The accompanying notes are an integral part
of these condensed consolidated financial statements.
The accompanying notes are an integral part
of these condensed consolidated financial statements.
The accompanying notes are an integral part
of these condensed consolidated financial statements.
The accompanying notes are an integral part
of these condensed consolidated financial statements.
The accompanying notes are an integral part
of these condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(Unaudited)
|
1.
|
Organization and Nature of Operations
|
Organization
WidePoint Corporation
(“WidePoint” or the “Company”) was incorporated in Delaware on May 30, 1997 and conducts operations through
its wholly-owned operating subsidiaries 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
The Company is a leading
provider of communications solutions and federally certified secure identity management solutions globally to government and commercial
enterprises. The Company uses proprietary software, analytical and reporting tools to deliver its communications and related identity
management solutions. The Company’s solutions are internally hosted solutions and accessible on-demand through a secure portal.
The Company’s customers can actively process orders, manage, analyze and protect their valuable communications assets through
their portal.
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. The Company derives a
significant amount of revenues from contracts funded by federal government agencies for which WidePoint’s
subsidiaries act in the capacity as the prime contractor, or as a subcontractor. The Company believes that contracts with
federal government agencies in particular, will be the primary source of revenues for the foreseeable future. External
factors outside of the Company’s control such as delays and/or changes in government administrations, budgets and
other political matters that may impact the timing and commencement of such work and could result in variations in operating
results and directly affect the Company’s financial performance.
A significant portion
of the Company’s expenses, such as personnel and facilities costs, are fixed in the short term and may be not be easily modified
to manage through changes in the Company’s market place that may create pressure on pricing and/or costs to deliver its services.
The Company has
periodic capital expense requirements to maintain and upgrade its internal technology infrastructure tied to its hosted
solutions and other such costs may be significant when incurred in any given quarter.
|
2.
|
Basis of Presentation and Accounting Policies
|
Basis of Presentation
The unaudited condensed
consolidated financial statements as of March 31, 2017 and for each of the three month periods ended March 31, 2017 and 2016, 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, 2016 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, 2016. The results of operations for the three month period ended March
31, 2017 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
Upon
the adoption of recent accounting standards as further described below the Company changed its presentation of deferred tax asset at December 31, 2016 to present a single non-current deferred tax classification.
The Company netted its current deferred tax assets against its long term deferred tax liabilities to present a single net
deferred tax liability as non-current as of December 31, 2016 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. There were no significant changes in accounting estimates used by management during the quarter.
Significant Accounting Policies
There have been no
significant changes in the Company’s significant accounting policies during the first three months of 2017 from those disclosed
in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 filed with the SEC on March 31, 2017, except
as noted below under the section “recently adopted accounting pronouncements.”
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.
Recently Adopted Accounting Standards
Accounting Standards
Codification 740 “Income Taxes.” In November 2015, ASU No. 2015-17, “Balance Sheet Classification of Deferred
Taxes” was issued. This ASU requires that deferred tax liabilities and assets be classified as noncurrent in a classified
statement of financial position. The amendments in this update apply to all entities that present a classified statement of financial
position. The Company adopted this ASU in the three months ended March 31, 2017 and reclassified $48,826 of current deferred tax
assets to long-term deferred tax assets as of December 31, 2016.
Accounting
Standards Codification 718 “Compensation-Stock Compensation.” In March 2016, ASU No. 2016-09, “Improvements
to Employee Share-Based Payment Accounting” was issued. This ASU provides for areas of simplification for several
aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of
awards as either equity or liabilities, and classification on the statement of cash flows. The amendments in this ASU are
effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The Company
adopted this ASU in the three months ended March 31, 2017, and the Company did not recognize any adjustments due to the fact
that the Company had a tax-effected full valuation allowance of approximately $9.3 million applied against its U.S. based
deferred tax assets, of which approximately $352,200 was applied against unrealized stock option benefits. In the event the
Company generates sufficient taxable income to utilize its deferred tax assets the Company may be required to recognize up to
$352,200 in deferred tax assets relating to unrealized stock option benefits and a corresponding adjustment to retained
earnings. The Company estimates forfeiture rates and adjust such rates when appropriate.
Accounting Standards
Codification 230 “Statement of Cash Flows.” In August 2016, ASU No. 2016-15, “Classification of Certain Cash
Receipts and Cash Payments” was issued. This ASU provides guidance on eight specific cash flow issues with the objective
of reducing the existing diversity in practice for those issues. The amendments in this ASU are effective for annual periods beginning
after December 15, 2017, and interim periods within those annual periods. The adoption of this accounting standard during the three month period ended March 31, 2017 and the comparative
period did not have a material effect on the Company’s condensed consolidated statements of cash flows.
Accounting Standards under Evaluation
In May 2014, the Financial Accounting Standards Board (FASB) issued new accounting guidance on revenue recognition. The
accounting standard establishes the principles to apply to determine the amount and timing of revenue recognition, specifying
the accounting for certain costs related to revenue, and requiring additional disclosures about the nature, amount, timing
and uncertainty of revenues and related cash flows. The guidance, as amended, supersedes most of the current revenue recognition
requirements, and is effective January 1, 2018. Upon adoption of the new revenue recognition guidance, the Company anticipates
using the full retrospective method, which applies the new standard to each prior reporting period presented. The Company
has been working on the implementation of the standard and has made good progress in evaluating the potential impact on its
consolidated financial statements. There will be some changes to the recognition timing and classification of revenues and
expenses; however, the Company does not expect a significant impact to pretax income upon adoption. The Company is also in
the process of implementing changes to its accounting policies, business processes, systems and internal controls to support
the recognition and disclosure requirements under the new standard.
In February 2016,
the FASB issued new accounting guidance on leases. The guidance, which is effective January 1, 2019, with early adoption permitted,
requires virtually all leases to be recognized on the Consolidated Balance Sheets. The Company currently anticipates adopting
the standard effective January 1, 2019, using the modified retrospective approach, which requires recording existing operating
leases on the Consolidated Balance Sheets upon adoption and in the comparative period. The Company is in the process of identifying
changes to its accounting policies, business processes, systems, and internal controls in preparation for the implementation.
Specifically, the Company is currently reviewing its lease portfolio and is evaluating and interpreting the requirements under
the guidance, including the available accounting policy elections, in order to determine the impacts to the Company’s financial
position, results of operations and cash flows upon adoption. The Company anticipates that the impact of recording existing operating
leases on the consolidated balance sheets will be material to the Company’s financial position and cash flows upon adoption.
Accounting
Standards Codification 350 “Intangibles - Goodwill and Other.” In January 2017, ASU No. 2017-04, “Simplifying
the Test for Goodwill Impairment” was issued. Under the amendments in this ASU, an entity should perform its annual, or
interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize
an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value; however, the loss should
not exceed the total amount of goodwill allocated to that reporting unit. The ASU also eliminated the requirements for any reporting
unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform
Step 2 of the goodwill impairment test. An entity should apply this ASU on a prospective basis and for its annual or any interim
goodwill impairment tests in fiscal years beginning after December 15, 2019. The Company is continuing to evaluate the effect
this guidance will have on the consolidated financial statements and related disclosures.
In
November 2016, the Company evaluated plans to either expand its current Lewis Center, Ohio (“Lewis Center Facility”)
or relocate to a larger facility that could accommodate the Company’s growth and operational requirements. In December 2016,
the Company’s management decided to put the Lewis Center Facility up for sale and identify a larger facility to lease. The
Company expects to continue to fully utilize the Lewis Center Facility until the sale is closed. Assets held for sale are set forth
in the table below as of the periods presented:
|
|
MARCH 31,
|
|
|
DECEMBER 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(Unaudited)
|
|
Land
|
|
$
|
139,656
|
|
|
$
|
139,656
|
|
Building
|
|
|
537,398
|
|
|
|
537,398
|
|
|
|
|
|
|
|
|
|
|
Total Land and building held for sale, at cost
|
|
$
|
677,054
|
|
|
$
|
677,054
|
|
Less: Accumulated depreciation
|
|
|
(82,678
|
)
|
|
|
(82,678
|
)
|
|
|
|
|
|
|
|
|
|
Land and building held for sale, net
|
|
$
|
594,376
|
|
|
$
|
594,376
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
$
|
427,483
|
|
|
$
|
432,367
|
|
The
Company expects to close the sale of its Lewis Center Facility during the second quarter of 2017 and use the net sales proceeds
received to repay the mortgage obligation in full and use the remaining proceeds to pay for leasehold improvements, computer hardware
and any other costs to pay for lease improvement costs at a new facility.
|
4.
|
Accounts Receivable and Significant Concentrations
|
Accounts receivable
consist of the following by customer type in the table below as of the periods presented:
|
|
MARCH 31,
|
|
|
DECEMBER 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(Unaudited)
|
|
Commercial
|
|
$
|
2,816,288
|
|
|
$
|
2,319,142
|
|
Government
|
|
|
4,315,360
|
|
|
|
3,178,362
|
|
Gross accounts receivable
|
|
|
7,131,648
|
|
|
|
5,497,504
|
|
Less: allowances for doubtful accounts
|
|
|
(345,264
|
)
|
|
|
(344,411
|
)
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
$
|
6,786,384
|
|
|
$
|
5,153,093
|
|
For the three month
periods ended March 31, 2017 and 2016, respectively, the Company did not recognize any material provisions for bad debt or any
material recoveries of commercial accounts receivable for which an allowance had been previously established. The Company has not
historically maintained a bad debt reserve for its government customers as it has not experienced material or recurring bad debt
charges and the nature and size of the contracts has not necessitated the Company’s establishment of such a bad debt reserve.
Significant Concentrations
Customers representing
ten percent or more of consolidated trade accounts receivable are set forth in the table below as of the periods presented:
|
|
MARCH 31,
|
|
|
DECEMBER 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
As a % of
|
|
|
As a % of
|
|
Customer Name
|
|
Receivables
|
|
|
Receivables
|
|
|
|
(Unaudited)
|
|
Department of Homeland Security (DHS)
|
|
|
54%
|
|
|
|
47%
|
|
Customers representing ten percent or more
of consolidated revenues are set forth in the table below for each of the periods presented:
|
|
THREE MONTHS ENDED
|
|
|
|
MARCH 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
As a % of
|
|
|
As a % of
|
|
Customer Name
|
|
Revenues
|
|
|
Revenues
|
|
|
|
(Unaudited)
|
|
Department of Homeland Security (DHS)
|
|
|
59%
|
|
|
|
65%
|
|
|
5.
|
Unbilled Accounts Receivable
|
Unbilled accounts receivable
represents amount not yet billed for services delivered. Unbilled receivables consist of the following by customer type as of the
periods presented below:
|
|
MARCH 31,
|
|
|
DECEMBER 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(Unaudited)
|
|
Commercial
|
|
$
|
340,149
|
|
|
$
|
278,862
|
|
Government
|
|
|
6,053,227
|
|
|
|
7,833,828
|
|
|
|
|
|
|
|
|
|
|
Unbilled accounts receivable
|
|
$
|
6,393,376
|
|
|
$
|
8,112,690
|
|
|
6.
|
Property and Equipment
|
Major classes of property and equipment
consisted of the following as of the periods presented below:
|
|
MARCH 31,
|
|
|
DECEMBER 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(Unaudited)
|
|
Computer hardware and software
|
|
$
|
1,228,275
|
|
|
$
|
1,214,052
|
|
Furniture and fixtures
|
|
|
256,514
|
|
|
|
211,376
|
|
Leasehold improvements
|
|
|
489,371
|
|
|
|
486,467
|
|
Automobile
|
|
|
173,173
|
|
|
|
216,880
|
|
Gross property and equipment
|
|
|
2,147,333
|
|
|
|
2,128,775
|
|
Less: accumulated depreciation and amortization
|
|
|
1,369,131
|
|
|
|
1,392,097
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
778,202
|
|
|
$
|
736,678
|
|
There were no changes
in the estimated useful lives used to depreciate property and equipment during the three month periods ended March 31, 2017 and
2016. During the three month period ended March 31, 2017 there were disposals of fully depreciated owned property and equipment
with related cost and accumulated depreciation of approximately $31,500. During the three month period ended March
31, 2016 there were no material sales or disposals of owned property and equipment.
Assets under capital
lease included in the table above consisted of the following as of the periods presented below:
|
|
MARCH 31,
|
|
|
DECEMBER 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(Unaudited)
|
|
Automobiles
|
|
$
|
93,301
|
|
|
$
|
63,498
|
|
Less: accumulated amortization
|
|
|
-
|
|
|
|
36,823
|
|
|
|
|
|
|
|
|
|
|
Capital lease assets, net
|
|
$
|
93,301
|
|
|
$
|
26,675
|
|
During the three month
period ended March 31, 2017, the Company acquired two automobiles under capital lease arrangements and recognized a gross asset
of $93,301 (€87,300). For the three month period ended March 31, 2017, the Company disposed of two leased automobiles with
a net book value of $47,800 (€44,900) and received gross proceeds of approximately $51,800 (€48,700). The Company recognized
a net gain on disposal of approximately $4,100 (€3,800). During the three month period ended March 31, 2016 there were no
material sales or disposals of owned or leased property and equipment.
Property and equipment
depreciation expense (including amortization of capital lease property) was approximately as follows for the periods presented
below:
|
|
THREE MONTHS ENDED
|
|
|
|
MARCH 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(Unaudited)
|
|
Property and equipment depreciation expense
|
|
$
|
83,800
|
|
|
$
|
119,800
|
|
|
|
|
|
|
|
|
|
|
Capital lease amortization (included in property and equipment depreciation expense)
|
|
$
|
-
|
|
|
$
|
3,700
|
|
|
7.
|
Goodwill and Intangible Assets
|
The Company has recorded
goodwill of $18,555,578 as of March 31, 2017. There were no changes in the carrying amount of goodwill during the three month periods
ended March 31, 2017. The Company considered whether there were indicators of impairment during the three month period ended March
31, 2017.
The Company has recorded
intangible assets of $4,042,679, consisting of purchased intangibles and internally developed software used in the conduct of business.
For the three month period ended March 31, 2017, the Company capitalized internally developed software costs of approximately $13,800
related to costs associated with our next generation TDI Optimiser™ application. There were no disposals of intangible assets
for the three month periods ended March 31, 2017 and 2016.
The aggregate amortization
expense recorded for the three month periods ended March 31, 2017 and 2016 were approximately $269,800 and $266,900, respectively.
The total weighted remaining average life of purchased and internally developed intangible assets is approximately 4.1 years and
1.8 years, respectively, at March 31, 2017.
|
8.
|
Line of Credit and Long Term Debt
|
Commercial Loan Agreement Facility
On April 28, 2016,
the Company entered into a Business Loan Agreement with Cardinal Bank (the “Loan Agreement”) for a $6.0 million working
capital credit facility. On November 4, 2016, the Company entered into a modification of its Loan Agreement that: 1) decreased
the Company’s borrowing base as a percentage of qualified government and commercial receivables from 75% to 65% and 2) decreased
the minimum after-tax net income requirement from $200,000 to $1.00 for the fourth quarter of 2016. On April 11, 2017, the Company
entered into a Change in Terms Agreement to extend the maturity date the working capital
credit facility from April 30, 2017 to July 31, 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) 65%
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 $6.5 million; (ii) generate
a minimum after-tax net income of at least $1.00 and (iii) maintain a current ratio of
1.1:1 tested quarterly.
Under the
credit facility the Company was advanced and repaid approximately $2.4 million during the three month period ended March 31,
2017. There was no balance outstanding against the Company’s credit facility at March 31, 2017. As of March 31, 2017,
the Company was eligible to borrow up to $4.9 million under the borrowing base formula.
Long-Term Debt
Long-term debt consisted
of the following:
|
|
MARCH 31,
|
|
|
DECEMBER 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(Unaudited)
|
|
Cardinal Bank mortgage dated December 17, 2010 (1)
|
|
$
|
427,483
|
|
|
$
|
432,367
|
|
Cardinal Bank term note dated December 31, 2011 (2)
|
|
|
-
|
|
|
|
74,681
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
427,483
|
|
|
|
507,048
|
|
Less: current portion
|
|
|
20,491
|
|
|
|
94,868
|
|
|
|
|
|
|
|
|
|
|
Long-term debt, net of current portion
|
|
$
|
406,992
|
|
|
$
|
412,180
|
|
|
|
|
|
|
|
|
|
|
Long-term debt related to assets held for sale, net of current portion
|
|
$
|
406,992
|
|
|
$
|
412,180
|
|
(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 and financed a significant portion of the purchase price with a $528,000 ten-year mortgage
with Cardinal Bank. 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. This mortgage obligation was classified separately
as a liability held for sale on the condensed consolidated balance sheets. See Note 3 for additional information regarding the
planned sale of the Lewis Center Facility.
(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. dated December 30, 2011. The term note bears interest at 4.5% with monthly principal and interest payments of
approximately $74,694, and matured on December 30, 2016. The term note was secured under a corporate security agreement. The
Company paid the last scheduled installment on January 6, 2017.
Capital Lease Obligations
As more fully
described in Note 6, the Company acquired two new automobiles at a cost of $93,301 (€87,300) and financed the purchase
of these vehicles under a capital lease agreement for $80,527 (€75,400). These automobiles will be used by the
Company’s sales office in the United Kingdom. Minimum lease payments required under current capital leases range from
$695 (€651) to $1,210 (€1,130) and these leases expire in March 2021. The following sets forth the Company’s
future minimum payment obligations under these capital lease agreements for fiscal years ending March 31, 2017:
2017
|
|
$
|
22,850
|
|
2018
|
|
|
22,850
|
|
2019
|
|
|
22,850
|
|
2020
|
|
|
22,838
|
|
|
|
|
|
|
Total principal and interest payments
|
|
|
91,388
|
|
Less: portion representing interest
|
|
|
10,861
|
|
Present value of minimum lease payments under capital lease agreements
|
|
|
80,527
|
|
Less: current portion
|
|
|
22,850
|
|
Capital lease obligations, net of current portion
|
|
$
|
57,677
|
|
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 March 31, 2017, 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 March 31, 2017 or December 31, 2016. In the future if applicable, any interest
and penalties related to uncertain tax positions will be recognized in income tax expense.
As of March 31, 2017,
the Company had approximately $31.9 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
2020 and 2036. Included in the recorded deferred tax asset, the Company had a benefit of approximately $28.5 million available
to offset future taxable income for state income tax purposes. These state NOL carry forwards expire between 2024 and 2036. 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 month periods ended March 31, 2017 and 2016
.
Common Stock
The
Company is authorized to issue 110,000,000 shares of common stock, $.001 par value per share. As of March 31, 2017, there were
82,844,322 shares of common stock outstanding.
The
Company issued 84,188 and 209,438 shares of common stock, respectively, as a result of the vesting of Restricted Stock Awards
(RSA) during the three month period ended March 31, 2017 and 2016. See Note 11 for additional information regarding RSA
activity. There was no vesting of RSAs during the three month period ended March 31, 2016.
Shares
of common stock issued as a result of Non-Qualified Stock Option (NQSO) exercises and realized gross proceeds during the
three month period ended March 31, 2017 were 30,000 and $17,100, respectively, from the exercise of such non-qualified stock
options. No tax benefit has been associated with the exercise of stock options for the three month period ended March 31,
2017, because of the existence of net operating loss carryforwards for which there is a full valuation allowance. There were
no stock options exercised during three month period ended March 31, 2016.
See Note 11 for additional information
regarding the stock incentive plans.
The Company’s
stock incentive plan is administered by the Compensation Committee and authorizes the grant or award of incentive stock options,
nonqualified 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
options forfeited are added back to the number of shares that underlie stock options to be granted under the stock incentive plan.
The Company has issued restricted stock awards and non-qualified stock option awards as described below.
Valuation of Stock
Awards
The Company
estimates the fair value of all NQSO stock awards using a Black-Scholes option pricing model (“Black-Scholes
model”). The fair value of each stock award is estimated on the date of grant using a Black-Scholes option pricing
model (“Black-Scholes model”), which requires an assumption of dividend yield, risk free interest rates,
volatility, forfeiture rates and expected option life. The risk-free interest rates are based on the U.S. Treasury yield for
a period consistent with the expected term of the option in effect at the time of the grant. Expected volatilities are based
on the historical volatility of our common stock over the expected option term. The expected term of options granted is based
on analyses of historical employee termination rates and option exercises.
The Company records the fair value of all restricted stock awards based on the grant date fair value and amortizes stock compensation
on a straight-line basis over the vesting period.
Restricted Stock
Awards
During the three
month period ended March 31, 2017, the Company granted 300,000 RSAs to its Chief Executive Officer that had a grant date fair value of approximately $246,000. The vesting of these RSAs are tied to attainment of certain financial
goals as outlined by the Company’s Compensation Committee of the Board of Directors. There were no RSAs granted during
the three month period ended March 31, 2016.
During the three
month period ended March 31, 2017, 125,000 RSAs vested upon expiration of the employment agreement between Steve L. Komar and
the Company. On January 3, 2017, the Company issued 84,188 shares of the Company’s common stock. Mr. Komar
received less than 125,000 shares vested because he elected to have 40,812 of such shares withheld in satisfaction of the
corresponding tax liability of approximately $46,000. The Company's payment of this tax liability was recorded as a cash flow
from financing activity on the Condensed Consolidated Statements of Cash Flows.
There were no RSAs
that were cancelled or expired during the three month periods ended March 31, 2017 and 2016, respectively.
During the three month
period ended March 31, 2016, 250,000 RSAs vested upon the Company reporting over $70 million in revenues in its Annual Report on
Form 10-K for 2015. On March 15, 2016, the Company issued 209,438 shares of the Company’s common stock in connection with
this accelerated vesting event, of which Mr. Komar received 125,000 shares and James T. McCubbin received 84,438 shares. Mr. McCubbin
received less than 125,000 shares because he elected to have 40,562 of such shares withheld in satisfaction of the corresponding
tax liability of approximately $32,300. The Company's payment of this tax liability was recorded as a cash flow from financing
activity on the Condensed Consolidated Statements of Cash Flows.
A summary of RSA activity
as of March 31, 2017 and 2016, and changes during three month periods ended March 31, 2017 and 2016 are set forth below:
|
|
2017
|
|
|
2016
|
|
NON-VESTED AWARDS
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
Non-vested awards outstanding, January 1,
|
|
|
250,000
|
|
|
|
500,000
|
|
Granted (+)
|
|
|
300,000
|
|
|
|
-
|
|
Vested (-)
|
|
|
125,000
|
|
|
|
250,000
|
|
Non-vested awards outstanding, March 31,
|
|
|
425,000
|
|
|
|
250,000
|
|
|
|
|
|
|
|
|
|
|
Weighted-average remaining contractual life (in years)
|
|
|
2.8
|
|
|
|
1.7
|
|
|
|
|
|
|
|
|
|
|
Unamortized RSA compensation expense
|
|
$
|
243,188
|
|
|
$
|
72,619
|
|
|
|
|
|
|
|
|
|
|
Aggregate intrinsic value of RSAs non-vested, March 31
|
|
$
|
191,250
|
|
|
$
|
150,000
|
|
|
|
|
|
|
|
|
|
|
Aggregate intrinsic value of RSAs vested during the quarter
|
|
$
|
108,750
|
|
|
$
|
185,000
|
|
Non-Qualified Stock Option Awards
During the
three month period ended March 31, 2017, the Company granted 600,000 NQSOs to its Chief Executive Officer and valued the
award using a Black-Scholes model with the following valuation inputs: 3-year vesting period, 7-year option term, a risk free
rate of 2.1%, volatility of 68.2%, no assumed dividend yield, and a forfeiture rate estimate of 4.6%. During the three month
period ended March 31, 2016, the Company granted 50,000 NQSOs to a member of the Board of Directors and valued the award
using a Black-Scholes model that assumed a 3-year vesting period, 5-year option term, a risk free rate of 1.7%, volatility of
68.0%, no assumed dividend yield, and a forfeiture rate estimate of 7.5%.
During the three
month period ended March 31, 2017, there were 60,000 stock options of that were unvested and cancelled, of which
10,000 were unvested and cancelled due to termination of employment and the remainder expired unexercised at the end of the
option term. During the three month period ended March 31, 2016, there were 292,000 stock options of that were cancelled, of
which 180,000 were cancelled due to termination of employment and the remainder were options granted to members of the Board
of Directors that expired unexercised at the end of the option term.
A summary of stock
option activity as of March 31, 2017 and 2016, and changes during three month periods ended March 31, 2017 and 2016 are set forth
below:
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Grant Date
|
|
|
|
|
|
Grant Date
|
|
NON-VESTED AWARDS
|
|
Shares
|
|
|
Fair Value
|
|
|
Shares
|
|
|
Fair Value
|
|
|
|
(Unaudited)
|
|
Non-vested balances, January 1,
|
|
|
920,000
|
|
|
$
|
0.59
|
|
|
|
841,672
|
|
|
$
|
0.80
|
|
Granted (+)
|
|
|
600,000
|
|
|
$
|
0.48
|
|
|
|
50,000
|
|
|
$
|
0.39
|
|
Cancelled (-)
|
|
|
60,000
|
|
|
$
|
0.68
|
|
|
|
-
|
|
|
$
|
-
|
|
Vested (-)
|
|
|
-
|
|
|
|
|
|
|
|
439,172
|
|
|
$
|
0.65
|
|
Non-vested balances, March 31,
|
|
|
1,460,000
|
|
|
$
|
0.54
|
|
|
|
452,500
|
|
|
$
|
0.90
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
OUTSTANDING AND EXERCISABLE AWARDS
|
|
Shares
|
|
|
Exercise Price
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
|
(Unaudited)
|
|
Awards outstanding, January 1,
|
|
|
2,090,668
|
|
|
$
|
0.86
|
|
|
|
1,857,668
|
|
|
$
|
0.91
|
|
Granted (+)
|
|
|
600,000
|
|
|
$
|
0.82
|
|
|
|
50,000
|
|
|
$
|
0.68
|
|
Cancelled (-)
|
|
|
70,000
|
|
|
$
|
0.79
|
|
|
|
292,000
|
|
|
$
|
0.74
|
|
Exercised (-)
|
|
|
30,000
|
|
|
$
|
0.57
|
|
|
|
-
|
|
|
$
|
-
|
|
Awards outstanding, March 31,
|
|
|
2,590,668
|
|
|
$
|
0.85
|
|
|
|
1,615,668
|
|
|
$
|
0.94
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Awards vested and expected to vest, March 31,
|
|
|
2,392,908
|
|
|
$
|
0.85
|
|
|
|
1,608,449
|
|
|
$
|
0.94
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Awards outstanding and exercisable, March 31,
|
|
|
1,130,668
|
|
|
$
|
0.82
|
|
|
|
1,163,168
|
|
|
$
|
0.77
|
|
The weighted-average
remaining contractual life of the non-qualified stock options outstanding, exercisable, and vested and expected to vest as of March
31, 2017 were 3.7 years, 3.7 years and 2.1 years, respectively. There was no intrinsic value associated with options outstanding,
exercisable and expected to vest as of March 31, 2017 as the stock price was below the lowest option exercise price. Aggregate
intrinsic value represents total pretax intrinsic value (the difference between WidePoint’s closing stock price on March
31, 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 March 31, 2017. The intrinsic value will change based on the fair market
value of WidePoint’s stock. The total intrinsic value of options exercised during the three months ended March 31, 2017 was
approximately $9,000.
Stock Compensation
Expense
Share-based compensation
(including restricted stock awards) represents both stock options based expense and stock grant expense. The following table sets
forth the composition of stock compensation expense included in general and administrative expense for the periods then ended:
|
|
THREE MONTHS ENDED
|
|
|
|
MARCH 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(Unaudited)
|
|
Restricted stock compensation expense
|
|
$
|
22,054
|
|
|
$
|
21,786
|
|
Non-qualified stock compensation expense
|
|
|
62,963
|
|
|
|
66,093
|
|
|
|
|
|
|
|
|
|
|
Total share-based compensation before taxes
|
|
$
|
85,017
|
|
|
$
|
87,879
|
|
At March 31,
2017, the Company had approximately $730,300 of total unamortized stock-based compensation expense, net of estimated
forfeitures, related to stock option plans that will be recognized over the weighted average remaining period of 2.2
years.
|
12.
|
Earnings Per Common
Share (EPS)
|
The computations of
basic and diluted EPS were as follows for the periods presented below:
|
|
THREE MONTHS ENDED
|
|
|
|
MARCH 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(Unaudited)
|
|
Basic EPS Computation:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,154,217
|
)
|
|
$
|
(659,510
|
)
|
Weighted average number of common shares
|
|
|
82,841,812
|
|
|
|
82,559,822
|
|
Basic EPS
|
|
$
|
(0.01
|
)
|
|
$
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
Diluted EPS Computation:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,154,217
|
)
|
|
$
|
(659,510
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares
|
|
|
82,841,812
|
|
|
|
82,559,822
|
|
Incremental shares from assumed conversions of stock options
|
|
|
-
|
|
|
|
-
|
|
Adjusted weighted average number of common shares
|
|
|
82,841,812
|
|
|
|
82,559,822
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS
|
|
$
|
(0.01
|
)
|
|
$
|
(0.01
|
)
|
The dilutive effect
of unexercised stock options and restricted stock awards excludes 3,015,668 and 1,865,668 of options from the computation of EPS
for the three month periods ended March 31, 2017 and 2016, respectively, because inclusion of the options would have been anti-dilutive.
|
13.
|
Details of Consolidated Revenue and Revenue by Geographic
Region
|
The following table
was prepared to provide additional information about the composition of revenues based on broad service descriptions for the periods
presented:
|
|
THREE MONTHS ENDED
|
|
|
|
MARCH 31,
|
|
Revenue Mix
|
|
2017
|
|
|
2016
|
|
|
|
(Unaudited)
|
|
Carrier Services
|
|
$
|
10,035,761
|
|
|
$
|
12,019,873
|
|
Managed Services
|
|
|
8,576,478
|
|
|
|
8,488,767
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
18,612,239
|
|
|
$
|
20,508,640
|
|
The following table
presents our domestic and foreign revenue mix for the periods presented:
|
|
THREE MONTHS ENDED
|
|
|
|
MARCH 31,
|
|
Geographic Region
|
|
2017
|
|
|
2016
|
|
|
|
(Unaudited)
|
|
North America
|
|
$
|
17,563,096
|
|
|
$
|
19,173,741
|
|
Europe
|
|
|
1,049,143
|
|
|
|
1,334,899
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
18,612,239
|
|
|
$
|
20,508,640
|
|
|
14.
|
Commitments and Contingencies
|
Operating Lease Commitments
In March 2017, the
Company entered into 10-year lease agreement for a 14,382 square foot facility to accommodate growth and operational requirements
in Columbus, Ohio to replace our Lewis Center Facility that we expect to sell. The Lewis Center Facility is being built out to
meet the Company's requirements and is expected to be ready for occupancy by no later than May 2017. The lease agreement includes
six (6) months of free rent from May 1, 2017 (assumed commencement date) through October 31, 2017. The lease requires monthly minimum
rent of approximately $20,700, of which $10,200 covers base minimum lease payments and $10,500 covers estimated annual operating
expenses and real estate taxes. Base minimum lease payments are subject to an annual escalation of approximately 3.5% beginning
on October 1, 2018. The term of the lease expires on September 30, 2027, unless the Company elects to use an early termination
provision that is available in October 2023. Any early termination election would require an immediate payment of a fixed penalty
that may range from $260,000 to $265,000.
Except as described
above, there were no other leases entered into or modifications of existing leases during the three month period ended March 31,
2017.
Employment Agreements
The Company has employment
agreements with certain senior executives that set forth compensation levels and provide for severance payments in certain instances.
On May 3, 2017, a subsidiary of the Company entered into an Asset Purchase Agreement with Probaris
Technologies, Inc. whereby the Company purchased certain commercial identity and authentication software assets, contract
license assignments, and other assets associated with the sale of the software assets (the “Software Assets”).
The aggregate purchase price for the Software Assets was $400,000, consisting of $300,000 paid in cash at closing and $100,000
contingent upon the optional renewal of a license agreement expected in 2018.