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’s TM2 solutions are internally hosted and 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 TM2 framework is a set of state-of-the-art
integrated workflow solution that meets Federal Information
Security Management Act requirements for data security and other
recognized industry compliance certifications related to system
processing controls and privacy which enables its customers to
focus its valuable resources on managing, analyzing and protecting
access to and use of their valuable communication assets.
Additionally, the Company’s TM2 platform received an
Authorization to Operate by the U.S. Department of Homeland
Security (DHS) and the General Service Administration
(GSA).
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, will be the primary source of revenues for the
foreseeable future. External factors outside of the Company’s
control such as delays and/or a changes in government
administrations, budgets and other political matters that may
impact the timing and commencement of such work and could result in
variations in operating results and directly affect the
Company’s financial performance. 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.
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, 2018 and for each of the three and nine month periods
ended September 30, 2018 and 2017, 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, 2017 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, 2017. The results of operations for the three
and nine month periods ended September 30, 2018 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.
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 2018 from those
disclosed in the Company’s Annual Report on Form 10-K for the
year ended December 31, 2017 filed with the SEC on March 21, 2018,
except as further described below under Recently Adopted Accounting
Standards.
Segment Reporting
Our TM2
solution offerings comprise an overall single business from which
the Company earns revenues and incurs costs. The Company’s
TM2 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 14 for detailed information
regarding the composition of revenues.
Accounting Standards Update
Recently Adopted Accounting Standards
Accounting
Standards Codification 606 “Revenue from Contracts with
Customers”. In May 2014, ASU 2014-09, “Revenue from
Contracts with Customers (Topic 606)” was issued. This ASU
requires the use of a five-step methodology to depict the transfer
of promised goods and services to customers in an amount that
reflects the consideration to which the entity expects to be
entitled in exchange for those goods or services. In addition, the
ASU requires enhanced disclosure regarding revenue
recognition.
The
standard permits the use of either the retrospective or cumulative
effect transition method (modified retrospective method). The
Company adopted the ASU on a modified retrospective transition
method on January 1, 2018 and will apply the guidance to the most
current period presented in the financial statements issued
subsequent to the adoption date. The Company did not record a
cumulative adjustment to retained earnings as of January 1, 2018
since the Company was recognizing revenue consistent with the
provisions of ASC 606 and any adjustment would have been deemed
immaterial. In preparation for adoption of the standard, the
Company has implemented internal controls to enable the preparation
of financial information and have reached conclusions on key
accounting assessments related to the standard, including that
accounting for variable consideration is immaterial.
The
Company adopted the standard through the application of the
portfolio approach and selected a sample of customer contracts to
assess under the guidance of the new standard that are
characteristically representative of each revenue stream. The
Company has completed its review of the sample contracts, and the
Company does not anticipate a significant change to the pattern or
timing of revenue recognition as a result of adopting the new
standard. The Company revised its revenue recognition policy as
follows to incorporate the requirements of the new
standard.
Revenue from Contracts with Customers
Revenue
is recognized upon transfer of control of promised products or
services to customers in an amount that reflects the consideration
the Company expects to receive in exchange for those products or
services. The Company enters into contracts that can include
various combinations of products and services, which are generally
capable of being distinct and accounted for as separate performance
obligations. Revenue is recognized net of allowances for returns
and any taxes collected from customers, which are subsequently
remitted to governmental authorities.
Nature of Products and Services
The
Company’s TM2 solution consists of three broad services as
described below:
■
Telecom Lifecycle Management
Services.
The Company delivers managed services under firm
fixed price contracts that include multiple performance
obligations. Revenue for managed services are billed on a monthly
basis to the end customer by multiplying the contractual fixed
price times the base output (e.g. number of units managed,
percentage of supplier spend and/or savings, units delivered,
certificates issued and/or billable hours). Revenue is accrued
based on what the Company expects will be ultimately invoiced.
Differences between accrued revenues and actual billed revenues are
adjusted in the period that billings are prepared and such
differences have not historically been material. Revenue on
contingent-fee arrangements are recognized upon customer acceptance
of proposed billing. Managed services are not interdependent and
there are no undelivered performance obligations in these
arrangements.
■
Identity Management.
The
Company issues digital identity credentialing software certificates
to individuals and devices using its own Public Key Infrastructure
(PKI) enabled environment. The Company also assists large
enterprises with their own certificate programs by PKI-enabling an
enterprises environment which allows an enterprise to issue and
utilize individual certificates to its employees and contractors in
accordance with similar PKI issuance policies and procedures.
Certificates issued have a fixed life and cannot be modified or
reissued. There are nominal post contract services to maintain
issued public and private certificate key pairs issued to
individuals and devices. Revenue is recognized from the sales of
credentials to an individual or as an enterprise solution upon
issuance; provided there are no other additional performance
obligations. Revenue from this service does not require significant
accounting estimates. Cost of Revenues includes general
infrastructure support costs to maintain the continued issuance of
credentials.
■
Telecom Bill Presentation and
Analytics.
The Company offers a proprietary online bill
consolidation, bill presentment and data intelligence software
solution under a perpetual and Software-as-a-Service license model.
Revenue from software licenses that are sold as a perpetual license
and do not involve the significant production, modification or
customization of the software are recognized when the software is
delivered. Where an arrangement to deliver software involves
significant production, modification or customization, the software
revenue is not recognized until such time as the software has been
accepted by the customer. Revenue from software licenses which are
sold as term licenses, which do not involve the significant
production, modification or customization of the software are
recognized evenly over the license term once the software has been
delivered. Where an arrangement to deliver software involves
significant production, modification or customization, software
sold as a term license is recognized ratably over the license term
from the date the software is accepted by the customer.
Implementation fees are recognized over the term of the license
agreement once the software has been delivered. Maintenance
services, if contracted, are recognized ratably over the term of
the maintenance agreement, generally twelve months. Revenue from
this service does not require significant accounting
estimates.
Significant Judgments
The
Company’s contracts with customers often include promises to
transfer multiple products and services to a customer under a fixed
rate or fixed fee arrangement. Determining whether products and
services are considered distinct performance obligations that
should be accounted for separately versus together may require
significant judgment. Components of our managed service solution
are generally distinct performance obligations that are not
interdependent and can be completed within a month. The
Company’s products are generally sold with a right of return
and the Company may provide other event driven credits or
disincentives for not meeting performance obligations which are
accounted for as variable consideration when estimating the amount
of revenue to recognize. Returns and credits are estimated at
contract inception and updated at the end of each reporting period
as additional information becomes available and only to the extent
that it is probable that a significant reversal of any incremental
revenue will not occur.
Contract Balances
A
significant portion of contract balances represent revenues earned
on federal government contracts. Timing of revenue recognition may
differ materially from the timing of invoicing to customers due a
long-standing practice of issuing a consolidated managed service
invoice. A consolidated invoice usually requires data such as
billable hours, units managed, credentials issued, accessories sold
and usage data from telecommunications providers and other
suppliers. As a result it could take between thirty (30) to sixty
(60) days after all performance obligations have been met to
deliver a complete customer invoice. As a result, the Company may
have both accounts receivables (invoiced revenue) and unbilled
receivables (revenue recognize but not yet invoiced) that could
represent one or more months of revenue. Additionally, the Company
may be required under contractual terms to bill for services in
advance and deferred recognition of revenue until all performance
obligations have been met.
Payment
terms and conditions vary by contract type, although terms
generally include a requirement of payment within thirty (30) to
ninety (90) days. Government contract billings are 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
customer. 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. In
instances where the timing of revenue recognition differs from the
timing of invoicing, we have determined our contracts generally do
not include a significant financing component. The primary purpose
of our invoicing terms is to provide customers with simplified and
predictable ways of purchasing our products and services, not to
receive financing from our customers.
The
allowance for doubtful accounts reflects the Company’s best
estimate of probable losses inherent in uncollected accounts
receivable. Customer accounts receivable balances that remain
uncollected for more than 45 days are reviewed for collectability
and are considered past due after 90 days unless different
contractual repayment terms were extended under a contract with a
customer. The Company determines its allowance for doubtful
accounts after considering factors that could affect collectability
of past due accounts receivable and such factors regularly include
the customers’ financial condition and credit worthiness,
recent payment history, type of customer and the length of time
accounts receivable are past due. Upon specific review and its
determination that a bad debt reserve may be required, the Company
will reserve such amount if it views the account as potentially
uncollectable. Customer accounts receivable balances that remain
uncollected for more than 120 days and/or that have not been
settled in accordance with contractual repayment terms and for
which no firm payment commitments exist are placed with a third
party collection agency and a reserve is established for the entire
uncollected balance. The Company writes off accounts receivable
after 180 days or earlier when they become uncollectible. Payments
subsequently received on such receivables are credited to the
allowance for doubtful accounts. If the accounts receivable has
been written off and no allowance for doubtful accounts exist
subsequent payments received are credited to bad debt expense as a
recovery.
Costs to Obtain a Contract with a Customer
The
Company does not recognize assets from the costs to obtain a
contract with a customer and generally expenses these costs as
incurred. The Company primarily uses internal labor to manage
and oversee the customer acquisition process and to finalize
contract terms and conditions and commence customer start-up
activities, if any. Internal labor costs would be incurred
regardless of the outcome of a contract with a customer and as such
those costs are not considered incremental to the cost to obtain a
contract with a customer. The Company does not typically
incur significant incremental costs to obtain a contract with a
customer after such contract has been awarded. Incremental
costs to obtain a contract with a customer may include payment of
commissions to certain internal and/or external sales agents upon
collection of invoiced sales from the customer. The Company
does not typically prepay sales commissions in advance of being
paid for services delivered.
Accounting Standards under Evaluation
In
February 2016, the FASB issued new accounting guidance on leases.
The guidance, effective January 1, 2019, with early adoption
permitted, requires virtually all leases to be recognized on the
Company’s condensed consolidated balance sheets. The Company
will adopt the standard effective January 1, 2019. The new guidance
currently requires a modified retrospective transition approach,
which would cause us to record existing operating leases on the
condensed consolidated balance sheets upon adoption and in the
comparative period. In January 2018, the FASB released an exposure
draft that, if issued in its current form, would provide the
Company with the option to adopt the provisions of the new guidance
prospectively, without adjusting the comparative periods presented.
The Company is currently reviewing its property and equipment
leases and evaluating and interpreting the requirements under the
guidance, including the available accounting policy elections, in
order to determine the impacts on the consolidated financial
position, results of operations and cash flows upon
adoption.
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 June
2018, the FASB issued ASU 2018-07, Compensation-Stock Compensation
(Topic 718); Improvements to Nonemployee Share-Based Payment
Accounting. ASU 2018-07 simplifies the accounting for share-based
payments made to nonemployees so the accounting for such payments
is substantially the same as those made to employees. Under this
ASU, share-based awards to non employees will be measured at fair
value on the grant date of the awards, entities will need to assess
the probability of satisfying performance conditions if any are
present, and awards will continue to be classified according to ASC
718 upon vesting, which eliminates the need to reassess
classification upon vesting, consistent with awards granted to
employees. This ASU is effective for fiscal years beginning after
December 15, 2018, including interim periods within those fiscal
years, and early adoption is permitted. We do not anticipate this
update will have a material effect on our consolidated financial
statements.
3.
Contingent
Consideration
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”). 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 renewed
its license agreement in 2018. 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. During the nine month period ended September 30, 2018 the
Company settled its contingent consideration and paid $100,000 to
the Seller upon renewal of the customer’s annual contract in
April 2018.
4.
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 large
multinational publicly traded and private corporations. Accounts
receivable consist of the following by customer type in the table
below as of the periods presented:
|
|
|
|
|
|
|
|
Government
|
$
5,738,189
|
$
6,055,397
|
Commercial
|
2,381,034
|
2,183,246
|
Gross accounts
receivable
|
8,119,223
|
8,238,643
|
Less: allowances
for doubtful
|
|
|
accounts
|
96,846
|
107,618
|
|
|
|
Accounts
receivable, net
|
$
8,022,377
|
$
8,131,025
|
Provision for Doubtful Accounts
For the
three and nine month periods ended September 30, 2018, the Company
did not recognize any material provisions for bad debt or
write-offs of existing provisions for bad debt. For the nine month
period ended September 30, 2017, the Company recorded a provision
for bad debt of approximately $31,200 related to a billing dispute
with a commercial customer and wrote-off a previously reserved
uncollectible customer account of approximately
$274,500.
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 customers that represent ten (10) percent
or more of consolidated trade accounts receivable in the current
and/or comparative period:
|
|
|
|
|
|
|
|
|
Customer
Name
|
|
|
|
|
U.S. Customs Border
Patrol
|
8%
|
12%
|
U.S.
Immigration and Customs Enforcement
|
14%
|
13%
|
U.S.
Federal Air Marshall Service
|
4%
|
10%
|
The
following table presents customers that represent ten (10) percent
or more of consolidated revenues in the current and/or comparative
period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer
Name
|
|
|
|
|
|
|
U.S. Immigration
and Customs Enforcement
|
16%
|
18%
|
18%
|
17%
|
U.S. Customs Border
Patrol
|
15%
|
9%
|
11%
|
11%
|
U.S. Citizenship
and Immigration Services
|
15%
|
5%
|
5%
|
5%
|
5.
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 in the current
and/or comparative period:
|
|
|
|
|
|
|
|
|
Customer
Name
|
|
|
|
|
U.S.
Department of Homeland Security Headquarters
|
13%
|
11%
|
U.S.
Immigration and Customs Enforcement
|
30%
|
27%
|
U.S. Transportation
Safety Administration
|
12%
|
12%
|
6.
Other
Current Assets and Accrued Expenses
Other
current assets consisted of the following as of the periods
presented below:
|
|
|
|
|
|
|
|
Inventories
|
$
218,703
|
$
157,058
|
Prepaid rent,
insurance and other assets
|
744,946
|
610,886
|
|
|
|
Total other current
assets
|
$
963,649
|
$
767,944
|
Accrued
expenses consisted of the following as of the periods presented
below:
|
|
|
|
|
|
|
|
Carrier service
costs
|
$
6,798,020
|
$
7,339,150
|
Salaries and
payroll taxes
|
1,229,736
|
1,259,331
|
Inventory
purchases, consultants and other costs
|
1,012,029
|
762,770
|
Severance
costs
|
1,634
|
328,109
|
U.S. income tax
payable
|
11,350
|
8,850
|
Foreign income tax
payable (receivable)
|
11,600
|
(1,860
)
|
Contingent
consideration (Note 3)
|
-
|
100,000
|
|
|
|
Total accrued
expenses
|
$
9,064,369
|
$
9,796,350
|
7.
Property
and Equipment
Major
classes of property and equipment consisted of the following as of
the periods presented below:
|
|
|
|
|
|
|
|
Computer hardware
and software
|
$
2,042,522
|
$
1,943,180
|
Furniture and
fixtures
|
334,984
|
296,316
|
Leasehold
improvements
|
253,759
|
260,748
|
Automobiles
|
182,314
|
188,238
|
Gross property and
equipment
|
2,813,579
|
2,688,482
|
Less: accumulated
depreciation and
|
|
|
amortization
|
1,754,793
|
1,370,062
|
|
|
|
Property and
equipment, net
|
$
1,058,786
|
$
1,318,420
|
During
the three and nine month periods ended September 30, 2018 there
were other disposals of fully depreciated owned property and
equipment with related cost and accumulated depreciation of
approximately $129,000.
During
the nine month period ended September 30, 2017, the Company
relocated from the Lewis Center Facility to a larger facility in
Columbus and abandoned undepreciated building and leasehold
improvements with a gross cost and accumulated depreciation of
approximately $282,200 and $105,500, respectively. The Company
recorded within general and administrative expenses a loss on
disposal of approximately $176,700 as a result of the
move.
There
were no changes in the estimated useful lives used to depreciate
property and equipment during the three and nine month periods
ended September 30, 2018 and 2017.
Assets
under capital lease included in the table above consisted of the
following as of the periods presented below:
|
|
|
|
|
|
|
|
Automobiles
|
$
97,706
|
$
100,882
|
Computer hardware
and software
|
290,223
|
290,223
|
Gross leased
property and equipment
|
$
387,929
|
$
391,105
|
Less: accumulated
amortization
|
110,539
|
20,890
|
|
|
|
Capital lease
assets, net
|
$
277,390
|
$
370,215
|
During
the nine month period ended September 30, 2018, the Company did not
enter into any capital lease arrangements and there were no
material sales or disposals of assets under capital leases.
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.
Property and
equipment depreciation expense (including amortization of capital
leases) was approximately as follows for the periods presented
below:
|
|
|
|
|
|
|
|
|
|
|
|
|
Owned property and
equipment depreciation
|
$
108,600
|
$
94,200
|
$
323,200
|
$
282,000
|
Leased property and
equipment amortization
|
30,500
|
6,000
|
91,300
|
13,800
|
|
|
|
|
|
Total property and
equipment depreciation and
|
|
|
|
|
amortization
|
$
139,100
|
$
100,200
|
$
414,500
|
$
295,800
|
8.
Goodwill
and Intangible Assets
The
Company has recorded goodwill of $18,555,578 as of September 30,
2018. There were no changes in the carrying amount of goodwill
during the three and nine month periods ended September 30, 2018.
There were no indicators of impairment during the three and nine
month periods ended September 30, 2018.
The
Company has recorded net intangible assets of $3,284,626,
consisting of purchased intangibles and internally developed
software used to deliver managed service solutions offered by the
Company. For the three and nine month periods ended September 30,
2018, the Company capitalized internally developed software costs
of approximately $78,500 and $230,100, respectively, related to
costs associated with our next generation TDI Optimiser™
application. There were no disposals of intangible assets during
the three month period ended September 30, 2018. For the nine month
period ended September 30, 2018 there were disposals of fully
amortized intangible assets of approximately $2,374,700. There were
no material disposals of intangible assets during the three and
nine month periods ended September 30, 2017.
The
aggregate amortization expense recorded for the three month periods
ended September 30, 2018 and 2017 were approximately $213,800 and
$276,400, respectively.
The aggregate
amortization expense recorded for the nine month periods ended
September 30, 2018 and 2017 were approximately $700,400 and
$812,200, respectively.
The total weighted remaining average
life of all purchased intangible assets and internally developed
software costs was approximately 5.8 years and 1.8 years,
respectively, at September 30, 2018.
9.
Line
of Credit and 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. Effective April 30, 2018, the Company
entered into a second modification agreement (“Modification
Agreement”) with Access National Bank to amend the existing
Loan Agreement. The Modification Agreement extended
the maturity date of the facility through April
30, 2019 and added an additional financial covenant requiring the
Company to
maintain consolidated minimum adjusted earnings
before interest, taxes, depreciation and amortization, plus
share-based compensation, plus non-cash charges (EBITDA) (as
defined in the Modification Agreement) of at least two times
interest expense
to be measured as of
the last day of each quarterly period.
The
Loan Agreement requires that the Company meet the following
financial covenants on a quarterly basis: (i) maintain a minimum
adjusted tangible net worth of at least $2.0 million, (ii) maintain
minimum consolidated adjusted EBITDA of at least two times interest
expense and (iii) maintain a current ratio of 1.10:1.
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. As of September 30,
2018, the Company was eligible to borrow up to $4.8 million under
the borrowing base formula.
Capital Leases and Other Term Obligations
Capital
leases and other term obligations consisted of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
Lease Obligations (1)
|
$
105,712
|
$
151,037
|
$
256,749
|
$
101,591
|
$
232,109
|
$
333,700
|
|
|
|
|
|
|
|
Deferred
Rent Liability (2)
|
45,043
|
64,006
|
109,049
|
70,021
|
78,336
|
148,357
|
Short
term installment borrowings (3)
|
62,066
|
-
|
62,066
|
133,250
|
-
|
133,250
|
Total
Other Term Obligations
|
$
107,109
|
$
64,006
|
$
171,115
|
$
203,271
|
$
78,336
|
$
281,607
|
|
|
|
|
|
|
|
Total
Capital Leases and Other
|
|
|
|
|
|
|
Term
Obligations
|
$
212,821
|
$
215,043
|
|
$
304,862
|
$
310,445
|
|
(1) As
more fully described in Note 7, the Company entered into capital
leases to acquire computer hardware and software for its client
facing infrastructure and two automobiles that expire between 2020
and 2021.
(2) The
Company has two long term building lease obligations that contain
fixed rent escalations and rent abatements. The Company has
recognized a deferred rent liability related to the difference
between actual cash rent paid and rent recognized for financial
reporting purposes.
(3) The
Company annually finances the cost of its commercial liability
insurance premiums for a period of less than 12
months.
Capital Lease Obligations
Minimum
lease payments required under capital leases range from $695 to
$8,900, 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 (unaudited):
2018
|
$
121,951
|
2019
|
121,951
|
2020
|
36,432
|
|
|
Total principal and
interest payments
|
280,334
|
Less: portion
representing interest
|
23,585
|
Present value of
minimum lease payments
|
|
under capital
leases
|
256,749
|
Less: current
portion
|
105,712
|
Capital leases, net
of current portion
|
$
151,037
|
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, 2018, 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, 2018 or December 31, 2017. 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, 2018, the Company had approximately $36.7 million in
net operating loss (NOL) carry forwards available to offset future
taxable income for federal income tax purposes, net of the
potential Section 382 limitations. These federal NOL carry forwards
expire between 2020 and 2037. Included in the recorded deferred tax
asset, the Company had a benefit of approximately $44.0 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, 2018 and 2017
.
Common Stock
The
Company is authorized to issue 110,000,000 shares of common stock,
$.001 par value per share. As of September 30, 2018, there were
84,062,446 shares issued (including 980,851 restricted stock awards
issued, of which 300,000 were unvested) and 83,762,446 shares of
common stock outstanding. There were no shares of common stock
issued as a result of the vesting of restricted stock awards (RSA)
or stock option exercises during the three month period ended
September 30, 2018.
The Company issued
102,525 shares of common stock, as a result of the vesting of a
portion of RSAs during the three month period ended September
30,
2017. See Note 12 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, 2018
and 2017. Shares of common stock issued as a result of stock option
exercises and realized gross proceeds during the nine month period
ended September 30, 2018 were 50,000 and $22,000, 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
. See Note 12 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 issuance of restricted
stock or exercise of stock options. Any shares associated with
unvested restricted stock and non-qualified stock 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 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 125,000
non-qualified stock option awards granted during the three and nine
month periods ended September 30, 2018.
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 granted and included in the total number of
common shares issued but not included in total common shares
outstanding until the vesting requirements have been met. As of
September 30, 2018, there were 980,851 shares of restricted stock
included in shares issued, of which 300,000 were unvested as of
September 30, 2018.
Restricted Stock Award Activity
A
summary of RSA activity as of September 30, 2018 and 2017, and
changes during the nine month periods ended September 30, 2018 and
2017 are set forth below:
|
|
|
|
NON-VESTED
AWARDS
|
|
|
|
|
|
Non-vested awards
outstanding, January 1,
|
-
|
|
250,000
|
Granted
(+)
|
980,851
|
(1
)
|
300,000
|
Cancelled
(-)
|
-
|
|
150,000
|
Vested
(-)
|
680,851
|
(1
)
|
275,000
|
Non-vested awards
outstanding, September 30,
|
300,000
|
|
125,000
|
|
|
|
|
Weighted-average
remaining contractual life (in years)
|
0.8
|
|
0.2
|
|
|
|
|
Unamortized RSA
compensation expense
|
$
153,418
|
|
$
1,090
|
|
|
|
|
Aggregate intrinsic
value of RSAs non-vested, September 30
|
$
138,000
|
|
$
81,250
|
|
|
|
|
Aggregate intrinsic
value of RSAs vested, September 30
|
$
320,000
|
|
$
177,750
|
(1)
During the nine month period ended September 30, 2018, the Company
granted 980,851 RSAs, of which i) 300,000 of RSAs
were awarded as part of additional compensation
plan to align key employees with the Company’s long term
financial goals, and ii) 680,851 were awarded to members of the
Company’s board of directors as part of their annual board
retainer fee and vested during the period.
(2)
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.
On June 30, 2017, in connection with resignation
of our former Chief Executive Officer, the Board of Directors
accelerated vesting of 150,000 RSAs and cancelled the remaining
unvested RSAs.
(3)
During the nine month period ended September 30, 2017,
125,000 RSAs vested upon expiration of the
employment agreement between Steve L. Komar and the Company. On
January 3, 2017, the Company issued 84,188 shares of the
Company’s common stock. Mr. Komar received less than 125,000
shares vested because he elected to have 40,812 of such shares
withheld in satisfaction of the corresponding tax liability of
approximately $46,000. The Company's payment of this tax liability
was recorded as a cash flow from financing activity on the
Condensed Consolidated Statements of Cash
Flows.
Non-Qualified Stock Option Award Activity
A
summary of stock option activity as of September 30, 2018 and 2017,
and changes during the nine month periods ended September 30, 2018
and 2017 are set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NON-VESTED
AWARDS
|
|
|
|
|
|
|
|
|
Non-vested
balances, January 1,
|
2,685,004
|
|
$
0.35
|
920,000
|
|
$
0.59
|
Granted
(+)
|
125,000
|
(1
)
|
$
0.25
|
3,440,000
|
(2
)
|
$
0.30
|
Cancelled
(-)
|
50,000
|
(3
)
|
$
0.32
|
860,000
|
(3
)
|
$
0.68
|
Vested/Excercised
(-)
|
312,500
|
|
$
0.26
|
110,000
|
|
$
0.69
|
Non-vested
balances, September 30,
|
2,447,504
|
|
$
0.35
|
3,390,000
|
|
$
0.27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OUTSTANDING
AND EXERCISABLE AWARDS
|
|
|
|
|
|
|
|
|
Awards outstanding,
January 1,
|
4,173,334
|
|
$
0.60
|
2,090,668
|
|
$
0.86
|
Granted
(+)
|
125,000
|
(1
)
|
$
0.50
|
3,440,000
|
(2
)
|
$
0.59
|
Cancelled
(-)
|
110,000
|
(3
)
|
$
1.11
|
1,402,334
|
(3
)
|
$
0.97
|
Exercised
(-)
|
50,000
|
(4
)
|
$
0.44
|
30,000
|
(4
)
|
$
0.57
|
Awards outstanding,
September 30,
|
4,138,334
|
|
$
0.58
|
4,098,334
|
|
$
0.60
|
|
|
|
|
|
|
|
Awards vested and
expected to vest,
|
|
|
|
|
|
|
September
30,
|
3,547,472
|
|
$
0.58
|
3,614,538
|
|
$
0.59
|
|
|
|
|
|
|
|
Awards outstanding
and exercisable,
|
|
|
|
|
|
|
September
30,
|
1,690,830
|
|
$
0.56
|
708,334
|
|
$
0.73
|
(1)
During the nine month period ended September 30, 2018, there were
NQSO grants of 125,000, as further described below:
●
Employees.
During the nine month period
ended September 30, 2018, the Company granted 75,000 non-qualified
stock options as part of an additional compensation to align a key
employee with the Company’s long term financial goals. This
stock award grant was valued using a Black-Scholes model that
assumed a 3-year vesting period, 5-year option term, a risk free
rate of 2.7%, volatility of 66.7%, no assumed dividend yield, and a
forfeiture rate estimate of 4.8%.
●
Non-Employees.
During the nine month
period ended September 30, 2018, the Company granted 50,000
non-qualified stock options as payment for a portion of the annual
retainer paid to its public investor relations firm. This stock
award grant was valued using a Black-Scholes model that assumed a
1-year vesting period, 2-year option term, a risk free rate of
2.6%, volatility of 69.5%, no assumed dividend yield, and a
forfeiture rate estimate of 10.3%.
(2) During the nine month period ended
September 30,
2017
, there were NQSO grants of
3,440,000, as further described below:
●
Director
Grants
. During the nine month
period ended September 30, 2017, the Company granted a total of
250,000 non-qualified stock options, of which 50,000 options were
granted to each director as part of their annual board retainer
fee. This stock award grant was valued using a
Black-Scholes
model
that assumed a 6-month vesting
period, 7-year option term, a risk free rate of 2.0%, volatility of
69.6%, no assumed dividend yield, and a forfeiture rate estimate of
4.2%.
●
Non-Director Grants.
During the nine month period ended
September 30, 2017, the Company granted 3,190,000 non-qualified
stock options, of which i) 600,000 non-qualified stock options were
granted to its former Chief Executive Officer and valued the award
using a
Black-Scholes model
that assumed a 3-year vesting period, 7-year
option term, a risk free rate of 2.1%, volatility of 68.2%, no
assumed dividend yield, and a forfeiture rate estimate of 4.6%, and
ii) 2,590,000 were granted as part of an additional compensation to
align key employees with the Company’s long term financial
goals and valued the awards using a
Black-Scholes model
that assumed a 3-year vesting period,
7-year option term, a risk free rate of 2.1%, volatility of 68.2%,
no assumed dividend yield, and a forfeiture rate estimate of
4.6%.
(3) During the nine month period ended September 30, 2018, there
110,000 were non-qualified stock options that were cancelled, of
which 50,000 were cancelled to due to termination of employment and
the reminder expired unexercised at the end of the option term.
During the nine month period ended September 30, 2017, there were
1,402,334 non-qualified stock options 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.
(4) The
total intrinsic value of stock options exercised during the nine
months ended September 30, 2018 and 2017 was approximately $5,500
and
$9,000,
respectively.
The
weighted-average remaining contractual life of the non-qualified
stock options outstanding, exercisable, and vested and expected to
vest as of September 30, 2018 were 3.38 years, 3.38 years and 3.12
years, respectively.
The
aggregate intrinsic value associated with options outstanding,
vested and expected to vest, and exercisable as of September 30,
2018 was approximately $15,500, $13,443 and $10,250, respectively.
Aggregate intrinsic value represents total pretax intrinsic value
(the difference between WidePoint’s closing stock price on
September 30, 2018 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, 2018. The intrinsic value will change based on the
fair market value of WidePoint’s stock.
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock
compensation expense
|
$
202,664
|
$
5,447
|
$
370,582
|
$
156,768
|
Non-qualified
option stock compensation expense
|
70,073
|
(86,490
)
|
222,493
|
(18,732
)
|
|
|
|
|
|
Total
share-based compensation before taxes
|
$
272,737
|
$
(81,043
)
|
$
593,075
|
$
138,036
|
At
September 30, 2018, the Company had approximately $564,777 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 1.04
years.
13.
Loss
Per Common Share (EPS)
The
computations of basic and diluted loss per share were as follows
for the periods presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
Loss Per Share Computation:
|
|
|
|
|
Net
loss
|
$
(110,011
)
|
$
(314,601
)
|
$
(1,044,355
)
|
$
(2,768,993
)
|
Weighted average
number of common shares
|
83,177,804
|
82,946,847
|
83,100,832
|
82,878,287
|
Basic Loss Per
Share
|
$
(0.00
)
|
$
(0.00
)
|
$
(0.01
)
|
$
(0.03
)
|
|
|
|
|
|
Diluted
Loss Per Share Computation:
|
|
|
|
|
Net
loss
|
$
(110,011
)
|
$
(314,601
)
|
$
(1,044,355
)
|
$
(2,768,993
)
|
|
|
|
|
|
Weighted average
number of common shares
|
83,177,804
|
82,946,847
|
83,100,832
|
82,878,287
|
Incremental shares
from assumed conversions
|
|
|
|
|
of stock
options
|
-
|
-
|
-
|
-
|
Adjusted weighted
average number of
|
|
|
|
|
common
shares
|
83,177,804
|
82,946,847
|
83,100,832
|
82,878,287
|
|
|
|
|
|
Diluted Loss Per
Share
|
$
(0.00
)
|
$
(0.00
)
|
$
(0.01
)
|
$
(0.03
)
|
The
dilutive effect of unexercised stock options and restricted stock
awards excludes 4,438,334 and
4,223,334
of options from the computation
of loss per share for the three and nine month periods ended
September 30, 2018 and 2017, respectively, because inclusion of the
options would have been anti-dilutive.
14.
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrier
Services
|
$
13,104,865
|
$
11,245,395
|
$
36,199,890
|
$
33,522,669
|
Managed
Services:
|
|
|
|
|
Managed
Service Fees
|
5,729,620
|
5,295,743
|
16,709,827
|
16,859,799
|
Billable
Service Fees
|
423,858
|
796,727
|
1,553,750
|
2,556,304
|
Reselling
and Other Services
|
2,036,017
|
1,126,007
|
4,454,850
|
3,017,845
|
|
|
|
|
|
|
$
21,294,360
|
$
18,463,872
|
$
58,918,317
|
$
55,956,617
|
The
Company recognized revenues from contracts with customers for the
following customer types as set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Federal Government
|
$
16,947,681
|
$
14,379,567
|
$
45,132,500
|
$
43,098,730
|
U.S.
State and Local Governments
|
112,273
|
134,904
|
331,801
|
293,216
|
Foreign
Governments
|
28,933
|
48,563
|
133,855
|
145,015
|
Commercial
Enterprises
|
4,205,473
|
3,900,838
|
13,320,161
|
12,419,656
|
|
|
|
|
|
|
$
21,294,360
|
$
18,463,872
|
$
58,918,317
|
$
55,956,617
|
The
Company recognized revenues from contracts with customers in the
following geographic regions:
|
|
|
|
|
|
|
|
|
|
|
|
|
North
America
|
$
20,033,557
|
$
17,342,443
|
$
55,074,640
|
$
52,664,719
|
Europe
|
1,260,803
|
1,121,429
|
3,843,677
|
3,291,898
|
|
|
|
|
|
|
$
21,294,360
|
$
18,463,872
|
$
58,918,317
|
$
55,956,617
|
15.
Commitments
and Contingencies
Operating Lease Commitments
In
January 2018, the Company entered into a fourth modification
(“Modification”) of its Fairfax, VA office lease. The
Modification included: i) ten (10) year lease extension through
March 31, 2029, ii) leasehold improvement allowances of up to
$535,000 between 2018 and 2021 and iii) an early termination
provision in March 2023 with payment of an early termination fee
consisting of the landlord's unamortized costs of tenant
improvements, real estate brokerage commissions, and six months
base rent.
Except
as described above, there were no other significant leases
amendments or modifications of existing leases during the nine
month period ended September 30, 2018.
Employment Agreements
The
Company has employment agreements with certain senior executives
that set forth compensation levels and provide for severance
payments in certain instances.