one-fourth will be released on the one-year anniversary of the date of the grant and the balance will be
released quarterly over a three-year period. For the year ended December 31, 2019 and 2018, we did not attain the
annual performance goals.
The weighted-average assumptions used in the fair value calculations of the stock options are as follows:
For the Years Ended December 31,
2018
Expected term (years) ...................................................................................
Risk-free interest rate ....................................................................................
Expected volatility ........................................................................................
Expected dividend yield ...............................................................................
6.0
2.9%
38.43%
0.0%
The following is a summary of stock option activity under the stock option plans for the years ended
December 31, 2019 and 2018:
Weighted-
Average
Number of Average Contractual
Weighted- Remaining Aggregate
Intrinsic
Value
(in thousands)
128
Exercise Term
(Years)
8.23 $
Price
Shares
(in thousands)
Options outstanding at January 1, 2018 ......................
Less options forfeited/cancelled .................................
Less options exercised ................................................
Add options granted ...................................................
Options outstanding at December 31, 2018 ................
Less options forfeited/cancelled .................................
Less options expired ...................................................
Options outstanding at December 31, 2019 ................
713 $
(142)
(10)
30
591 $
(138)
(15)
438 $
5.71
5.20
0.40
2.25
5.75
5.61
8.94
5.69
Options exercisable at December 31, 2019 ................
323 $
6.19
6.00 $
59
7.39 $
6.51 $
–
–
–
The following is a summary of stock options outstanding under the plans as of December 31, 2019:
Stock Options Outstanding
Stock Options Exercisable
Weighted Avg.
Remaining
Contractual
Life
(years)
Range of
Exercise Prices
2.25 $
4.32 $
4.56 $
5.91 $
7.18 $
$
$
$
$
$
Number of Shares
33,108
150,000
90,112
85,563
79,413
4.31
4.55
5.90
7.17
10.90
Weighted Avg.
Weighted Avg.
Exercise Price Number of Shares Exercise Price
3.09
4.50
5.15
6.07
9.52
19,358 $
75,000 $
63,817 $
85,563 $
79,413 $
2.74
4.50
5.00
6.07
9.52
6.39 $
7.84 $
6.98 $
5.43 $
4.68 $
The weighted-average grant-date fair value of stock options granted during the year ended December 31,
2018 was $1.84.
As of December 31, 2019, there were approximately $0.7 million of total time-based unrecognized
compensation costs related to unvested stock options and restricted stock. These costs are expected to be recognized
over a weighted average period of 1.4 years.
The total intrinsic value of stock option exercises for the year ended December 31, 2018 was less than $0.1
million. There were no exercises for the year ended December 31, 2019. The total fair value of stock awards vested
during the years ended December 31, 2019 and 2018 was $0.3 million and $0.2 million, respectively.
There was no deferred income tax benefit from stock option expense related to Evolving Systems U.K. for
the year ended December 31, 2019. The deferred income tax benefit from stock options expense related to Evolving
Systems U.K. totaled less than $0.1 million for the years ended December 31, 2018.
There was no cash received from stock option exercises for the year ended December 31, 2019. Cash
received from stock option exercises was less than $0.1 million for the year ended December 31, 2018. There were
no net settlement exercises during the year ended December 31, 2019 and 2018, respectively.
Employee Stock Purchase Plan
Under the Employee Stock Purchase Plan (“ESPP”), we are authorized to issue up to 0.55 million 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 0.01 million 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, 2019, there were less than 0.1 million shares available for purchase. For
the years ended December 31, 2019 and 2018, we recorded compensation expense of $0.0 million 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.
We did not receive any cash from our employee stock purchase plan for the year ended December 31, 2019
and it was a de minimis amount for the year ended December 31, 2018. We did not issue any shares related to the
ESPP for the year ended December 31, 2019 and we issued a de minimis number of shares related to the ESPP for
the year ended December 31, 2018.
NOTE 8 — 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
60
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 2019 and 2018, we recorded a consolidated expense of $0.4 million, respectively, under the
aforementioned plans.
NOTE 9 — LOSS PER SHARE
Basic loss per share is computed by dividing loss or income available to common stockholders by the
weighted average number of shares of common stock outstanding during the period, including common stock
issuable under participating securities. Diluted earnings per share 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 and restricted stock. The following is the reconciliation
of the numerators and denominators of the basic and diluted earnings per share computations (in thousands except
per share data):
Basic loss per common share:
Net loss ........................................................................................................................
$
Basic weighted average shares outstanding ................................................................
$
Basic loss per common share: ......................................................................................
For the Years Ended
December 31,
2019
2018
(9,695) $
12,157
(0.80) $
(14,787)
12,108
(1.22)
Diluted loss per common share:
Net loss ........................................................................................................................
Weighted average shares outstanding ..........................................................................
$
Effect of dilutive securities - options and restricted stock ...........................................
Diluted weighted average shares outstanding .............................................................
$
Diluted loss per common share: ..................................................................................
(9,695) $
12,157
–
12,157
(0.80) $
(14,787)
12,108
–
12,108
(1.22)
Weighted average options to purchase approximately 0.4 million shares, and 0.6 million shares of common
stock equivalents were excluded from the computation of diluted weighted average shares outstanding for the years
ended December 31, 2019, and 2018, 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 10 — COMMITMENTS AND CONTINGENCIES
(a)
Lease Commitments
Under Topic 842, operating lease expense is generally recognized evenly over the term of the lease. The
Company has operating leases primarily consisting of facilities with remaining lease terms of one year to seven
years. We lease office and operating facilities under non-cancelable operating leases. Current facility leases include
our offices in Englewood, Colorado, New York, New York, Durham, North Carolina, London, England, Bangalore,
Kolkata and Delhi India, Johannesburg, South Africa, Kuala Lumpur, Malaysia, Mexico City, Mexico, Grenoble,
France, Cluj-Napoca, Romania and Madrid, Spain. The Company did not enter into any new leases in the year ended
December 31, 2019. Our lease for the Kolkata facility provides us with the option to terminate the lease in August
2020; however, we do not expect to exercise our termination option and have included costs through the July 2026
lease end date. Total rent expense consisted of operating lease expense of $0.5 million and short-term lease expense
of $0.2 million for the year ended December 31, 2019. Rent expense was $0.7 million for the year ended December
31, 2019 and 2018, respectively. There was no sublease rental income for the years ended December 31, 2019 and
2018. We paid $0.5 million against Lease obligations — operating leases in the year ended December 31, 2019.
61
Leases with an initial term of twelve months or less are not recorded on the consolidated balance sheet. For
lease agreements entered into or reassessed after the adoption of Topic 842, we combine the lease and non-lease
components in determining the lease liabilities and right-of-use (“ROU’) assets.
Our lease agreements generally do not provide an implicit borrowing rate; therefore, an internal
incremental borrowing rate is determined based on information available at lease commencement date for purposes
of determining the present value of lease payments. We used the incremental borrowing rate on January 1, 2019 for
all leases that commenced prior to that date.
ROU lease assets and lease liabilities for our operating leases were recorded in the consolidated balance
sheet as follows:
Other Long-term assets - right of use assets ............................................................................
As of
December 31, 2019
1,205
$
Operating Lease current ...........................................................................................................
Lease obligations — operating leases, net of current portion ..................................................
$
Total lease liability .................................................................................................................. $
Weighted average remaining operating lease term (in years) ..................................................
Weighted average discount rate ...............................................................................................
321
876
1,197
4.4
6.75%
Future lease payments included in the measurement of lease liabilities on the consolidated balance sheet as
of December 31, 2019, for the following five fiscal years and thereafter were as follows:
2020 ............................................................................................................................................ $
2021 ............................................................................................................................................
2022 ............................................................................................................................................
2023 ............................................................................................................................................
2024 ............................................................................................................................................
Thereafter ...................................................................................................................................
Total future minimum lease payments ......................................................................................
Present value Adjustment ...........................................................................................................
Total .......................................................................................................................................... $
For the year ending
395
330
306
173
73
116
1,393
196
1,197
(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. As a result of our insurance policy coverage, we believe the estimated fair
value of these indemnification agreements is minimal. Accordingly, we did not record any liabilities for these
agreements as of December 31, 2019 and 2018.
We enter into standard indemnification terms with customers and suppliers, in the ordinary course of
business, for third party claims arising under our contracts. In addition, as we may subcontract the development of
deliverables under customer contracts, we could be required to indemnify customers for work performed by
subcontractors. Depending upon the nature of the indemnification, the potential amount of future payments we could
be required to make under these indemnification agreements may be unlimited. We may be able to recover damages
from a subcontractor or other supplier if the indemnification results from the subcontractor’s or supplier’s failure to
perform. To the extent we are unable to recover damages from a subcontractor or other supplier, we could be
62
required to reimburse the indemnified party for the full amount. We have never incurred costs to defend lawsuits or
settle claims relating to an indemnification. As a result, we believe the estimated fair value of these agreements is
minimal. We did not record any liabilities for these agreements as of December 31, 2019 and 2018.
Our standard license agreements contain product warranties that the software will be free of material
defects and will operate in accordance with the stated requirements for a limited period of time. The product
warranty provisions require us to cure any defects through any reasonable means. We believe the estimated fair
value of the product warranty provisions in the license agreements in place with our customers is minimal.
Accordingly, there were no liabilities recorded for these product warranty provisions as of December 31, 2019 and
2018.
Our software arrangements generally include a product indemnification provision whereby we will
indemnify and defend a customer in actions brought against the customer for claims that our products infringe upon
a copyright, trade secret, or valid patent of a third party. We have not historically incurred any significant costs
related to product indemnification claims. Accordingly, there were no liabilities recorded for these indemnification
provisions as of December 31, 2019 and 2018.
(c)
Litigation
From time to time, we are involved in various legal matters arising in the normal course of business. The
Company has been served a complaint from the Company’s former Chief Executive Officer claiming he was not
properly compensated upon termination along with additional allegations. The Company has engaged legal counsel
through our insurance carrier and intends to defend rigorously. The ultimate outcome of this matter is not estimable
or determinable at this time.
In June 2018, we agreed to a Mutual Release and Settlement Agreement and a Contribution Agreement (the
“SSM Agreements”) with certain parties related to our September 30, 2015 acquisition of SSM. The SSM
Agreements settled a dispute with a former SSM contractor, for which the Company asserted indemnification from
the SSM sellers. Under the SSM Agreements, in July 2018 we paid $0.3 million toward the settlement, $0.1 million
of which was on the Company’s behalf and was recorded as other expense for the fiscal year ending December 31,
2018. The Company and the SSM sellers agreed to offset the Company’s contribution to the settlement against the
final payment due to the SSM sellers and, therefore, we were released from a $0.3 million final payment due to the
sellers of SSM. In 2019, we agreed to and received a settlement of $0.2 million, with our insurance carrier at the
time of claim, for coverage related to the reimbursement of costs incurred on this matter.
NOTE 11 — GEOGRAPHICAL INFORMATION
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 North Carolina and our U.K.-based subsidiaries. Additionally, personnel in Cluj -Napoca, Romania;
Grenoble, France; and Bangalore and Kolkata, India; provide software development services and support to our
global operations. Financial information relating to U.S. based companies and by international geographic region
exceeding the threshold (defined as contributing at least 10%) of revenue from operations is as follows (in
thousands):
Long-lived assets, net .................................................................................................
United States ............................................................................................................... $
United Kingdom ..........................................................................................................
Other ...........................................................................................................................
$
2,063 $
1,727
1,562
5,352 $
2,741
7,098
1,752
11,591
December
31,
2019
December
31,
2018
63
NOTE 12 — SUBSEQUENT EVENTS
Our common stock is currently listed on The Nasdaq Capital Market. In order to maintain that listing, we
must satisfy minimum financial and other listing requirements. On January 3, 2020, the Nasdaq Listing
Qualifications Department notified us that we no longer complied with Rule 5550(a)(2) (the “Minimum Bid Price
Rule”), as the bid price of our shares of common stock closed below the minimum $1.00 per share for the 30
consecutive business days prior to the date of the letter. In accordance with Rule 5810(c)(3)(A), we have 180
calendar days, or until July 1, 2020, to regain compliance with the Minimum Bid Price Rule. If we were unable to
demonstrate compliance with the Minimum Bid Price Rule during the applicable grace period, our common stock
would be subject to delisting after that time.
The Nasdaq letter further states that if compliance with the Minimum Bid Price Rule cannot be
demonstrated by July 1, 2020 and, except for the bid price requirement, the Company meets all other initial listing
standards for The Nasdaq Capital Market set forth in Marketplace Rule 5505, then the Company may be granted an
additional 180 calendar day period in which to demonstrate compliance with the Minimum Bid Price Rule. If the
Company does not regain compliance with the Minimum Bid Price Rule prior to July 1, 2020 and is not eligible for
the additional compliance period, then Nasdaq will notify the Company that the Common Stock will be subject to
delisting. At such time, the Company may appeal Nasdaq’s delisting determination.
Management has confidence in the Company’s underlying business fundamentals and plans to take
advantage of the 180 days period to attempt to regain compliance with the Minimum Bid Price Rule.
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
We maintain “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) under the
Securities Exchange Act of 1934 (the “Exchange Act”), that are designed to provide reasonable assurance that
information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules
and forms, and that such information is accumulated and communicated to our management, including our Chief
Executive Officer and Senior Vice President of Finance, as appropriate, to allow timely decisions regarding required
disclosure.
Our management, including our Chief Executive Officer and the Senior Vice President of Finance, 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 Senior Vice President of
Finance have concluded that our disclosure controls and procedures were effective as of the end of December 31,
2019.
In designing and evaluating our disclosure controls and procedures, management recognized that disclosure
controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute,
assurance that the objectives of the disclosure controls and procedures are met. Additionally, in designing disclosure
controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-
benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and
procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no
assurance that any design will succeed in achieving its stated goals under all potential future conditions.
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 Senior Vice President of Finance, we conducted an evaluation of the
effectiveness of our internal control over financial reporting based on the 2013 framework set forth in the report
64
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, 2019.
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, 2019, 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
65
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Incorporated by reference to the sections of Evolving Systems, Inc. 2019 Proxy Statement, anticipated to be
filed within 120 days of December 31, 2019, entitled “Proposal No. 1-Election of Directors,” “Management,”
“Information Regarding the Board and Its Committees” and “Delinquent Section 16(a) Reports.”
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference to the section of Evolving Systems, Inc. 2019 Proxy Statement, anticipated to be
filed within 120 days of December 31, 2019, 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. 2019 Proxy Statement, anticipated to
be filed within 120 days of December 31, 2019, 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. 2019 Proxy Statement, anticipated
to be filed within 120 days of December 31, 2019, 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. 2019 Proxy Statement, anticipated to
be filed within 120 days of December 31, 2019, entitled “Proposal No. 3-Ratification of Selection of Independent
Registered Public Accounting Firm.”
66
PART IV
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.
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.
Description of Document
2.1 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.
2.2 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.
2.3 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.
3.1† Restated Certificate of Incorporation.
3.1(a) 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 10, 2004 and incorporated herein by reference.
3.1(b) 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.
3.1(c) 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.
3.1(d) 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.
3.1(e) 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.
3.2† Amended and Restated Bylaws.
3(ii)(1) 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.
4.1† Reference is made to Exhibits 3.1 and 3.2.
67
Exhibit No.
Description of Document
4.1 (b) 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.
4.2† Specimen stock certificate representing shares of Common Stock.
4.3 Description of Registrant's securities registered pursuant to Section 12 of the Securities Exchange
Act of 1934 (filed herewith).
10.1 * 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.
10.2† * Amended and Restated Stock Option Plan.
10.2 (a) 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.
10.3† * Employee Stock Purchase Plan.
10.4 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.
10.5 Letter from Singer Children’s Management Trust, as filed as Exhibit 10.1 to the Registrant’s Form 8-
K filed December 14, 2009 and incorporated herein by reference.
10.6† 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.).
10.8 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.
10.9 Agreement entered into with Singer Children’s Management Trust, as filed as Exhibit 10.1 to the
Company’s Form 8-K filed April 22, 2011 and incorporated herein by reference.
10.12 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.
10.13 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.
10.14 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.
10.15 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.
10.16 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.
68
Exhibit No.
Description of Document
Sixth 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 October 9, 2019 and incorporated
herein by reference.
First Amendment to Term Loan Facility Agreement entered into by and among Evolving Systems,
Inc. as Parent Guarantor, Evolving Systems Holdings Limited, as Original Borrower, Evolving
Systems Limited and Evolving Systems BLS Limited, as further Original Guarantors, Lumata UK
Limited, and East West Bank as Lender, as filed as Exhibit 10.2 to the Registrant’s Form 8-K filed on
October 9, 2019 and incorporated herein by reference.
10.20* Evolving Systems, Inc. 2016 Stock Incentive Plan, as amended, as filed as Appendix A to the
Registrant’s Definitive Proxy Statement on Schedule 14A filed with the Commission on April 26,
2018 and incorporated herein by reference.
10.21 Asset Purchase Agreement, dated as of May 5, 2017 by BLS Limited and Business Logic Systems
Limited.
10.23 Completion of Acquisition or Disposition of Assets entered into by BLS Limited and Business Logic
Systems Limited dated as of May 5, 2017, as filed as Exhibit 2.1 to the Registrant’s Form 8-K filed on
July 6, 2017 and incorporated herein by reference.
10.24 Share Purchase Agreement entered into between Evolving Systems Holdings Limited and Lumata
Holdings Limited and Francisco Partners III (Cayman) L.P., dated August 12, 2017, as filed as Exhibit
10.1 to the Registrant’s Form 8-K filed on August 17, 2017 and incorporated herein by reference.
10.25 Form of Management Warranty Deed, as filed as Exhibit 10.2 to the Registrant’s Form 8-K filed on
August 17, 2017 and incorporated herein by reference.
10.26 Term Loan Facility Agreement entered into by and among Evolving Systems, Inc. as Parent
Guarantor, Evolving Systems Holdings Limited, as Original Borrower, Evolving Systems Limited and
Evolving Systems BLS Limited, as further Original Guarantors and East West Bank as Lender dated
August 16, 2017, as filed as Exhibit 10.1 to the Registrant’s Form 8-K filed on August 22, 2017 and
incorporated herein by reference.
10.27 Debenture entered into by and among Evolving Systems Holdings Limited, the Original Guarantors
and East West Bank, dated August 16, 2017, as filed as Exhibit 10.2 to the Registrant’s Form 8-K
filed on August 22, 2017 and incorporated herein by reference.
10.28 Subordination Deed entered into by and among Evolving Systems, Inc., Evolving Systems Holdings
Limited, the Original Guarantors and East West Bank, dated August 16, 2017, as filed as Exhibit 10.3
to the Registrant’s Form 8-K filed on August 22, 2017 and incorporated herein by reference.
10.31* Employment Agreement dated December 4, 2017, entered into between Evolving Systems, Inc. and
Mark P. Szynkowski, as filed as Exhibit 10.1 to the Registrant’s Form 8-K filed on December 4, 2017
and incorporated herein by reference.
10.32 East West Bank Fixed Coverage Charge Waiver Letter dated, as filed as Exhibit 10.32 to the
Registrant’s Form 10-K filed on April 4, 2019 and incorporated herein by reference.
10.33* Employment Agreement entered into between Evolving Systems, Inc. and Matthew Stecker, as filed
as Exhibit 10.1 to the Registrant’s Form 8-K filed on July 23, 2019 and incorporated herein by
reference.
21(a) Subsidiaries of the Registrant (filed herewith).
69
Exhibit No.
Description of Document
23.1 Consent of Marcum LLP, Independent Registered Public Accounting Firm related to Registration
Statements on Forms S-8 (filed herewith).
24.1 Power of Attorney (included on signature page)
31.1 Certification of Chief Executive Officer and Executive Chairman pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 (filed herewith).
31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
(filed herewith).
32.1 Certification of Chief Executive Officer and Executive Chairman pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith).
32.2 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).
Exhibit 101 The following financial information from the annual report on Form 10-K of Evolving Systems, Inc.
for the year ended December 31, 2019, formatted in XBRL (eXtensible Business Reporting
Language): (i) Consolidated Balance Sheets as of December 31, 2019 and 2018 (ii) Consolidated
Statements of Operations for the years ended December 31, 2019 and 2018 (iii) Consolidated
Statements of Comprehensive Loss for the years ended December 31, 2019 and 2018 (iv)
Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2019
and 2018, (v) Consolidated Statements of Cash Flows for the years ended December 31, 2019 and
2018 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.
70
SIGNATURES
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.
EVOLVING SYSTEMS, INC.
By: /s/ MATTHEW STECKER
Chief Executive Officer and Executive Chairman
March 30, 2020
Matthew Stecker
(Principal Executive Officer)
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes
and appoints Matthew Stecker, 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.
Signature
Title
Date
By:
/s/ MATTHEW STECKER
Chief Executive Officer and Executive
March 30, 2020
Matthew Stecker
Chairman
(Principal Executive Officer)
By:
By:
By:
By:
/s/ MARK P. SZYNKOWSKI
Mark P. Szynkowski
Senior Vice President of Finance
March 30, 2020
(Principal Financial and Accounting Officer)
/s/ DAVID J. NICOL
David J. Nicol
/s/ DAVID S. OROS
David S. Oros
Director
Director
/s/ JULIAN D. SINGER
Julian D. Singer
Director
March 30, 2020
March 30, 2020
March 30, 2020
71
EVOLVING SYSTEMS, INC.
DESCRIPTION OF SECURITIES
DESCRIPTION OF COMMON STOCK
Exhibit 4.3
The common stock of Evolving Systems, Inc. is listed on the Nasdaq Capital Market under the symbol
“EVOL.” All outstanding shares of common stock are validly issued, fully paid, and nonassessable.
The following description of the terms of our common stock is not complete and is qualified in its entirety by
reference to our Restated Certificate of Incorporation, as amended (the “Certificate of Incorporation”), and our
Amended and Restated Bylaws (the “Bylaws”), both of which are exhibits to our Annual Reports on Form 10-K and
Quarterly Reports on Form 10-Q.
Voting Rights
The holders of our common stock are entitled to one vote per share on all matters submitted for action by our
stockholders. There is no provision for cumulative voting with regard to the election of directors.
Dividend and Liquidation Rights
Subject to the preferences applicable to any shares of preferred stock outstanding at any time, holders of our
common stock are entitled to receive dividends when, as, and if declared by our board of directors from funds
legally available therefor and are entitled, in the event of a liquidation, to share ratably in all assets available for
distribution after payment of all debts.
Other Rights
The holders of our common stock have no preemptive rights and no rights to convert their common stock into
any other securities, and our common stock is not subject to any redemption or sinking fund provisions.
Anti-Takeover Provisions of our Certificate of Incorporation, Bylaws, and Delaware Law
Various provisions contained in our Certificate of Incorporation, our Bylaws, and Delaware law could delay or
discourage some transactions involving an actual or potential change in control of Evolving Systems, Inc. or its
management.
Certificate of Incorporation and Bylaws
Provisions in our Certificate of Incorporation and our Bylaws:
•
•
•
•
•
authorize our board of directors to establish one or more series of any class or classes of our preferred
stock, the terms of which can be determined by the board of directors at the time of issuance and may
include rights and preferences that are superior to the rights of our common stock;
do not authorize cumulative voting;
allow our directors to fill any vacancies on our board of directors, including vacancies resulting from a
board of directors resolution to increase the number of directors;
prohibit our stockholders from taking action by written consent;
impose advance notice requirements for nominations for election to the Board of Directors or for proposing
matters that can be acted upon at stockholder meetings;
•
•
allow our stockholders to remove directors without cause only by supermajority vote; and
provide that 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.
Delaware Law
In addition, we are subject to the anti-takeover provisions of Section 203 of the 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 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.
SUBSIDIARIES OF THE REGISTRANT
Exhibit 21 (a)
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 NC, Inc. (formerly RateIntegration, Inc. d/b/a Sixth Sense Media)
RateIntegration Software Technologies PVT LTD
Evolving Digital Data Solutions LTD
Evolving Systems BLS LTD
Lumata UK LTD
Lumata France SAS
Lumata Deutschland GmbH
Lumata Spain SL
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM’S CONSENT
We consent to the incorporation by reference in the Registration Statement of Evolving Systems, Inc. on Form S-8
(File No. 333-227667, File No. 333-222091, File No. 333-212538, File No. 333-205795) of our report dated March
30, 2020, with respect to our audit of the consolidated financial statements of Evolving Systems, Inc. as of
December 31, 2019 and for the year then ended, which report is included in this Annual Report on Form 10-K of
Evolving Systems, Inc. for the year ended December 31, 2019.
EXHIBIT 23.1
/s/ Marcum LLP
Marcum LLP
Philadelphia, Pennsylvania
March 30, 2020
Exhibit 31.1
I, Matthew Stecker, 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;
3. Based on my knowledge, the financial statements, and other financial information included in this report,
fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure
controls and 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,
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of
internal control over 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 30, 2020
/s/ Matthew Stecker
Matthew Stecker
Chairman and Chief Executive Officer
Exhibit 31.2
I, Mark P. Szynkowski, 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;
3. Based on my knowledge, the financial statements, and other financial information included in this report,
fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure
controls and 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,
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of
internal control over 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 30, 2020
/s/ Mark P. Szynkowski
Mark P. Szynkowski
Senior Vice President of Finance and Secretary
(Principal Financial and Accounting Officer)
Exhibit 32.1
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, Matthew Stecker, 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, 2019 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.
/s/ Matthew Stecker
Matthew Stecker
Chairman and Chief Executive Officer
March 30, 2020
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.
Exhibit 32.2
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, Mark P. Szynkowski, 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, 2019 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.
/s/ Mark P. Szynkowski
Mark P. Szynkowski
Senior Vice President of Finance and Secretary
(Principal Financial and Accounting Officer)
March 30, 2020
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.
Important Notice of Availability of Proxy Materials for the Stockholder Meeting of
EVOLVING SYSTEMS, INC.
To Be Held On:
June 17, 2020 at 9:00 a.m. local time
at 9800 Pyramid Court, Suite 400, Englewood, CO 80112
JOHN SMITH
1234 MAIN STrEET
APT. 203
NEw YOrk, NY 10038pro
COMPANY NUMBEr
ACCOUNT NUMBEr
CONTrOL NUMBEr
This communication presents only an overview of the more complete proxy materials that are available to you on the Internet. we
encourage you to access and review all of the important information contained in the proxy materials before voting.
If you want to receive a paper or e-mail copy of the proxy materials you must request one. There is no charge to you for requesting a
copy. To facilitate timely delivery please make the request as instructed below before 6/5/20.
Please visit https://www.evolving.com/investors where the following materials are available for view:
• Notice of Annual Meeting of Stockholders
• Proxy Statement
• Form of Electronic Proxy Card
• Annual Report on Form 10-K
TO rEqUEST MATErIAL: TELEPHONE: 1-844-SEC-EVOL (1-844-732-3865)
E-MAIL: proxy@evolving.com
wEBSITE: https://www.evolving.com/investors
TO VOTE:
ONLINE: To access your online proxy card, please visit www.voteproxy.com and follow the on-screen
instructions or scan the QR code with your smartphone. You may enter your voting instructions at
www.voteproxy.com up until 11:59 PM Eastern Time the day before the meeting date.
IN PErSON: You may vote your shares in person by attending the Annual Meeting.
TELEPHONE: To vote by telephone, please visit www.voteproxy.com to view the materials and to obtain
the toll free number to call.
MAIL: You may request a card by following the instructions above.
1. To elect four (4) directors to the Board of Directors of the Company
to serve until the next annual meeting of stockholders and until their
successors are duly elected and qualified.
2. RATIFICATION OF SELECTION OF MARCUM LLP AS THE COMPANY’S
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
NOMINEES:
David J. Nicol
David S. Oros
Julian D. Singer
Matthew Stecker
THE BOArD OF DIrECTOrS rECOMMENDS A VOTE “FOr” THE ELECTION OF EACH
NOMINEE FOr DIrECTOr AND “FOr” PrOPOSAL 2.
These items of business are more fully described in the proxy statement. The record
date for the Annual Meeting is April 20, 2020. Only stockholders of record at the close
of business on that date may vote at the meeting or any adjournment thereof.
Please note that you cannot use this notice to vote by mail.
ANNUAL MEETING OF STOCKHOLDERS OF
EVOLVING SYSTEMS, INC.
June 17, 2020
PROXY VOTING INSTRUCTIONS
INTERNET - Access “www.voteproxy.com” and follow the on-screen
instructions or scan the QR code with your smartphone. Have your
proxy card available when you access the web page.
TELEPHONE - Call toll-free 1-800-PROXIES (1-800-776-9437) in
the United States or 1-718-921-8500 from foreign countries from any
touch-tone telephone and follow the instructions. Have your proxy
card available when you call.
Vote online/phone until 11:59 PM EDT the day before the meeting.
MAIL - Sign, date and mail your proxy card in the envelope
provided as soon as possible.
COMPANY NUMBER
IN PERSON - You may vote your shares in person by attending
the Annual Meeting.
GO GREEN - e-Consent makes it easy to go paperless. With
e-Consent, you can quickly access your proxy material, statements
and other eligible documents online, while reducing costs, clutter
and paper waste. Enroll today via www.astfinancial.com to enjoy
online access.
ACCOUNT NUMBER
NOTICE OF INTERNET AVAILABILITY OF PROXY MATERIAL:
The Notice of meeting, proxy statement and proxy card
are available at https://www.evolving.com/investors
Please detach along perforated line and mail in the envelope provided IF you are not voting via telephone or the Internet.
20430000000000000000 8
061720
THE BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR’’ THE ELECTION OF DIRECTORS
AND "FOR" PROPOSAL 2.
PLEASE MARK, SIGN, DATE AND RETURN PROMPTLY IN THE ENCLOSED ENVELOPE. PLEASE MARK YOUR VOTE IN BLUE OR BLACK INK AS SHOWN HERE
x
2. RATIFICATION OF SELECTION OF MARCUM LLP AS THE
PUBLIC
INDEPENDENT
REGISTERED
COMPANY’S
ACCOUNTING FIRM
FOR AGAINST ABSTAIN
You are encouraged to specify your choices by marking the appropriate boxes, but you
need not mark any boxes if you wish to vote in accordance with the Board of Directors'
recommendations. The persons named herein as agents and proxies cannot vote your
shares unless you sign and return this card.
In their discretion, the proxies are entitled to vote upon such other matters as may properly
come before the meeting.
This proxy when properly executed will be voted in the manner directed herein by the
undersigned. If no direction is made, this proxy will be voted FOR Proposals 1 and 2.
1. ELECTION OF DIRECTORS
NOMINEES:
O David J. Nicol
O David S. Oros
O Julian D. Singer
O Matthew Stecker
FOR ALL NOMINEES
WITHHOLD AUTHORITY
FOR ALL NOMINEES
FOR ALL EXCEPT
(See instructions below)
INSTRUCTIONS: To withhold authority to vote for any individual nominee(s), mark “FOR ALL EXCEPT”
and fill in the circle next to each nominee you wish to withhold, as shown here:
JOHN SMITH
1234 MAIN STREET
APT. 203
NEW YORK, NY 10038
To change the address on your account, please check the box at right and
indicate your new address in the address space above. Please note that
changes to the registered name(s) on the account may not be submitted via
this method.
Signature of Stockholder Date: Signature of Stockholder Date:
Note: Please sign exactly as your name or names appear on this Proxy. When shares are held jointly, each holder should sign. When signing as executor, administrator, attorney, trustee or guardian, please give full
title as such. If the signer is a corporation, please sign full corporate name by duly authorized officer, giving full title as such. If signer is a partnership, please sign in partnership name by authorized person.