WYY WidePoint Corporation

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Organization

WidePoint Corporation (“WidePoint” or the “Company”) was incorporated in Delaware on May 30, 1997. The Company is a global provider of information technology (IT) based products, services, and solutions. The Company offers secure, cloud-based, enterprise-wide information technology-based solutions that enable commercial markets, and federal and state government organizations, to deploy fully compliant IT services in accordance with government-mandated regulations and advanced system requirements. The Company has sales and operational offices strategically located throughout the continental United States, Ireland, the Netherlands and the United Kingdom. The Company’s principal executive and administrative headquarters is located in McLean, Virginia.

Nature of Operations

We provide secure, cloud-based, enterprise-wide information technology (IT) solutions to commercial enterprises, federal state and foreign governments in many different industry sectors. Our IT solutions are accessible on-demand through cloud computing and provide our customers with a set of streamlined mobile communications management, identity management, and consulting solutions that provide our customers with the ability to manage, analyze and protect their valuable communications assets, and deploy compliant identity management solutions that provide secured virtual and physical access to restricted environments. We use proprietary software, analytical tools and reporting solutions that enable our customers to actively manage their fixed and mobile communications assets and expenses and identity management requirements in an efficient and cost-effective manner in a safe and secure environment anywhere in the world.

The Company’s operating results may vary significantly from quarter-to-quarter, due to revenues earned on contracts, the number of billable days in a quarter, the timing of the pass-through of other direct costs, the commencement and completion of contracts during any particular quarter, the schedule of the government agencies for awarding contracts, the term of each contract awarded and general economic conditions. A significant portion of the Company’s expenses, such as personnel and facilities costs, are fixed in the short term. Successful contract performance and variation in the volume of activity as well as in the number of contracts commenced or completed during any quarter may cause significant variations in operating results from quarter to quarter.

Basis of Presentation

The unaudited condensed consolidated financial statements as of June 30, 2016 and for each of the three and six month periods ended June 30, 2016 and 2015, respectively, included herein have been prepared by the Company, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Pursuant to such regulations, certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles (“GAAP”) have been condensed or omitted. It is the opinion of management that all adjustments (which include normal recurring adjustments) necessary for a fair statement of financial results are reflected in the financial statements for the interim periods presented. The condensed consolidated balance sheet as of December 31, 2015 was derived from the audited condensed consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015. The results of operations for the three and six month periods ended June 30, 2016 are not indicative of the operating results for the full year.

Principles of Consolidation

The accompanying condensed consolidated financial statements include the accounts of the Company, its wholly owned subsidiaries and acquired entities since their respective dates of acquisition. All significant inter-company amounts were eliminated in consolidation.

Reclassifications

The Company reclassified amounts representing product development previously included in the caption “general and administrative expenses” in the comparative statement of operations presentation as a separate line item to conform to the current year presentation.

Foreign Currency

Assets and liabilities denominated in foreign currencies are translated into U.S. dollars based upon exchange rates prevailing at the end of each reporting period. The resulting translation adjustments, along with any related tax effects, are included in accumulated other comprehensive (loss) income, a component of stockholders’ equity. Translation adjustments are reclassified to earnings upon the sale or substantial liquidation of investments in foreign operations. Revenues and expenses are translated at the average month-end exchange rates during the year. Gains and losses related to transactions in a currency other than the functional currency, including operations outside the U.S. where the functional currency is the U.S. dollar, are reported net in the Company’s Consolidated Statements of Operations, depending on the nature of the activity.

Use of Estimates

The preparation of condensed consolidated financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The more significant areas requiring use of estimates and judgment relate to revenue recognition, accounts receivable valuation reserves, ability to realize intangible assets and goodwill, ability to realize deferred income tax assets, fair value of certain financial instruments and the evaluation of contingencies and litigation. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results could differ from those estimates.

Significant Accounting Policies

There have been no significant changes in the Company’s significant accounting policies during the first six months of 2016 from those disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 filed with the SEC on March 15, 2016.

Segment Reporting

Our customers and the industry view our market as a singular business and demand an integrated and scalable suite of information technology-based enterprise-wide solutions. Our information technology service offerings comprise a single business from which the Company earns revenues and incurs costs. The Company’s information technology service offerings are centrally managed and reported on that basis to its Chief Operating Decision Maker who evaluates its business as a single segment. See Note 13 for detailed information regarding the composition of information technology services.

Accounting Standards Update

In March 2016, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net), which amended certain existing illustrative examples and adding additional illustrative examples to assist in the application of the guidance on principal versus agent considerations. The effective date and transition of these amendments is the same as the effective date and transition of ASU 2014-09, Revenue from Contracts with Customers (Topic 606). The new standard is effective for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The Company is currently evaluating the effect that ASU 2016-08 will have on its consolidated financial statements and related disclosures. The Company has not yet selected a transition method, adoption date, or determined the effect of the standard on its ongoing financial reporting.

In March 2016, the Financial Accounting Standards Board issued Accounting Standards Update (ASU) ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, which included amendments to simplify the timing of when excess tax benefits are recognized and cash flow statement classification. The new standard is effective for financial statements issued for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. Early adoption is permitted for financial statements that have not been previously issued. The standard may be applied on a using a full retrospective, modified retrospective, or prospective transition method depending on the amendment adopted. Any retrospective adjustment shall be accounted for as a cumulative-effect adjustment to equity as of the beginning of the earliest comparative period presented. The Company is currently evaluating the effect that ASU 2016-09 will have on its consolidated financial statements and related disclosures. The Company has not yet selected a transition method, adoption date, or determined the effect of the standard on its ongoing financial reporting.

There were no business combinations during the six month period ended June 30, 2016.

Accounts receivable consist of the following by customer type for each of the periods presented below:

For the three and six month periods ended June 30, 2016 and 2015, respectively, the Company had no material recoveries of accounts receivable for which an allowance had been previously established.

Customers representing ten percent or more of consolidated revenues are set forth in the table below for each of the periods presented:

Unbilled accounts receivable represents amount not yet billed for services delivered. Unbilled receivables consist of the following by customer type for each of the periods presented below:

Major classes of property and equipment consisted of the following for each of the periods presented below:

There were no changes in the estimated useful lives used to depreciate property and equipment during the three and six month periods ended June 30, 2016 and 2015. For each of the three month periods ended June 30, 2016 and 2015, property and equipment depreciation expense recorded was approximately $111,100 and $117,800, respectively. For each of the six month periods ended June 30, 2016 and 2015, property and equipment depreciation expense recorded was approximately $231,100 and $243,200, respectively. For each of the three and six month periods ended June 30, 2016 and 2015, there were no material sales or disposals of owned property and equipment.

Included in property and equipment are certain equipment purchases acquired under capital lease arrangements. Total capitalized cost of equipment under capital leases at June 30, 2016 and December 31, 2015 was approximately $63,500 and $372,600, respectively. For each of the three and six month periods ended June 30, 2016 and 2015, the Company did not enter into any capital lease arrangements.

For the three and six month periods ended June 30, 2016 and 2015, depreciation expense for leased equipment was approximately $7,500 and $19,700, respectively. Accumulated depreciation for leased equipment at June 30, 2016 and December 31, 2015 was approximately $31,300 and $351,400, respectively. For the three and six month periods ended June 30, 2016 there were disposals of fully amortized leased equipment of approximately $309,100. For the three and six month periods ended June 30, 2015 there were no disposals of leased equipment. Total net book value of assets under capital leases at June 30, 2016 and December 31, 2015 was approximately $32,200 and $21,200, respectively.

The Company has recorded goodwill of $18,555,578 as of June 30, 2016. There were no changes in the carrying amount of goodwill for the three and six month periods ended June 30, 2016. The Company considered whether there were indicators of impairment during the six month period ended June 30, 2016.

The Company has recorded intangible assets of $4,801,164, consisting of purchased intangibles and internally developed software used in the conduct of business. For the three and six month periods ended June 30, 2016, the Company capitalized internally developed software of approximately $233,500 substantially related to our Certificate-on-Device credentialing tools and applications. For the three and six month periods ended June 30, 2015, the Company capitalized internally developed software of approximately $186,400 related to our Public Key Infrastructure software certificate credentialing tools and applications. There were no disposals of intangible assets for the three and six month periods ended June 30, 2016 and 2015.

The aggregate amortization expense recorded for the three month periods ended June 30, 2016 and 2015 were approximately $266,900 and $262,500, respectively. The aggregate amortization expense recorded for the six month periods ended June 30, 2016 and 2015 were approximately $533,800 and $530,800, respectively. The total weighted average life of purchased and internally developed intangible assets is approximately 6.1 years at June 30, 2016.

Commercial Loan Agreement Facility

On April 28, 2016, the Company entered into a Business Loan Agreement with Cardinal Bank (the “Loan Agreement”) to replace the prior $8.0 million revolving line of credit facility with Cardinal Bank effective as of April 27, 2016.

The Loan Agreement is for $6.0 million and extended the maturity date of the credit facility is April 30, 2017. The available amount under the revolving line of credit is subject to a borrowing base, which is equal to the lesser of (i) $6.0 million or (ii) 75% of qualified government and commercial accounts receivables, less any amounts outstanding on the Company’s $4.0 million term loan with Cardinal Bank. The interest rate for the revolving line of credit is the Wall Street Journal prime rate plus 0.75%, with a floor of 4.25%.

The Loan Agreement requires that the Company (i) maintain a minimum tangible net worth of at least $6.25 million as of June 30, 2016, increasing to $6.5 million at December 31, 2016; (ii) generate a minimum after-tax net income of at least $1.00 for the third quarter of 2016 and at least $200,000 for the fourth quarter of 2016 and (iii) maintain a current ratio of 1.1:1 tested quarterly.

Under the credit facility in place prior to the subsequent renewal as discussed above the Company was advanced approximately $10.2 million and repaid approximately $10.1 million during the six month period ended June 30, 2016. There was approximately $0.1 million outstanding against the Company’s credit facility at June 30, 2016. As of June 30, 2016, the Company was in compliance with all financial covenants and was eligible to borrow up to $4.8 million under the borrowing base formula.

(1)    On December 17, 2010, the Company entered into a real estate purchase agreement to acquire operations and call center facility in Columbus, Ohio for approximately $677,000. In connection with the real estate purchase agreement, the Company entered into a $528,000 ten-year mortgage with Cardinal Bank to fund the unpaid portion of the purchase price. The mortgage loan bears interest at 6.0% with monthly principal and interest payments of approximately $3,800, and matures on December 17, 2020. The mortgage loan principal and interest payments are based on a twenty-year amortization with the unpaid balance due at maturity. The mortgage loan is secured by the real estate.

(2)    On December 31, 2011, the Company entered into a $4.0 million 5-year term note with Cardinal Bank (“Cardinal Bank Term Note”) to fund a portion of the purchase price paid in connection with the asset purchase agreement with Avalon Global Solutions, Inc. (“AGS”) dated December 30, 2011. The term note bears interest at 4.5% with monthly principal and interest payments of approximately $74,694, and matures on December 30, 2016. The term note is secured under a corporate security agreement.

Capital Lease Obligations

The Company has leased certain equipment and automobiles under capital lease arrangements that expire in 2017. Except for the assumption of certain capital lease arrangements in connection with the acquisition of Soft-ex Communications Ltd. (“SCL”), there were no changes to existing lease arrangements during the six month period ended June 30, 2016.

The Company files U.S. federal income tax returns with the Internal Revenue Service (“IRS”) as well as income tax returns in various states and certain foreign countries. The Company may be subject to examination by the IRS or various state taxing jurisdictions for tax years 2003 and forward. The Company may be subject to examination by various foreign countries for tax years 2014 forward. As of June 30, 2016, the Company was not under examination by the IRS, any state or foreign tax jurisdiction. The Company did not have any unrecognized tax benefits at either June 30, 2016 or December 31, 2015. In the future if applicable, any interest and penalties related to uncertain tax positions will be recognized in income tax expense.

As of June 30, 2016, the Company had recorded a deferred tax asset of approximately $29.7 million reflecting the benefit of approximately $26.7 million in net operating loss (NOL) carry forwards available to offset future taxable income for federal income tax purposes, net of the potential Section 382 limitations. These federal NOL carry forwards expire between 2017 and 2032. Included in the recorded deferred tax asset, the Company had a benefit of approximately $29.7 million available to offset future taxable income for state income tax purposes. These state NOL carry forwards expire between 2024 and 2032. Because of the change of ownership provisions of the Tax Reform Act of 1986, use of a portion of our domestic NOL may be limited in future periods. Further, a portion of the carryforwards may expire before being applied to reduce future income tax liabilities.

Management assesses the available positive and negative evidence to estimate if sufficient future taxable income will be generated to use the existing deferred tax assets. Under existing income tax accounting standards such objective evidence is more heavily weighted in comparison to other subjective evidence such as our projections for future growth, tax planning and other tax strategies. A significant piece of objective negative evidence considered in management’s evaluation of the realizability of its deferred tax assets was the existence of cumulative losses over the latest three-year period. Management forecast future taxable income, but concluded that there may not be enough of a recovery before the end of the fiscal year to overcome the negative objective evidence of three years of cumulative losses. On the basis of this evaluation, management recorded a valuation allowance against all deferred tax assets. If management’s assumptions change and we determine we will be able to realize these deferred tax assets, the tax benefits relating to any reversal of the valuation allowance on deferred tax assets will be accounted for as a reduction of income tax expense.

Preferred Stock

There were no issuances of preferred stock during the three and six month periods ended June 30, 2016 and 2015 .

Common Stock

The Company is authorized to issue 110,000,000 shares of common stock, $.001 par value per share. As of June 30, 2016, there were 82,730,134 shares of common stock outstanding.

Employee Stock Option Exercises

The Company issued 209,438 shares of common stock issued as a result of vesting of Restricted Stock Awards (RSA) during the six month period ended June 30, 2016. See Note 11 for additional information regarding RSA activity. There was no vesting of RSAs during the six month period ended June 30, 2015.

Shares of common stock issued as a result of stock option exercises and realized gross proceeds during the six month period ended June 30, 2015 were 825,029 and $670,500, respectively, from the exercise of such stock options. See Note 11 for additional information regarding the stock incentive plans.

Stock Incentive Plan

The Company adopted the 2008 Stock Incentive Plan (the “2008 Plan”) on December 18, 2008. The 2008 Plan was amended and restated on December 15, 2009. The 2008 Plan will terminate on December 17, 2017. The 2008 Plan is administered by the Compensation Committee and authorizes the grant or award of incentive stock options, non-qualified stock options, restricted stock awards, stock appreciation rights, dividend equivalent rights, performance unit awards and phantom shares. The Company issues new shares of common stock upon the exercise of stock options. Any shares associated with forfeited awards are added back to the number of shares to be granted under the stock incentive plan.

Under the 2008 Plan, 6,578,049 shares were reserved for issuance under equity incentive awards to be issued pursuant to the 2008 Plan. As of June 30, 2016, there were 3,327,211 shares available to be issued under the 2008 Plan. As of June 30, 2016, the Company awarded restricted stock and non-qualified stock option awards of 500,000 and 2,750,838, respectively. A summary of restricted stock and non-qualified stock option award activity during the three and six months ended June 30, 2016 and 2015 is described in more detail below.

Restricted Stock Awards

On November 18, 2010, the Company’s Compensation Committee granted Steve L. Komar and James T. McCubbin each an award of 250,000 shares of restricted stock of the Company, the vesting of which is based upon the earlier to occur of (a) the seventh anniversary date of the grant, or (b) an acceleration event set forth in the award agreement with respect to such grant, including the acceleration of fifty (50) percent of such awards upon the Company reporting annual consolidated revenue in excess of $70 million. Accordingly, each of the executives had 125,000 shares vest in March 2016.

A summary of RSA activity as of June 30, 2016, and changes during six month period ended June 30, 2016 is set forth below:

At June 30, 2016, the Company had approximately $61,700 of total unamortized RSA compensation expense, related to the remaining 250,000 unvested RSAs that will be recognized over the weighted average remaining period of 1.5 years. The total intrinsic value of RSAs vested during the six month period ended June 30, 2016 was approximately $185,000. The intrinsic value of outstanding RSAs as of June 30, 2016 was approximately $147,500.

Stock Option Awards

The Company granted 650,000 stock options during the six month period ended June 30, 2016. The Company granted 180,000 stock options during the six month period ended June 30, 2015. A summary of stock option activity as of June 30, 2016 and 2015, and changes during six month periods ended June 30, 2016 and 2015 is set forth below:

During the six month period ended June 30, 2016, there were stock options of 317,000 that were cancelled, of which 205,000 were cancelled due to termination of employment and the remainder expired unexercised at the end of the option term.

The weighted-average remaining contractual life and the aggregate intrinsic value (the amount by which the fair value of the Company’s stock exceeds the exercise price of the option) of the stock options outstanding, exercisable, and vested and expected to vest as of June 30, 2016 are as follows:

Aggregate intrinsic value represents total pretax intrinsic value (the difference between WidePoint’s closing stock price on June 30, 2016 and the exercise price, multiplied by the number of in-the-money options) that would have been received by the option holders had all option holders exercised their options on June 30, 2016. The intrinsic value will change based on the fair market value of WidePoint’s stock. The total intrinsic value of options exercised during the six months ended June 30, 2015 was approximately $670,200.

Share-based compensation (including restricted stock awards) represents both stock options based expense and stock grant expense. For the three and six month periods ended June 30, 2016 and 2015, the Company recognized share-based compensation expense of approximately $48,400 and $81,400, $136,300 and $118,900, respectively. At June 30, 2016, the Company had approximately $367,000 of total unamortized compensation expense, net of estimated forfeitures, related to stock option plans that will be recognized over the weighted average remaining period of 2.47 years.

The computations of basic and diluted EPS were as follows for the periods presented below:

The dilutive effect of unexercised stock options and restricted stock awards excludes 2,190,668 and 1,896,572 of options from the computation of EPS for the three and six month periods ended June 30, 2016 and 2015, respectively, because inclusion of the options would have been anti-dilutive.

The following table was prepared to provide additional information about the composition of revenues based on broad service descriptions:

The following table presents our domestic and foreign revenue mix for the periods presented:

Operating Lease Commitments

There were no leases entered into or modifications of existing leases during the six month periods ended June 30, 2016 and 2015.

Employment Agreements

The Company has employment agreements with certain executives that set forth compensation levels and provide for severance payments in certain instances.