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 trusted mobility management solutions to the government and commercial sectors. Our hosted solutions are
accessible on-demand through a secure proprietary portal 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 federal government compliant identity management solutions that provide secured
virtual and physical access to restricted environments. 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.
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 its 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 a 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 June 30, 2017 and for each of the three and six month periods ended June 30,
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
and six month periods ended June 30, 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 made certain reclassifications to the
condensed consolidated balance sheets to comply with the standard and made similar reclassifications to conform to the
current year presentation. At December 31, 2016, the Company reclassified deferred tax assets of $48,826 against non-current deferred tax liabilities
of $447,811. There was no impact on the consolidated statement of operations or earnings per share as a result of adopting
this standard.
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 six 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 information technology
service offerings comprise an overall single business from which the Company earns revenues and incurs costs derived from several
related information technology-based trusted mobile solutions and technology services. 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 first quarter of 2017 and reclassified $48,826 of current deferred tax assets to non-current
deferred tax assets reflected at December 31, 2017. All deferred tax assets are presented as non-current.
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 adjusts 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 Company early adopted this ASU during the year ended December 31,
2016. 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.
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 facility located in 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 closed the sale of its Lewis Center Facility on May 22, 2017 at a gross
sales price of $730,000 and received net proceeds of approximately $236,400 after paying off the existing mortgage, broker
commissions and other closing costs. The Company recognized a net gain of approximately $66,700 on the sale of its Lewis
Center Facility and reported this gain within general and administrative expense in the consolidated statements of
operations. Assets held for sale are set forth in the table below as of the periods presented:
|
|
JUNE 30,
|
|
|
DECEMBER 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(Unaudited)
|
|
Land
|
|
$
|
-
|
|
|
$
|
139,656
|
|
Building
|
|
|
-
|
|
|
|
537,398
|
|
|
|
|
|
|
|
|
|
|
Total Land and building held for sale, at cost
|
|
$
|
-
|
|
|
$
|
677,054
|
|
Less: Accumulated depreciation
|
|
|
-
|
|
|
|
(82,678
|
)
|
|
|
|
|
|
|
|
|
|
Land and building held for sale, net
|
|
$
|
-
|
|
|
$
|
594,376
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
$
|
-
|
|
|
$
|
432,367
|
|
|
4.
|
Accounts Receivable and Significant Concentrations
|
Accounts receivable
consist of the following by customer type in the table below as of the periods presented:
|
|
JUNE 30,
|
|
|
DECEMBER 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(Unaudited)
|
|
Commercial
|
|
$
|
2,701,888
|
|
|
$
|
2,319,142
|
|
Government
|
|
|
6,022,245
|
|
|
|
3,178,362
|
|
Gross accounts receivable
|
|
|
8,724,133
|
|
|
|
5,497,504
|
|
Less: allowances for doubtful accounts
|
|
|
75,521
|
|
|
|
344,411
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
$
|
8,648,612
|
|
|
$
|
5,153,093
|
|
For the six month period ended June 30, 2017, the Company recorded
a provision for bad debt of approximately $31,200 related to a billing dispute with a commercial customer. For the six month period
ended June 30, 2017, the Company wrote-off a specific provision for bad debt of approximately $274,500 against the related customer
invoice which reduced ending allowances for doubtful accounts at June 30, 2017. For the three and six month periods ended June
30, 2016, the Company did not recognize any material provisions for bad debt, write-offs of existing 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:
|
|
JUNE 30,
|
|
DECEMBER 31,
|
|
|
2017
|
|
2016
|
|
|
As a % of
|
|
As a % of
|
Customer Name
|
|
Receivables
|
|
Receivables
|
|
|
(Unaudited)
|
Department of Homeland Security (DHS)
|
|
50%
|
|
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
|
|
SIX MONTHS ENDED
|
|
|
JUNE 30,
|
|
JUNE 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
|
As a % of
|
|
As a % of
|
|
As a % of
|
|
As a % of
|
Customer Name
|
|
Revenues
|
|
Revenues
|
|
Revenues
|
|
Revenues
|
|
|
(Unaudited)
|
Department of Homeland Security (DHS)
|
|
61%
|
|
61%
|
|
60%
|
|
63%
|
|
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:
|
|
JUNE 30,
|
|
|
DECEMBER 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(Unaudited)
|
|
Commercial
|
|
$
|
204,976
|
|
|
$
|
278,862
|
|
Government
|
|
|
5,843,154
|
|
|
|
7,833,828
|
|
|
|
|
|
|
|
|
|
|
Unbilled accounts receivable
|
|
$
|
6,048,130
|
|
|
$
|
8,112,690
|
|
|
6.
|
Property and Equipment
|
Major classes of property and equipment consisted
of the following as of the periods presented below:
|
|
JUNE 30,
|
|
|
DECEMBER 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(Unaudited)
|
|
Computer hardware and software
|
|
$
|
1,687,206
|
|
|
$
|
1,214,052
|
|
Furniture and fixtures
|
|
|
302,095
|
|
|
|
211,376
|
|
Leasehold improvements
|
|
|
223,842
|
|
|
|
486,467
|
|
Automobile
|
|
|
180,886
|
|
|
|
216,880
|
|
Gross property and equipment
|
|
|
2,394,029
|
|
|
|
2,128,775
|
|
Less: accumulated depreciation and amortization
|
|
|
1,417,477
|
|
|
|
1,392,097
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
976,552
|
|
|
$
|
736,678
|
|
On April 30, 2017, the
Company entered into an Asset Purchase Agreement with Probaris Technologies, Inc. (“Seller”) and paid approximately
$304,300 to purchase certain commercial identity and authentication software assets (the “Software Assets”). The Company
principally purchased the Software Assets to ensure that a key component in the delivery of the Company’s identify management
solution offering was neither acquired by a competitor nor no longer made available to license. Also under the terms of the Software
Asset Purchase Agreement, the Company agreed to pay contingent consideration of $100,000 to the Seller if the Seller’s sole
government customer renews its license agreement in 2018. The Company estimated the fair value of contingent consideration at
$50,000 based on a number of different factors including the current state of the government fiscal budget and planned cuts, as
well as changes in the technology and industry that may require expensive development that may not make renewal feasible. Contingent
consideration is recorded within “accrued expenses” on the consolidated balance sheets.
During the three month
period ended June 30, 2017, the Company relocated from the Lewis Center Facility to a larger facility in Columbus and abandoned
undepreciated building and leasehold improvements with a gross cost and accumulated depreciation of approximately $282,200 and
$105,500, respectively. The Company recorded within general and administrative expenses a loss on disposal of approximately $176,700
as a result of the move. During the six month period ended June 30, 2017 there were disposals of fully depreciated owned property
and equipment with related cost and accumulated depreciation of approximately $31,500 and building and leasehold improvements
with a net book value of approximately $176,700. During the three and six month periods ended June 30, 2016 there were no material
sales or disposals of property and equipment.
There were no changes in
the estimated useful lives used to depreciate property and equipment during the three of six month periods ended June 30, 2017
and 2016.
Assets under capital lease
included in the table above consisted of the following as of the periods presented below:
|
|
JUNE 30,
|
|
|
DECEMBER 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(Unaudited)
|
|
Automobiles
|
|
$
|
93,301
|
|
|
$
|
63,498
|
|
Less: accumulated amortization
|
|
|
7,846
|
|
|
|
36,823
|
|
|
|
|
|
|
|
|
|
|
Capital lease assets, net
|
|
$
|
85,455
|
|
|
$
|
26,675
|
|
During the six month period
ended June 30, 2017, the Company acquired two automobiles under capital lease arrangements and recognized a gross asset of $93,301.
For the six month period ended June 30, 2017, the Company disposed of two leased automobiles with a net book value of $47,800 and
received gross proceeds of approximately $51,800. The Company recognized a net gain on disposal of approximately $4,100. During
the three month periods ended June 30, 2017 and 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
|
|
|
SIX MONTHS ENDED
|
|
|
|
JUNE 30,
|
|
|
JUNE 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
(Unaudited)
|
|
Property and equipment depreciation expense
|
|
$
|
100,200
|
|
|
$
|
117,800
|
|
|
$
|
184,000
|
|
|
$
|
231,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital lease amortization (included in property and equipment depreciation expense)
|
|
$
|
7,800
|
|
|
$
|
7,500
|
|
|
$
|
7,800
|
|
|
$
|
19,700
|
|
|
7.
|
Goodwill and Intangible Assets
|
The Company has recorded
goodwill of $18,555,578 as of June 30, 2017. There were no changes in the carrying amount of goodwill during the three month periods
ended June 30, 2017. The Company considered whether there were indicators of impairment during the three and six month periods
ended June 30, 2017.
The Company has recorded
net intangible assets of $3,988,662, consisting of purchased intangibles and internally developed software used in the conduct
of business. For the three and six month periods ended June 30, 2017, the Company capitalized internally developed software costs
of approximately $201,100 and $13,800, respectively, related to costs associated with our next generation TDI Optimiser™
application. There were no material disposals of intangible assets for the three and six month periods ended June 30, 2017 and
2016.
The aggregate amortization
expense recorded for the three month periods ended June 30, 2017 and 2016 were approximately $266,000 and $262,900, respectively.
The aggregate amortization expense recorded for the six month periods ended June 30, 2017 and 2016 were approximately $535,800
and $533,800, respectively. The total weighted remaining average life of all purchased intangible assets and internally developed
software costs is approximately 7.0 years and 3.0 years, respectively, at June 30, 2017.
|
8.
|
Line of Credit and Long Term Debt
|
Commercial Loan Agreement Facility
On June 15, 2017, the
Company entered into a Loan and Security Agreement with Access National Bank (the “Loan Agreement”). The Loan Agreement
provides for a $5.0 million working capital revolving line of credit through April 30, 2018 and replaces the Company’s prior
credit facility with Cardinal Bank.
The available amount under
the working capital line of credit is subject to a borrowing base, which is equal to the lesser of (i) $5.0 million or (ii) 70%
of the net unpaid balance of the Company’s eligible accounts receivable. The interest rate for the working capital line of
credit is the Wall Street Journal prime rate plus 1.0%. The facility is secured by a first lien security interest on all of the
Company’s personal property, including its accounts receivable, general intangibles, inventory and equipment maintained in
the United States.
The Loan Agreement requires
that the Company (i) maintain a minimum adjusted tangible net worth of at least $4.0 million for the quarter ending December 31,
2017, increasing to $4.5 million for each quarter thereafter and (ii) maintain a current ratio of 1.10:1 tested quarterly.
Under the previous credit
facility with Cardinal Bank the Company was advanced and repaid approximately $3.3 million during the six month period ended June
30, 2017. The Company had no advances under the current credit facility with Access National Bank at June 30, 2017.
As of June 30, 2017, the
Company was eligible to borrow up to $5.0 million under the borrowing base formula.
Long-Term Debt
Long-term debt consisted
of the following:
|
|
JUNE 30,
|
|
|
DECEMBER 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(Unaudited)
|
|
Cardinal Bank mortgage dated December 17, 2010 (1)
|
|
$
|
-
|
|
|
$
|
432,367
|
|
Cardinal Bank term note dated December 31, 2011 (2)
|
|
|
-
|
|
|
|
74,681
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
-
|
|
|
|
507,048
|
|
Less: current portion
|
|
|
-
|
|
|
|
94,868
|
|
|
|
|
|
|
|
|
|
|
Long-term debt, net of current portion
|
|
$
|
-
|
|
|
$
|
412,180
|
|
|
|
|
|
|
|
|
|
|
Long-term debt related to assets held for sale, net of current portion
|
|
$
|
-
|
|
|
$
|
412,180
|
|
(1) On December 17, 2010, the
Company entered into a real estate purchase agreement to acquire the Lewis Center Facility for approximately $677,000 and financed
a significant portion of the purchase price with a $528,000 ten-year mortgage with Cardinal Bank. On May 22, 2017, the Company
completed the sale of this real estate asset and paid off the balance of the mortgage. See Note 3 for additional information regarding
the sale of the property.
(2) On December 31, 2011, the
Company entered into a $4.0 million 5-year term note with Cardinal Bank 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 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 and financed the purchase of these vehicles under a capital
lease agreement for $80,527. Minimum lease payments required under current capital leases range from $695 to $1,210 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 June 30, 2017:
2017
|
|
$
|
22,500
|
|
2018
|
|
|
22,500
|
|
2019
|
|
|
22,500
|
|
2020
|
|
|
21,115
|
|
|
|
|
|
|
Total principal and interest payments
|
|
|
88,615
|
|
Less: portion representing interest
|
|
|
9,469
|
|
Present value of minimum lease payments under capital lease agreements
|
|
|
79,146
|
|
Less: current portion
|
|
|
18,027
|
|
Capital lease obligations, net of current portion
|
|
$
|
61,119
|
|
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, 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 June 30, 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 June 30, 2017, the
Company had approximately $33.4 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 $30.0 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 six month periods ended June 30, 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 June 30, 2017, there were 82,946,847 shares of common
stock outstanding. The Company issued 102,525 shares of common stock, as a result of the vesting of a portion of Restricted Stock
Awards (RSA) during the three month period ended June 30, 2017. There was no vesting of RSAs during the three month period ended
June 30, 2016. The Company issued 186,713 and 209,438 shares of common stock, respectively, as a result of the vesting of RSAs
during the six month periods ended June 30, 2017 and 2016, respectively. See Note 11 for additional information regarding RSA activity.
There
were no shares of common stock issued as a result of stock option exercises during the three month periods ended June 30, 2017
and 2016, respectively. Shares of common stock issued as a result of stock option exercises and realized gross proceeds during
the six month period ended June 30, 2017 were 30,000 and $17,100, respectively, from the exercise of such stock options. See Note
11 for additional information regarding the stock incentive plans.
11. Stock Award Programs
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 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.
Restricted Stock Awards
During the six month
period ended June 30, 2017, the Company granted 300,000 RSAs to its former Chief Executive Officer that had a grant date fair
value of approximately $246,000. The vesting of these RSAs were tied to attainment of certain financial goals as outlined by
the Company’s Compensation Committee of the Board of Directors. In connection with his resignation on June 30, 2017,
150,000 shares immediately vested and the remaining 150,000 were cancelled. As a result of share withholdings to satisfy tax
liabilities of approximately $21,800, the Company issued 102,525 shares of the Company’s common stock to Mr. Nyweide.
The Company's payment of the tax liability associated with this accelerated vesting was recorded as a cash flow from
financing activity on the condensed consolidated statements of cash flows.
In addition, during the
six month period ended June 30, 2017, 125,000 RSAs vested upon expiration of the employment agreement between Steve L. Komar (the
former Chief Executive Officer) and the Company on January 3, 2017. 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 granted
during the six month period ended June 30, 2016.
During the six month period
ended June 30, 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.
There were no RSAs that
were cancelled or expired during the three and six month periods ended June 30, 2016.
A summary of RSA activity
as of June 30, 2017 and 2016, and changes during six month periods ended June 30, 2017 and 2016 are set forth below:
|
|
2017
|
|
|
2016
|
|
|
|
(Unaudited)
|
|
NON-VESTED AWARDS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested awards outstanding, January 1,
|
|
|
250,000
|
|
|
|
500,000
|
|
Granted (+)
|
|
|
300,000
|
|
|
|
-
|
|
Cancelled (-)
|
|
|
150,000
|
|
|
|
-
|
|
Vested (-)
|
|
|
275,000
|
|
|
|
250,000
|
|
Non-vested awards outstanding, June 30,
|
|
|
125,000
|
|
|
|
250,000
|
|
|
|
|
|
|
|
|
|
|
Weighted-average remaining contractual life (in years)
|
|
|
0.4
|
|
|
|
1.5
|
|
|
|
|
|
|
|
|
|
|
Unamortized RSA compensation expense
|
|
$
|
8,300
|
|
|
$
|
61,700
|
|
|
|
|
|
|
|
|
|
|
Aggregate intrinsic value of RSAs non-vested, June 30
|
|
$
|
57,500
|
|
|
$
|
147,500
|
|
|
|
|
|
|
|
|
|
|
Aggregate intrinsic value of RSAs vested during the quarter
|
|
$
|
177,750
|
|
|
$
|
185,000
|
|
Non-Qualified Stock Option Awards
During the six month periods
ended June 30, 2017 and 2016, there were NQSO grants of 850,000 and 650,000, respectively, as further described below:
|
§
|
Director Grants.
During the six month period ended June 30, 2017, the Board of Directors
granted each of the five (5) existing non-employee directors as of June 23, 2017, a grant of 50,000 non-qualified stock options
that were valued the award using a Black-Scholes Option Pricing model that assumed a 6-month vesting period, 7-year option term,
a risk free rate of 2.0%, volatility of 69.6%, no assumed dividend yield, and a forfeiture rate estimate of 4.2%. During the six
month period ended June 30, 2016, the Board of Director granted 50,000 non-qualified stock options 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%.
|
|
§
|
Non-Director Grants.
During the six month period ended June 30, 2017, the Company granted
600,000 non-qualified stock options to its former Chief Executive Officer and valued the award using a Black-Scholes Option Pricing
model that assumed a 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%. There were no non-qualified stock options awards issued to non-directors during
the six month period ended June 30, 2016.
|
During the six month period
ended June 30, 2017, there were 600,000 non-qualified stock options that were unvested and cancelled due to the resignation of
the Company’s former Chief Executive Officer on June 30, 2017. During the six month period ended June 30, 2016, there were
317,000 stock options 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.
A summary of stock option
activity as of June 30, 2017 and 2016, and changes during six month periods ended June 30, 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 (+)
|
|
|
850,000
|
|
|
$
|
0.47
|
|
|
|
650,000
|
|
|
$
|
0.40
|
|
Cancelled (-)
|
|
|
600,000
|
|
|
$
|
0.54
|
|
|
|
25,000
|
|
|
$
|
0.72
|
|
Vested (-)
|
|
|
110,000
|
|
|
$
|
0.69
|
|
|
|
534,172
|
|
|
$
|
0.69
|
|
Non-vested balances, June 30,
|
|
|
1,060,000
|
|
|
$
|
0.54
|
|
|
|
932,500
|
|
|
$
|
0.59
|
|
|
|
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 (+)
|
|
|
850,000
|
|
|
$
|
0.71
|
|
|
|
650,000
|
|
|
$
|
0.70
|
|
Cancelled (-)
|
|
|
1,023,334
|
|
|
$
|
0.91
|
|
|
|
317,000
|
|
|
$
|
0.80
|
|
Exercised (-)
|
|
|
30,000
|
|
|
$
|
0.57
|
|
|
|
-
|
|
|
|
-
|
|
Awards outstanding, June 30,
|
|
|
1,887,334
|
|
|
$
|
0.76
|
|
|
|
2,190,668
|
|
|
$
|
0.86
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Awards vested and expected to vest, June 30,
|
|
|
1,763,594
|
|
|
$
|
0.77
|
|
|
|
2,064,739
|
|
|
$
|
0.87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Awards outstanding and exercisable, June 30,
|
|
|
887,334
|
|
|
$
|
0.75
|
|
|
|
1,258,168
|
|
|
$
|
0.82
|
|
The weighted-average remaining
contractual life of the non-qualified stock options outstanding, exercisable, and vested and expected to vest as of June 30, 2017
were 3.5 years, 3.5 years and 2.3 years, respectively.
There was no intrinsic
value associated with options outstanding, exercisable and expected to vest as of June 30, 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 June 30, 2017 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, 2017. The intrinsic value will change
based on the fair market value of WidePoint’s stock.
The total intrinsic value
of stock options exercised during the six months ended June 30, 2017 was approximately $9,000.
Share-Based 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
|
|
|
SIX MONTHS ENDED
|
|
|
|
JUNE 30,
|
|
|
JUNE 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
(Unaudited)
|
|
Restricted stock compensation expense
|
|
$
|
129,267
|
|
|
$
|
21,786
|
|
|
$
|
151,321
|
|
|
$
|
43,572
|
|
Non-qualified stock compensation expense
|
|
|
4,795
|
|
|
|
26,661
|
|
|
|
67,758
|
|
|
|
92,754
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total share-based compensation before taxes
|
|
$
|
134,062
|
|
|
$
|
48,447
|
|
|
$
|
219,079
|
|
|
$
|
136,326
|
|
At June 30, 2017, the Company
had approximately $268,300 of total unamortized share-based compensation expense, net of estimated forfeitures, related to stock
option plans that will be recognized over the weighted average remaining period of 1.43 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
|
|
|
SIX MONTHS ENDED
|
|
|
|
JUNE 30,
|
|
|
JUNE 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
(Unaudited)
|
|
Basic EPS Computation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,300,175
|
)
|
|
$
|
(896,930
|
)
|
|
$
|
(2,454,392
|
)
|
|
$
|
(1,556,440
|
)
|
Weighted average number of common shares
|
|
|
82,845,449
|
|
|
|
82,730,134
|
|
|
|
82,843,631
|
|
|
|
82,644,978
|
|
Basic EPS
|
|
$
|
(0.02
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(0.02
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS Computation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,300,175
|
)
|
|
$
|
(896,930
|
)
|
|
$
|
(2,454,392
|
)
|
|
$
|
(1,556,440
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares
|
|
|
82,845,449
|
|
|
|
82,730,134
|
|
|
|
82,843,631
|
|
|
|
82,644,978
|
|
Incremental shares from assumed conversions of stock options
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Adjusted weighted average number of common shares
|
|
|
82,845,449
|
|
|
|
82,730,134
|
|
|
|
82,843,631
|
|
|
|
82,644,978
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS
|
|
$
|
(0.02
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(0.02
|
)
|
The dilutive effect of
unexercised stock options and restricted stock awards excludes 2,012,334 and 2,190,668 of options from the computation of EPS for
the three and six month periods ended June 30, 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
|
|
|
SIX MONTHS ENDED
|
|
|
|
JUNE 30,
|
|
|
JUNE 30,
|
|
Revenue Mix
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
(Unaudited)
|
|
Carrier Services
|
|
$
|
10,910,179
|
|
|
$
|
10,168,755
|
|
|
$
|
20,945,940
|
|
|
$
|
22,188,628
|
|
Managed Services
|
|
|
7,970,327
|
|
|
|
7,370,911
|
|
|
|
16,546,805
|
|
|
|
15,859,678
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
18,880,506
|
|
|
$
|
17,539,666
|
|
|
$
|
37,492,745
|
|
|
$
|
38,048,306
|
|
The following table presents
our domestic and foreign revenue mix for the periods presented:
|
|
THREE MONTHS ENDED
|
|
|
SIX MONTHS ENDED
|
|
|
|
JUNE 30,
|
|
|
JUNE 30,
|
|
Geographic Region
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
(Unaudited)
|
|
North America
|
|
$
|
17,759,180
|
|
|
$
|
16,319,805
|
|
|
$
|
35,322,276
|
|
|
$
|
35,493,546
|
|
Europe
|
|
|
1,121,326
|
|
|
|
1,219,861
|
|
|
|
2,170,469
|
|
|
|
2,554,760
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
18,880,506
|
|
|
$
|
17,539,666
|
|
|
$
|
37,492,745
|
|
|
$
|
38,048,306
|
|
|
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. In late May 2017, the Company moved into the new Columbus, Ohio facility. The lease agreement includes six (6) months of
free rent from June 1, 2017 through November 30, 2017. Thereafter, 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 material leases entered into or modifications of existing leases during the six month period ended June 30,
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.
Effective July 1, 2017,
the Board of Directors elected Jin H. Kang as the Company’s new Chief Executive Officer and expanded Jason Holloway’s
Executive Vice President and Chief Sales and Marketing position to include the title of Chief Executive Officer and President of
the Company’s wholly-owned subsidiary WidePoint Cybersecurity Solutions Corporation in connection with a restructuring of
the Company’s management team. In connection with Mr. Kang’s appointment as the Company’s Chief Executive Officer,
Mr. Kang was appointed as a Class I Director of the Company to fill an existing vacancy on the Board.
On July 20, 2017, the
Company entered into an appointment and standstill agreement with its significant stockholder, Nokomis Capital, L.L.C., pursuant
to which, among other things, the Company agreed to immediately appoint Alan Howe and Philip Richter as Class II directors of
the Company and as members of the Corporate Governance and Nominating Committee and the Compensation Committee of the Board and
to nominate them for election at the Company’s 2017 Annual Meeting of Stockholders. As part of the agreement, Nokomis, among
other things, agreed to customary standstill commitments during the term of the agreement and to vote its shares in favor of the
Board's recommendations regarding director elections and other matters to be submitted to a vote at the 2017 Annual Meeting of
Stockholders. The term of the agreement expires on the date that is thirty days prior to the deadline related to nominations by
stockholders of directors for election at the Company’s 2018 Annual Meeting of Stockholders.