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 (TM2) solutions to the government and commercial sectors. The Company utilizes
its subject matter expertise and internally developed proprietary software, analytical and reporting tools to deliver its communications
and related identity management solutions. The Company’s solutions are internally hosted solutions which are accessible on-demand
through a secure portal that provides its customers with a set of streamlined mobile communications management, identity management,
and consulting solutions. The Company’s trusted mobility management solutions provides its customers the ability to efficiently
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.
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 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 September 30, 2017 and for each of the three and nine month periods ended September
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 nine month periods ended September 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 condensed 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 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.
Significant Accounting Policies
There have been no
significant changes in the Company’s significant accounting policies during the first nine 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 30, 2017, except
as noted below under the section “Recently Adopted Accounting Standards”.
Segment Reporting
Our trusted mobility
management solution offerings comprise an overall single business from which the Company earns revenues and incurs costs. The Company’s
trusted mobility management solution 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 revenues.
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, 2016. 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, 2017. The adoption of this accounting standard did not have a material effect on the Company’s condensed consolidated
statements of cash flows presented herein.
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 completed 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 recorded
within general and administrative expenses a net gain of approximately $66,700 on the sale of its Lewis Center Facility. Assets
held for sale are set forth in the table below as of the periods presented:
|
|
SEPTEMBER 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:
|
|
SEPTEMBER 30,
|
|
|
DECEMBER 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(Unaudited)
|
|
Commercial
|
|
$
|
2,275,740
|
|
|
$
|
2,319,142
|
|
Government
|
|
|
5,744,525
|
|
|
|
3,178,362
|
|
Gross accounts receivable
|
|
|
8,020,265
|
|
|
|
5,497,504
|
|
Less: allowances for doubtful
|
|
|
|
|
|
|
|
|
accounts
|
|
|
78,230
|
|
|
|
344,411
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
$
|
7,942,035
|
|
|
$
|
5,153,093
|
|
For the nine
month period ended September 30, 2017, the Company recorded a provision for bad debt of approximately $31,200 and separately
wrote-off a specific provision for bad debt of approximately $274,500 against the related customer invoice which reduced
ending allowances for doubtful accounts. For the three and nine month periods ended September 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:
|
|
SEPTEMBER 30,
|
|
|
DECEMBER 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
As a % of
|
|
|
As a % of
|
|
Customer Name
|
|
Receivables
|
|
|
Receivables
|
|
|
|
(Unaudited)
|
|
Department of Homeland Security (DHS)
|
|
|
46%
|
|
|
|
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
|
|
|
NINE MONTHS ENDED
|
|
|
|
SEPTEMBER 30,
|
|
|
SEPTEMBER 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)
|
|
|
60%
|
|
|
|
62%
|
|
|
|
60%
|
|
|
|
63%
|
|
|
5.
|
Unbilled Accounts Receivable
|
Unbilled accounts receivable
represents amount not yet billed for products and/or services delivered. Unbilled receivables consist of the following by customer
type as of the periods presented below:
|
|
SEPTEMBER 30,
|
|
|
DECEMBER 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(Unaudited)
|
|
Commercial
|
|
$
|
285,912
|
|
|
$
|
278,862
|
|
Government
|
|
|
5,846,841
|
|
|
|
7,833,828
|
|
|
|
|
|
|
|
|
|
|
Unbilled accounts receivable
|
|
$
|
6,132,753
|
|
|
$
|
8,112,690
|
|
|
6.
|
Property and Equipment
|
Major classes of property and equipment
consisted of the following as of the periods presented below:
|
|
SEPTEMBER 30,
|
|
|
DECEMBER 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(Unaudited)
|
|
Computer hardware and software
|
|
$
|
1,516,560
|
|
|
$
|
1,214,052
|
|
Furniture and fixtures
|
|
|
297,291
|
|
|
|
211,376
|
|
Leasehold improvements
|
|
|
242,792
|
|
|
|
486,467
|
|
Automobile
|
|
|
186,623
|
|
|
|
216,880
|
|
Gross property and equipment
|
|
|
2,243,266
|
|
|
|
2,128,775
|
|
Less: accumulated depreciation and
|
|
|
|
|
|
|
|
|
amortization
|
|
|
1,273,615
|
|
|
|
1,392,097
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
969,651
|
|
|
$
|
736,678
|
|
|
|
|
|
|
|
|
|
|
Land and building held for sale, net
|
|
$
|
-
|
|
|
$
|
594,376
|
|
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 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 condensed consolidated balance sheets.
As discussed further
in Note 3, in May 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 nine month
period ended September 30, 2017 there were disposals of fully depreciated owned property and equipment with related cost and accumulated
depreciation of approximately $398,600 and building and leasehold improvements with a net book value of approximately $176,700.
During the three and nine month periods ended September 30, 2016 there were disposals of fully depreciated owned property
and equipment of approximately $309,100.
There were no changes
in the estimated useful lives used to depreciate property and equipment during the three or nine month periods ended September
30, 2017 and 2016.
Assets under capital
lease included in the table above consisted of the following as of the periods presented below:
|
|
SEPTEMBER 30,
|
|
|
DECEMBER 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(Unaudited)
|
|
Automobiles
|
|
$
|
93,301
|
|
|
$
|
63,498
|
|
Less: accumulated amortization
|
|
|
14,611
|
|
|
|
36,823
|
|
|
|
|
|
|
|
|
|
|
Capital lease assets, net
|
|
$
|
78,690
|
|
|
$
|
26,675
|
|
During the nine month
period ended September 30, 2017, the Company acquired two automobiles under capital lease arrangements and recognized a gross asset
of $93,301. For the nine month period ended September 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 and nine month periods ended September 30, 2017 there were no material sales or disposals of leased equipment.
During the three and nine month periods ended September 30, 2016 there were disposals of fully amortized leased equipment
of approximately $309,100.
Property and equipment
depreciation expense (including amortization of capital lease property) was approximately as follows for the periods presented
below:
|
|
THREE MONTHS ENDED
|
|
|
NINE MONTHS ENDED
|
|
|
|
SEPTEMBER 30,
|
|
|
SEPTEMBER 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
(Unaudited)
|
|
Property and equipment depreciation expense
|
|
$
|
100,200
|
|
|
$
|
105,200
|
|
|
$
|
295,800
|
|
|
$
|
336,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital lease amortization (included in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
property and equipment depreciation expense)
|
|
$
|
6,000
|
|
|
$
|
3,400
|
|
|
$
|
13,800
|
|
|
$
|
10,900
|
|
|
7.
|
Goodwill and Intangible Assets
|
The Company has recorded
goodwill of $18,555,578 as of September 30, 2017. There were no changes in the carrying amount of goodwill during the three and
nine month periods ended September 30, 2017. The Company considered whether there were indicators of impairment during the three
and nine month periods ended September 30, 2017.
The Company has recorded
net intangible assets of $3,900,433, consisting of purchased intangibles and internally developed software used in the conduct
of business. For the three and nine month periods ended September 30, 2017, the Company capitalized internally developed software
costs of approximately $128,000 and $360,700, respectively, related to costs associated with our next generation TDI Optimiser™
application. There were no material disposals of intangible assets for the three and nine month periods ended September 30, 2017
and 2016.
The aggregate amortization
expense recorded for the three month periods ended September 30, 2017 and 2016 were approximately $276,400 and $286,800 respectively.
The aggregate amortization expense recorded for the nine month periods ended September 30, 2017 and 2016 were approximately $812,200
and $820,700, respectively. The total weighted remaining average life of all purchased intangible assets and internally developed
software costs is approximately 6.8 years and 2.8 years, respectively, at September 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 nine month period
ended September 30, 2017. Under the current credit facility with Access National Bank the Company was advanced and repaid approximately
$8.3 million and $7.8 million, respectively during the nine month period ended September 30, 2017.
As of September 30,
2017, the Company was eligible to borrow up to $4.4 million under the borrowing base formula.
Long-Term Debt
Long-term debt consisted
of the following:
|
|
SEPTEMBER 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 these two new capital leases are $695 and $1,210, respectively,
and these leases expire in March 2020. The following sets forth the Company’s future minimum payment obligations under these
capital lease agreements for fiscal years ending September 30:
2017
|
|
$
|
24,500
|
|
2018
|
|
|
24,500
|
|
2019
|
|
|
24,500
|
|
2020
|
|
|
12,291
|
|
|
|
|
|
|
Total principal and interest payments
|
|
|
85,791
|
|
Less: portion representing interest
|
|
|
9,028
|
|
Present value of minimum lease payments
|
|
|
|
|
under capital lease agreements
|
|
|
76,763
|
|
Less: current portion
|
|
|
20,216
|
|
Capital lease obligations, net of current portion
|
|
$
|
56,547
|
|
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 September 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 September 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 September 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 nine month periods ended September 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 September 30, 2017, there were 82,946,847 shares
of common stock outstanding. The Company issued 186,713 and 209,438 shares of common stock, respectively, as a result of the vesting
of RSAs during the nine month periods ended September 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 September 30,
2017 and 2016, respectively. Shares of common stock issued as a result of stock option exercises and realized gross proceeds during
the nine month period ended September 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.
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 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 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 nine month
period ended September 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,
the Company issued 102,525 shares of the Company’s common stock to Mr. Nyweide and recognized a non-cash stock based compensation
expense of approximately $94,400 in conjunction with this acceleration event. 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 nine month period ended September 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 nine month period ended September 30, 2016.
During the nine month
period ended September 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 nine month periods ended September 30, 2016.
A summary of RSA activity
as of September 30, 2017 and 2016, and changes during nine month periods ended September 30, 2017 and 2016 are set forth below:
|
|
2017
|
|
|
2016
|
|
NON-VESTED AWARDS
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
Non-vested awards outstanding, January 1,
|
|
|
250,000
|
|
|
|
500,000
|
|
Granted (+)
|
|
|
300,000
|
|
|
|
-
|
|
Cancelled (-)
|
|
|
150,000
|
|
|
|
-
|
|
Vested (-)
|
|
|
275,000
|
|
|
|
250,000
|
|
Non-vested awards outstanding, September 30,
|
|
|
125,000
|
|
|
|
250,000
|
|
|
|
|
|
|
|
|
|
|
Weighted-average remaining contractual life (in years)
|
|
|
0.2
|
|
|
|
1.5
|
|
|
|
|
|
|
|
|
|
|
Unamortized RSA compensation expense
|
|
$
|
1,090
|
|
|
$
|
61,700
|
|
|
|
|
|
|
|
|
|
|
Aggregate intrinsic value of RSAs non-vested, September 30
|
|
$
|
81,250
|
|
|
$
|
147,500
|
|
|
|
|
|
|
|
|
|
|
Aggregate intrinsic value of RSAs vested during the quarter
|
|
$
|
177,750
|
|
|
$
|
185,000
|
|
Non-Qualified Stock
Option Awards
During the three
and nine month periods ended September 30, 2017 and 2016, employee and non-employee NQSO grants were valued based on the
assumptions as set forth in the table below:
Employee Stock Option Grants
|
|
THREE MONTHS ENDED
|
|
NINE MONTHS ENDED
|
|
|
SEPTEMBER 30,
|
|
SEPTEMBER 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
|
(Unaudited)
|
Stock options granted
|
|
2,590,000
|
|
--
|
|
3,440,000
|
|
650,000
|
Expected dividend yield
|
|
0%
|
|
--
|
|
0%
|
|
0%
|
Expected volatility
|
|
69.6%
|
|
--
|
|
68.2%-74.2%
|
|
66%-72%
|
Risk-free interest rate
|
|
2.0%
|
|
--
|
|
1.8% - 2.1%
|
|
0.9%-1.5%
|
Forfeiture rate
|
|
4.2%
|
|
--
|
|
4.6% - 6.8%
|
|
--
|
Expected life
|
|
5 years
|
|
--
|
|
5 years
|
|
3-5 years
|
Director Stock Option Grants
|
|
THREE MONTHS ENDED
|
|
NINE MONTHS ENDED
|
|
|
SEPTEMBER 30,
|
|
SEPTEMBER 30,
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
|
(Unaudited)
|
Stock options granted
|
|
100,000
|
|
--
|
|
250,000
|
|
--
|
Expected dividend yield
|
|
0%
|
|
--
|
|
0%
|
|
--
|
Expected volatility
|
|
70.1%
|
|
--
|
|
69.6% - 70.1%
|
|
--
|
Risk-free interest rate
|
|
2.0%
|
|
--
|
|
1.7% - 2.0%
|
|
--
|
Forfeiture rate
|
|
5.9%
|
|
--
|
|
4.2% - 5.9%
|
|
--
|
Expected life
|
|
7 years
|
|
--
|
|
7 years
|
|
--
|
A summary
of stock option activity as of September 30, 2017 and 2016, and changes during nine month periods ended September 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 (+)
|
|
|
3,440,000
|
|
|
$
|
0.30
|
|
|
|
650,000
|
|
|
$
|
0.40
|
|
Cancelled (-)
|
|
|
860,000
|
|
|
$
|
0.68
|
|
|
|
25,000
|
|
|
$
|
0.72
|
|
Vested (-)
|
|
|
110,000
|
|
|
$
|
0.69
|
|
|
|
534,172
|
|
|
$
|
0.69
|
|
Non-vested balances, September 30,
|
|
|
3,390,000
|
|
|
$
|
0.27
|
|
|
|
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 (+)
|
|
|
3,440,000
|
|
|
$
|
0.59
|
|
|
|
650,000
|
|
|
$
|
0.70
|
|
Cancelled (-)
|
|
|
1,402,334
|
|
|
$
|
0.97
|
|
|
|
392,000
|
|
|
$
|
0.62
|
|
Exercised (-)
|
|
|
30,000
|
|
|
$
|
0.57
|
|
|
|
-
|
|
|
|
-
|
|
Awards outstanding, September 30,
|
|
|
4,098,334
|
|
|
$
|
0.60
|
|
|
|
2,115,668
|
|
|
$
|
0.87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Awards vested and expected to vest,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
3,614,538
|
|
|
$
|
0.59
|
|
|
|
1,989,739
|
|
|
$
|
0.88
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Awards outstanding and exercisable,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
708,334
|
|
|
$
|
0.73
|
|
|
|
1,183,168
|
|
|
$
|
0.82
|
|
During the nine month period ended September 30, 2017, the Company awarded 3,440,000 stock options, of which: i) 2,590,000 stock
options were awarded as part of an additional compensation plan to align certain key employees with the Company's long term
financial goals, ii) 600,000 stock options were awarded to the Company's former CEO and iii) 250,000 stock options were awarded
to the members of the Company's board of directors.
During the
nine month period ended September 30, 2017, there were stock options of 1,402,334 that were cancelled, of which 993,334 were cancelled
due to termination of employment, 225,000 were cancelled by the board of directors as part of a compensation plan change, and the
remainder expired unexercised at the end of the option term. During the nine month period ended September 30, 2016, there were
stock options of 392,000 that were cancelled, of which 205,000 were cancelled due to termination of employment and the remainder
expired unexercised at the end of the option term.
The weighted-average
remaining contractual life of the non-qualified stock options outstanding, exercisable, and vested and expected to vest as of September
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 September 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 September 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 September 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 nine months ended September 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
|
|
|
NINE MONTHS ENDED
|
|
|
|
SEPTEMBER 30,
|
|
|
JUNE 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
(Unaudited)
|
|
Restricted stock compensation expense
|
|
$
|
5,447
|
|
|
$
|
21,786
|
|
|
$
|
156,768
|
|
|
$
|
65,358
|
|
Non-qualified stock compensation expense
|
|
|
(86,490
|
)
|
|
|
46,302
|
|
|
|
(18,732
|
)
|
|
|
139,056
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total share-based compensation before taxes
|
|
$
|
(81,043
|
)
|
|
$
|
68,088
|
|
|
$
|
138,036
|
|
|
$
|
204,414
|
|
During the three
and nine month periods ended September 30, 2017, the board of directors cancelled 225,000 stock awards previously awarded to
employees and recognized a benefit related to cancellation of stock awards. At September 30, 2017, the Company had
approximately $661,900 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
|
|
|
NINE MONTHS ENDED
|
|
|
|
SEPTEMBER 30,
|
|
|
SEPTEMBER 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
(Unaudited)
|
|
Basic EPS Computation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(314,601
|
)
|
|
$
|
(148,040
|
)
|
|
$
|
(2,768,993
|
)
|
|
$
|
(1,704,480
|
)
|
Weighted average number of common shares
|
|
|
82,946,847
|
|
|
|
82,730,134
|
|
|
|
82,878,287
|
|
|
|
82,673,570
|
|
Basic EPS
|
|
$
|
(0.00
|
)
|
|
$
|
(0.00
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(0.02
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS Computation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(314,601
|
)
|
|
$
|
(148,040
|
)
|
|
$
|
(2,768,993
|
)
|
|
$
|
(1,704,480
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares
|
|
|
82,946,847
|
|
|
|
82,730,134
|
|
|
|
82,878,287
|
|
|
|
82,673,570
|
|
Incremental shares from assumed conversions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of stock options
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Adjusted weighted average number of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
common shares
|
|
|
82,946,847
|
|
|
|
82,730,134
|
|
|
|
82,878,287
|
|
|
|
82,673,570
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted EPS
|
|
$
|
(0.00
|
)
|
|
$
|
(0.00
|
)
|
|
$
|
(0.03
|
)
|
|
$
|
(0.02
|
)
|
The dilutive effect
of unexercised stock options and restricted stock awards excludes 4,223,334 and 2,363,668 of options from the computation of EPS
for the three and nine month periods ended September 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
|
|
|
NINE MONTHS ENDED
|
|
|
|
SEPTEMBER 30,
|
|
|
SEPTEMBER 30,
|
|
Revenue Mix
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
(Unaudited)
|
|
Carrier Services
|
|
$
|
11,245,395
|
|
|
$
|
13,532,617
|
|
|
$
|
32,191,335
|
|
|
$
|
35,721,245
|
|
Managed Services
|
|
|
7,218,477
|
|
|
|
8,582,222
|
|
|
|
23,765,282
|
|
|
|
24,441,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
18,463,872
|
|
|
$
|
22,114,839
|
|
|
$
|
55,956,617
|
|
|
$
|
60,163,145
|
|
The following table
presents our domestic and foreign revenue mix for the periods presented:
|
|
THREE MONTHS ENDED
|
|
|
NINE MONTHS ENDED
|
|
|
|
SEPTEMBER 30,
|
|
|
SEPTEMBER 30,
|
|
Geographic Region
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
(Unaudited)
|
|
North America
|
|
$
|
17,342,443
|
|
|
$
|
20,867,324
|
|
|
$
|
52,664,719
|
|
|
$
|
56,360,870
|
|
Europe
|
|
|
1,121,429
|
|
|
|
1,247,515
|
|
|
|
3,291,898
|
|
|
|
3,802,275
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
18,463,872
|
|
|
$
|
22,114,839
|
|
|
$
|
55,956,617
|
|
|
$
|
60,163,145
|
|
|
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 nine month period ended
September 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.