WIDEPOINT CORP - Quarter Report: 2019 March (Form 10-Q)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

 

☑	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended March 31, 2019
or
☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from __________________ to ___________________

 

Commission File Number: 001-33035

WidePoint Corporation

(Exact name of Registrant as specified in its charter)

 

Delaware		52-2040275
(State or other jurisdiction of		(I.R.S. employer
incorporation or organization)		identification no.)

 

11250 Waples Mill Road, South Tower, Suite 210, Fairfax, Virginia 22030

(Address of principal executive offices) (Zip Code)

 

(703) 349-2577

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes ☑ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files): Yes ☑ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer ☐		Accelerated filer ☐
Non-accelerated filer ☐		Smaller reporting company ☑ Emerging growth company ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. Yes ☐ No ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☑

 

As of May 14, 2019, there were 84,351,018 shares of the registrant’s Common Stock issued and outstanding.

 

Securities Registered pursuant to Section 12(b) of the Act:

Title of Each Class	Trading Symbol	Name of Exchange on Which Registered
Common Stock, $0.001 par value per share	WYY	NYSE American

 

 

WIDEPOINT CORPORATION

 

INDEX

 

	Page No.
Part I.       FINANCIAL INFORMATION
Item 1.      Condensed Consolidated Financial Statements
Condensed Consolidated Statements of Operations for the three month periods ended March 31, 2019 and 2018 (unaudited)	2
Condensed Consolidated Statements of Comprehensive Income (Loss) for the three month periods ended March 31, 2019 and 2018 (unaudited)	3
Condensed Consolidated Balance Sheets as of March 31, 2019 and December 31, 2018 (unaudited)	4
Condensed Consolidated Statements of Cash Flows for the three month periods ended March 31, 2019 and 2018 (unaudited)	5
Condensed Consolidated Statements of Changes in Stockholders’ Equity for the three month periods ended March 31, 2019 and 2018 (unaudited)	6
Notes to Condensed Consolidated Financial Statements (unaudited)	7
Item 2.     Management's Discussion and Analysis of Financial Condition and Results of Operations	22
Item 3.     Quantitative and Qualitative Disclosures About Market Risk	26
Item 4.     Controls and Procedures	27
Part II.      OTHER INFORMATION	27
Item 1.       Legal Proceedings	27
Item 1A.    Risk Factors	27
Item 2.       Unregistered Sales of Equity Securities and Use of Proceeds	27
Item 3.       Default Upon Senior Securities	27
Item 4.       Mine Safety Disclosures	27
Item 5.       Other Information	27
Item 6.       Exhibits	27
SIGNATURES	28
CERTIFICATIONS

 

 

 

 

 

 

 

 

WIDEPOINT CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

	THREE MONTHS ENDED
	MARCH 31,
	2019	2018
	(Unaudited)
REVENUES	$21,916,902	$20,079,619
COST OF REVENUES (including amortization and depreciation
of $232,191, and $295,979, respectively)	17,663,059	16,527,612
GROSS PROFIT	4,253,843	3,552,007
OPERATING EXPENSES
Sales and marketing	393,411	534,637
General and administrative expenses (including share-based
compensation of $89,266, and $124,404, respectively)	3,134,709	3,353,341
Depreciation and amortization	240,548	97,386
Total operating expenses	3,768,668	3,985,364
INCOME (LOSS) FROM OPERATIONS	485,175	(433,357)
OTHER (EXPENSE) INCOME
Interest income	4,462	3,326
Interest expense	(77,545)	(25,950)
Other income	9	(2)
Total other expense	(73,074)	(22,626)
INCOME (LOSS) BEFORE INCOME TAX PROVISION	412,101	(455,983)
INCOME TAX PROVISION	28,000	6,190
NET INCOME (LOSS)	$384,101	$(462,173)
BASIC EARNINGS (LOSS) PER SHARE	$0.00	$(0.01)
BASIC WEIGHTED-AVERAGE SHARES OUTSTANDING	83,812,448	83,041,597
DILUTED EARNINGS (LOSS) PER SHARE	$0.00	$(0.01)
DILUTED WEIGHTED-AVERAGE SHARES OUTSTANDING	83,814,670	83,041,597

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

WIDEPOINT CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

	THREE MONTHS ENDED
	MARCH 31,
	2019	2018
	(Unaudited)
NET INCOME (LOSS)	$384,101	$(462,173)
Other comprehensive (loss) income:
Foreign currency translation adjustments, net of tax	(29,282)	2,938
Other comprehensive (loss) income	(29,282)	2,938
COMPREHENSIVE INCOME (LOSS)	$354,819	$(459,235)

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

WIDEPOINT CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

	MARCH 31,	DECEMBER 31,
	2019	2018
	(Unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$4,567,168	$2,431,892
Accounts receivable, net of allowance for doubtful accounts
of $112,754 and $106,733 in 2019 and 2018, respectively	11,220,420	11,089,315
Unbilled accounts receivable	8,232,585	9,566,170
Other current assets	1,200,056	1,086,686
Total current assets	25,220,229	24,174,063
NONCURRENT ASSETS
Property and equipment, net	737,766	1,012,684
Operating lease right of use asset, net	5,969,894	-
Intangibles, net	2,959,442	3,103,753
Goodwill	18,555,578	18,555,578
Other long-term assets	233,073	209,099
Total assets	$53,675,982	$47,055,177
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable	$9,374,095	$7,363,621
Accrued expenses	9,676,357	10,716,438
Deferred revenue	1,690,592	2,072,344
Current portion of finance leases	481,562	107,325
Current portion of other term obligations	88,226	192,263
Total current liabilities	21,310,832	20,451,991
NONCURRENT LIABILITIES
Finance leases, net of current portion	5,594,671	122,040
Other term obligations, net of current portion	-	73,952
Deferred revenue	351,262	466,714
Deferred tax liability	1,558,162	1,523,510
Total liabilities	28,814,927	22,638,207
STOCKHOLDERS' EQUITY
Preferred stock, $0.001 par value; 10,000,000 shares
authorized; 2,045,714 shares issued and none outstanding	-	-
Common stock, $0.001 par value; 110,000,000 shares
authorized; 84,112,446 and 84,112,446 shares
issued and oustanding, respectively	84,113	84,113
Additional paid-in capital	95,015,826	94,926,560
Accumulated other comprehensive loss	(215,767)	(186,485)
Accumulated deficit	(70,023,117)	(70,407,218)
Total stockholders’ equity	24,861,055	24,416,970
Total liabilities and stockholders’ equity	$53,675,982	$47,055,177

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

WIDEPOINT CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

	THREE MONTHS ENDED
	MARCH 31,
	2019	2018
	(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)	$384,101	$(462,173)
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Deferred income tax expense	34,652	-
Depreciation expense	273,923	131,065
Provision for doubtful accounts	7,610	(5,766)
Amortization of intangibles	198,816	262,300
Amortization of deferred financing costs	1,250	7,819
Share-based compensation expense	89,266	124,404
Changes in assets and liabilities:
Accounts receivable and unbilled receivables	1,151,421	1,494,740
Inventories	(104,992)	(170,185)
Prepaid expenses and other current assets	(45,286)	(124,058)
Other assets	(29,710)	(84,815)
Accounts payable and accrued expenses	961,804	1,166,610
Income tax payable	(8,339)	(5,240)
Deferred revenue and other liabilities	(486,385)	(82,833)
Net cash provided by operating activities	2,428,131	2,251,868
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment	(83,797)	(13,918)
Software development costs	(58,461)	(70,674)
Net cash used in investing activities	(142,258)	(84,592)
CASH FLOWS FROM FINANCING ACTIVITIES
Advances on bank line of credit	6,192,656	8,362,503
Repayments of bank line of credit advances	(6,192,656)	(8,362,503)
Principal repayments under finance lease obligations	(122,300)	(26,050)
Proceeds from exercise of stock options	-	22,000
Net cash used in financing activities	(122,300)	(4,050)
Net effect of exchange rate on cash and equivalents	(28,297)	10,039
NET INCREASE IN CASH	2,135,276	2,173,265
CASH AND CASH EQUIVALENTS, beginning of period	2,431,892	5,272,457
CASH AND CASH EQUIVALENTS, end of period	$4,567,168	$7,445,722

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

WIDEPOINT CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

	THREE MONTHS ENDED
	MARCH 31,
	2019	2018
	(Unaudited)
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest	$63,309	$18,130
Cash paid for income taxes	$-	$11,429

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

WIDEPOINT CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

 

			Additional
	Common Stock		Paid-In	Accumulated	Accumulated
	Issued	Amount	Capital	OCI	Deficit	Total
			(Unaudited)
Balance, January 1, 2018	83,031,595	$83,032	$94,200,237	$(122,461)	$(68,950,742)	$25,210,066
Issuance of common stock —
options exercises	50,000	50	21,950	-	-	22,000
Issuance of common stock —
restricted	980,851	981	(981)	-	-	-
Stock compensation expense —
restricted	-	-	49,884	-	-	49,884
Stock compensation expense —
non-qualified stock options	-	-	74,520	-	-	74,520
Foreign currency translation —
gain	-	-	-	2,938	-	2,938
Net loss	-	-	-		(462,173)	(462,173)
Balance, March 31, 2018	84,062,446	$84,063	$94,345,610	$(119,523)	$(69,412,915)	$24,897,235

 

			Additional
	Common Stock		Paid-In	Accumulated	Accumulated
	Issued	Amount	Capital	OCI	Deficit	Total
			(Unaudited)
Balance, January 1, 2019	84,112,446	$84,113	$94,926,560	$(186,485)	$(70,407,218)	$24,416,970
Stock compensation expense —
restricted	-	-	16,737	-	-	16,737
Stock compensation expense —
non-qualified stock options	-	-	72,529	-	-	72,529
Foreign currency translation —
(loss)	-	-	-	(29,282)	-	(29,282)
Net income	-	-	-	-	384,101	384,101
Balance, March 31, 2019	84,112,446	$84,113	$95,015,826	$(215,767)	$(70,023,117)	$24,861,055

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

WIDEPOINT CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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 Fairax, Virginia.

 

Nature of Operations

 

The Company is a leading provider of trusted mobility management (TM2). The Company’s TM2 platform and service solutions enable its customers to efficiently secure, manage and analyze the entire lifecycle of their mobile communications assets through its federally compliant platform Intelligent Telecommunications Management System (ITMS™). The Company’s ITMS™ platform is SSAE 18 compliant and was granted an Authority to Operate by the U.S. Department of Homeland Security. Additionally, the Company was granted an Authority to Operate by the General Services Administration with regard to its identity credentialing component of its TM2 platform. The Company’s TM2 platform is internally hosted and accessible on-demand through a secure customer portal that is specially configured for each customer. The Company can deliver these solutions in a number of configurations ranging from utilizing the platform as a service to a full-service solution that includes full lifecycle support for all end users and the organization.

 

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 change 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.

 

Basis of Presentation

 

The unaudited condensed consolidated financial statements as of March 31, 2019 and for each of the three month periods ended March 31, 2019 and 2018, 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, 2018 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, 2018. The results of operations for the three month period ended March 31, 2019 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.

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.

Significant Accounting Policies

 

There were no significant changes in the Company’s significant accounting policies during the first three months of 2019 from those disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 filed with the SEC on March 22, 2019, except as further described below.

 

Recently Adopted Accounting Standards

 

In February 2016, the FASB issued new accounting guidance on leases. Effective January 1, 2019, the Company adopted an accounting standards update with new guidance intended to increase transparency and comparability among organizations relating to leases. The new guidance requires lessees to recognize a liability to make lease payments and a right-of-use asset representing the right to use the underlying asset for the lease term. The standards update retained a dual model for lease classification, requiring leases to be classified as finance or operating leases to determine recognition in the statements of operations and cash flows; however, substantially all leases are now required to be recognized on the balance sheet. The standards update also requires quantitative and qualitative disclosures regarding key information about leasing arrangements.

 

 

 

The Company elected the modified retrospective transition method and applied the new guidance at the date of adoption, without adjusting the comparative periods presented. The Company also elected the practical expedients permitted under the transition guidance that retain the lease classification and initial direct costs for any leases that existed prior to adoption of the standard. In addition, the Company did not reassess whether any contracts entered into prior to adoption are leases.

Upon adoption of the standard, the Company recorded approximately $6.1 million of right of use assets and finance lease-related liabilities, respectively. The adoption of this standards update had a material impact on the Company’s Consolidated Balance Sheets and related disclosures. The adoption of this standards update did not have a material impact on the Company’s results of operations or cash flows.

The cumulative effect of the changes made to our January 1, 2019 balance sheet for the adoption of the standards update was as follows:

 

			As Reported
	As Previously		under
	Reported		Topic 842
	DECEMBER 31,	Adoption	JANUARY 1,
	2018	Adjustment	2019
Operating lease right of use asset, net	$-	$6,061,566	$6,061,566
Property and equipment, net	1,012,684	(170,000)	842,684
Other current assets	1,086,686	(38,015)	1,048,671
Current portion of finance leases	122,040	268,711	390,751
Current portion of other term obligations	192,263	(40,859)	151,404
Finance leases, net of current portion	122,040	5,699,651	5,821,691
Other term obligations, net of current portion	73,952	(73,952)	-

 

In June 2018, the FASB issued ASU 2018-07, Compensation - Stock Compensation (Topic 718); Improvements to Nonemployee Share-Based Payment Accounting. Effective January 1, 2019, the Company adopted ASU 2018-07. The new guidance 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 nonemployees 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. The Company has not historically issued a material amount of share-based payments to non-employees. There was no material effect on the Company’s consolidated financial statements upon adoption.

 

Accounting Standards under Evaluation

 

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.

 

 

A significant portion of the Company’s receivables are billed under firm fixed price contracts with agencies of the U.S. federal government and similar pricing structures with several corporations. Accounts receivable consist of the following by customer type in the table below as of the periods presented:

 

	MARCH 31,	DECEMBER 31,
	2019	2018
	(Unaudited)
Government (1)	$8,689,290	$7,332,338
Commercial (2)	2,643,884	3,863,710
Gross accounts receivable	11,333,174	11,196,048
Less: allowances for doubtful
accounts (3)	112,754	106,733
Accounts receivable, net	$11,220,420	$11,089,315

 

(1) Government contracts are generally firm fixed price not to exceed arrangements with a term of five (5) years, which consists of a base year and four (4) annual option year renewals. Government receivables are billed under a single consolidated monthly invoice and are billed approximately thirty (30) to sixty (60) days in arrears from the date of service and payment is generally due within thirty (30) days of the invoice date. Government accounts receivable payments could be delayed due to administrative processing delays by the government agency, continuing budget resolutions that may delay availability of contract funding, and/or administrative only invoice correction requests by contracting officers that may delay payment processing by our government customer.

 

(2) Commercial contracts are generally fixed price arrangements with contract terms ranging from two (2) to three (3) years. Commercial accounts receivables are billed based on the underlying contract terms and conditions which generally have repayment terms that range from thirty (30) to ninety (90) days. Commercial receivables are stated at amounts due from customers net of an allowance for doubtful accounts if deemed necessary.

 

(3) For the three months ended March 31, 2019, the Company did not recognize any material provisions for bad debt, write-offs or recoveries of existing provisions for bad debt. The Company has not historically maintained a bad debt reserve for its government customers as it has not experienced material or recurring bad debt charges and the nature and size of the contracts has not necessitated the Company’s establishment of such a bad debt reserve.

 

Significant Concentrations

 

The following table presents customers that represent ten (10) percent or more of consolidated trade accounts receivable in the current and/or comparative period:

 

	MARCH 31,	DECEMBER 31,
	2019	2018
	As a % of	As a % of
Customer Name	Receivables	Receivables
	(Unaudited)
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:

 

	THREE MONTHS ENDED
	MARCH 31,
	2019	2018
	As a % of	As a % of
Customer Name	Revenues	Revenues
	(Unaudited)
U.S. Immigration and Customs Enforcement	15%	16%
U.S. Customs Border Patrol	14%	--
U.S. Federal Air Marshall Service	--	11%

 

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:

 

	MARCH 31,	DECEMBER 31,
	2019	2018
	As a % of	As a % of
Customer Name	Receivables	Receivables
	(Unaudited)
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%

 

Other current assets consisted of the following as of the periods presented below:

 

	MARCH 31,	DECEMBER 31,
	2019	2018
	(Unaudited)
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:

 

	MARCH 31,	DECEMBER 31,
	2019	2018
	(Unaudited)
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

 

 

Major classes of property and equipment consisted of the following as of the periods presented below:

 

	MARCH 31,	DECEMBER 31,
	2019	2018
	(Unaudited)
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:

 

	THREE MONTHS ENDED
	MARCH 31,
	2019
	(Unaudited)
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:

 

	THREE MONTHS ENDED
	MARCH 31,
	2019
	(Unaudited)
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:

 

	MARCH 31,
	2019
	(Unaudited)
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:

 

	Operating Leases	Finance Leases
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.

 

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.

 

 

 

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:

 

	2019		2018
	(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	$-		$-