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 Fairfax, Virginia.
Nature of Operations
The Company is a leading provider of Technology Management as a Service (TMaaS). The Company’s TMaaS platform and service solutions enable its customers to efficiently secure, manage and analyze the entire lifecycle of their mobile communications assets through its federally compliant platform Intelligent Technology Management System (ITMS™). The Company’s ITMS platform is SSAE 18 compliant and was granted an Authority to Operate by the U.S. Department of Homeland Security. Additionally, the Company was granted an Authority to Operate by the General Services Administration with regard to its identity credentialing component of its TMaaS platform. The Company’s TMaaS platform is internally hosted and accessible on-demand through a secure customer portal that is specially configured for each customer. The Company can deliver these solutions in a number of configurations ranging from utilizing the platform as a service to a full-service solution that includes full lifecycle support for all end users and the organization.
A significant portion of the Company’s expenses, such as personnel and facilities costs, are fixed in the short term and may 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, 2022 and for each of the three and six month periods ended June 30, 2022 and 2021, 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 accounting principles generally accepted in the United States (“U.S. 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, 2021 was derived from the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021. The results of operations for the three and six month periods ended June 30, 2022 are not necessarily 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.
Government Subsidies
On March 27, 2020, the U.S. government enacted the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), which among other things, provides employer payroll tax credits for qualified wages and options to defer payroll tax payments for a limited period. Based on our evaluation of the CARES Act, in certain circumstances, we qualify for certain employer payroll tax credits as well as the deferral of payroll tax payments in the future. The Company recorded the payroll tax credit as a receivable in other current assets on the consolidated balance sheet as of June 30, 2022 and December 31, 2021
Deferred payroll tax payments of $246,000 was included in accrued liabilities on our condensed consolidated balance sheets as of June 30, 2022 and December 31, 2021.
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 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 condensed 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, except for the goodwill impairment adjustment discussed below.
Segment Reporting
The Company’s TMaaS offerings are substantially managed service driven solutions that use our proprietary technology platform to deliver our services and reported on that basis to its Chief Operating Decision Maker who evaluates its business as a single segment. See Note 16 for detailed information regarding the composition of revenues.
Significant Accounting Policies
There were no significant changes in the Company’s significant accounting policies during the first six months of 2022 from those disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 filed with the SEC on March 28, 2022.
Accounting Standards under Evaluation
In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“Topic 326”). Topic 326 amends guidance on reporting credit losses for assets held at amortized cost basis and available for sale debt securities. For assets held at amortized cost basis, Topic 326 eliminates the probable initial recognition threshold in current GAAP and, instead, requires an entity to reflect its current estimate of all expected credit losses. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial assets to present the net amount expected to be collected. For available for sale debt securities, credit losses should be measured in a manner similar to current GAAP, however Topic 326 will require that credit losses be presented as an allowance rather than as a write-down. This ASU update affects entities holding financial assets and net investment in leases that are not accounted for at fair value through net income. This update is effective for the company for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Company is currently evaluating the impact of the pending adoption of this new standard on its consolidated financial statements.
3. Business Combination
On October 1, 2021, the Company completed the acquisition of specified assets of IT Authorities, Inc. (ITA) to increase its capabilities and broaden its footprint in the commercial sector. The closing purchase price paid by the Company consisted of $4.75 million in cash and 75,000 fully vested warrants to purchase an equal number of shares of the Company’s common stock at an exercise price of $5.33 per share (“Warrants”) exercisable for a period of four years. In addition, the Company agreed to pay contingent consideration to the seller as follows: (i) up to an additional $250,000 and 75,000 Warrants exercisable for four years depending on the EBITDA of the business in 2021; (ii) up to an additional $1.0 million and 150,000 Warrants exercisable for three years depending on the EBITDA of the business in 2022; (iii) up to an additional $1.0 million and 125,000 Warrants exercisable for three years depending on the EBITDA of the business in 2023; and (iv) up to an additional $1.0 million and 125,000 Warrants exercisable for three years depending on the EBITDA of the Business in 2024. In addition, the Company entered into employment agreements with two of the founders of the seller and in the event of the termination of either employee without cause (or by the employee for good reason), the contingent consideration payable under the purchase agreement will be deemed earned and payable for earn-out periods that have not been completed at the time of termination. During the first quarter of 2022, the Company issued 75,000 warrants and paid cash of approximately $250,000 related to ITA achieving EBITDA target for 2021.
The following supplemental unaudited pro forma information sets forth unaudited consolidated financial information for the year ended December 31, 2021 for the Company assuming we completed the acquisition on January 1, 2021:
| | THREE MONTHS ENDED | | | SIX MONTHS ENDED | |
| | JUNE 30, | | | JUNE 30, | |
| | 2021 | | | 2021 | |
| | (a) | | | (a) | |
Revenues | | $ | 22,493 | | | $ | 45,360 | |
Net (Loss) Income | | | (148 | ) | | | 442 | |
| (a) | To reflect on a pro forma basis unaudited consolidated financial information assuming we completed the acquisition on January 1, 2021. The unaudited financial information presented herein were derived from historical internally prepared financial statements with certain adjustments for ITA and WidePoint’s audited financial statements. |
4. Fair Value Measurements
The following tables present information about the Company’s liabilities measured at fair value on a recurring basis in the condensed consolidated balance sheets:
| | | | | Quoted Prices in | | | Significant Other | | | | |
| | JUNE 30, | | | Active Markets | | | Observable Inputs | | | Unobservable Inputs | |
Description | | 2022 | | | (Level 1) | | | (Level 2) | | | (Level 3) | |
| | (Unaudited) | |
Liabilities: | | | | | | | | | | | | |
Contingent consideration - cash settled | | $ | - | | | $ | - | | | $ | - | | | $ | - | |
Contingent consideration - warrants | | | - | | | | - | | | | - | | | | - | |
Contingent consideration - cash settled, net of current portion | | | 338,000 | | | | - | | | | - | | | | 338,000 | |
Contingent consideration - warrants, net of current portion | | | 42,000 | | | | - | | | | - | | | | 42,000 | |
Total liabilities measured and recorded at fair value | | $ | 380,000 | | | $ | - | | | $ | - | | | $ | 380,000 | |
| | | | | Quoted Prices in | | | Significant Other | | | | |
| | DECEMBER 31, | | | Active Markets | | | Observable Inputs | | | Unobservable Inputs | |
Description | | 2021 | | | (Level 1) | | | (Level 2) | | | (Level 3) | |
Liabilities: | | | | | | | | | | | | |
Contingent consideration - cash settled | | $ | 250,000 | | | $ | - | | | $ | - | | | $ | 250,000 | |
Contingent consideration - warrants | | | 108,000 | | | | - | | | | - | | | | 108,000 | |
Contingent consideration - cash settled, net of current portion | | | 1,095,000 | | | | - | | | | - | | | | 1,095,000 | |
Contingent consideration - warrants, net of current portion | | | 252,000 | | | | - | | | | - | | | | 252,000 | |
Total liabilities measured and recorded at fair value | | $ | 1,705,000 | | | $ | - | | | $ | - | | | $ | 1,705,000 | |
The Company’s contingent consideration is categorized as Level 3 within the fair value hierarchy. The contingent consideration has been recorded at their fair value using a Monte Carlo simulation model. This model incorporates probability of achievement of certain milestones, risk-free rates and volatility. The development and determination of the unobservable inputs for Level 3 fair value measurements and fair value calculations are the responsibility of the Company’s management with the assistance of a third-party valuation specialist.
Management estimates the fair value of the contingent consideration liability based on financial projections of ITA’s business and forecasted results, including revenue growth rates, costs and expenses, volatility, and discount rates. The Company evaluates, on a routine, periodic basis, the estimated fair value of the contingent consideration and quarterly changes in estimated fair value are reflected in other income in the consolidated statements of operations. Changes in the fair value of contingent consideration obligations may result from changes in changes of any of the key assumptions that are used. Changes in the estimated fair value of contingent consideration liability may have a material impact on the Company’s operating results.
The following table presents a reconciliation of the change in fair value of contingent consideration for the three and six months ended June 30, 2022:
Contingent consideration, December 31, 2021 | | $ | 1,705,000 | |
| | | | |
Change in fair value (gain) reported in the consolidated statement of operations | | | (301,000 | ) |
| | | | |
Contingent consideration settled - cash | | | (171,000 | ) |
| | | | |
Contingent consideration settled - warrants | | | (108,000 | ) |
| | | | |
Contingent consideration, March 31, 2022 | | | 1,125,000 | |
| | | | |
Change in fair value (gain) reported in the consolidated statement of operations | | | (666,000 | ) |
| | | | |
Contingent consideration settled - cash | | | (79,000 | ) |
| | | | |
Contingent consideration, June 30, 2022 | | $ | 380,000 | |
5. Accounts Receivable and Significant Concentrations
A significant portion of the Company’s receivables are billed under firm fixed price contracts with agencies of the U.S. federal government and similar pricing structures with several corporations. Accounts receivable consist of the following by customer type in the table below as of the periods presented:
| | JUNE 30, | | | DECEMBER 31, | |
| | 2022 | | | 2021 | |
| | (Unaudited) | |
Government (1) | | $ | 10,485,480 | | | $ | 11,010,794 | |
Commercial (2) | | | 1,984,143 | | | | 1,588,778 | |
Gross accounts receivable | | | 12,469,623 | | | | 12,599,572 | |
Less: allowances for doubtful | | | | | | | | |
accounts (3) | | | 45,023 | | | | 62,988 | |
| | | | | | | | |
Accounts receivable, net | | $ | 12,424,600 | | | $ | 12,536,584 | |
(1) Government contracts are generally firm fixed price not to exceed arrangements with a term of five (5) years, which consists of a base year and four (4) annual option year renewals. Government receivables are billed under a single consolidated monthly invoice and are billed approximately thirty (30) to sixty (60) days in arrears from the date of service and payment is generally due within thirty (30) days of the invoice date. Government accounts receivable payments could be delayed due to administrative processing delays by the government agency, continuing budget resolutions that may delay availability of contract funding, and/or administrative only invoice correction requests by contracting officers that may delay payment processing by our government customers.
(2) Commercial contracts are generally fixed price arrangements with contract terms ranging from two (2) to three (3) years. Commercial accounts receivables are billed based on the underlying contract terms and conditions which generally have repayment terms that range from thirty (30) to ninety (90) days. Commercial receivables are stated at amounts due from customers net of an allowance for doubtful accounts if deemed necessary.
(3) For the six month period ended June 30, 2022, the Company did not recognize any material provisions of recoveries of existing provision for bad debt. 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
The following table presents revenue by customer for each of the periods presented:
| | THREE MONTHS ENDED | | | SIX MONTHS ENDED | |
| | JUNE 30, | | | JUNE 30, | |
Customer Type | | 2022 | | | 2021 | | | 2022 | | | 2021 | |
| | (Unaudited) | |
U.S. Federal Government (1) | | | 80.5 | % | | | 83.3 | % | | | 79.1 | % | | | 82.6 | % |
U.S. State & Local and Foreign Governments | | | 0.5 | % | | | 0.4 | % | | | 0.6 | % | | | 0.4 | % |
Commercial | | | 18.9 | % | | | 16.3 | % | | | 20.2 | % | | | 17.0 | % |
(1) Sales to the U.S. federal government include sales from contracts for which we are the prime contractor, as well as those for which we are a subcontractor and the ultimate customer is the U.S. government.
6. Unbilled Accounts Receivable
Unbilled accounts receivable represent revenues earned but not invoiced to the customer at the balance sheet date due to either timing of invoice processing or delays due to fixed contractual billing schedules. A significant portion of our unbilled accounts receivable consist of carrier services and hardware and software products delivered but not invoiced at the end of the reporting period.
The following table presents customers that represent ten (10) percent or more of consolidated unbilled accounts receivable as of the dates presented below:
| | JUNE 30, | | | DECEMBER 31, | |
| | 2022 | | | 2021 | |
| | As a % of | | | As a % of | |
Customer Type | | Receivables | | | Receivables | |
| | (Unaudited) | |
U.S. Federal Government | | | 96 | % | | | 97 | % |
Commercial | | | 4 | % | | | 3 | % |
7. Other Current Assets and Accrued Expenses
Other current assets consisted of the following as of the dates presented below:
| | JUNE 30, | | | DECEMBER 31, | |
| | 2022 | | | 2021 | |
| | (Unaudited) | |
Inventories | | $ | 724,037 | | | $ | 590,065 | |
Prepaid rent, insurance and other assets | | | 920,985 | | | | 1,307,548 | |
Qualified payroll credit receivable | | | 1,144,365 | | | | 1,296,396 | |
| | | | | | | | |
Total other current assets | | $ | 2,789,387 | | | $ | 3,194,009 | |
Accrued expenses consisted of the following as of the dates presented below:
| | JUNE 30, | | | DECEMBER 31, | |
| | 2022 | | | 2021 | |
| | (Unaudited) | |
Carrier service costs | | $ | 6,808,710 | | | $ | 8,771,660 | |
Salaries and payroll taxes | | | 2,071,688 | | | | 2,213,356 | |
Inventory purchases, consultants and other costs | | | 1,073,639 | | | | 1,345,900 | |
U.S. Income tax payable | | | (188,370 | ) | | | (23,562 | ) |
Other | | | 44,682 | | | | 37,072 | |
| | | | | | | | |
| | $ | 9,810,349 | | | $ | 12,344,426 | |
8. Property and Equipment
Major classes of property and equipment consisted of the following as of the dates presented below:
| | JUNE 30, | | | DECEMBER 31, | |
| | 2022 | | | 2021 | |
| | (Unaudited) | |
Computer hardware and software | | $ | 3,106,774 | | | $ | 2,700,807 | |
Furniture and fixtures | | | 501,175 | | | | 454,401 | |
Leasehold improvements | | | 278,892 | | | | 298,352 | |
Automobiles | | | 123,678 | | | | 137,105 | |
Gross property and equipment | | | 4,010,519 | | | | 3,590,665 | |
Less: accumulated depreciation and | | | | | | | | |
amortization | | | 2,857,629 | | | | 2,749,532 | |
| | | | | | | | |
Property and equipment, net | | $ | 1,152,890 | | | $ | 841,133 | |
During the three month and six month periods ended June 30, 2022, property and equipment depreciation expense was approximately $110,000 and $204,200, respectively. During the three month and six month periods ended June 30, 2021, property and equipment depreciation expense was approximately $104,140 and $206,500, respectively.
During the six month periods ended June 30, 2022 and 2021, there were no material disposals of owned property and equipment.
There were no changes in the estimated useful lives used to depreciate property and equipment during the three and six month periods ended June 30, 2022 and 2021.
9. Leases
On January 1, 2022, the Company entered into an amendment to its lease agreement for its Tampa office to amend the term and the extension option. The amendment updated the term of the lease from sixty (60) calendar months ending December 31, 2026 to the Company’s ability to terminate the lease on June 30, 2022. As a result of the amendment, the Company removed the lease right of use asset and lease liability for its Tampa office from its condensed consolidated balance sheet. The Company accounted for the lease as month to month and recorded the monthly rent expense in its condensed consolidated statement of operations.
10. Goodwill and Intangible Assets
Goodwill consisted of the following:
| | JUNE 30, | |
| | 2022 | |
| | | |
Balances, January 1 | | $ | 22,088,578 | |
Impairment charge | | | (16,277,000 | ) |
| | | | |
Balances, June 30 | | $ | 5,811,578 | |
As a result of the significant decrease in the Company’s publicly quoted share price and market capitalization during the second quarter of 2022, the Company conducted additional testing of its goodwill, definite-lived intangibles, and other long-lived assets as of June 30, 2022. As a result of this review and additional testing, the Company did not identify an impairment to its definite-lived intangible assets or other long lived assets, but the Company did identify an impairment to goodwill resulting in recording a $16.3 million non-cash goodwill impairment charge for the three month period ended June 30, 2022.
For the June 30, 2022, the Company performed its additional goodwill impairment test with support from an external consultant and estimated the fair value of its single reporting unit based on a combination of the income (estimates of future discounted cash flows) and the market approach (market multiples for similar companies). The income approach uses a discounted cash flow (DCF) method that utilizes the present value of cash flows to estimate fair value of our reporting unit. The future cash flows for the reporting unit were projected based upon our estimates of future revenue, operating income and other factors such as working capital and capital expenditures. As part of our DCF analysis, the Company projected revenue and operating profits, and assumed a long-term revenue growth rates in the terminal year. The market approach utilizes multiples of revenues and earnings before interest expense, taxes, depreciation and amortization (EBITDA) to estimate the fair value of our reporting unit. The market multiples used for our single reporting unit were based on a group of comparable companies’ market multiples applied to the Company’s revenue and EBITDA.
As compared to the Company’s impairment testing on December 31, 2021, for the June 30, 2022 testing the Company updated certain inputs into the valuation models, including the discount rate used in the DCF analysis which increased reflecting, in part, higher interest rates and market volatility, and also the market factors used in the market approach. In addition, the Company reviewed its estimated future cash flows used in the impairment assessment and due to updated business conditions made reductions to those estimates, including revenues, margin, and capital expenditures, to reflect its best estimates as of such date..
Intangible assets consists of the following as of June 30, 2022:
| | JUNE 30, 2022 | |
| | | | | | | | | |
| | Gross Carrying | | | Accumulated | | | Net Book | |
| | Amount | | | Amortization | | | Value | |
| | (Unaudited) | |
Customer Relationships | | $ | 2,392,000 | | | $ | (184,950 | ) | | $ | 2,207,050 | |
Channel Relationships | | | 2,628,080 | | | | (1,430,844 | ) | | | 1,197,236 | |
Internally Developed Software | | | 3,767,380 | | | | (1,931,239 | ) | | | 1,836,141 | |
Trade Name and Trademarks | | | 1,330,472 | | | | (210,647 | ) | | | 1,119,825 | |
| | | | | | | | | | | | |
| | $ | 10,117,932 | | | $ | (3,757,680 | ) | | $ | 6,360,252 | |
| | DECEMBER 31, 2021 | |
| | | | | | | | | |
| | Gross Carrying | | | Accumulated | | | Net Book | |
| | Amount | | | Amortization | | | Value | |
| | | | | |
Customer Relationships | | $ | 2,392,000 | | | $ | (61,650 | ) | | $ | 2,330,350 | |
Channel Relationships | | | 2,628,080 | | | | (1,343,241 | ) | | | 1,284,839 | |
Internally Developed Software | | | 3,082,705 | | | | (1,633,516 | ) | | | 1,449,189 | |
Trade Name and Trademarks | | | 1,330,472 | | | | (165,964 | ) | | | 1,164,508 | |
| | | | | | | | | | | | |
| | $ | 9,433,257 | | | $ | (3,204,371 | ) | | $ | 6,228,886 | |
For the three and six month periods ended June 30, 2022, the Company capitalized $1.1 million and $1.9 million, respectively, of internally developed software costs, primarily associated with upgrading our ITMS™ (Intelligent Technology Management System), next generation TDITM application, secure identity management technology and secure network operations center of which $699,360 was transferred from capital work in progress to internally developed software and $316,900 was transferred from capital work in progress to property and equipment during the period. Capital work in progress is included in other long-term assets in the consolidated balance sheet
For the three and six month periods ended June 30, 2021, the Company capitalized $178,000 and $519,000, respectively, of internally developed software costs, primarily associated with upgrading our ITMS™ secure identity management technology and secure network operations center of which $38,500 was transferred from capital work in progress to internally developed software during the quarter.
There were no disposals of intangible assets during the six month period ended June 30, 2022. During the six month period ended June 30, 2021, the Company disposed of fully amortized intangible assets with a historical cost and accumulated amortization of $1,980,000.
The aggregate amortization expense recorded for the three month periods ended June 30, 2022 and 2021 were approximately $305,900 and $120,300 respectively. The aggregate amortization expense recorded for the six month periods ended June 30, 2022 and 2021 were approximately $592,500 and $239,300 respectively.
As of June 30, 2022, estimated annual amortization for our intangible assets for each of the next five years is approximately:
Remainder of 2022 | | $ | 664,399 | |
2023 | | | 1,293,569 | |
2024 | | | 1,065,112 | |
2025 | | | 602,153 | |
2026 | | | 511,170 | |
Thereafter | | | 2,223,849 | |
Total | | $ | 6,360,252 | |
11. Line of Credit
On June 15, 2017, the Company entered into a Loan and Security Agreement with Atlantic Union Bank (formerly known as Access National Bank) (the “Loan Agreement”). The Loan Agreement provides for a $5.0 million working capital revolving line of credit as described below.
Effective, June 15, 2022, the Company entered into a seventh modification agreement (“Modification Agreement”) with Atlantic Union Bank to amend the existing Loan Agreement. The Modification Agreement (i) extended the maturity date of the facility from June 15, 2022 through June 15, 2023, (ii) removed the current ratio and interest coverage ratio financial covenants, (iii) increased the tangible net worth covenant from $2,000,000 to $6,500,000, (iv) added a minimum EBITDA covenant that requires that the Company’s Adjusted EBITDA to not be less than $1,000,000 on a trailing 12-month basis as of the last day of each quarter (See Note 18) and (v) modified the definition of Borrowing Base.
Effective, June 27, 2022, the Company entered into an eighth Modification Agreement with Atlantic Union Bank to amend the existing Loan Agreement to increase the working capital revolving line of credit from $5.0 million to $7.0 million.
The available amount under the working capital line of credit is subject to a borrowing base, which is equal to the lesser of (i) $7.0 million or (ii) sum of 90% of the net unpaid balance of the Company’s eligible government accounts receivable and 80% of the net unpaid balance of the Company’s eligible commercial accounts receivable. 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. As of June 30, 2022, the Company was eligible to borrow up to $7.0 million under the borrowing base formula and was in compliance with all covenants under the Loan Agreement.
12. Income Taxes
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, 2022, 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, 2022 or December 31, 2021. 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, 2022, the Company had approximately $34.4 million in net operating loss (NOL) carry forwards available to offset future taxable income for federal income tax purposes. These federal NOL carry forwards expire between 2022 and 2038. Included in the recorded deferred tax asset, the Company had a benefit of approximately $38.4 million available to offset future taxable income for state income tax purposes. These state NOL carry forwards expire between 2024 and 2036. Under the provisions of the Internal Revenue Code, the net operating losses (“NOL”) and tax credit carryforwards are subject to review and possible adjustment by the Internal Revenue Service and state tax authorities. NOL and tax credit carryforwards may become subject to an annual limitation in the event of certain cumulative changes in the ownership interest of significant shareholders over a three-year period in excess of 50%, as defined under Sections 382 and 383 of the Internal Revenue Code of 1986, respectively, as well as similar state tax provisions. This could limit the amount of tax attributes that the Company can utilize annually to offset future taxable income or tax liabilities. The amount of the annual limitation, if any, will be determined based on the value of the Company immediately prior to the ownership change. Subsequent ownership changes may further affect the limitation in future years. This annual limitation may result in the expiration of the net operating losses and credits before utilization.
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. There were no changes to the valuation allowance as of June 30, 2022. In the future, changes in the Company’s valuation allowance may result from, among other things, additional pretax operating losses resulting in increases in its valuation allowance or pretax operating income resulting in decreases in its valuation allowance.
13. Stockholders’ Equity
Common Stock
The Company is authorized to issue 30,000,000 shares of common stock, $.001 par value per share. As of June 30, 2022, there were 8,725,476 shares issued and outstanding. During the six month period ended June 30, 2022, there were 83,728 shares of common stock vested in accordance with the vesting terms of the RSAs. Three employees received less than the shares vested because they elected to have a total of 11,280 shares withheld in satisfaction of the employees corresponding tax liability of approximately $49,300. The Company’s payment of this tax liability was recorded as a cash flow from financing activity on the consolidated statement of cash flows. During the six month period ended June 30, 2021, there were 132,384 shares of common stock vested in accordance with the vesting terms of the RSAs. Two employees received less than the shares vested because they elected to have a total of 12,526 shares withheld in satisfaction of each of the employees corresponding tax liability of approximately $140,900. The Company’s payment of this tax liability was recorded as a cash flow from financing activity on the consolidated statement of cash flows.
There were no stock option exercises during the six month period ended June 30, 2022. Shares of common stock issued as a result of stock option exercises and realized gross proceeds for the six month period ended June 30, 2021, were 2,500 and $10,250, respectively.
Contingent Warrants
Liability-classified warrants consist of warrants to acquire common stock at an exercise price of $5.33 per share as part of the consideration for the acquisition of ITA, during the earn-out period from 2021 to 2024. Based on our consideration of the ASC 815-40 guidance, we account for these contingent warrants as a liability. The estimated fair value of outstanding contingent warrants accounted for as liabilities is determined at each balance sheet date. Any decrease or increase in the estimated fair value of the warrant liability since the most recent balance sheet date is recorded in the consolidated statement of operations as a other income (expense). Refer to Notes 3 and 4 for more information about the warrants.
Warrants Issued
On March 31, 2022, the Company issued a warrant to purchase 75,000 shares of common stock as part of the contingent consideration earned by ITA for 2021 EBITDA achievement. The warrant contains a strike price of $5.33 and has a four-year contractual term. The warrant is classified within stockholders’ equity at its fair value. The fair value of the warrant was determined to be $108,000 utilizing the Black-Scholes-Merton option-pricing model at the time of issuance. Following such issuance, the Company has outstanding warrants to acquire 150,000 shares of common stock at a strike price of $5.33 that expire at terms through October 1, 2025.
Stock Repurchase Program
On October 7, 2019, the Company announced that its Board of Directors approved a stock repurchase plan (the “Repurchase Plan”) to purchase up to $2.5 million of the Company’s common stock. Any repurchases will be made in compliance with the SEC’s Rule 10b-18 if applicable, and may be made in the open market or in privately negotiated transactions, including the entry into derivatives transactions. During November 2021, the Board increased the size of the Repurchase Plan to up to $5.0 million of the Company’s common stock, increasing the amount available for future purchases under the Repurchase Plan to $4.6 million. During the three month period ended March 31, 2022, we repurchased 196,586 shares of our common stock for a total of $818,200 and subsequently in March of 2022, the Board suspended the repurchase plan in order to use the company’s excess funds to invest into the business.
At The Market Offering Agreement
On August 18, 2020, the Company entered into an At-The-Market Issuance Sales Agreement (the “Sales Agreement”) with B. Riley Securities, Inc. (“B. Riley FBR”), The Benchmark Company, LLC (“Benchmark”) and Spartan Capital Securities, LLC (“Spartan”, and together with B. Riley FBR and Benchmark, the “Sales Agents”) which establishes an at-the-market equity program pursuant to which the Company may offer and sell shares of our common stock, par value $0.001 per share, from time to time as set forth in the Sales Agreement. The Sales Agreement provides for the sale of shares of the Company’s common stock (“Shares”) having an aggregate offering price of up to $24,000,000.
The Sales Agreement will terminate upon the earlier of sale of all of the Shares under the Sales Agreement or termination of the Sales Agreement as permitted.
The Company has no obligation to sell any of the Shares, and, at any time, we may suspend offers under the Sales Agreement or terminate the Sales Agreement. The Company did not sell any shares during the six months ended June 30, 2022. The Company did not sell any shares during the three month period ended June 30, 2021. During the three month period ended March 31, 2021, the Company sold 100,687 shares for gross proceeds of $1.1 million and incurred $62,700 of offering costs.
14. Share-based Compensation
Share-based compensation (including restricted stock awards) represents both stock option 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, | |
| | 2022 | | | 2021 | | | 2022 | | | 2021 | |
| | (Unaudited) | |
Restricted stock compensation expense | | $ | 89,385 | | | $ | 214,852 | | | $ | 269,126 | | | $ | 371,959 | |
Non-qualified option stock compensation expense | | | - | | | | 28,969 | | | | - | | | | 54,704 | |
| | | | | | | | | | | | | | | | |
Total share-based compensation before taxes | | $ | 89,385 | | | $ | 243,821 | | | $ | 269,126 | | | $ | 426,663 | |
The Company’s stock incentive plan is administered by the Compensation Committee of the Board of Directors and authorizes the grant or award of incentive stock options, nonqualified stock options (NQSO), restricted stock awards (RSA), 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.
Restricted Stock
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 award shares are issued when vested and included in the total number of common shares issued and outstanding. During the six month period ended June 30, 2022, the Company granted 56,300 RSAs. During the six month period ended June 30, 2021, the Company granted 83,326 RSAs.
Non-Qualified Stock Options
The Company estimates the fair value of nonqualified 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 the 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. There were no non-qualified stock option awards granted during the six month periods ended June 30, 2022 and 2021.
At June 30, 2022, the Company had approximately $239,700 of total unrecognized share-based compensation expense, net of estimated forfeitures, related to share-based compensation that will be recognized over the weighted average remaining period of 1.3 years.
15. Earnings Per Common Share (EPS)
The computations of basic and diluted earnings per share were as follows for the periods presented below:
| | THREE MONTHS ENDED | | | SIX MONTHS ENDED | |
| | JUNE 30, | | | JUNE 30, | |
| | 2022 | | | 2021 | | | 2022 | | | 2021 | |
| | (Unaudited) | |
Basic Earnings Per Share Computation: | | | | | | | | | | | | |
Net (loss) income | | $ | (13,759,209 | ) | | $ | (204,731 | ) | | $ | (14,152,106 | ) | | $ | 380,693 | |
Weighted average number of common shares | | | 8,696,111 | | | | 9,072,281 | | | | 8,739,043 | | | | 9,033,905 | |
Basic Earnings Per Share | | $ | (1.58 | ) | | $ | (0.02 | ) | | $ | (1.62 | ) | | $ | 0.04 | |
| | | | | | | | | | | | | | | | |
Diluted Earnings Per Share Computation: | | | | | | | | | | | | | | | | |
Net (loss) income | | $ | (13,759,209 | ) | | $ | (204,731 | ) | | $ | (14,152,106 | ) | | $ | 380,693 | |
| | | | | | | | | | | | | | | | |
Weighted average number of common shares | | | 8,696,111 | | | | 9,072,281 | | | | 8,739,043 | | | | 9,033,905 | |
Incremental shares from assumed conversions of dilutive securities | | | - | | | | - | | | | - | | | | 157,627 | |
Adjusted weighted average number of common shares | | | 8,696,111 | | | | 9,072,281 | | | | 8,739,043 | | | | 9,191,532 | |
| | | | | | | | | | | | | | | | |
Diluted Earnings Per Share | | $ | (1.58 | ) | | $ | (0.02 | ) | | $ | (1.62 | ) | | $ | 0.04 | |
16. Revenue from Contracts with Customers
The following table was prepared to provide additional information about the composition of revenues from contracts with customers for the periods presented:
| | THREE MONTHS ENDED | | | SIX MONTHS ENDED | |
| | JUNE 30, | | | JUNE 30, | |
| | 2022 | | | 2021 | | | 2022 | | | 2021 | |
| | (Unaudited) | |
Carrier Services | | $ | 12,500,358 | | | $ | 11,898,302 | | | $ | 25,432,413 | | | $ | 23,247,174 | |
Managed Services | | | 10,556,996 | | | | 8,085,118 | | | | 20,061,368 | | | | 17,387,089 | |
| | | | | | | | | | | | | | | | |
| | $ | 23,057,354 | | | $ | 19,983,420 | | | $ | 45,493,781 | | | $ | 40,634,263 | |
The Company recognized revenues from contracts with customers for the following customer types as set forth below:
| | THREE MONTHS ENDED | | | SIX MONTHS ENDED | |
| | JUNE 30, | | | JUNE 30, | |
| | 2022 | | | 2021 | | | 2022 | | | 2021 | |
| | (Unaudited) | |
U.S. Federal Government | | $ | 18,572,618 | | | $ | 16,649,566 | | | $ | 36,006,341 | | | $ | 33,581,297 | |
U.S. State and Local Governments | | | 100,879 | | | | 64,705 | | | | 227,021 | | | | 118,088 | |
Foreign Governments | | | 24,059 | | | | 12,993 | | | | 56,466 | | | | 39,089 | |
Commercial Enterprises | | | 4,359,798 | | | | 3,256,156 | | | | 9,203,953 | | | | 6,895,789 | |
| | | | | | | | | | | | | | | | |
| | $ | 23,057,354 | | | $ | 19,983,420 | | | $ | 45,493,781 | | | $ | 40,634,263 | |
The Company recognized revenues from contracts with customers in the following geographic regions:
| | THREE MONTHS ENDED | | | SIX MONTHS ENDED | |
| | JUNE 30, | | | JUNE 30, | |
| | 2022 | | | 2021 | | | 2022 | | | 2021 | |
| | (Unaudited) | |
North America | | $ | 22,236,044 | | | $ | 18,763,660 | | | $ | 43,670,678 | | | $ | 38,173,804 | |
Europe | | | 821,310 | | | | 1,219,760 | | | | 1,823,103 | | | | 2,460,459 | |
| | | | | | | | | | | | | | | | |
| | $ | 23,057,354 | | | $ | 19,983,420 | | | $ | 45,493,781 | | | $ | 40,634,263 | |
During the three months ended June 30, 2022 and 2021, the Company recognized approximately $580,100 and $568,000, respectively, of revenue related to amounts that were included in deferred revenue as of December 31, 2021 and 2020, respectively.
During the six months ended June 30, 2022 and 2021, the Company recognized approximately $1,660,000 and $1,510,000, respectively, of revenue related to amounts that were included in deferred revenue as of December 31, 2021 and 2020, respectively.
17. Commitments and Contingencies
Employment Agreements
The Company has employment agreements with certain executives that set forth compensation levels and provide for severance payments in certain instances.
Litigation
The Company is not involved in any material legal proceedings.
18. Subsequent Events
As a result of the impairment charge described in Note 10, the Company received from Atlantic Union Bank a clarification to its covenant calculation indicating for the impairment charge to be added to net (loss) income to arrive at Adjusted EBITDA.