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
|
12
%
|
14
%
|
U.S.
Department of Homeland Security HQ
|
11
%
|
--
|
U.S. Coast
Guard
|
13
%
|
13
%
|
Iron
Bow Technologies
|
--
|
15
%
|
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
|
15
%
|
16
%
|
U.S. Customs Border
Patrol
|
14
%
|
--
|
U.S. Federal Air
Marshall Service
|
--
|
11
%
|
4.
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
|
28
%
|
37
%
|
U.S.
Coast Guard
|
13
%
|
11
%
|
U.S. Transportation
Safety Administration
|
12
%
|
10
%
|
5.
Other
Current Assets and Accrued Expenses
Other
current assets consisted of the following as of the periods
presented below:
|
|
|
|
|
|
|
|
Inventories
|
$
288,842
|
$
183,900
|
Prepaid rent,
insurance and other assets
|
911,214
|
902,786
|
|
|
|
Total other current
assets
|
$
1,200,056
|
$
1,086,686
|
Accrued
expenses consisted of the following as of the periods presented
below:
|
|
|
|
|
|
|
|
Carrier service
costs
|
$
7,410,640
|
$
8,476,110
|
Salaries and
payroll taxes
|
1,249,276
|
1,308,726
|
Inventory
purchases, consultants and other costs
|
1,006,307
|
913,038
|
Severance
costs
|
1,634
|
1,634
|
U.S. income tax
payable
|
5,900
|
8,550
|
Foreign income tax
payable
|
2,600
|
8,380
|
|
|
|
Total accrued
expenses
|
$
9,676,357
|
$
10,716,438
|
6.
Property
and Equipment
Major
classes of property and equipment consisted of the following as of
the periods presented below:
|
|
|
|
|
|
|
|
Computer hardware
and software
|
$
1,883,645
|
$
1,820,075
|
Furniture and
fixtures
|
338,141
|
333,539
|
Leasehold
improvements
|
263,996
|
268,561
|
Automobiles
|
83,689
|
82,997
|
Gross property and
equipment
|
2,569,471
|
2,505,172
|
Less: accumulated
depreciation and
|
|
|
amortization
|
1,831,705
|
1,738,357
|
|
|
|
Property and
equipment, net
|
$
737,766
|
$
766,815
|
During
the three month period ended March 31, 2019 and 2018, property and
equipment depreciation expense was approximately $135,000 and
$131,100, respectively.
During
the three month period ended March 31, 2019 there were no material
disposals of owned property and equipment. During the three month
period ended March 31, 2018 there were other disposals of fully
depreciated owned property and equipment with related cost and
accumulated depreciation of approximately $129,600.
There
were no changes in the estimated useful lives used to depreciate
property and equipment during the three month periods ended March
31, 2019 and 2018.
The
Company entered into operating leases for corporate and operational
facilities (“real estate leases”), computer hardware
for datacenters and automobiles (“all other
leases”).
Real estate leases.
Substantially all
real estate operating leases have remaining terms of seven (7) to
ten (10) years, with additional five (5) year extensions available.
All of these leases require a fixed lease payment that contains an
annual lease payment escalation provision ranging from 3% to 4% per
year. Certain finance leases contain early termination provisions
that would require payment of unamortized tenant improvements, real
estate broker commissions paid, and up to six (6) months of rent to
compensate the landlord for early termination. The cost to exist a
lease would be significant and potentially range $0.2 million to
$0.8 million. The earliest any lease termination provisions could
be exercised would be in 2023.
All other leases.
Non-real estate
operating leases have remaining terms of two (2) to three (3)
years. All of these leases require a fixed lease payment over the
entire lease term with no escalation provision. There are no early
termination provisions under such arrangements.
The
components of lease expense were as follows:
|
|
|
|
|
|
|
|
Operating lease
expense
|
$
59,000
|
|
|
Finance lease
expense:
|
|
Amortization of
right of use assets
|
$
139,035
|
Interest on finance
lease liabilities
|
69,735
|
|
|
Total finance lease
expense
|
$
208,770
|
Operating lease
expense is included in general and administrative expenses in the
condensed consolidated statement of operations. Amortization of
right of use assets is included in depreciation and amortization in
the condensed consolidated statement of operations.
Supplemental cash
flow information related to leases was as follows:
|
|
|
|
|
|
|
|
Cash
paid for amounts included in the measurement of lease
liabilities:
|
|
Operating
cash flows from operating leases
|
$
47,573
|
Operating
cash flows from finance leases
|
69,735
|
Financing
cash flows from finance leases
|
122,300
|
Supplemental
balance sheet information related to leases was as
follows:
|
|
|
|
|
|
Operating
lease right of use assets, net
|
$
5,969,894
|
Current
portion of finance leases
|
481,562
|
Finance
leases, net of current portion
|
5,594,671
|
|
|
Weighted
average remaining lease term
|
|
Operating
leases
|
12.3
|
Finance
leases
|
1.8
|
Weighted
average discount rate
|
|
Operating
leases
|
5
%
|
Finance
leases
|
5
%
|
Maturities of lease
liabilities as of March 31, 2019, were as follows:
|
|
|
2019
|
$
681,960
|
$
97,417
|
2020
|
650,944
|
121,934
|
2021
|
694,063
|
-
|
2022
|
680,233
|
-
|
2023
|
665,728
|
-
|
Thereafter
|
4,605,847
|
-
|
Total
undiscounted operating lease payments
|
7,978,775
|
219,351
|
Less:
Imputed interest
|
2,106,613
|
15,280
|
Total
finance lease liability
|
$
5,872,162
|
$
204,071
|
During
the three month period ended March 31, 2019, there were no new
material operating leases or modifications to existing operating
leases.
8.
Goodwill
and Intangible Assets
The
Company has recorded goodwill of $18,555,578 as of March 31, 2019.
There were no changes in the carrying amount of goodwill during the
three month period ended March 31, 2019. There were no indicators
of impairment during the three month period ended March 31,
2019.
The
Company has recorded net intangible assets of $2,959,442,
consisting of purchased intangibles and internally developed
software used to deliver managed service solutions offered by the
Company. For the three month periods ended March 31, 2019 and 2018,
the Company capitalized internally developed software costs of
approximately $58,500 and $70,700, respectively, related to costs
associated with our next generation TDI Optimiser™
application. There were no disposals of intangible assets during
the three month periods ended March 31, 2019 and 2018.
The
aggregate amortization expense recorded for the three month periods
ended March 31, 2019 and 2018 were approximately $198,800 and
$262,300, respectively. The total weighted remaining average life
of all purchased intangible assets and internally developed
software costs was approximately 5.2 years and 1.2 years,
respectively, at March 31, 2019.
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 with Access National
Bank that extended
the maturity date
of the facility through April 30, 2019, increased the interest rate
to the Wall Street Journal prime rate plus 1.0%, 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
second modification) of at least two times interest expense
(excluding interest reported under
recently adopted lease accounting standards) to be measured as of
the last day of each quarterly period.
Effective, April
30, 2019, the Company entered into a fourth modification agreement
(“Modification Agreement”) with Access National Bank to
amend the existing Loan Agreement expiring on April 30, 2019. The
Modification Agreement extended the maturity date of the facility
through April 30, 2020 and changed the variable interest rate to
the Wall Street Journal prime rate plus 0.50%.
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 (excluding
finance lease liabilities reported under recently adopted lease
accounting standards).
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 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 March 31, 2019, the Company was
eligible to borrow up to $4.9 million under the borrowing base
formula.
The
Company files U.S. federal income tax returns with the Internal
Revenue Service (“IRS”) as well as income tax returns
in various states and certain foreign countries. The Company may be
subject to examination by the IRS or various state taxing
jurisdictions for tax years 2003 and forward. The Company may be
subject to examination by various foreign countries for tax years
2014 forward. As of March 31, 2019, the Company was not under
examination by the IRS, any state or foreign tax jurisdiction. The
Company did not have any unrecognized tax benefits at either March
31, 2019 or December 31, 2018. In the future if applicable, any
interest and penalties related to uncertain tax positions will be
recognized in income tax expense.
As of
March 31, 2019, the Company had approximately $38.5 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 $39.8 million
available to offset future taxable income for state income tax
purposes. These state NOL carry forwards expire between 2024 and
2036. Because of the change of ownership provisions of the Tax
Reform Act of 1986, use of a portion of our domestic NOL may be
limited in future periods. Further, a portion of the carryforwards
may expire before being applied to reduce future income tax
liabilities.
Management assesses
the available positive and negative evidence to estimate if
sufficient future taxable income will be generated to use the
existing deferred tax assets. Under existing income tax accounting
standards such objective evidence is more heavily weighted in
comparison to other subjective evidence such as our projections for
future growth, tax planning and other tax strategies. A significant
piece of objective negative evidence considered in
management’s evaluation of the realizability of its deferred
tax assets was the existence of cumulative losses over the latest
three-year period. Management forecast future taxable income, but
concluded that there may not be enough of a recovery before the end
of the fiscal year to overcome the negative objective evidence of
three years of cumulative losses. On the basis of this evaluation,
management recorded a valuation allowance against all deferred tax
assets. If management’s assumptions change and we determine
we will be able to realize these deferred tax assets, the tax
benefits relating to any reversal of the valuation allowance on
deferred tax assets will be accounted for as a reduction of income
tax expense.
Preferred Stock
There
were no issuances of preferred stock during the three month periods
ended March 31, 2019 and 2018
.
Common Stock
The
Company is authorized to issue 110,000,000 shares of common stock,
$.001 par value per share. As of March 31, 2019, there were
84,112,446 shares issued and outstanding (including 200,010
restricted shares not vested). 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 periods ended
March 31, 2019 and 2018. 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 period ended March 31, 2019.
Shares of common stock issued as a result of stock option exercises
and realized gross proceeds during the three month period ended
March 31, 2018 were 50,000 and $22,000, 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, non-qualified stock options (NQSO),
restricted stock awards (RSA), stock appreciation rights, dividend
equivalent rights, performance unit awards and phantom shares. The
Company issues new shares of common stock upon the exercise of
stock options. 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
Restricted Stock.
The Company records
the fair value of all restricted stock awards based on the grant
date fair value and amortizes stock compensation on a straight-line
basis over the vesting period. Restricted stock award shares are
issued when 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 March 31, 2019,
there were 300,000 shares of restricted stock included in shares
issued and outstanding. There were no restricted stock awards
granted during the three month period ended March 31, 2019. During
the three month period ended March 31, 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.
Non-Qualified Stock Options.
The
Company estimates the fair value of nonqualified stock awards using
a Black-Scholes Option Pricing model (“Black-Scholes
model”). The fair value of each stock award is estimated on
the date of grant using the Black-Scholes model, which requires an
assumption of dividend yield, risk free interest rates, volatility,
forfeiture rates and expected option life. The risk-free interest
rates are based on the U.S. Treasury yield for a period consistent
with the expected term of the option in effect at the time of the
grant. Expected volatilities are based on the historical volatility
of our common stock over the expected option term. The expected
term of options granted is based on analyses of historical employee
termination rates and option exercises. There were 25,000 of
non-qualified stock option awards granted to a non-employee as
compensation for investor relations services during the three month
period ended March 31, 2019.
Restricted Stock Award Activity
A
summary of RSA activity as of March 31, 2019 and 2018, and changes
during the three month periods ended March 31, 2019 and 2018 are
set forth below:
|
|
|
|
|
|
(unaudited)
|
|
NON-VESTED
AWARDS
|
|
|
|
|
Non-vested awards
outstanding, January 1,
|
300,000
|
|
-
|
|
Granted
(+)
|
-
|
|
980,851
|
(2
)
|
Vested
(-)
|
99,990
|
(1
)
|
-
|
|
Non-vested awards
outstanding, March 31,
|
200,010
|
(3
)
|
980,851
|
(3
)
|
|
|
|
|
|
Weighted-average
remaining contractual life (in years)
|
1.76
|
|
1.3
|
|
|
|
|
|
|
Unamortized RSA
compensation expense
|
$
119,573
|
|
$
474,116
|
|
|
|
|
|
|
Aggregate intrinsic
value of RSAs non-vested, March 31
|
$
84,004
|
|
$
568,894
|
|
|
|
|
|
|
Aggregate intrinsic
value of RSAs vested, March 31
|
$
-
|
|
$
-
|
|
(1) During
the three month period ended March 31, 2019, 99,990 RSAs vested
during the period.
(2)
During the three month period ended March 31, 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.
(3) There were no RSAs that were cancelled or expired during
the three month periods ended
March 31, 2019
and 2018, respectively.
Non-Qualified Stock Option Award Activity
A
summary of stock option activity as of March 31, 2019 and 2018, and
changes during the three month periods ended March 31, 2019 and
2018 are set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NON-VESTED
AWARDS
|
(unaudited)
|
Non-vested
balances, January 1,
|
2,067,503
|
$
0.36
|
2,685,004
|
$
0.35
|
Granted
(+)
|
25,000
(1)
|
$
0.15
|
-(1)
|
$
0.00
|
Non-vested
balances, March 31,
|
2,092,503
|
$
0.35
|
2,685,004
|
$
0.35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OUTSTANDING
AND EXERCISABLE AWARDS
|
(unaudited)
|
Awards outstanding,
January 1,
|
4,013,334
|
$
0.58
|
4,173,334
|
$
0.60
|
Granted
(+)
|
25,000
(1)
|
$
0.41
|
-
(1)
|
$
0.00
|
Exercised
(-)
|
-
|
$
0.00
|
50,000
(2)
|
$
0.44
|
Awards outstanding,
March 31,
|
4,038,334
|
$
0.58
|
4,123,334
|
$
0.00
|
|
|
|
|
|
Awards vested and
expected to vest,
|
|
|
|
|
March
31,
|
3,447,184
|
$
0.58
|
3,527,089
|
$
0.60
|
|
|
|
|
|
Awards outstanding
and exercisable,
|
|
|
|
|
March
31,
|
1,945,831
|
$
0.56
|
1,438,330
|
$
0.62
|
(1)
During the three month period ended March 31, 2019, there were NQSO
grants of 25,000 granted to a non-employee as compensation for
investor relations services. 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 2.5%, volatility of 64.6%,
no assumed dividend yield, and a forfeiture rate estimate of 1.2%.
During the three month period ended March 31, 2018, there were no
grants of non-qualified stock options.
(2) The total intrinsic value of stock options exercised during the
three month ended March 31, 2018 was approximately
$5,500.
The
weighted-average remaining contractual life of the non-qualified
stock options outstanding, exercisable, and vested and expected to
vest as of March 31, 2019 were 2.9 years, 2.7 years and 2.7 years,
respectively.
The
aggregate intrinsic value associated with options outstanding,
vested and expected to vest, and exercisable as of March 31, 2019
was approximately $7,250, $6,209 and $3,625, respectively.
Aggregate intrinsic value represents total pretax intrinsic value
(the difference between WidePoint’s closing stock price on
March 31, 2019 and the exercise price, multiplied by the number of
in-the-money options) that would have been received by the option
holders had all option holders exercised their options on March 31,
2019. 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:
|
|
|
|
|
|
|
|
(Unaudited)
|
Restricted stock
compensation expense
|
$
16,737
|
$
49,884
|
Non-qualified
option stock compensation expense
|
72,529
|
74,520
|
|
|
|
Total share-based
compensation before taxes
|
$
89,266
|
$
124,404
|
At
March 31, 2019, the Company had approximately $394,600 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 1.1
years.
13.
Earnings
(Loss) Per Common Share (EPS)
The
computations of basic and diluted earnings per share were as
follows for the periods presented below:
|
|
|
|
|
|
|
|
|
Basic
Earnings (Loss) Per Share Computation:
|
|
|
Net income
(loss)
|
$
384,101
|
$
(462,173
)
|
Weighted average
number of common shares
|
83,812,448
|
83,041,597
|
Basic Loss Per
Share
|
$
0.00
|
$
(0.01
)
|
|
|
|
Diluted
Earnings (Loss) Per Share Computation:
|
|
|
Net income
(loss)
|
$
384,101
|
$
(462,173
)
|
|
|
|
Weighted average
number of common shares
|
83,812,448
|
83,041,597
|
Incremental shares
from assumed conversions
|
|
|
of stock
options
|
2,222
|
-
|
Adjusted weighted
average number of
|
|
|
common
shares
|
83,814,670
|
83,041,597
|
|
|
|
Diluted Earnings
(Loss) Per Share
|
$
0.00
|
$
(0.01
)
|
The
dilutive effect of unexercised stock options and restricted stock
awards excludes 4,313,334
of options from the computation of
loss per share for the three month periods ended March 31, 2018,
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
|
$
14,343,010
|
$
11,812,144
|
Managed
Services
|
7,573,892
|
8,267,475
|
|
|
|
|
$
21,916,902
|
$
20,079,619
|
The
Company recognized revenues from contracts with customers for the
following customer types as set forth below:
|
|
|
|
|
|
|
|
|
U.S.
Federal Government
|
$
18,162,498
|
$
14,274,046
|
U.S.
State and Local Governments
|
115,839
|
107,002
|
Foreign
Governments
|
44,544
|
26,544
|
Commercial
Enterprises
|
3,594,021
|
5,672,027
|
|
|
|
|
$
21,916,902
|
$
20,079,619
|
The
Company recognized revenues from contracts with customers in the
following geographic regions:
|
|
|
|
|
|
|
|
|
North
America
|
$
20,780,311
|
$
18,743,650
|
Europe
|
1,136,591
|
1,335,969
|
|
|
|
|
$
21,916,902
|
$
20,079,619
|
15.
Commitments
and Contingencies
The
Company has employment agreements with certain senior executives
that set forth compensation levels and provide for severance
payments in certain instances.