WIDEPOINT CORP
10-Ks and 10-Qs
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UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
Form
10-K
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☑
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
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For
the Fiscal Year Ended December 31, 2018
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or
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☐
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
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For
the transition period from __________________ to
___________________
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Commission
File Number: 001-33035
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WidePoint
Corporation
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(Exact name of Registrant as specified in its charter)
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Delaware
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52-2040275
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(State or other jurisdiction of
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(I.R.S. Employer
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incorporation or organization)
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Identification No.)
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11250
Waples Mill Road, South Tower, Suite 210, Fairfax, Virginia
22030
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(Address of principal executive offices) (Zip Code)
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(703)
349-2577
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(Registrant’s telephone number, including area
code)
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Securities
registered pursuant to Section 12(b) of the act:
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Title
of each class
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Name
of each exchange
on
which registered
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Common Stock,
$0.001 par value per share
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NYSE
AMERICAN
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Securities
registered pursuant to Section 12(g) of the act:
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None
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Indicate by check
mark if the registrant is a well-known seasoned issuer, as defined
in Rule 405 of the Securities Act. Yes ☐ No
☑
Indicate by check
mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes ☐ No
☑
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 if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K.
☐
Indicate by check
mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated
filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange
Act.
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Large
accelerated filer ☐
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Accelerated filer
☐
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Non-accelerated
filer ☐
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Smaller
reporting company ☑
Emerging growth
company ☐
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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 ☑
The
aggregate market value of the registrant’s Common Stock held
by non-affiliates of the registrant, computed by reference to the
closing price of the Common Stock on the NYSE American on the last
business day of the registrant’s most recently completed
second fiscal quarter, was
approximately $42,717,000.
As of
March 22, 2019, there were 84,112,446 shares of the
registrant’s Common Stock issued and
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions
of WidePoint Corporation's proxy statement in connection with its
2019 Annual Meeting of Stockholders are incorporated by reference
in Part III.
Cautionary Note Regarding Forward Looking Statements
This
Annual Report on Form 10-K contains forward-looking statements
concerning our business, operations and financial performance and
condition as well as our plans, objectives and expectations for our
business operations and financial performance and condition that
are subject to risks and uncertainties. All statements other than
statements of historical fact included in this Annual Report on
Form 10-K are forward-looking statements. You can identify these
statements by words such as “aim,”
“anticipate,” “assume,”
“believe,” “could,” “due,”
“estimate,” “expect,” “goal,”
“intend,” “may,” “objective,”
“plan,” “potential,”
“positioned,” “predict,”
“should,” “target,” “will,”
“would” and other similar expressions that are
predictions of or indicate future events and future trends. These
forward-looking statements are based on current expectations,
estimates, forecasts and projections about our business and the
industry in which we operate and our management's beliefs and
assumptions. These statements are not guarantees of future
performance or development and involve known and unknown risks,
uncertainties and other factors that are in some cases beyond our
control. All forward-looking statements are subject to risks and
uncertainties that may cause actual results to differ materially
from those that we expected, including:
●
Our ability to
successfully execute our strategy;
●
Our ability to
achieve and sustain profitability and positive cash
flows;
●
Our ability to gain
market acceptance for our products;
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Our
ability to win new contracts, execute contract extensions and
expansion of services of existing contracts;
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Our
ability to re-win our Blanket Purchase Agreement with the
Department of Homeland Security;
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Our ability to
compete with companies that have greater resources than
us;
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Our ability to
penetrate the commercial sector to expand our
business;
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Our
ability to borrow funds against our credit facility and renew or
replace our credit facility on favorable terms or at
all;
●
Our ability to
raise additional capital on favorable terms or at all;
and
●
Our ability to
retain key personnel.
For the
discussion of these risks and uncertainties and others that could
cause actual results to differ materially from those contained in
our forward-looking statements, please refer to “Risk
Factors” in this Annual Report on Form 10-K. The
forward-looking statements included in this Annual Report on Form
10-K are made only as of the date hereof. We undertake no
obligation to publicly update or revise any forward-looking
statement as a result of new information, future events or
otherwise, except as otherwise required by law.
In this
Annual Report on Form 10-K, unless the context indicates otherwise,
the terms “Company” and “WidePoint,” as
well as the words “we,” “our,”
“ours” and “us,” refer collectively to
WidePoint Corporation and its consolidated
subsidiaries.
PART
I
ITEM
1. BUSINESS
Company
Overview
We are
a leading provider of Trusted Mobility Management (TM2) that
consists of federally certified communications management, identity
management, and bill presentment and analytics solutions. We also
provide a professional services solution that is centered on the
use of our proprietary advanced and federally certified software
solutions and supported by our in-house subject matter
experts.
2
We
offer our TM2 solutions through a flexible managed services model
which includes both a scalable and comprehensive set of functional
capabilities that can be used by any customer to meet the most
common functional, technical and security requirements for mobility
management. Our TM2 solutions were designed and implemented with
flexibility in mind such that it can accommodate a large variety of
customer requirements through simple configuration settings rather
than through costly software development. The flexibility of our
TM2 solutions enables our customers to be able to quickly expand or
contract their mobility management requirements. Our TM2 solutions
are hosted and accessible on-demand through a secure federal
government certified proprietary portal that provides our customers
with the ability to manage, analyze and protect their valuable
communications assets, and deploy identity management solutions
that provide secured virtual and physical access to restricted
environments.
Our
Solutions
Our TM2
framework combines the strengths of our core capabilities into a
single secure comprehensive enterprise-wide solution set that
offers our customer’s the ability to securely enable and
manage their mobile assets as described below:
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Trusted Mobility Management (TM2)
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||||
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Telecom Lifecycle Management
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Mobile and Identity Management
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Telecom Bill Presentment and Analytics
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We
offer comprehensive telecom lifecycle management solutions to both
large commercial and governmental enterprises. Our solutions are
delivered in a hosted and secure multi-modal delivery environment.
Our solutions provide full visibility of telecom assets for our
customers thereby enabling our customers to securely and
efficiently manage all aspects of telecom assets all the while
reducing the overall cost of ownership. We offer state-of-the-art
call centers that are available 24/7 to help our users stay
productive.
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We
offer several different federally certified digital certificates
and credentials that enable our customers to conduct business
through secure portals owned and managed by the U.S. federal
government, access government facilities and secure mobile devices
that are used to access corporation networks, databases and other
IT assets. We also offer comprehensive mobile security solutions
that protect users, devices, and corporate resources, including
establishing effective policies to create a scalable, adaptable,
successful mobile program.
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We
offer a flexible and comprehensive set of analytical solutions
including unified bill presentment, robust subscriber data
intelligence and hosted voice analytics to large communications
service providers (CSPs). Our solutions are delivered in a hosted
and secure environment and provide our CSPs with full visibility
into their revenue model which drives a stronger customer
experience and reduces their operating costs and improves
profitability.
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We sell
service solutions to government and business enterprises. Our
ability to successfully sell our services depends upon the
relationships we build and maintain with key decisions makers at
existing customers and prospective customer organizations. Our
sales cycle is long and is often affected by many factors outside
of our control including but not limited to customer specific
proposal and acquisition processes, unique customer service
requirements, the customer’s timetable and urgency, changes
in key leadership and/or personnel that slows down the proposal or
project, an evaluation by different functional groups within the
prospective customers organization before a purchase decision is
made by the organization, budgetary funding delays, intermittent
U.S. federal government shutdowns, competitive bidding processes
and other policy constraints, as well as additional factors that
may lengthen the sales cycle. Many of these variables are outside
our control and we attempt to manage the financial impact on us by
building a large pipeline with opportunities that have overlapping
sales cycles.
3
It
could take more than 12 months to enter into a contract with a
customer from the time we first actively engage a prospective
customer and then a full implementation could range from mere weeks
to several months depending on the complexity of the customers
statement of work and level of engagement by us and the customer to
get the deployment completed. Contract closing and implementation
timelines vary as a result of these factors, many of which are
outside our control.
Sales
Approaches
We
approach selling our services under either a direct sales model
under which we control the contract and key relationships or we
partner with a large systems integrator subcontractor to provide
our TM2 solution as part of their overall total solution offering
to the end customer. We have historically grown our business under
the direct sales model; however, during fiscal 2018 we closed a
significant portion of our new sales through our partnerships with
large systems integrators. While we believe we can continue to be
successful growing our sales through both models, larger scale
opportunities likely exist when we partner with large systems
integrators.
Our
sales approaches are summarized below:
Systems
Integrators.
We partner with large systems integrators to
collectively pursue and win large market opportunities that include
our TM2 solution within the scope of the solicitations. In these
types of arrangements, we generally operate as a subcontractor and
manage the customer relationship closely with the prime contractor.
We do not utilize any channel partners or third-party firms in this
sales approach.
Internal Sales
Force.
We have a team of sales professionals account
managers and project managers that are responsible for identifying
and pursuing commercial and government opportunities for our TM2
offerings. We take a team approach for engaging with a potential
customer. Our sales teams consists of sales lead, account managers,
solution experts and other subject matter experts to assist with
execution of product demonstrations, proposal creation and
submission, contract negotiation, relationship management, sales
closing and final transition of closed deals to the operations
team. Sales commissions are calculated and paid based on net
collected gross managed service revenues times a fixed commission
rate that declines over the base term of the contract. There are no
commissions paid after the base term expires.
Upselling and
Cross Selling.
After a customer is on boarded, we focus on
delivering our service promise and then upsell and cross sell our
TM2 solution offerings. We may enter into preferred supplier
network programs agreements with our customers and offer our TM2
solutions on similar terms and conditions to their suppliers and
customer which in turn could increase our potential sales
opportunities. We also directly ask our customers for referrals
into their professional network, customer and supplier groups to
drive additional sales opportunities.
Indirect Sales
Approach.
We may use an indirect sales approach to reach new
target markets by outsourcing our lead generation and certain
business development activities through a third-party channel
partner. We do not use this sales approach very often due to the
high cost of commissions charged by these channel partners as their
commission terms often span the entire life of the customer
relationship which may not be financially viable to the customer or
us. We do not anticipate using this sales approach extensively to
drive sales opportunities.
Our
sales team has a wide variety of skills and expertise to cultivate
qualified leads and guide our prospective customers towards finding
a solution that meets their organization’s goals and
objectives.
4
Marketing
and Branding
Our
marketing strategy is to build our brand and increase market
awareness of our solutions in our target markets that will allow us
to successfully build strong relationships with key decision
markers involved in the sales process on the customer side. Key
decisions makers typically consist of information technology
executives, finance executives and managers of communications
assets and networks.
We
engage in a wide variety of broad-based and targeted marketing
campaigns designed to broaden market awareness of our solutions and
expertise. Broad-based marketing campaigns include attending and
speaking at industry and tradeshows, website marketing, publishing
technical whitepapers and use case studies, topical webcasts,
public relations campaigns, subject matter expert forums and
industry visibility initiatives. Targeted marketing campaigns
including internet search engine optimization, directed e-mail and
direct mail, co-marketing strategies designed to leverage existing
customer and network relationships.
Customer
Concentrations
We
derive a significant amount of our revenues from contracts funded
by federal government agencies for which we act in capacity as the
prime contractor, or as a subcontractor. We believe that contracts
with federal government agencies in particular, will be the primary
source of our revenues for the foreseeable future although we are
working to increase our footprint with commercial customers through
our relationships with large systems integrators. Accordingly,
negative changes in federal government fiscal or spending policies
(including continuing budget resolutions and government shutdowns)
that impact the spending budgets of our key government customers,
including Department of Homeland Security, will directly affect our
financial performance.
We
expect all of our customers to be motivated to meet their
organizational needs for mobile management and security objectives
in this challenging mobile environment. As a result of delivering
our TM2 service solution we can often save our customers up to 75%
of their total spend on mobility and security management which
translates into real cash savings. While most of our customers use
their savings to purchase and upgrade their managed services our
customers could potentially negatively impact our billable revenue
base and result in lower profit margins if they decide to retain
the savings and not purchase additional higher margin services. We
believe we have an attractive set of solutions and we also believe
that government spending for cybersecurity services and solutions
will increase for the foreseeable future.
Our
government customer base is located predominantly in the
Mid-Atlantic region of the U.S. while our commercial customer base
is located throughout the continental U.S., Canada, Europe and the
Middle East. Historically, we have derived, and may continue to
derive in the future, a significant percentage of our total
revenues from federal government contracts.
Due to
the nature of our business and the relative size of certain
contracts which are entered into in the ordinary course of
business, the loss of any single significant customer would have a
material adverse effect on our results of operations. In future
periods, we will continue to focus on diversifying our revenue by
increasing the size and number of customer contracts both in public
and private sectors.
Government
Contracts
We have
numerous government contracts and contract vehicles. Our contracts
with the federal government, and many contracts with other
entities, permit the government customer to modify, curtail or
terminate the contract at any time for the convenience of the
government, or for default by the contractor. If a contract is
terminated for convenience, we are generally reimbursed for our
allowable costs through the date of termination and are paid a
proportionate amount of the stipulated profit or fee attributable
to the work actually performed.
5
Contract vehicles
include Government Wide Acquisition Contracts
(“GWACs”), and Blanket Purchase Agreements
(“BPAs”) based upon GSA Schedule 70, and customer
specific contracts. We also hold a number of Indefinite
Delivery/Indefinite Quantity (“ID/IQ”) contracts,
including, but not limited to:
■
Department of
Homeland Security Blanket Purchase Agreement (DHS BPA) for Cellular
Wireless Managed Services.
■
Department of
Health and Human Services Telecommunications Inventory and Expense
Management Solutions contract.
■
Subsidiaries of
WidePoint are approved subcontractors for the following ID/IQ
contracts:
o
Defense Logistics
Agency J6 Enterprise Technology Services (JETS)
o
GSA Alliant
2
o
GSA
Networx
o
GSA Connections
II
o
National Institutes
of Health Chief Information Officer Solutions and Partners
(CIO-SP3)
o
Defense Logistics
Agency (DLA) Program Management and Support Services
(PMSS)
o
NASA Solutions for
Enterprise-Wide Procurement (SEWP)
o
Department of
Justice Information Technology Support Services
(“ITSS”) 3 contract
We will
continue to build on our partnerships with key systems integrators
to out compete our competitors for public and private sector
opportunities.
Product
Development and Technology Solution Enhancements
We
believe that our existing technology platforms are adequate and
meet our operational obligations to our customers. We may fund
certain product development initiatives to enhance or customize
existing client facing platforms and software solutions. These
initiatives are aimed at improving the efficiency and effectiveness
of our software solutions and meet our customer’s changing
organizational requirements, as necessary. We determine which
enhancements to further develop after assessing the market
capabilities sought by potential customers, considering
technological advances, feedback on enhancements from our current
customer user groups and other factors. Our current development
activities are focused on the integration of our heterogeneous
services delivery platforms, and improving the security posture and
delivery of our information technology services.
We
utilize a standard architecture to ensure enhancements are subject
to appropriate oversight and scrutiny and follow a consistent and
efficient process. Our development team is comprised of
professionals with hands-on technical and practical customer-side
development experience. We believe this allows us to design and
deploy enhancements that can resolve real-world problems in a
timely manner.
6
We
funded and expensed strategic product development initiatives as
well as platform and portal integrations and other product and
portal enhancements totaling approximately $229,000 in 2018, which
was capitalized and $579,800, of which $360,700 was capitalized in
2017. In 2019, we will continue to work with our strategic partners
to continue and focus our product development efforts as well as
with customer integrations.
Data
Centers
We host
our proprietary solutions and operate all servers, systems and
networks at five (5) data centers located in Ireland, Ohio, and
Virginia, which we may consolidate in the future. Our agreements
with our customers contain guarantees regarding specified levels of
system availability, and we regularly provide our customers with
performance reports against those standards. We utilize monitoring
technology software tools that continuously checks our servers and
key underlying components at regular intervals for issues with
system availability and performance, server and application
security and penetration vulnerabilities, and other factors that
may impact the availability of our systems to our customers. Each
data center provides security measures, redundant environmental
controls, fire suppression systems and redundant electrical
generators to meet our service level agreements. To facilitate data
loss recovery, we operate a multi-tiered system configuration with
load-balanced web server pools, replicated database servers and
fault-tolerant storage devices. The architecture is designed to
ensure near real-time data recovery in the event of a malfunction
of a primary server. Based on customer requirements, we can also
provide near real-time asynchronous data replication between
operational and disaster recovery backup sites.
Intellectual
Property
Our
intellectual property rights are important to our business. We rely
on a combination of patent, copyright, trademark, service mark,
trade secret and other rights in the United States and other
jurisdictions, as well as confidentiality procedures and
contractual provisions to protect our proprietary service as a
solution, technology, operational processes and other intellectual
property. We protect our intellectual property rights in a number
of ways including entering into confidentiality and other written
agreements with our employees, customers, consultants and partners
in an attempt to control access to and distribution of our
software, documentation and other proprietary technology and other
information. Despite our efforts to protect our proprietary rights,
third parties may, in an unauthorized manner, attempt to use, copy
or otherwise obtain and market or distribute our intellectual
property rights or technology or otherwise develop software or
services with the same functionality as our software and
services.
U.S.
patent filings are intended to provide the holder with a right to
exclude others from making, using, selling or importing in the
United States the inventions covered by the claims of granted
patents. Our patents, including our pending patents, if granted,
may be contested, circumvented or invalidated. Moreover, the rights
that may be granted in those issued and pending patents may not
provide us with proprietary protection or competitive advantages,
and we may not be able to prevent third parties from infringing
those patents. Therefore, the exact benefits of our issued patents
and, if issued, our pending patents and the other steps that we
have taken to protect our intellectual property cannot be predicted
with certainty.
7
Market Competition
Our TM2
market is centered around mobile management and security as shown
below:
Target Markets.
Our target
market is highly fragmented and we compete with small and large
companies that offer different components of TM2. We believe that
we are presently the only provider of all three of these critical
services offerings. We believe that our TM2 solution offering gives
us a strong competitive advantage over our competitors due to our
distinctive technical competencies, successful past contract
performance with large commercial and government organizations,
governmental certifications and approvals to operate within this
space, price and value of services delivered, reputation for
quality, and key management personnel with subject matter
expertise.
Market Pricing.
Pricing for
services in our market lack of transparency due to the way in which
our competitors price their services. Our competitors take
advantage of this lack of pricing transparency and prospective
customer’s lack of understanding and awareness of market
pricing for services. Our competitors often take advantage of a
prospective customer and will often heavily discount their prices
to unprofitable levels thereby creating a commodity pricing
environment that affects the value of the solution perceived by
prospective customers, severely limits profitability for other
service providers that provide better solutions, discourages
further innovation and harms the customer in the end. The
costs to switch solutions can be high for a prospective customer
even if they know their current solution is not
working.
Our
pricing for services are transparent and we attempt to match our
customers need with the right level of services for a single
inclusive fee whenever practical. We practice transparent pricing
strategies that allow our customers to purchase our entire
full-service solution or select only the services they require to
meet their needs. We do not use introductory teaser rates to
attract new customers or conduct bait and switch pricing tactics
with our customers as is often practiced by our competitors.
Pricing for our TM2 offering will vary depending on our prospective
customer’s technology infrastructure, scale of their
operations, workflow requirements and many other factors that can
affect pricing.
We do
not view our services as a commodity, and comparability of our TM2
offering against other competitors’ service offerings is not
practical due to differences in pricing models described above and
overall capabilities among competitors. As a result of this pricing
differences between us and our competitors it can be difficult to
compare to pricing models in our market.
All
prospective customers tend to initially have price sensitivity and
that often changes after we are able to demonstrate that our
solutions will save them time and money. We believe our TM2
solution pricing is competitive and reflects the value of the
solutions provide to our customers. Our goal is providing the best
solution for our customers that meets their needs. We may not
always be the lowest cost provider and as a result our ability to
win new work and charge a reasonable fee for our services entirely
depends on the value perceived by our
customers.
8
Competition.
Our TM2 solution
crosses into several different market segments and as a result we
do not have competitors that compete in all of the market segments
in which we conduct business. The following table outlines
what areas of TM2 our competitors provide:
Our
larger competitors often have more size and financial resources
than us and they may be able to provide a wider array of technology
solutions outside of our core capabilities. Due to our
significant federal government contract concentrations we also
experience competition from a variety of both large and small
companies, including divisions of large federal government
integrators such as Lockheed Martin Corporation, Northrop Grumman
Corporation, and other large and mid-sized federal contractors, as
well as a limited number of small to mid-sized subject matter
expert organizations offering specialized capabilities within the
identity management space.
If we
are unable to keep pace with the intense competition in our
marketplace, deliver cost-effective and relevant solutions to our
target market, our business, financial condition and results of
operations will suffer.
Contracting
We
prefer to serve as the prime contractor when we win contract
awards; however, we will often serve as a subcontractor and partner
with a large systems integrator to win a larger market opportunity.
We also may enter into strategic teaming agreements with another
competitor or a vertical supplier to capture a market opportunity.
Prospective customers in our target market use a wide array of
contract vehicles to purchase technology services ranging from
individual purchase orders, awards or consolidated service
contracts (including blanket purchase agreements and similar
indefinite delivery indefinite quantity contracts) that cover a
range of technology services, of which we may or may not be able to
provide all of the services to serve as the prime
contractor.
Seasonality
Our
business is not seasonal. However, our revenues and operating
results may vary significantly from quarter to quarter, due to
revenues earned on contracts, the number of billable days in a
quarter, the timing of the pass-through of other direct costs, the
commencement and completion of contracts during any particular
quarter; as well as the schedule of the government agencies for
awarding contracts, the term of each contract that we have been
awarded and general economic conditions. Because a significant
portion of our expenses, such as personnel and facilities costs,
are fixed in the short term, 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.
9
Employees
As of
December 31, 2018, we had approximately 227 full-time employees
(182 in the U.S. and 45 in Europe). We periodically engage
additional consultants and employ temporary employees. None of our
employees are subject to a collective bargaining agreement. We
believe that our relations with our employees are
good.
Corporate
Information
We were
incorporated on May 30, 1997 under the laws of the State of
Delaware under the name WidePoint Corporation. Our principal
executive offices are located at 11250 Waples Mill Rd., South
Tower, Suite 210, Fairfax, Virginia 22030. Our internet address is
www.widepoint.com. Information on our website is not incorporated
into this Form 10-K. We make available free of charge through our
website our Annual Report on Form 10-K, Quarterly Reports on Form
10-Q, current reports on Form 8-K, and amendments to those reports
filed or furnished pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 as soon as reasonably practicable
after we electronically file such material with, or furnish it to,
the United States Securities and Exchange Commission (the
“SEC”). The SEC maintains an Internet site that
contains reports, proxy and information statements, and other
information regarding issuers that file electronically with the SEC
at http://www.sec.gov.
ITEM
1A. RISK FACTORS
You should carefully consider the risk factors set forth below and
in other reports that we file from time to time with the Securities
and Exchange Commission and the other information in this Annual
Report on Form 10-K. The matters discussed in the risk factors, and
additional risks and uncertainties not currently known to us or
that we currently deem immaterial, could have a material adverse
effect on our business, financial condition, results of operation
and future growth prospects and could cause the trading price of
our common stock to decline.
Risks
Related to our Business and our Industry
Our inability to successfully recompete and re-win our expiring DHS
BPA contract, and on terms that do not material affect our profit
margins, could have a material adverse impact on our results of
operations.
Our DHS
BPA expired on December 16, 2018 and was extended through June 16,
2019. The DHS BPA could potentially be further extended if
required. While we believe we have a strong relationship and past
performance under this expiring contract that may provide us with a
competitive advantage in the re-compete process, there is no
guarantee that we will be successful in our efforts. If we are
unable to retain this contract the DHS may not be able to continue
to use our services beyond fiscal 2020, unless they separate create
and fund a different contract vehicle, which is unlikely. Revenue
generated under this single DHS BPA for fiscal year ended December
31, 2018 was approximately $64.5 million (representing 77% of total
revenue of which 13% related to managed service revenue); and our
inability to successfully re-win this contract would have a
material adverse effect on our future revenue, profitability and
cash flows.
10
Changes in the spending policies or budget priorities of the
federal government could cause us to lose revenues.
We
derive a significant amount of our annual revenues from contracts
funded by federal government agencies. We believe that contracts
with federal government agencies will be a significant source of
our revenues for the foreseeable future. Accordingly, changes in
federal government fiscal or spending policies or the U.S. federal
budget could directly affect our financial performance. Among the
factors that could harm our business are:
■
curtailment of the
federal government’s use of technology services
firms;
■
a significant
decline in spending by the federal government, in general, or by
specific agencies such as the Department of Defense;
■
reductions in
federal government programs or requirements, including government
agency shutdowns and/or reductions in connection with
sequestration;
■
any failure to
raise the debt ceiling;
■
government
inability to approve a budget and operate under a “Continuing
Resolution”;
■
a shift in spending
to federal programs and agencies that we do not support or where we
currently do not have contracts;
■
delays in the
payment of our invoices by government payment offices;
■
federal
governmental shutdowns, and other potential delays in the
government appropriations process; and
■
general economic
and political conditions, including any event that results in a
change in spending priorities of the federal
government.
These
or other factors could cause federal government agencies and
departments to delay payments owed for our services, to reduce
their purchases under contracts, to exercise their right to
terminate contracts, or not to exercise options to renew contracts,
any of which could cause us to lose revenues. In addition, any
limitations imposed on spending by U.S. government agencies that
result from efforts to reduce the federal deficit, including as a
result of sequestration or otherwise, may limit both the continued
funding of our existing contracts and our ability to obtain
additional contracts.
We have had a history of losses; and we may be unable to achieve
and sustain profitability.
We have
a long history of net losses over the last six (6) years, including
net losses of $1.5 million in 2018 and $3.5 million in 2017. Prior
to fiscal 2018, a significant contributing factor driving our
significant net operating losses were investments in sales and
marketing and product development projects that did not produce the
expected return on investment; and as a result placed a significant
cumulative strain on our networking capital and overall financial
position. There is no guarantee that we will be able to sustain
improvements in financial performance realized over the last six
(6) calendar quarters and ultimately meet our financial goals of
growing top line revenue and positive net income without closing
significant new business and incremental contract expansions. An
inability to successfully grow our sales pipeline and close on new
business that is profitable could affect our long-term viability
and ultimately limit the financial resources we have available to
grow our business and achieve our desired financial
results.
11
We currently have access to a credit facility agreement, which
requires us to maintain financial covenants and failure to maintain
such covenants could limit our access to debt capital and
simultaneously require immediate repayment of borrowings by our
lender.
W
e have access to a credit facility, which consists
of a variable line of credit to primarily to meet short term
working capital requirements and to partially fund acquisition
growth. Our credit facility agreement requires us to maintain
certain financial covenants on a quarterly and annual basis. If we
are unable to meet future covenants, our lender could take adverse
actions that might include raising our variable interest rate,
accelerating in part or in full payment of all unpaid principal and
interest, reducing the amount of our credit facility, or offering
renewal terms that are unfavorable, all of which could have a
material adverse impact on our ability to meet periodic short term
operational cash flow requirements and manage through prolonged
government shutdowns. Similarly, if we are unable to renew the
credit facility with our current lender or any other lender in the
future, our business and operating results will suffer and we may
need to obtain additional funding or raise capital, which may not
be available on favorable terms or at all.
The loss of significant customer contracts, could also have an
adverse impact on our financial results.
While
we believe that our business relationships with key decision makers
are strong and represent a strong competitive advantage for us;
however, it is possible that the strength of our relationship could
diminish if our primary customer contacts leaves their firm or the
customer is acquired by another firm that uses a competitor to
deliver the same services. We estimate that the loss of any large
contract with annual managed service revenues of more than $1
million, without any offsetting aggregate contract wins, could have
a significant adverse impact on our operating cash flow and
financial results; and we would likely be faced with a decision to
initiate additional cost reduction actions that would largely
include reductions in force for personnel and assets affected by
the contract loss.
Also,
the loss of a significant customer contract could also cause the
Company to defer potentially advantageous strategic options. In the
case of the loss of a material customer contract, the Company may
be required to rapidly consider other strategic alternatives
including selling a portion or all of our assets if our financial
performance deteriorates as a result of key customer contract
losses. Accordingly, the loss of a significant customer would have
a material adverse effect on our operations.
Our sales cycles can be long, unpredictable and require
considerable time and expense, which may cause our operating
results to fluctuate.
Our
sales cycle, which is the time between initial contact with a
potential customer and the ultimate sale, is often lengthy and
unpredictable. Some of our potential customers may already have
partial managed mobility solutions in place under fixed-term
contracts, which may limit their ability to commit to purchase our
solution in a timely fashion. In addition, our potential customers
typically undertake a significant evaluation process that can last
up to a year or more, and which requires us to expend substantial
time, effort and money educating them about the capabilities of our
offerings and the potential cost savings they can bring to an
organization. Furthermore, the purchase of our solution typically
also requires coordination and agreement across many departments
within a potential customer’s organization, which further
contributes to our lengthy sales cycle. As a result, we have
limited ability to forecast the timing and size of specific sales.
Any delay in completing, or failure to complete, sales in a
particular quarter or year could harm our business and could cause
our operating results to vary significantly.
12
Our market is highly competitive and we may not be able to compete
effectively or gain market acceptance of our products and
service.
Our
service business operates in a market that is highly fragmented,
price sensitive and subject to fierce competition. Additionally,
rapid changes in technology affect our ability to respond timely
with new and innovative product offerings to address new market
needs. We have a significant presence in the U.S federal
marketplace and we expect the intensity of competition for
government contracts, as well as commercial contracts to increase
in the future as existing competitors develop additional
capabilities that better align with our core competencies and those
of our target customer segment.
While
we believe our customer service, strong customer retention and
integrated technology solution sets are among our key
differentiators, our competitors may offer introductory pricing and
significantly discount their services to gain market share and/or
in exchange for revenues with higher margin services in other areas
or at later dates. Increased competition could result in additional
pricing pressure, reduced sales, shorter term lengths for customer
contracts, lower margins or the failure of our solution to achieve
or maintain broad market acceptance. If we are unable to compete
effectively, it will be difficult for us to maintain our pricing
rates and add and retain customers, have adequate financial
resources to pay for and retain key personnel, and our business,
financial condition and results of operations will be
harmed.
Our financial resources are limited and the failure of one or more
new product or service offerings could materially harm our
financial results and limit our ability to adequately support
marketing and promotion of new offerings; and also limit our
ability to gain market acceptance of our new
offerings.
Since
we have less resources than many of our competitors, the failure of
one of our products or services to gain market acceptance will
cause us greater harm due to the costs involved in developing or
acquiring new products and services as we must carefully consider
the allocation of our resources given our financial position.
Furthermore, larger companies tend to hold a significant advantage
over us with potential customers due to their name brand
recognition, longevity and resources. Any failure to gain market
acceptances of our products and services will have a material
adverse impact on our operations and our ability to continue our
business.
If we
cannot keep pace with the intense competition in our marketplace,
our business, financial condition and results of operations will
suffer.
We have significant fixed operating costs, which may be difficult
to adjust in response to unanticipated fluctuations in
revenues.
A high
percentage of our operating expenses, particularly personnel, rent
and communications costs, are fixed in advance of any particular
quarter. As a result, an unanticipated or prolonged decrease in the
number or average size of, or an unanticipated delay in the
scheduling for our projects, including U.S. government shutdowns,
may cause significant variations in operating results in any
particular quarter and could have a material adverse effect on
operations and cash flow for that quarter. An unanticipated
termination, decrease or delay in the implementation of a
significant anticipated customer contract could require us to
maintain underutilized employees and that could have a material
adverse effect on our cash flow, financial condition and results of
operations.
Additional points
of clarification regarding factors that may negatively affect our
earnings from quarter to quarter include changes in:
■
the contractual
terms and timing of completion of projects, including achievement
of certain business results;
■
acceptance of our
products to commercial or government customers;
■
budgets for
government customers;
■
the implementation
of new projects ;
■
the adequacy of
provisions for losses and bad debts;
■
the accuracy of our
estimates of resources required to complete ongoing
projects;
■
personnel,
including the loss of key highly skilled personnel necessary to
complete projects; and
■
general economic
conditions.
13
We may not be able to respond to rapid technological changes with
new software products and services, which could harm our sales and
profitability.
Our
portfolio of products, services, and solutions could become
obsolete due to rapid technological changes and frequent new
product and service introductions by our competitors in the mobile
world. Additionally, frequent changes in mobile computing hardware
and software technology, and resulting inconsistencies between the
billing platforms utilized by major communications carriers and the
changing demands of customers regarding the means of delivery of
communications management solutions could affect our ability to
efficiently deliver our services and harm our profit
margins.
To
achieve and maintain market acceptance for our solution, we must
effectively anticipate these changes and offer software products
and services that respond to them in a timely manner. Customers may
require customized transactional and reporting capabilities that
our current solution does not have and/or may be cost prohibitive
to develop to meet the customer’s requirements and ensure our
contract is profitable. In addition, the development of new
products and services comes with a high degree of uncertainty with
regard to return on investment and involves significant time and
financial resources to action, as there is no guarantee that the
funds and time spent on developing such products will ever generate
a return. If we fail to develop software products and services that
satisfy customer preferences in a timely and cost-effective manner,
our ability to renew our agreements with existing customers and our
ability to create or increase demand for our solution will be
harmed.
Our inability to accurately price and sell our product offerings at
an acceptable profit margin that customers are willing to pay will
have a negative impact on our business that could extend for a
number of years.
Most of
our contracts with customers have terms of three (3) to five (5)
years, with optional additional renewal periods. Our government
contracts generally consist of a base period award with 4 option
periods depending on the needs of the agency issuing the contract
award. Our commercial contracts have contractual terms of 3 or more
years with automatic annual renewals in most cases. Most of our
contracts are offered at firm fixed price per performance
obligation such as price per unit managed. Due to the long-term
nature of our firm fixed price contracts, any failure on our part
to accurately define the scope of work and prevent scope creep,
properly price our products to match the customer’s operating
environment, or to effectively manage our costs to deliver against
these performance obligations could have an adverse negative impact
to our financial position and results of operations over a number
of years. Additionally, our failure to complete our contractual
performance obligations in a manner consistent with the contract
could adversely affect our overall profitability and could have a
material adverse effect on our business, financial condition and
results of operations.
Our largest customers could unexpectedly terminate their
contracts.
All of
our government contracts contain a standard clause which allows the
government to cancel our contract for convenience without penalty.
Some of our commercial contracts with large enterprises contain
contract clauses that include the ability to cancel a contract for
convenience by the customer for convenience with limited advance
notice and without significant penalty. In addition, our contracts
with the federal government permit the governmental agency to
modify, curtail or terminate the contract at any time for the
convenience of the government. Termination, delay or modification
of a contract by any large government or commercial customer could
result in a loss of expected revenues and additional expenses for
staff that were allocated to that customer’s project. We
could be required to maintain underutilized employees who were
assigned to the terminated contract or we could ultimately lose the
subject matter expertise for that contract and be required to
retain more expensive staffing resources to perform the contract
when it resumes. The unexpected cancellation or significant
reduction in the scope of any of our large projects could have an
immediate material adverse effect on our business, financial
condition and results of operations.
14
We may be unable to successfully acquired complementary businesses,
services or technologies to support our growth
strategy.
We may
in the future acquire or invest in complementary and supplementary
businesses, services or technologies. Demand for businesses with
credible business relationships and capabilities to provide
services to large commercial enterprises and/or governmental
agencies at the federal, state and local level is very competitive.
To the extent that the price of such acquisitions may rise beyond
reasonable levels where funding for such acquisitions is no longer
available, we may not be able to acquire strategic assets. Further,
these acquisitions, investments or new business relationships may
result in unforeseen difficulties and expenditures. We may
encounter difficulties assimilating or integrating the businesses,
technologies, products, services, personnel or operations of
companies we have acquired or companies that we may in the future
acquire. These difficulties may arise if the key personnel of the
acquired company choose not to work for us, the company’s
technology or services do not easily integrate with ours or we have
difficulty retaining the acquired company’s customers due to
changes in its management or for other reasons. These acquisitions
may also disrupt our business, divert our resources and require
significant management attention that would otherwise be available
for development of our business. Moreover, the anticipated benefits
of any acquisition, investment or business relationship may not be
realized or we may be exposed to unknown liabilities. In addition,
any future acquisition may require us to:
■
issue additional
equity securities that would dilute our stockholders;
■
use cash that we
may need in the future to operate our business;
■
incur debt on terms
unfavorable to us or that we are unable to repay;
■
incur large charges
or substantial liabilities; or
■
become subject to
adverse tax consequences, substantial depreciation or deferred
compensation charges.
If any
of these risks materializes, our business and operating results
would be harmed.
We may be liable to our customers for damages caused by our
services or by our failure to remedy system failures.
Many of
our projects involve technology applications or systems that are
critical to the operations of our customers’ businesses. If
we fail to perform our services correctly, we may be unable to
deliver applications or systems to our customers with the promised
functionality or within the promised time frame, or to satisfy the
required service levels for support and maintenance. While we have
created redundancy and back-up systems, any such failures by us
could result in claims by our customers for substantial damages
against us. Additionally, in the event we manage third party
services on behalf of our customers and fail to execute in approved
changes requested by our customers it could result in claims
asserted by our customers for substantial damages against
us.
Although we attempt
to limit the amount and type of our contractual liability for
defects in the applications or systems we provide, and carry
insurance coverage that mitigates this liability in certain
instances, we cannot be assured that these limitations and
insurance coverages will be applicable and enforceable in all
cases. Even if these limitations and insurance coverages are found
to be applicable and enforceable, our liability to our customers
for these types of claims could still exceed our insurance coverage
and be material in amount and affect our business, financial
condition and results of operations.
15
We may be unable to protect our proprietary software and
methodology.
Our
success depends, in part, upon our proprietary software,
methodology and other intellectual property rights. We rely upon a
combination of trade secrets, nondisclosure and other contractual
arrangements, and copyright and trademark laws to protect our
proprietary rights. We generally enter into nondisclosure and
confidentiality agreements with our employees, partners,
consultants, independent sales agents and customers, and limit
access to and distribution of our proprietary information. We
cannot be certain that the steps we take in this regard will be
adequate to deter misappropriation of our proprietary information
or that we will be able to detect unauthorized use and take
appropriate steps to enforce our intellectual property rights.
Furthermore, statutory contracting regulations protect the rights
of federal agencies to retain access to, and utilization of,
proprietary intellectual property utilized in the delivery of
contracted services to such agencies. We have attempted to put in
place certain safeguards in our policies and procedures to protect
intellectual property developed by employees. Our policies and
procedures stipulate that intellectual property created by
employees and its consultants remain our property. If we are unable
to protect our proprietary software and methodology, the value of
our business may decrease and we may face increased
competition.
Assertions by a third party that our software products or
technology infringes its intellectual property, whether or not
correct, could subject us to costly and time-consuming litigation
or expensive licenses.
Although we believe
that our services and products do not infringe on the intellectual
property rights of others, infringement claims may be asserted
against us in the future. There is frequent litigation in the
communications and technology industries based on allegations of
infringement or other violations of intellectual property rights.
As we face increasing competition, the possibility of intellectual
property rights claims against us may increase. These claims,
whether or not successful, could:
■
divert
management’s attention;
■
result in costly
and time-consuming litigation;
■
require us to enter
into royalty or licensing agreements, which may not be available on
acceptable terms, or at all; or
■
require us to
redesign our software products to avoid infringement.
As a
result, any third-party intellectual property claims against us
could increase our expenses and impair our business. In addition,
although we have licensed proprietary technology, we cannot be
certain that the owners’ rights in such technology will not
be challenged, invalidated or circumvented. Furthermore, many of
our customer agreements require us to indemnify our customers for
certain third-party intellectual property infringement claims,
which could increase our costs as a result of defending such claims
and may require that we pay damages if there were an adverse ruling
related to any such claims. These types of claims could harm our
relationships with our customers, may deter future customers from
purchasing our software products or could expose us to litigation
for these claims. Even if we are not a party to any litigation
between a customer and a third party, an adverse outcome in any
such litigation could make it more difficult for us to defend our
intellectual property in any subsequent litigation in which we are
a named party.
Our net operating loss carry-forwards are subject to a valuation
adjustment if we do not maintain and increase our
profitability.
As of
December 31, 2018, we had aggregate federal net operating loss
carry-forwards of approximately $38.5 million and state net
operating loss carry-forwards of approximately $39.8 million. Our
ability to utilize our net operating loss carry-forwards and
related deferred tax assets is based upon our ability to generate
future taxable income. Our ability to generate future taxable
income can be impacted by many circumstances. If we fail to
generate taxable income our existing net operating loss
carry-forwards and related deferred tax assets may expire unused.
In addition, net operating loss carry-forwards may become subject
to an annual limitation if there is a cumulative change in the
ownership interest of significant stockholders (or certain
stockholder groups) over a three-year period in excess of 50%, in
accordance with rules esstablished under Section 382 of the
Internal Revenue Code of 1986, as amended, or the Code, and similar
state rules (we refer to each as an ownership change). Such an
ownership change could limit the amount of historic net operating
loss carry-forwards that can be utilized annually to offset future
taxable income.
16
The loss of key personnel or an inability to attract and retain
additional personnel may impair our ability to grow our
business.
We are
highly dependent upon the continued service and performance of our
key executives, operational managers and subject matter experts to
run our core operations. The replacement of these individuals
likely would involve expenditure of significant time and financial
resources, and their loss might significantly delay or prevent the
achievement of our business objectives. We do not maintain key man
life insurance with respect to any of our key executives and
subject matter experts.
We plan
to continue to replenish our ranks with the best available talent
to optimize our workforce to do more with less resources. We face
intense competition for qualified individuals from numerous
consulting, technology, software and communications companies. Our
ability to achieve significant revenue growth will depend, in large
part, on our success in recruiting, training and retaining
sufficient numbers of qualified personnel to support our growth.
New hires may require significant training and may take significant
time before they achieve full productivity. If our recruiting,
training and retention efforts are not successful or do not
generate a corresponding increase in revenue, our business will be
harmed.
In
addition, if our key employees resign from us or our subsidiaries
to join a competitor or to form a competing company, the loss of
such personnel and any resulting loss of existing or potential
customers to any such competitor could have a material adverse
effect on our business, financial condition and results of
operations. Although we require certain of our employees to sign
agreements prohibiting them from joining a competitor, forming a
competing company or soliciting our customers or employees for
certain periods of time, we cannot be certain that these agreements
will be effective in preventing our key employees from engaging in
these actions or that courts or other adjudicative entities will
substantially enforce these agreements.
We may incur substantial costs in connection with contracts awarded
through a competitive procurement process, which could negatively
impact our operating results.
Most if
not all federal, state and local governments, as well as commercial
contracts are awarded through a competitive procurement process
that could be a year or more from the initial solicitation to final
contract award. We expect that much of the business we seek in the
foreseeable future will be awarded through competitive procedures
and similar lengthy sales cycle. Competitive procurements impose
substantial upfront costs and present a number of risks,
including:
■
the substantial
cost and managerial time and effort that we spend to prepare bids
and proposals for contracts that may not be awarded to
us;
■
requirements to
register to conduct business in another state or country could
increase our compliance costs;
■
requirements to
post a bid guarantee or similar performance guarantee as part of a
bid submission; and
■
the expense and
delay that we may face if our competitors protest or challenge
contract awards made to us pursuant to competitive procedures, and
the risk that any such protest or challenge could result in the
resubmission of offers, or in termination, reduction, or
modification of the awarded contract.
The
costs we incur in the competitive procurement process may be
substantial and, to the extent we participate in competitive
procurements and are unable to win particular contracts, these
costs could negatively affect our operating results. In addition,
the General Services Administration multiple award schedule
contracts, government-wide acquisitions contracts, blanket purchase
agreements, and other indefinite delivery/indefinite quantity
contracts do not guarantee more than a minimal amount of work for
us, but instead provide us access to work generally through further
competitive procedures. This competitive process may result in
increased competition and pricing pressure, requiring that we make
sustained post-award efforts to realize revenues under the relevant
contract.
17
Unfavorable government audit results could subject us to a variety
of penalties and sanctions, and could harm our reputation and
relationships with our customers.
The
federal government audits and reviews our performance on contracts,
pricing practices, cost structure, and compliance with applicable
laws, regulations, and standards. Like most large government
contractors, our contracts are audited and reviewed on a regular
basis by federal agencies, including the Defense Contract Audit
Agency. An unfavorable audit of us, or of our subcontractors, could
have a substantial adverse effect on our operating results. For
example, any costs that were originally reimbursed could
subsequently be disallowed. In this case, cash we have already
collected may need to be refunded.
If a
government audit uncovers improper or illegal activities, we may be
subject to civil and criminal penalties and administrative
sanctions, including termination of contracts, forfeiture of
profits, suspension of payments, fines, and suspension or debarment
from doing business with U.S. government agencies. In addition, we
could suffer serious harm to our reputation if allegations of
impropriety were made against us, whether true or not
true.
Security breaches or cybersecurity events in sensitive government
systems could result in the loss of customers and negative
publicity.
Many of
the services we provide involve managing and protecting information
involved in intelligence, national security, and other sensitive or
classified government functions. A security breach or cybersecurity
event in one of these systems could cause serious harm to our
business, damage our reputation, and prevent us from being eligible
for further work on sensitive or classified systems for federal
government customers. In addition, sensitive personal data could be
illegally accessed and/or stolen through a cybersecurity event. We
could incur losses from such a security breach that could exceed
the policy limits under our insurance. Damage to our reputation or
limitations on our eligibility for additional work resulting from a
security breach in one of the systems we develop, install, and
maintain could materially reduce our revenues.
Many
states have enacted laws requiring companies to notify consumers of
data security breaches involving their personal data. These
mandatory disclosures regarding a security breach often lead to
widespread negative publicity, which may cause our customers to
lose confidence in the effectiveness of our data security measures.
Any security breach or cybersecurity event, whether successful or
not, would harm our reputation and could cause the loss of
customers. Any of these events could have material adverse effects
on our business, financial condition, and operating
results.
Our ability to provide services to our customers depends on our
customers’ continued high-speed access to the internet and
the continued reliability of the internet
infrastructure.
Our
business depends on our customers’ continued high-speed
access to the internet, as well as the continued maintenance and
development of the internet infrastructure. The future delivery of
our solutions will depend on third-party internet service providers
to expand high-speed internet access, to maintain a reliable
network with the necessary speed, data capacity and security, and
to develop complementary solutions and services, including
high-speed modems, for providing reliable and timely internet
access and services. All of these factors are out of our control.
To the extent that the internet continues to experience an
increased number of users, frequency of use, or bandwidth
requirements, the internet may become congested and be unable to
support the demands placed on it, and its performance or
reliability may decline. Any internet outages or delays could
adversely affect our ability to provide services to our
customers.
Currently, internet
access is provided by telecommunications companies and internet
access service providers that have significant and increasing
market power in the broadband and internet access marketplace. On
December 14, 2017, the Federal Communications Commission classified
broadband internet access service as an unregulated information
service and repealed the specific rules against blocking,
throttling or “paid prioritization” of content or
services. In the absence of government regulation, these providers
could take measures that affect their customers’ ability to
use our products and services, such attempting to charge their
customers more for using our products and services. To the extent
that internet service providers implement usage-based pricing,
including meaningful bandwidth caps, or otherwise try to monetize
access to their networks, we could incur greater operating expenses
and customer acquisition and retention could be negatively
impacted. Furthermore, to the extent network operators were to
create tiers of internet access service and either charge us for or
prohibit our services from being available to our customers through
these tiers, our business could be negatively impacted. Some of
these providers may also offer products and services that directly
compete with our own offerings, which could potentially give them a
competitive advantage.
18
Our failure to obtain and maintain security certifications and
necessary security clearances may limit our ability to perform
classified work directly for government customers as a prime
contractor or subcontractor, which could cause us to lose
business.
Some
government contracts require us to maintain both federal and
industry recognized security certifications of our systems,
facility security clearances, and require some of our employees to
maintain individual security clearances. If we are unable to
maintain security certifications of our systems, or our employees
lose or are unable to timely obtain security clearances, or we lose
a facility clearance, our customer may have the right to terminate
the contract or decide not to renew it upon its expiration. As a
result, to the extent we cannot obtain or maintain the required
security certifications and clearances for a particular contract,
or we fail to obtain them on a timely basis, we may not derive the
revenues anticipated from the contract, which, if not replaced with
revenues from other contracts, could harm our operating results. To
the extent we are not able to obtain facility security clearances
or engage employees with the required security clearances for a
particular contract, we will be unable to perform that contract and
we may not be able to compete for or win new contracts for similar
work.
Federal government contracts contain provisions giving government
customers a variety of rights that are unfavorable to us, including
the ability to terminate a contract at any time for
convenience.
Federal
government contracts contain provisions and are subject to laws and
regulations that provide government customers with rights and
remedies not typically found in commercial contracts. These rights
and remedies allow government customers, among other things,
to:
■
terminate existing
contracts, with short notice, for convenience, as well as for
default;
■
reduce orders under
or otherwise modify contracts;
■
for larger
contracts subject to the Truth in Negotiations Act, reduce the
contract price or cost where it was increased because a contractor
or subcontractor during negotiations furnished cost or pricing data
that was not complete, accurate, and current;
■
for GSA multiple
award schedule contracts, government-wide acquisition agreements,
and blanket purchase agreements, demand a refund, make a forward
price adjustment, or terminate a contract for default if a
contractor provided inaccurate or incomplete data during the
contract negotiation process, or reduce the contract price under
certain triggering circumstances, including the revision of
pricelists or other documents
■
upon which the
contract award was predicated, the granting of more favorable
discounts or terms and conditions than those contained in such
documents, and the granting of certain special discounts to certain
customers;
■
terminate our
facility security clearances and thereby prevent us from receiving
classified contracts;
■
cancel multi-year
contracts and related orders if funds for contract performance for
any subsequent year become unavailable;
■
decline to exercise
an option to renew a multi-year contract or issue task orders in
connection with indefinite delivery/indefinite quantity
contracts;
■
claim rights in
solutions, systems, and technology produced by us;
■
prohibit future
procurement awards with a particular agency due to a finding of
organizational conflict of interest based upon prior related work
performed for the agency that would give a contractor an unfair
advantage over competing contractors or the existence of
conflicting roles that might bias a contractor’s
judgment;
■
subject the award
of contracts to protest by competitors, which may require the
contracting federal agency or department to suspend our performance
pending the outcome of the protest and may also result in a
requirement to resubmit offers for the contract or in the
termination, reduction, or modification of the awarded contract;
and
■
suspend or debar us
from doing business with the federal government.
If a
federal government customer terminates one of our contracts for
convenience, we may recover only our incurred or committed costs,
settlement expenses, and profit on work completed prior to the
termination. If a federal government customer were to unexpectedly
terminate, cancel, or decline to exercise an option to renew with
respect to one or more of our significant contracts or suspend or
debar us from doing business with the federal government, our
revenues and operating results would be materially
harmed.
19
Our failure to comply with complex procurement laws and regulations
could cause us to lose business and subject us to a variety of
penalties.
We must
comply with laws and regulations relating to the formation,
administration, and performance of federal government contracts,
which affect how we do business with our federal government
customers and may impose added costs on our business. Among the
most significant laws and regulations are:
■
the Federal
Acquisition Regulation, and agency regulations analogous or
supplemental to the Federal Acquisition Regulation, which
comprehensively regulate the formation, administration, and
performance of government contracts;
■
the Truth in
Negotiations Act, which requires certification and disclosure of
all cost or pricing data in connection with some contract
negotiations;
■
the Cost Accounting
Standards, which impose cost accounting requirements that govern
our right to reimbursement under some cost-based government
contracts; and
■
laws, regulations,
and executive orders restricting the use and dissemination of
information classified for national security purposes and the
exportation of specified solutions and technical data.
If a
government review or investigation uncovers improper or illegal
activities, we may be subject to civil and criminal penalties and
administrative sanctions, including the termination of our
contracts, the forfeiture of profits, the suspension of payments
owed to us, fines, and our suspension or debarment from doing
business with federal government agencies. In particular, the civil
False Claims Act provides for treble damages and potentially
substantial civil penalties where, for example, a contractor
presents a false or fraudulent claim to the government for payment
or approval, or makes a false statement in order to get a false or
fraudulent claim paid or approved by the government. Actions under
the civil False Claims Act may be brought by the government or by
other persons on behalf of the government. These provisions of the
civil False Claims Act permit parties, such as our employees, to
sue us on behalf of the government and share a portion of any
recovery. Any failure to comply with applicable laws and
regulations could result in contract termination, price or fee
reductions, or suspension or debarment from contracting with the
government, each of which could lead to a material reduction in our
revenues.
The adoption of new procurement laws or regulations could reduce
the amount of services that are outsourced by the federal
government and cause us to experience reduced
revenues.
New
legislation, procurement regulations, or labor organization
pressure could cause federal agencies to adopt restrictive
procurement practices regarding the use of outside service
providers. The American Federation of Government Employees, the
largest federal employee union, strongly endorses legislation that
may restrict the procedure by which services are outsourced to
government contractors. One such proposal, the Truthfulness,
Responsibility, and Accountability in Contracting Act, would have
effectively reduced the volume of services that is outsourced by
the federal government by requiring agencies to give in-house
government employees expanded opportunities to compete against
contractors for work that could be outsourced. If such legislation,
or similar legislation, were to be enacted, it would likely reduce
the amount of IT services that could be outsourced by the federal
government, which could materially reduce our
revenues.
If a communications carrier prohibits customer disclosure of
communications billing and usage data to us, the value of our
solution to customers of that carrier would be impaired, which may
limit our ability to compete for their business.
Certain
of our information technology based solutions software
functionality and services that we offer depend on our ability to
access a customer’s communications billing and usage data.
For example, our ability to offer outsourced or automated
communications bill auditing, billing dispute resolution, bill
payment, cost allocation and expense optimization depends on our
ability to access this data. If a communications carrier were to
prohibit its customers from disclosing this information to us,
those enterprises would only be able to use these billing-related
aspects of our solution on a self-serve basis, which would impair
some of the value of our solution to those enterprises. This in
turn could limit our ability to compete with the internally
developed communications management solutions of those enterprises,
require us to incur additional expenses to license access to that
billing and usage data from the communications carrier, if such a
license is made available to us at all, or put us at a competitive
disadvantage against any third-party communications management
solutions service provider that licenses access to that
data.
20
Our long-term success in our industry depends, in part, on our
ability to expand the sales of our solutions to customers located
outside of the United States, and thus our business is susceptible
to risks associated with international sales and
operations.
We are
currently seeking to expand the international sales and operations
of our portfolio of solutions. This international expansion will
subject us to new risks that we have not faced in the United
States. These risks include:
■
geographic
localization of our software products, including translation into
foreign languages and adaptation for local practices and regulatory
requirements;
■
lack of familiarity
with and unexpected changes in foreign regulatory
requirements;
■
longer accounts
receivable payment cycles and difficulties in collecting accounts
receivable;
■
difficulties in
managing, staffing and overseeing international implementations and
operations, including increased reliance on foreign
subcontractors;
■
challenges in
integrating our software with multiple country-specific billing or
communications support systems for international
customers;
■
challenges in
providing procurement, help desk and fulfillment capabilities for
our international customers;
■
fluctuations in
currency exchange rates;
■
potentially adverse
tax consequences, including the complexities of foreign value added
or other tax systems and restrictions on the repatriation of
earnings;
■
the burdens of
complying with a wide variety of foreign laws and legal
standards;
■
increased financial
accounting and reporting burdens and complexities;
■
potentially slower
adoption rates of communications management solutions services
internationally;
■
political, social
and economic instability abroad, terrorist attacks and security
concerns in general; and
■
reduced or varied
protection for intellectual property rights in some
countries.
Operating in
international markets also requires significant management
attention and financial resources. The investment and additional
resources required to establish operations and manage growth in
other countries may not produce desired levels of revenue or
profitability.
Expansion into international markets could require us to comply
with additional billing, invoicing, communications, data privacy
and similar regulations, which could make it costly or difficult to
operate in these markets.
Many
international regulatory agencies have adopted regulations related
to where and how communications bills may be sent and how the data
on such bills must be handled and protected. For instance, certain
countries restrict communications bills from being sent outside of
the country, either physically or electronically, while other
countries require that certain information be encrypted or redacted
before bills may be transmitted electronically. These regulations
vary from jurisdiction to jurisdiction and international expansion
of our business could subject us to additional similar regulations.
Failure to comply with these regulations could result in
significant monetary penalties and compliance with these
regulations could require expenditure of significant financial and
administrative resources.
In
addition, personally identifiable information is increasingly
subject to legislation and regulations in numerous jurisdictions
around the world, the intent of which is to protect the privacy of
personal information that is collected, processed and transmitted
in or from the governing jurisdiction. Our failure to comply with
applicable safe harbor, privacy laws and international security
regulations or any security breakdown that results in the
unauthorized release of personally identifiable information or
other customer data could result in fines or proceedings by
governmental agencies or private individuals, which could harm our
results of operations.
21
If we fail to effectively manage and develop our strategic
relationships with key systems integrators, or if those third
parties choose not to market and sell our TM2 offering, our
operating results would suffer.
The
successful implementation of our strategic goals is dependent in
part on strategic relationships with key systems integrators. While
our relationships with key systems integrators is new, we believe
that our business relationship is strong and continuing to grow and
we believe that our key systems integrators will continue to
support the inclusion of our TM2 offering as part of their overall
technology solution offering.
Some of
our strategic relationships are relatively new and, therefore, it
is uncertain whether these third parties will be able to market and
sell our solution successfully or provide the volume and quality of
customers that we believe may exist. If we are unable to manage and
develop our strategic relationships, the growth of our customer
base may be harmed and we may have to devote substantially more
resources to the distribution, sales and marketing of our solution,
which would increase our costs and decrease our
earnings.
The emergence of one or more widely used, standardized
communications devices or billing or operational support systems
could limit the value and operability of our TM2 solution and our
ability to compete with the manufacturers of such devices or the
carriers using such systems in providing similar
services.
Our TM2
solution derives its value in significant part from our
communications management software’s ability to interface
with and support the interoperation of diverse communications
devices, billing systems and operational support systems. The
emergence of a single or a small number of widely used
communications devices, billing systems or operational support
systems using consolidated, consistent sets of standardized
interfaces for the interaction between communications service
providers and their enterprise customers could significantly reduce
the value of our solution to our customers and potential customers.
Furthermore, any such communications device, billing system or
operational support system could make use of proprietary software
or technology standards that our software might not be able to
support. In addition, the manufacturer of such device, or the
carrier using such billing system or operational support system,
might actively seek to limit the interoperability of such device,
billing system or operational support system with our software
products for competitive or other reasons. The resulting lack of
compatibility of our software products would put us at a
significant competitive disadvantage, or entirely prevent us from
competing, in that segment of the potential market if such
manufacturer or carrier, or its authorized licensees, were to
develop one or more communications management solutions competitive
with our solution.
A continued proliferation and diversification of communications
technologies or devices could increase the costs of providing our
software products or limit our ability to provide our TM2 offering
to potential customers.
Our
ability to provide our TM2 offering is dependent on the
technological compatibility of our products with the communications
infrastructures and devices of our customers and their
communications service providers. The development and introduction
of new communications technologies and devices requires us to
expend significant personnel and financial resources to develop and
maintain interoperability of our software products with these
technologies and devices. Continued proliferation of communications
products and services could significantly increase our research and
development costs and increase the lag time between the initial
release of new technologies and products and our ability to provide
support for them in our software products, which would limit the
potential market of customers that we have the ability to serve and
the financial feasibility of our TM2 offering.
22
Actual or perceived breaches of our security measures, or
governmental required disclosure of customer information could
diminish demand for our solution and subject us to substantial
liability.
In the
processing of communications transactions, we receive, transmit and
store a large volume of sensitive customer information, including
call records, billing records, contractual terms, and financial and
payment information, including credit card information, and we have
entered into contractual obligations to maintain the
confidentiality of certain of this information. Any person who
circumvents our security measures could steal proprietary or
confidential customer information or cause interruptions in our
operations and any such lapse in security could expose us to
litigation, substantial contractual liabilities, loss of customers
or damage to our reputation or could otherwise harm our business.
We incur significant costs to protect against security breaches and
may incur significant additional costs to alleviate problems caused
by any breaches. In addition, if we are required to disclose any of
this sensitive customer information to governmental authorities,
that disclosure could expose us to a risk of losing customers or
could otherwise harm our business.
If
customers believe that we may be subject to requirements to
disclose sensitive customer information to governmental
authorities, or that our systems and software products do not
provide adequate security for the storage of confidential
information or its transmission over the Internet or corporate
extranets, or are otherwise inadequate for Internet or extranet
use, our business will be harmed. Customers’ concerns about
security could deter them from using the Internet to conduct
transactions that involve confidential information, including
transactions of the types included in our solution, so our failure
to prevent security breaches, or the occurrence of well-publicized
security breaches affecting the Internet in general, could
significantly harm our business and financial results.
Defects or errors in our TM2 platform and/or processes could harm
our reputation, impair our ability to sell our products and result
in significant costs to us.
A key
part of our service delivery involves the use of internally
developed software solutions. If our software solutions contain
undetected defects or errors that affect our ability to process
customer transactions, prepare reports and/or deliver our services
in general it may result in a failure to perform in accordance with
customer expectations and could result in monetary damages against
us. Because our customers use our software products for important
aspects of their businesses, any defects or errors in, or other
performance problems with, our software products could hurt our
reputation and may damage our customers’ businesses. If that
occurs, we could be required to issue substantial service credits
that reduce amounts invoiced to our customers, lose out on future
sales or our existing customers could elect to not renew their
customer agreements with us. Product performance problems could
result in loss of market share, failure to achieve market
acceptance and the diversion of development resources from software
enhancements. If our software products fail to perform or contain a
technical defect, a customer might assert a claim against us for
damages. Whether or not we are responsible for our software’s
failure or defect, we could be required to spend significant time
and money in litigation, arbitration or other dispute resolution,
and potentially pay significant settlements or
damages.
We provide minimum service-level commitments to many of our
customers, and our inability to meet those commitments could result
in significant loss of customers, harm to our reputation and costs
to us.
Many of
our customer agreements currently, or may in the future, require
that we meet minimum service level commitments regarding items such
as platform availability, invoice processing speed and order
processing speed. If we are unable to meet the stated service level
commitments under these agreements many of our customers will have
the right to terminate their agreements with us and we may be
contractually obligated to provide our customers with credits or
pay other penalties. If our software products are unavailable for
significant periods of time we may lose a substantial number of our
customers as a result of these contractual rights, we may suffer
harm to our reputation and we may be required to provide our
customers with significant credits or pay our customers significant
contractual penalties, any of which could harm our business,
financial condition, results of operations.
23
Risks
Related To Our Common Stock
Our common stock price has been volatile and trading in a narrow
range.
The
stock market has, from time to time, experienced extreme price and
volume fluctuations. The market prices of the securities of
companies in our industry have been especially volatile. Broad
market fluctuations of this type may adversely affect the market
price of our common stock. The market price of our common stock has
experienced, and may continue to be subject to volatility due to a
variety of factors, including:
■
our inability to
achieve and sustain profitability;
■
public
announcements concerning us, our competitors or our
industry;
■
externally
published articles and analyses about us by retail investors and
non-analysts;
■
changes in
analysts’ earnings estimates;
■
the failure the
meet the expectations of analysts;
■
fluctuations in
operating results;
■
additional
financings or capital raises;
■
introductions of
new products or services by us or our competitors;
■
announcements of
technological innovations;
■
additional sales of
our common stock or other securities;
■
trading by
individual investors that causes our stock prices to straddle at a
low price for prolonged periods of time; or
■
our inability to
gain market acceptance of our products and services.
In the
past, some companies that have experienced volatility in the market
price of their stock have been the object of securities class
action litigation. If we were the object of securities class action
litigation, we could incur substantial costs and experience a
diversion of our management’s attention and resources and
such securities class action litigation could have a material
adverse effect on our business, financial condition and results of
operations.
The future sale of shares of our common stock may negatively affect
our common stock price and/or be dilutive to current
stockholders.
If we
or our stockholders sell substantial amounts of our common stock,
the market price of our common stock could fall. Such stock
issuances may be made at a price that reflects a discount from the
then-current trading price of our common stock. In addition, in
order to raise capital for acquisitions or other general corporate
purposes, we would likely need to issue securities that are
convertible into or exercisable for a significant number of shares
of our common stock. These issuances would dilute our stockholders
percentage ownership interest, which would have the effect of
reducing our stockholders’ influence on matters on which our
stockholders vote, and might dilute the book value of our common
stock. There is no assurance that we will not seek to sell
additional shares of our common stock in order to meet our working
capital or other needs in a transaction that would be dilutive to
current stockholders.
A third party could be prevented from acquiring shares of our
common stock at a premium to the market price because of our
anti-takeover provisions.
Various
provisions of our certificate of incorporation, by-laws and
Delaware law could make it more difficult for a third party to
acquire us, even if doing so might be beneficial to you and our
other stockholders. We are subject to the provisions of Section 203
of the General Corporation Law of Delaware. Section 203 prohibits a
publicly held Delaware corporation from engaging in a
“business combination” with any interested stockholder
for a period of three years after the date of the transaction in
which the person became an interested stockholder, unless the
business combination is approved in a prescribed manner. A
“business combination” includes mergers, asset sales
and other transactions resulting in a financial benefit to the
interested stockholder. Subject to certain exceptions, an
“interested stockholder” is (i) a person who, together
with affiliates and associates, owns 15% or more of our voting
stock or (ii) an affiliate or associate of ours who was the owner,
together with affiliates and associates, of 15% or more of our
outstanding voting stock at any time within the 3-year period prior
to the date for determining whether such person is
“interested.”
Our
certificate of incorporation also provides that any action required
or permitted to be taken by our stockholders at an annual meeting
or special meeting of stockholders may be taken without such
meeting only by the unanimous consent of all stockholders entitled
to vote on the particular action. In order for any matter to be
considered properly brought before a meeting, a stockholder must
comply with certain requirements regarding advance notice to us.
The foregoing provisions could have the effect of delaying until
the next stockholders’ meeting stockholder actions, which are
favored by the holders of a majority of our outstanding voting
securities. These provisions may also discourage another person or
entity from making a tender offer for our common stock, because
such person or entity, even if it acquired a majority of our
outstanding voting securities, would be able to take action as a
stockholder (such as electing new directors or approving a merger)
only at a duly called stockholders’ meeting, and not by
written consent.
24
The
General Corporation Law of Delaware provides generally that the
affirmative vote of a majority of the shares entitled to vote on
any matter is required to amend a corporation’s certificate
of incorporation or bylaws, unless a corporation’s
certificate of incorporation or bylaws, as the case may be,
requires a greater percentage. Our certificate of incorporation and
bylaws do not require a greater percentage vote. Our board of
directors is classified into three classes of directors, with
approximately one-third of the directors serving in each such class
of directors and with one class of directors being elected at each
annual meeting of stockholders to serve for a term of three years
or until their successors are elected and take office. Our bylaws
provide that the board of directors will determine the number of
directors to serve on the board. Our board of directors presently
consists of seven members.
Our
certificate of incorporation and bylaws contain certain provisions
permitted under the General Corporation Law of Delaware relating to
the liability of directors. The provisions eliminate, to the
fullest extent permitted by the General Corporation Law of
Delaware, a director’s personal liability to us or our
stockholders with respect to any act or omission in the performance
of his or her duties as a director. Our certificate of
incorporation and bylaws also allow us to indemnify our directors,
to the fullest extent permitted by the General Corporation Law of
Delaware. Our bylaws also provide that we may grant indemnification
to any officer, employee, agent or other individual as our Board
may approve from time to time. We believe that these provisions
will assist us in attracting and retaining qualified individuals to
serve as directors.
We do not expect to declare any dividends in the foreseeable
future.
We do
not anticipate declaring any cash dividends to holders of our
common stock in the foreseeable future. Consequently, investors
must rely on sales of their common stock after price appreciation,
which may never occur, as the only way to realize any future gains
on their investment. Investors seeking cash dividends should not
purchase our common stock.
ITEM
1B. UNRESOLVED STAFF COMMENTS
Not
applicable.
ITEM
2. PROPERTIES
All of
our property locations are leased. We believe we can obtain
additional facilities required to accommodate projected needs
without difficulty and at commercially reasonable prices, although
no assurance can be given that we will be able to do so. The
following table presents our property locations at December 31,
2018 for our U.S. locations:
|
|
|
|
|
|
Base
|
|
|
Base
|
|
|||||||
|
|
|
|
|
Lease
|
|
Approx.
|
|
|
Cost
per
|
|
|
Annual
|
|
|||
|
Physical Street Address
|
|
City,
State Zip Code
|
|
Expiration
|
|
Sqft
|
|
|
Sqft
|
|
|
Cost
|
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
7926 Jones Branch Drive, Suite
520
|
|
McLean, VA 22102
|
|
August 2019
|
|
|
5,437
|
|
|
$
|
17
|
|
|
$
|
93,500
|
|
|
11250 Waples Mill Rd S. Tower, Suite
210
|
|
Fairfax, VA 22030
|
|
March 2029
|
|
|
11,852
|
|
|
$
|
28
|
|
|
$
|
336,000
|
|
|
8351 N High Street, Suite
200
|
|
Columbus, OH 43235
|
|
September 2027
|
|
|
14,382
|
|
|
$
|
9
|
|
|
$
|
127,300
|
|
|
2 Eaton Street Suites
800/807
|
|
Hampton, VA 23669
|
|
November 2019
|
|
|
4,519
|
|
|
$
|
15
|
|
|
$
|
66,300
|
|
The
following table presents our property locations at December 31,
2018 for our international locations:
|
|
|
|
|
|
|
|
|
|
Base
|
|
|
Base
|
|
|||
|
|
|
|
|
Lease
|
|
Approx.
|
|
|
Cost
per
|
|
|
Annual
|
|
|||
|
Physical Street Address
|
|
Country Postal Code
|
|
Expiration
|
|
Sqft
|
|
|
Sqft
|
|
|
Cost
|
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||
|
South County Business
Park
|
|
Dublin 18, Ireland
|
|
March 2026
|
|
|
6,000
|
|
|
$
|
31
|
|
|
$
|
186,000
|
|
ITEM
3. LEGAL PROCEEDINGS
From
time to time we may be involved in claims arising in the ordinary
course of business. We are not currently involved in legal
proceedings, governmental actions, investigations or claims
currently pending against us or involve us that, in the opinion of
our management, could reasonably be expected to have a material
adverse effect on our business and financial
condition.
ITEM
4. MINE SAFETY DISCLOSURES
None.
25
PART
II
ITEM
5.
MARKET
FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Our
common stock trades on the NYSE American under the symbol
“WYY”.
Holders
As of
the close of business on March 22, 2019, there were 113 registered
holders of record of our common stock.
Transfer Agent and Registrar
The
transfer agent and registrar for our common stock is American Stock
Transfer & Trust Company.
Dividend Policy
We have
never paid dividends on our Common Stock and intend to continue
this policy for the foreseeable future. We plan to retain earnings
for use in growing our business base. Any future determination to
pay dividends will be at the discretion of our Board of Directors
and will be dependent on our results of operations, financial
condition, contractual and legal restrictions and any other factors
deemed by the management and the Board to be a priority requirement
of the business.
Recent Sales of Unregistered Securities
None.
Repurchases of Equity Securities
We
repurchased no shares of our Common Stock during the fourth quarter
of 2018.
ITEM
6. SELECTED FINANCIAL DATA
Not
Applicable
ITEM
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This discussion should be read in conjunction with the other
sections of this Form 10-K, including “Risk Factors,”
and the Financial Statements and notes thereto. The various
sections of this discussion contain a number of forward-looking
statements, all of which are based on our current expectations and
could be affected by the uncertainties and risk factors described
throughout this Annual Report on Form 10-K. See
“Forward-Looking Statements.” Our actual results may
differ materially.
26
Organizational
Overview
We were
incorporated on May 30, 1997 under the laws of the state of
Delaware. We are a leading provider of federally certified secure
identity management and communications solutions to the government
and commercial sectors. Our on-demand solutions offer a suite of
advanced and federally certified proprietary software solutions
designed to enable secure identity management and manage the
complex processes and expenses associated with complex
communication assets and services of any enterprise.
Strategic
Focus
We
successfully executed on our two key goals for 2018 by stabilizing
the business and rebranding our solution offerings into a single
cohesive offering called Trusted Mobility Management, or TM2.
Looking forward to fiscal 2019, we will be focusing more of our
attention on the following key goals:
■
continued focus on
selling high margin managed services as one unified
company,
■
growing our sales
pipeline by investing in our business development and sales team
assets,
■
pursuing additional
opportunities with our key systems integrator
partners,
■
improving our
proprietary platform and products, which includes placing
ITMS™ onto GovCloud and receive a FedRAMP certification,
and
■
expanding our
solution offerings into the commercial space.
Our
longer-term strategic focus and goals are driven by our need to
expand our critical mass so that we have more flexibility to fund
investments in technology solutions and introduce new sales and
marketing initiatives in order to expand our marketplace share and
increase the breadth of our offerings in order to improve company
sustainability and growth. Our next steps towards achieving our
longer-term goals include:
■
pursuing accretive
and strategic acquisitions to expand our solutions and our customer
base,
■
delivering new
incremental offerings to add to our existing TM2
offering,
■
developing and
testing innovative new offerings that enhance our TM2 offering,
and
■
transitioning our
data center and support infrastructure into a more cost-effective
and federally approved cloud environment to comply with perceived
future contract requirements.
We
believe these actions could drive a strategic repositioning our TM2
offering and may include the sale of non-aligned offerings coupled
with acquisitions of complementary and supplementary offerings that
could result in a more focused core set of TM2
offerings.
The
execution of our strategy will require a significant amount of
time, expertise and expense. There may be a requirement to raise
additional capital, which may be on unfavorable terms to us. There
is also no guarantee that we will be able to successfully execute
our strategy or return to profitability in a timely fashion or at
all. However, management firmly believes that a focused execution
of our short and longer term strategies will put us on the path
towards returning to generating positive earnings and cash flow,
while also allowing the Company to build critical mass in the
future with a more sustainable and improved competitive market
position.
Critical
Accounting Policies and Estimates
Refer
to Note 2 to the consolidated financial statements for a summary of
our significant accounting policies referenced, as applicable, to
other notes. In many cases, the accounting treatment of a
particular transaction is specifically dictated by U.S. GAAP and
does not require management’s judgment in its application.
Our senior management has reviewed these critical accounting
policies and related disclosures with its Audit Committee. See Note
2 to consolidated financial statements, which contain additional
information regarding accounting policies and other disclosures
required by U.S. GAAP. The following section below provides
information about certain critical accounting policies that are
important to the consolidated financial statements and that require
significant management assumptions and judgments.
27
Segments
Segments are
defined by authoritative guidance as components of a company in
which separate financial information is available and is evaluated
by the chief operating decision maker (CODM), or a decision-making
group, in deciding how to allocate resources and in assessing
performance. Our CODM is our chief executive officer.
Our
customers view our market as a singular business and demand an
integrated and scalable suite of enterprise-wide solutions. Our TM2
offerings are substantially managed service driven solutions that
use our proprietary technology platform to deliver our services.
The amount of labor required to perform our contract obligations
may vary significantly contract to contract depending on the
customer’s specific requirements; however, the way in which
we perform these services is consistent across the company and
requires a connected group of internal subject matter experts and
support personnel.
We
conduct business with our customers through six operating entities
that were acquired through acquisitions; however, where a customer
contract is tied to neither affect how we deliver our services nor
does it affect how we allocate our financial resources to deliver
against our performance obligations. We are required to maintain
books and records for these legal entities for tax purposes as long
as they remain active; however, we are in the process of
eliminating legacy operating entities in favor of a more
streamlined operating structure and to simplify producing our
financial results.
In
order to evaluate a managed service business model our CODM and the
senior executive team measure financial performance based on our
overall mixture of managed and carrier services and related
margins. These financial metrics provide a stronger indication of
how we are managing our key customer relationships; and it also
determines our overall profitability.
We
present a single segment for purposes of financial reporting and
prepared consolidated financial statements upon that
basis.
Revenue
Recognition
Our
managed services solutions may require a combination of labor,
third party products and services. Our managed services are
generally not interdependent and our contract performance
obligations are delivered consistently on a monthly basis. We do
not typically have undelivered performance obligations in these
arrangements which would require us to spread our revenue over a
longer period of time. In the event there are undelivered
performance obligations our practice is to defer such revenue and
recognize when the performance obligation has been
satisfied.
.
A
substantial portion of our revenues are derived from firm fixed
price contracts with the U.S. federal government that are fixed fee
arrangements tied to the number of devices managed. Our actual
reported revenue may fluctuate month to month depending on the
hours worked, number of users, number of devices managed, actual or
prospective proven expense savings, actual technology spend, or any
other metrics as contractually agreed to with our
customers.
Our
revenue recognition policies for our billable managed services is
summarized and shown below:
■
Managed services
are delivered on a
monthly basis based on a standard fixed pricing scale and sensitive
to significant changes in per user or device counts which form the
basis for monthly charges. Revenue is recognized upon the
completion of the delivery of monthly managed services based on
user or device counts or other metrics. Managed services are not
interdependent and there are no undelivered elements in these
arrangements.
28
■
Identity service
s are delivered as an
on-demand managed service through the cloud to an individual or
organization or sold in bulk to an organization capable of
self-issuing credentials. There are two aspects to issuing an
identity credential to an individual that consists of identity
proofing which is a significant part of the service and monthly
credential valuation services which enable the credential holder to
access third party systems. Identity proofing services are not
bundled and do not generally include other performance obligations
to deliver. Revenue is recognized from the sales of identity
credentials to an individual or organization upon issuance less a
portion deferred for monthly credential validation support
services. In the case of bulk sales or consoles revenue is
recognized upon issue or availability to the customer for issuance.
There is generally no significant performance obligation to provide
post contract services in relation to identity consoles delivered.
Identity certificates issued have a fixed life and cannot be
modified once issued.
■
Audit services
are earned based on
actual savings delivered to a customer. We earn professional fees
for our services based on a percentage of proven savings. We
recognize contingent based service arrangements when our savings
results are verified by the carrier and accepted by the customer.
Contingent fees earned are calculated based on projected or proven
savings multiplied by an agreed upon recovery rate. Cost associated
with contingent fee arrangements are recognized as
incurred.
Our
revenue recognition policies for our billable labor services is
summarized and shown below:
■
Billable services
are professional
services provided on a project basis determined by our
customers’ specific requirements. These technical
professional services are billed based on time incurred and actual
costs. We recognize revenues for professional services performed
based on actual hours worked and actual costs
incurred.
Our
revenue recognition policies for our billable reselling services is
summarized and shown below:
■
Reselling services
require the Company
to acquire third party products and services to satisfy customer
contractual obligations. We recognize revenues and related costs on
a gross basis for such arrangements whenever we have primary
economic risk. We have economic risk in these transactions as we
are seen as the primary creditor, we carry inventory risk for
undelivered products and services, we directly issue purchase
orders third party suppliers, and we have discretion in sourcing
among many different suppliers. For those transactions in which we
procure and deliver products and services for our customers’
on their own account we do not recognize revenues and related costs
on a gross basis for these arrangements. We only recognize revenues
earned for arranging the transaction and any related
costs.
Our
revenue recognition policies for our billable carrier services is
summarized and shown below:
■
Carrier services
are delivered on a
monthly basis and consist of phone, data and satellite and related
mobile services for a connected device or end point. These services
require us to procure, process and pay communications carrier
invoices. We recognize revenues and related costs on a gross basis
for such arrangements whenever we have primary economic risk. We
have economic risk in these transactions when we are seen as the
primary creditor, we directly issue purchase orders directly to
communications carriers for wireline and wireless services, and/or
we have discretion in choosing optimal providers and rate plans.
For arrangements in which we do not have such economic risk we
recognize revenues and related costs on a net basis.
29
Goodwill
Goodwill represents
the excess of acquisition cost of an acquired company over the fair
value of assets acquired and liabilities assumed. In accordance
with GAAP, goodwill is not amortized but is tested for impairment
at the reporting unit level annually at December 31 and between
annual tests if events or circumstances arise, such as adverse
changes in the business climate, that would more likely than not
reduce the fair value of the reporting unit below its carrying
value.
A
reporting unit is defined as either an operating segment or a
business one level below an operating segment for which discrete
financial information is available that management regularly
reviews. The Company has a single reporting unit for the purpose of
impairment testing.
The
goodwill impairment test utilizes a two-step approach. The first
step identifies whether there is potential impairment by comparing
the fair value of a reporting unit to its carrying amount,
including goodwill. If the fair value of a reporting unit is less
than its carrying amount, the second step of the impairment test is
required to measure the amount of any impairment loss. We have the
option to bypass the qualitative assessment for any reporting
period and proceed to performing the first step of the two-step
goodwill impairment test and then subsequently resume performing a
qualitative assessment in any subsequent period. We bypassed using
a qualitative assessment for 2018.
Goodwill impairment
testing involves management judgment, requiring an assessment of
whether the carrying value of the reporting unit can be supported
by its fair value using widely accepted valuation techniques, such
as the market approach (earnings multiples or transaction multiples
for the industry in which the reporting unit operates) or the
income approach discounted cash flow methods). The fair values of
the reporting units were determined using a combination of
valuation techniques consistent with the market approach and the
income approach.
When
preparing discounted cash flow models under the income approach, we
estimate future cash flows using the reporting unit’s
internal five-year forecast and a terminal value calculated using a
growth rate that management believes is appropriate in light of
current and expected future economic conditions. We then apply a
discount rate to discount these future cash flows to arrive at a
net present value amount, which represents the estimated fair value
of the reporting unit. The discount rate applied approximates the
expected cost of equity financing, determined using a capital asset
pricing model. The model generates an appropriate discount rate
using internal and external inputs to value future cash flows based
on the time value of money and the price for bearing the
uncertainty inherent in an investment.
We had
approximately $18.5 million of goodwill as of December 31, 2018.
The fair value of our single reporting unit was above carrying
value; accordingly, we have concluded that goodwill is not impaired
at December 31, 2018. The Company could be exposed to increased
risk of goodwill impairment if future operating results or
macroeconomic conditions differ significantly from our current
assumptions.
Allowance
for Doubtful Accounts
We have
not historically maintained an allowance for doubtful accounts for
our federal government customers as we have not experienced
material or recurring losses. Allowances for doubtful accounts
relate to commercial accounts receivable and such an allowance
represents management’s best estimate of the losses inherent
in the Company’s outstanding trade accounts receivable. We
determine the allowance for doubtful accounts by considering a
number of factors, including the length of time accounts receivable
are past due, the customers’ previous payment history and
current ability to pay its obligation, and the condition of the
general economy and the industry as a whole. Customer account
balances outstanding longer than 120 days that have not been
settled in accordance with contract terms or for which no firm
payment commitments exist are placed with a third party collection
agency and a reserve is established. We write off the reserved
accounts receivable against the existing allowance after it is
determined that such accounts are ultimately 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.
30
To the
extent historical credit experience, updated for emerging market
trends in credit is not indicative of future performance, actual
losses could differ significantly from management’s judgments
and expectations, resulting in either higher or lower future
provisions for losses, as applicable. The process of determining
the allowance for doubtful accounts requires a high degree of
judgment. It is possible that others, given the same information,
may at any point in time reach different reasonable
conclusions.
During
the year ended December 31, 2018, the Company recorded net
provisions for bad debt expense totaling approximately $4,800
related to commercial contracts.
Share-Based
Compensation
We
issue share-based compensation awards to employees, directors, an
on occasion to non-employees upon which the fair value of awards is
subject to significant estimates made by management. The fair value
of each option award is estimated on the date of grant using a
Black-Scholes option pricing model (“Black-Scholes
model”), which uses the assumptions of no dividend yield,
risk free interest rates and expected life (in years) of
approximately two (2) to ten (10) years.
Expected
volatilities are based on the historical volatility of our common
stock. The expected term of options granted is based on analyses of
historical employee termination rates and option exercises. 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. To the extent historical volatility
estimates, risk free interest rates, option terms and forfeiture
rates updated for emerging market trends are not indicative of
future performance it could differ significantly from
management’s judgments and expectations on the fair value of
similar share-based awards, resulting in either higher or lower
future compensation expense, as applicable. The process of
determining fair value of share-based compensation requires a high
degree of judgment. It is possible that others, given the same
information, may at any point in time reach different reasonable
conclusions.
Accounting
for Income Taxes
Deferred tax assets
and liabilities are determined based on the differences between the
financial statement and tax bases of assets and liabilities using
the enacted tax rates expected to be in effect for the years in
which the differences are expected to reverse. A valuation
allowance is established when management determines that it is more
likely than not that all or some portion of the benefit of the
deferred tax asset will not be realized.
Since
deferred taxes measure the future tax effects of items recognized
in the financial statements, certain estimates and assumptions are
required to determine whether it is more likely than not that all
or some portion of the benefit of a deferred tax asset will not be
realized. In making this assessment, management analyzes and
estimates the impact of future taxable income, reversing temporary
differences and available tax planning strategies. These
assessments are performed quarterly, taking into account any new
information.
The
Company’s significant deferred tax assets consist of net
operating loss carryforwards, share-based compensation and
intangible asset amortization related to prior business
acquisitions. Should a change in facts or circumstances lead to a
change in judgment about the ultimate ability to realize a deferred
tax asset (including our utilization of historical net operating
losses and share-based compensation expense), the Company records
or adjusts the related valuation allowance in the period that the
change in facts or circumstances occurs, along with a corresponding
increase or decrease to the income tax provision.
31
2018
Results of Operations
Year Ended December 31, 2018 Compared to the Year ended December
31, 2017
Revenues
Revenues for the
year ended December 31, 2018 were approximately $83.7 million, an
increase of approximately $7.8 million (or 10%), as compared to
approximately $75.9 million in 2017. Our mix of revenues for the
periods presented is set forth below:
|
|
YEARS
ENDED
|
|
|
|
|
DECEMBER
31,
|
Dollar
|
|
|
|
2018
|
2017
|
Variance
|
|
|
|
|
|
|
Carrier
Services
|
$
50,050,000
|
$
45,003,335
|
$
5,046,665
|
|
Managed
Services:
|
|
|
|
|
Managed
Service Fees
|
25,232,019
|
22,810,476
|
2,421,543
|
|
Billable
Service Fees
|
1,838,018
|
3,257,840
|
(1,419,822
)
|
|
Reselling
and Other Services
|
6,558,859
|
4,812,595
|
1,746,264
|
|
|
|
|
|
|
|
$
83,678,896
|
$
75,884,246
|
$
7,794,650
|
■
Our carrier
services increased due to the implementation of the U.S. Coast
Guard contract during the second half of fiscal 2018 and to a
lesser extent task orders that were issued under our DHS BPA for
additional carrier services, as compared to last year.
■
Our managed service
fees increased due to implementation of new government customers,
expansion of managed services for existing government and
commercial customer as well as increases in sales of accessories to
our government customers as compared to last year.
■
Billable service
fees decreased as compared to last year due to our decision in
fiscal 2017 to discontinue low margin legacy business. We were able
to partially offset the impact of lower commercial billable service
fee revenue with the ramp up of services delivered through our
partnerships with large systems integrators.
■
Reselling and other
services increased as compared to last year due to a few large
product resales to agencies of the U.S. federal government.
Reselling and other services are transactional in nature and as a
result the amount and timing of revenue will vary significantly
from quarter to quarter.
32
Revenues by
customer type for the periods presented is set forth
below:
|
|
YEARS
ENDED
|
|
|
|
|
DECEMBER
31,
|
Dollar
|
|
|
|
2018
|
2017
|
Variance
|
|
|
|
|
|
|
U.S.
Federal Government
|
$
66,346,922
|
$
58,625,389
|
$
7,721,533
|
|
U.S.
State and Local Governments
|
445,855
|
394,704
|
51,151
|
|
Foreign
Governments
|
148,155
|
193,565
|
(45,410
)
|
|
Commercial
Enterprises
|
16,737,964
|
16,670,588
|
67,376
|
|
|
|
|
|
|
|
$
83,678,896
|
$
75,884,246
|
$
7,794,650
|
■
Our sales to
federal government customers increased due to the implementation of
the U.S. Coast Guard during the third quarter of fiscal 2018 and
one additional reselling order processed for the U.S. Airforce. We
did not experience any significant attrition of our government
customer base in fiscal 2018.
■
Our sales to state
and local governments increased as compared to last year due to
increases in the number of units managed.
■
Our sales to
foreign governments decreased as compared to last year due to a
slow-down in the timing of sales of perpetual
licenses.
■
Our sales to
commercial enterprises increased as compared to last year due
incremental expansion of managed services with existing
customers.
Cost
of Revenues
Cost of
revenues for the year ended December 31, 2018 were approximately
$68.4 million (or 82% of revenues) as compared to approximately
$62.1 million (or 82% of revenues) in 2017. The dollar increases
were driven by an increase in reselling transactions and higher
labor costs to support the U.S. Coast Guard implementation and
other billable service fee contracts implemented during the third
quarter of 2018. We expect an increase in our cost of revenues as
compared prior periods as subject matter experts and support
personnel transition from internal administrative projects to
support new customer implementations.
Gross
Profit
Gross
profit for the year ended was approximately $15.3 million (or 18%
of revenues), as compared to approximately $13.7 million (or 18% of
revenues) in 2017. A substantial portion of our gross profit
dollars are derived from managed services; however, the magnitude
of carrier services decreases our overall gross profit margin.
Excluding carrier services, our gross profit was approximately 45%
for fiscal 2018 as compared to 44% for fiscal 2017.
Operating
Expenses
Sales
and marketing expense for the year ended December 31, 2018 was
approximately $1.7 million (or 2% of revenues), as compared to
approximately $2.2 million (or 3% of revenues) in 2017. In 2017, we
eliminated ineffective sales and marketing assets and focused our
attention retaining and upselling our current customers, pursuing
teaming agreements with large systems integrators on larger
opportunities, and partnering with our suppliers to cross sell our
services to their existing customers.
33
General
and administrative expenses for the year ended December 31, 2018
were approximately $13.3 million (or 16% of revenues), as compared
to approximately $14.4 million (or 19% of revenues) in 2017.
The dollar and percentage decrease in general and administrative
expenses is primarily due to a reduction in management and
non-management administrative staff positions as compared to last
year. Excluding the impacts of approximately $1.2 million in
non-recurring severance ($1.0 million), office sale and closure
costs ($0.2 million), our general and administrative expense was
flat as compared to last year and reflects our steady state cost
run rate.
Product
development costs for the year ended December 31, 2018 were
approximately $229,000, which was capitalized. Product development
costs for the year ended December 31, 2017 were approximately
$579,800, of which we capitalized internally developed software
costs of approximately $360,700 related to costs associated with
our next generation TDI Optimiser™ application. We do not
have any significant product development plans for fiscal
2019.
Depreciation
expense for the year ended December 31, 2018 was approximately
$415,300, as compared to approximately $338,300 in
2017. A substantial portion of the increase in our
depreciable fixed asset base was attributable to asset additions
that occurred during the fourth quarter of 2017.
Other
Income (Expense)
Interest income for
the year ended December 31, 2018 was approximately $6,800, as
compared to approximately $15,400 in 2017. The decrease
was due to lower amounts of cash and cash equivalents being held in
interest bearing accounts and the length of time those deposits
were earning interest as compared to last year.
Interest expense
for the year ended December 31, 2018 was approximately $79,500 (or
less than 1% of revenues), an increase of approximately $27,300, as
compared to approximately $52,200 (or less than 1% of revenues) of
interest expense in 2017.
The
increase in interest expense was due to higher debt related to
capital leases, line of credit advances and the length of time such
advances were outstanding.
Other
income (expense) for both periods did not include any significant
items.
Provision
for Income Taxes
Income
tax provision for the year ended December 31, 2018 was
approximately $1.2 million, as compared to approximately $38,000 in
2017. The current year income tax provision includes state minimum
taxes and foreign taxes payable; as well as an adjustment of $1.2
million to deferred tax liabilities related to amortization of
goodwill that erroneously had not been established in prior
periods. This adjustment was a non-cash expense and increased tax
expense and net loss by $1.2 million for the year ended December
31, 2018. The Company determined that the adjustment was not
material to the consolidated financial statements for any
previously reported annual or interim periods.
Net
Loss
As a
result of the factors above, the net loss for the year ended
December 31, 2018 was approximately $1.5 million as compared to
approximately $3.5 million in 2017.
Liquidity
and Capital
Net Working Capital
Our
immediate sources of liquidity include cash and cash equivalents,
accounts receivable, unbilled receivables and access to a working
capital credit facility with Access National Bank for up to $5.0
million.
At
December 31, 2018, our net working capital was approximately $3.9
million as compared to $2.5 million at December 31, 2017. Our
increase in net working capital was primarily due to higher
accounts receivable and unbilled receivables arising from recently
implemented government contracts. We utilized a significant portion
of our available cash to manage through collection delays that were
caused by the partial government shutdown during December 2018. In
February 2019, the federal government reopened and all delayed
invoices are expected to be paid.
We must
successfully execute our strategic goals and tactically execute our
cost savings and new revenue initiatives as described above in
order to generate positive cash flows, improve our liquidity
position and meet our minimum operating requirements. We will
continue to identify additional opportunities for cost savings that
can further reduce our fixed operating costs and/or provide us
better flexibility to match our cost structure with our revenue
streams. We may need to raise additional capital to fund major
growth initiatives and/or acquisitions and there can be no
assurance that additional capital will be available on acceptable
terms or at all.
Cash Flows from Operating Activities
Cash
provided by operating activities provides an indication of our
ability to generate sufficient cash flow from our recurring
business activities. Our single largest cash operating expense is
labor and company sponsored benefits. Our second largest cash
operating expense is our facility costs and related technology
communication costs to support delivery of our services to our
customers. We lease our facilities under non-cancellable long term
contracts. Any changes to our fixed labor and/or infrastructure
costs may require a significant amount of time to take effect
depending on the nature of the change made and cash payments to
terminate any agreements that have not yet expired. We experience
temporary collection timing differences from time to time due to
customer invoice processing delays that are often beyond our
control, including intermittent U.S. federal government shutdowns
related to budgetary funding issues.
For the
year ended December 31, 2018, net cash used in operations was
approximately $2.1 million driven by an increase in uncollected
accounts receivable and a temporary slowdown in billing out
unbilled accounts receivable due to the government
shutdown.
For the
year ended December 31, 2017, net cash used in operations was
approximately $3.0 million driven by current year operating losses
and temporary timing differences as a result of complicated invoice
submission requirements for certain government customers that were
ultimately resolved during the third quarter of 2017.
Cash Flows from Investing Activities
Cash
used in investing activities provides an indication of our long
term infrastructure investments. We maintain our own technology
infrastructure and may need to make additional purchases of
computer hardware, software and other fixed infrastructure assets
to ensure our environment is properly maintained and can support
our customer obligations. We typically fund purchases of long term
infrastructure assets with available cash or capital lease
financing agreements.
For the
year ended December 31, 2018, cash used in investing activities was
approximately $0.5 million
and
predominantly consisted of computer hardware and software purchases
and capitalized internally developed software costs related to our
TDI Optimiser™ solutions.
34
For the
year ended December 31, 2017, cash used in investing activities was
approximately $0.8 million
and
consisted of the purchase of software assets from Probaris
Technologies, Inc., computer hardware and software purchases and
capitalized internally developed software costs related to our TDI
Optimiser™ solutions, partially offset by proceeds receive
from the disposal of leased automobiles and proceeds from the sale
of real estate assets held for sale
.
Cash Flows from Financing Activities
Cash
used in financing activities provides an indication of our debt
financing and proceeds from capital raise transactions and stock
option exercises.
For the
year ended December 31, 2018, cash used in financing activities was
approximately $0.2 million and consisted of capital lease principal
repayments of approximately $101,700, contingent consideration
of approximately $100,000 paid related to our intellectual property
acquisition of Probaris ID™, partially offset by proceeds of
approximately $44,000 from the exercise of stock options. The
Company was advanced and repaid approximately $14.0 million in
cumulative line of credit advances during the year.
For the year
ended December 31, 2017, cash used in financing activities was
approximately $0.3 million and reflects scheduled debt repayments
of approximately $162,200, payment of debt issuance costs of
$31,300, restricted stock award liability payment of approximately
$122,300, partially offset by proceeds of approximately $17,100
from the exercise of stock options. The Company was advanced and
repaid approximately $20.3 million in cumulative line of credit
advances during the year.
Net Effect of Exchange Rate on Cash and Equivalents
For the
year ended December 31, 2018, the gradual depreciation of the Euro
relative to the US dollar decreased the translated value of our
foreign cash balances by approximately $57,600 as compared to last
year. For the year ended December 31, 2017, the net effect of
exchange rate changes increased the translated value of our foreign
cash balances by approximately $212,400 due to appreciation of the
Euro relative to the US dollar.
Credit Facilities and Other Commitments
At
December 31, 2018, there were no outstanding borrowings against the
Company’s $5.0 million working capital credit facility with
Access National Bank. At December 31, 2018, there were no material
commitments for additional capital expenditures, but that could
change with the addition of material contract awards or task orders
awarded in the future. The available amount under the working
capital credit facility 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 our eligible accounts receivable. The facility is
secured by a first lien security interest on all of our personal
property, including its accounts receivable, general intangibles,
inventory and equipment. On February 19, 2018, the Company entered
into a first modification agreement (the “First Modification
Agreement”) with Access National Bank to amend its existing
$5.0 million working capital credit facility. The First
Modification Agreement (i) increased the interest rate for the
working capital line of credit from the Wall Street Journal prime
rate plus 1.0% and (ii) reduced the Company’s minimum
adjusted tangible net worth covenant from at least $4.0 million for
the quarter ended December 31, 2017 (increasing to $4.5 million for
subsequent quarters) to at least $2.0 million for each quarter. The
facility also requires us to maintain a current ratio of 1.1 to 1
tested quarterly.
35
Effective April 30,
2018, the Company entered into a second modification agreement
(“Second 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.
We
believe our working capital credit facility, provided it is renewed
or replaced upon its expiration on April 30, 2019, along with cash
on hand, should be sufficient to meet our minimum requirements for
our current business operations and implementation of new business
during fiscal 2019. Over the long term, we must successfully
execute our growth plans to increase profitable revenue and income
streams to generate positive cash flows to sustain adequate
liquidity without impairing growth initiatives or requiring the
infusion of additional funds from external sources to meet minimum
operating requirements, including debt service. We may need to
raise additional capital to fund our operations and there can be no
assurance that additional capital will be available on acceptable
terms, or at all.
Contractual
Obligations
The
table below identifies transactions that represent our
contractually committed future obligations. Purchase obligations
include our agreements to purchase goods and services that are
enforceable and legally binding and that specify significant terms,
including: fixed or minimum quantities to be purchased; fixed,
minimum or variable price provisions; and the approximate timing of
the transaction. The following reflects a summary of our
contractual obligations for fiscal years ending December
31:
|
Obligation Type
|
2019
|
2020
|
2021
|
2022
|
2023
|
Thereafter
|
Total
|
|
|
|
|
|
|
|
|
|
|
Operating
lease obligations (1)
|
$
935,000
|
$
793,000
|
$
811,000
|
$
839,000
|
$
1,240,500
|
$
3,888,500
|
$
8,507,000
|
|
Capital
lease obligations
|
121,000
|
121,000
|
6,000
|
-
|
-
|
-
|
248,000
|
|
|
|
|
|
|
|
|
|
|
|
$
1,056,000
|
$
914,000
|
$
817,000
|
$
839,000
|
$
1,240,500
|
$
3,888,500
|
$
8,755,000
|
(1)
Includes base
minimum rent and estimated annual operating expenses and real
estate tax due under lease agreement.
Off-Balance
Sheet Arrangements
The
Company has no existing off-balance sheet arrangements as defined
under SEC regulations.
ITEM
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
Not
required.
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
The
consolidated financial statements and schedules required hereunder
and contained herein are listed under Item 15 below.
36
ITEM
9A. CONTROLS AND PROCEDURES
Evaluation
of Disclosure Controls and Procedures
Under
the supervision and with the participation of our management,
including our chief executive officer and chief financial officer,
we conducted an evaluation of our disclosure controls and
procedures, as such term is defined under Rule 13a-15(e) and
15d-15(e) promulgated under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). Based on this evaluation, our chief
executive officer and chief financial officer concluded that our
disclosure controls and procedures were not effective as of the end
of the period covered by this annual report on Form 10-K to ensure
information required to be disclosed in the reports filed or
submitted under the Exchange Act is recorded, processed, summarized
and reported, within the time period specified in the SEC's rules
and forms. These disclosure controls and procedures include
controls and procedures designed to ensure that information
required to be disclosed by us in the reports we file or submit is
accumulated and communicated to management, including our chief
executive officer and chief financial officer, as appropriate, to
allow timely decisions regarding required disclosure.
Management's
Annual Report on Internal Control over Financial
Reporting
Our
management is responsible for establishing and maintaining adequate
internal control over financial reporting, as such term is defined
in Exchange Act Rules 13a-15(f) and 15d-15(f). Under the
supervision and with the participation of our management, including
our chief executive officer and chief financial officer, we
conducted an evaluation of the effectiveness of our internal
control over financial reporting based on the framework in Internal
Control - Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission.
Based
on our evaluation under the framework in Internal Control -
Integrated Framework (2013), our management concluded that our
internal control over financial reporting (ICOFR) was not effective
as of December 31, 2018 due to the existence of a material weakness
in ICOFR related to deferred income tax accounting. The material
weakness identified related to an error in the application of a
complex technical deferred income tax accounting presentation that
was non-cash in nature.
To
address this specific identified material weakness both management
and the tax firm that assists management with the preparation of
its interim and annual tax provision calculations discussed the
Company’s significant tax matters and validated through the
tax provision calculation that all significant deferred tax
accounts were identified, accounted for, and presented as
required.
This
Annual Report on Form 10-K does not include an attestation report
of the Company’s independent registered public accounting
firm regarding internal control over financial reporting due to the
permanent exemptions for smaller reporting companies.
Our
system of ICOFR was designed to provide reasonable assurance
regarding the preparation and fair presentation of published
financial statements in accordance with accounting principles
generally accepted in the United States. All internal control
systems, no matter how well designed, have inherent limitations.
Therefore, even those systems determined to be effective can
provide only reasonable assurance and may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness
to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may
deteriorate.
Changes
in Internal Controls over Financial Reporting
Except
for the material weakness identified related to deferred income tax
accounting, there were no changes in the Company’s ICOFR
during the fourth quarter of 2018 that have materially affected, or
are reasonably likely to materially affect, the Company’s
ICOFR.
37
PART III.
ITEM
10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE
Information
concerning our directors, executive officers, and corporate
governance is incorporated herein by reference to our definitive
proxy statement to be filed with the Securities and Exchange
Commission within 120 days after the end of the fiscal year covered
by this Form 10-K with respect to the 2019 Annual Meeting of
Stockholders. Information regarding executive officers is included
in Part I of this Form 10-K as permitted by General Instruction
G(3).
ITEM
11. EXECUTIVE COMPENSATION
Incorporated herein
by reference to our definitive proxy statement to be filed with the
Securities and Exchange Commission within 120 days after the end of
the fiscal year covered by this Form 10-K with respect to
the 2019 Annual Meeting of Stockholders.
ITEM
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED STOCKHOLDER MATTERS
Information about
security ownership is incorporated herein by reference to our
definitive proxy statement to be filed with the Securities and
Exchange Commission within 120 days after the end of the fiscal
year covered by this Form 10-K with respect to
the 2019 Annual Meeting of Stockholders.
Equity Compensation Plan Information
The
following table sets forth information as of December 31, 2018,
with respect to the Company’s compensation plans under which
its Common Stock is authorized for issuance:
|
|
(a)
|
(b)
|
(c)
|
|
|
|
|
Number of Securities
|
|
|
Number of Securities
|
|
remaining available
|
|
|
to be issued upon
|
Weighted average
|
for future issuance
|
|
|
exercise of
|
exercise price of
|
(excluding securities
|
|
|
outstanding options,
|
outstanding options,
|
reflected in
|
|
Directors, Nominees and Executive
Officers
|
warrants and rights
|
warrants and rights
|
column (a)
|
|
|
|
|
|
|
Equity
Compensation Plans:
|
|
|
|
|
|
|
|
|
|
Approved
by security holders
|
4,013,334
|
$
0.58
|
2,345,794
|
|
|
|
|
|
|
Not
approved by security holders
|
-
|
$
0.00
|
-
|
|
|
|
|
|
|
Total
|
4,013,334
|
$
0.58
|
2,345,794
|
ITEM
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
Incorporated herein
by reference to our definitive proxy statement to be filed with the
Securities and Exchange Commission within 120 days after the end of
the fiscal year covered by this Form 10-K with respect to the 2019
Annual Meeting of Stockholders.
38
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Incorporated herein
by reference to our definitive proxy statement to be filed with the
Securities and Exchange Commission within 120 days after the end of
the fiscal year covered by this Form 10-K with respect to the 2019
Annual Meeting of Stockholders.
PART
IV.
ITEM
15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
■
Financial
Statements and Financial Statement Schedule
Financial Statements:
Report
of Independent Registered Public Accounting Firm
Consolidated
Balance Sheets as of December 31, 2018 and 2017
Consolidated
Statements of Operations for the Years Ended December 31, 2018 and
2017
Consolidated
Statements of Changes in Stockholders’
Equity for the Years Ended
December 31, 2018 and 2017
Consolidated
Statements of Cash Flow for the Years Ended December 31, 2018 and
2017
Notes
to Consolidated Financial Statements
All
other schedules are omitted either because they are not applicable
or not required, or because the required information is included in
the financial statements or notes thereto
■
Exhibits
:
The following exhibits are filed herewith or incorporated herein by
reference:
39
|
10.7
|
Employment
Agreement between Kito Mussa and WidePoint Corporation*
(incorporated by reference from Exhibit 10.1 to Registrant’s
Current Report on Form 8-K, as filed on
December 29,
2017)
|
|
10.8
|
Appointment and
Standstill Agreement (incorporated by reference from Exhibit 10.1
to Registrant’s Current Report on Form 8-K, as filed on July
20, 2017)
|
|
10.9
|
Appointment and
Standstill Agreement dated July 3, 2018 (incorporated by reference
from Exhibit 10.1 to Registrant’s Current Report on Form 8-K,
as filed on July 3, 2018)
|
|
10.10
|
Employment
Agreement, between WidePoint Corporation and Jason Holloway. *
(Incorporated herein by reference to Exhibit 10.2 to the
Registrant’s Current Report on Form 8-K
filed
on December 20, 2017.)
|
|
101.
|
Interactive Data
Files
|
|
101.
|
INS+
XBRL Instance Document
|
|
101.
|
SCH+
XBRL Taxonomy Extension Schema Document
|
|
101.
|
CAL+ XBRL
Taxonomy Extension Calculation Linkbase Document
|
|
101.
|
DEF+ XBRL
Taxonomy Definition Linkbase Document
|
|
101.
|
LAB+ XBRL
Taxonomy Extension Label Linkbase Document
|
|
101.
|
PRE+ XBRL
Taxonomy Extension Presentation Linkbase Document
|
____________________
*
Management contract
or compensatory plan.
40
SIGNATURES
Pursuant to the
requirements of the Securities Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
|
|
|
WidePoint
Corporation
|
|
|
|
|
|
|
|
Date:
|
March 22,
2019
|
|
s/ JIN H.
KANG
|
|
|
|
|
Jin H. Kang
|
|
|
|
|
Chief Executive
Officer
|
|
|
|
|
|
|
Date:
|
March 22,
2019
|
|
/s/ KITO A.
MUSSA
|
|
|
|
|
Kito A. Mussa
|
|
|
|
|
Chief Financial
Officer
|
|
Dated:
|
March 22,
2019
|
|
/s/ JIN H.
KANG
|
|
|
|
|
Jin H. Kang
|
|
|
|
|
Director, Chief
Executive Officer and President
|
|
|
|
|
(Principal
Executive Officer)
|
|
|
|
|
|
|
Dated:
|
March 22,
2019
|
|
/s/ OTTO
GUENTHER
|
|
|
|
|
Otto
Guenther
|
|
|
|
|
Chairman of the
Board
|
|
|
|
|
|
|
Dated:
|
March 22,
2019
|
|
/s/ JULIA A.
BOWEN
|
|
|
|
|
Julia A.
Bowen
|
|
|
|
|
Director
|
|
|
|
|
|
|
Dated:
|
March 22,
2019
|
|
/s/ MORTON S.
TAUBMAN
|
|
|
|
|
Morton S.
Taubman
|
|
|
|
|
Director
|
|
|
|
|
|
|
Dated:
|
March 22,
2019
|
|
/s/ RICHARD L.
TODARO
|
|
|
|
|
Ricgard L.
Todaro
|
|
|
|
|
Director
|
|
|
|
|
|
|
Dated:
|
March 22,
2019
|
|
/s/ ALAN
HOWE
|
|
|
|
|
Alan
Howe
|
|
|
|
|
Director
|
|
|
|
|
|
|
Dated:
|
March 22,
2019
|
|
/s/ PHILIP
RICHTER
|
|
|
|
|
Philip
Richter
|
|
|
|
|
Director
|
41
INDEX
TO FINANCIAL STATEMENTS
|
|
Page
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
To the
Stockholders' and the Board of Directors
WidePoint
Corporation and Subsidiaries
Opinion on the Financial Statements
We have
audited the accompanying consolidated balance sheets of WidePoint
Corporation and subsidiaries (the “Company”) as of
December 31, 2018 and 2017, the related consolidated statements of
operations, comprehensive loss, changes in stockholders’
equity, and cash flows for the years then ended, and the related
notes (collectively referred to as the "consolidated financial
statements"). In our opinion, the consolidated financial statements
present fairly, in all material
respects, the
consolidated
financial position of the Company as of
December 31, 2018 and 2017
and
the
consolidated
results of its
operations and its cash flows for the years then ended, in
conformity with accounting principles generally accepted in the
United States of America.
Basis for Opinion
These
consolidated financial statements are the responsibility of the
Company’s management. Our responsibility is to express an
opinion on these consolidated financial statements based on our
audits.
We are a public accounting
firm registered with the Public Company Accounting Oversight Board
(United States) (“PCAOB”) and are required to be
independent with respect to the Company in accordance with the U.S.
federal securities laws, and the applicable rules and regulations
of the Securities and Exchange Commission and the
PCAOB.
We
conducted our audits in accordance with the standards of the PCAOB.
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement, whether due
to error or fraud. The Company is not required to have, nor were we
engaged to perform, an audit of its internal control over financial
reporting.
As part of our audits we
are required to obtain an understanding of internal control over
financial reporting but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal
control over financial reporting.
Accordingly, we express no
such opinion.
Our
audits included performing procedures to assess the risks of
material misstatement of the consolidated
financial statements, whether due
to error or fraud, and performing procedures to respond to those
risks. Such procedures included examining, on a test basis,
evidence regarding the amounts and disclosures in the consolidated
financial statements. Our audits also included evaluating the
accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the
consolidated financial statements. We believe that our audits
provide a reasonable basis for our opinion.
/s/ Moss Adams
LLP
Scottsdale,
Arizona
March 22,
2019
We have
served as the Company’s auditor since 2007.
F-1
WIDEPOINT
CORPORATION AND SUBSIDIARIES
Consolidated
Balance Sheets
|
|
DECEMBER 31,
|
|
|
|
2018
|
2017
|
|
|
|
|
|
ASSETS
|
||
|
CURRENT
ASSETS
|
|
|
|
Cash
and cash equivalents
|
$
2,431,892
|
$
5,272,457
|
|
Accounts
receivable, net of allowance for doubtful accounts
|
|
|
|
of
$106,733 and $107,618 in 2018 and 2017, respectively
|
11,089,315
|
8,131,025
|
|
Unbilled
accounts receivable
|
9,566,170
|
8,131,448
|
|
Other
current assets
|
1,086,686
|
767,944
|
|
|
|
|
|
Total
current assets
|
24,174,063
|
22,302,874
|
|
|
|
|
|
NONCURRENT
ASSETS
|
|
|
|
Property
and equipment, net
|
1,012,684
|
1,318,420
|
|
Intangibles,
net
|
3,103,753
|
3,671,506
|
|
Goodwill
|
18,555,578
|
18,555,578
|
|
Other
long-term assets
|
209,099
|
44,553
|
|
|
|
|
|
Total
assets
|
$
47,055,177
|
$
45,892,931
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
||
|
|
|
|
|
CURRENT
LIABILITIES
|
|
|
|
Accounts
payable
|
$
7,363,621
|
$
7,266,212
|
|
Accrued
expenses
|
10,716,438
|
9,796,350
|
|
Deferred
revenue
|
2,072,344
|
2,348,578
|
|
Current
portion of capital leases
|
107,325
|
101,591
|
|
Current
portion of other term obligations
|
192,263
|
203,271
|
|
|
|
|
|
Total
current liabilities
|
20,451,991
|
19,716,002
|
|
|
|
|
|
NONCURRENT
LIABILITIES
|
|
|
|
Capital
leases, net of current portion
|
122,040
|
232,109
|
|
Other
term obligations, net of current portion
|
73,952
|
78,336
|
|
Deferred
revenue
|
466,714
|
264,189
|
|
Deferred
tax liability
|
1,523,510
|
392,229
|
|
|
|
|
|
Total
liabilities
|
22,638,207
|
20,682,865
|
|
|
|
|
|
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 83,031,595 shares
|
|
|
|
issued
and outstanding, respectively
|
84,113
|
83,032
|
|
Additional
paid-in capital
|
94,926,560
|
94,200,237
|
|
Accumulated
other comprehensive loss
|
(186,485
)
|
(122,461
)
|
|
Accumulated
deficit
|
(70,407,218
)
|
(68,950,742
)
|
|
|
|
|
|
Total
stockholders’ equity
|
24,416,970
|
25,210,066
|
|
|
|
|
|
Total
liabilities and stockholders’ equity
|
$
47,055,177
|
$
45,892,931
|
The
accompanying notes are an integral part of these consolidated
financial statements.
F-2
WIDEPOINT
CORPORATION AND SUBSIDIARIES
Consolidated
Statements of Operations
|
|
YEARS
ENDED
|
|
|
|
DECEMBER
31,
|
|
|
|
2018
|
2017
|
|
|
|
|
|
REVENUES
|
$
83,678,896
|
$
75,884,246
|
|
COST OF REVENUES
(including amortization and depreciation
|
|
|
|
of
$892,314, and $1,154,901, respectively)
|
68,409,219
|
62,194,187
|
|
|
|
|
|
GROSS
PROFIT
|
15,269,677
|
13,690,059
|
|
|
|
|
|
OPERATING
EXPENSES
|
|
|
|
Sales and
marketing
|
1,743,693
|
2,202,913
|
|
General and
administrative expenses (including share-based
|
|
|
|
compensation of
$683,404, and $387,210, respectively)
|
13,301,052
|
14,392,660
|
|
Product
development
|
-
|
219,141
|
|
Depreciation and
amortization
|
415,337
|
338,314
|
|
|
|
|
|
Total
operating expenses
|
15,460,082
|
17,153,028
|
|
|
|
|
|
LOSS FROM
OPERATIONS
|
(190,405
)
|
(3,462,969
)
|
|
|
|
|
|
OTHER (EXPENSE)
INCOME
|
|
|
|
Interest
income
|
6,797
|
15,352
|
|
Interest
expense
|
(79,540
)
|
(52,158
)
|
|
Other
income
|
(2
)
|
3,805
|
|
|
|
|
|
Total
other expense
|
(72,745
)
|
(33,001
)
|
|
|
|
|
|
LOSS BEFORE INCOME
TAX PROVISION
|
(263,150
)
|
(3,495,970
)
|
|
INCOME
TAX PROVISION
|
1,193,326
|
37,967
|
|
|
|
|
|
NET
LOSS
|
$
(1,456,476
)
|
$
(3,533,937
)
|
|
|
|
|
|
BASIC
LOSS PER SHARE
|
$
(0.02
)
|
$
(0.04
)
|
|
|
|
|
|
BASIC
WEIGHTED-AVERAGE SHARES OUTSTANDING
|
83,274,171
|
82,911,730
|
|
|
|
|
|
DILUTED
LOSS PER SHARE
|
$
(0.02
)
|
$
(0.04
)
|
|
|
|
|
|
DILUTED
WEIGHTED-AVERAGE SHARES OUTSTANDING
|
83,274,171
|
82,911,730
|
The accompanying
notes are an integral part of these consolidated financial
statements.
F-3
WIDEPOINT
CORPORATION AND SUBSIDIARIES
Consolidated
Statements of Comprehensive Loss
|
|
YEARS ENDED
|
|
|
|
DECEMBER 31,
|
|
|
|
2018
|
2017
|
|
|
|
|
|
NET
LOSS
|
$
(1,456,476
)
|
$
(3,533,937
)
|
|
|
|
|
|
Other
comprehensive (loss) income:
|
|
|
|
Foreign
currency translation adjustments, net of tax
|
(64,024
)
|
186,908
|
|
|
|
|
|
Other
comprehensive (loss) income
|
(64,024
)
|
186,908
|
|
|
|
|
|
COMPREHENSIVE
LOSS
|
$
(1,520,500
)
|
$
(3,347,029
)
|
The accompanying
notes are an integral part of these consolidated financial
statements.
F-4
WIDEPOINT CORPORATION AND SUBSIDIARIES
Consolidated
Statements of Changes in Stockholders’ Equity
|
|
|
|
Additional
|
|
|
|
|
|
Common
Stock
|
Paid-In
|
Accumulated
|
Accumulated
|
|
|
|
|
Issued
|
Amount
|
Capital
|
OCI
|
Deficit
|
Total
|
|
|
|
|
|
|
|
|
|
Balance, January 1,
2017
|
82,730,134
|
$
82,730
|
$
93,920,095
|
$
(309,369
)
|
$
(65,416,805
)
|
$
28,276,651
|
|
|
|
|
|
|
|
|
|
Issuance of common
stock —
|
|
|
|
|
|
|
|
options
exercises
|
30,000
|
30
|
17,070
|
-
|
-
|
17,100
|
|
|
|
|
|
|
|
|
|
Issuance of common
stock —
|
|
|
|
|
|
|
|
restricted
|
271,461
|
272
|
(124,138
)
|
-
|
-
|
(123,866
)
|
|
|
|
|
|
|
|
|
|
Stock compensation
expense —
|
|
|
|
|
|
|
|
restricted
|
-
|
-
|
157,857
|
-
|
-
|
157,857
|
|
|
|
|
|
|
|
|
|
Stock compensation
expense —
|
|
|
|
|
|
|
|
non-qualified stock
options
|
-
|
-
|
229,353
|
-
|
-
|
229,353
|
|
|
|
|
|
|
|
|
|
Foreign currency
translation —
|
|
|
|
|
|
|
|
gain
|
-
|
-
|
-
|
186,908
|
-
|
186,908
|
|
|
|
|
|
|
|
|
|
Net
loss
|
-
|
-
|
-
|
-
|
(3,533,937
)
|
(3,533,937
)
|
|
|
|
|
|
|
|
|
|
Balance, December
31, 2017
|
83,031,595
|
$
83,032
|
$
94,200,237
|
$
(122,461
)
|
$
(68,950,742
)
|
$
25,210,066
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock —
|
|
|
|
|
|
|
|
options
exercises
|
100,000
|
100
|
43,900
|
-
|
-
|
44,000
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock —
|
|
|
|
|
|
|
|
restricted
|
980,851
|
981
|
(981
)
|
-
|
-
|
-
|
|
|
|
|
|
|
|
|
|
Stock compensation expense —
|
|
|
|
|
|
|
|
restricted
|
-
|
-
|
387,690
|
-
|
-
|
387,690
|
|
|
|
|
|
|
|
|
|
Stock compensation expense —
|
|
|
|
|
|
|
|
non-qualified
stock options
|
-
|
-
|
295,714
|
-
|
-
|
295,714
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation —
|
|
|
|
|
|
|
|
(loss)
|
-
|
-
|
-
|
(64,024
)
|
-
|
(64,024
)
|
|
|
|
|
|
|
|
|
|
Net
loss
|
-
|
-
|
-
|
-
|
(1,456,476
)
|
(1,456,476
)
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2018
|
84,112,446
|
$
84,113
|
$
94,926,560
|
$
(186,485
)
|
$
(70,407,218
)
|
$
24,416,970
|
The
accompanying notes are an integral part of these consolidated
financial statements.
F-5
WIDEPOINT
CORPORATION AND SUBSIDIARIES
Consolidated
Statements of Cash Flows
|
|
YEARS
ENDED
|
|
|
|
DECEMBER
31,
|
|
|
|
2018
|
2017
|
|
|
|
|
|
CASH FLOWS FROM
OPERATING ACTIVITIES
|
|
|
|
Net
loss
|
$
(1,456,476
)
|
$
(3,533,937
)
|
|
Adjustments to
reconcile net loss to net cash used in
|
|
|
|
operating
activities:
|
|
|
|
Deferred income tax
expense (benefit)
|
1,128,213
|
(1,619
)
|
|
Depreciation
expense
|
551,305
|
414,637
|
|
Provision for
doubtful accounts
|
4,803
|
62,522
|
|
Amortization of
intangibles
|
756,346
|
1,078,578
|
|
Amortization of
deferred financing costs
|
17,304
|
19,304
|
|
Share-based
compensation expense
|
683,404
|
387,210
|
|
Gain on sale of
assets held for sale
|
-
|
(66,683
)
|
|
Loss on disposal of
fixed assets
|
-
|
179,761
|
|
Changes in assets
and liabilities:
|
|
|
|
Accounts receivable
and unbilled receivables
|
(4,502,811
)
|
(2,766,467
)
|
|
Inventories
|
(26,986
)
|
(33,060
)
|
|
Prepaid expenses
and other current assets
|
(269,348
)
|
(278,174
)
|
|
Other
assets
|
(172,364
)
|
23,514
|
|
Accounts payable
and accrued expenses
|
1,190,046
|
151,732
|
|
Income tax
payable
|
10,179
|
43,176
|
|
Deferred revenue
and other liabilities
|
(48,505
)
|
1,327,745
|
|
|
|
|
|
Net
cash used in operating activities
|
(2,134,890
)
|
(2,991,761
)
|
|
|
|
|
|
CASH FLOWS FROM
INVESTING ACTIVITIES
|
|
|
|
Purchases of
property and equipment
|
(261,505
)
|
(695,622
)
|
|
Software
development costs
|
(228,841
)
|
(368,872
)
|
|
Proceeds
from sale of assets held for sale
|
-
|
236,451
|
|
Proceeds from the
sale of property and equipment
|
-
|
55,083
|
|
|
|
|
|
Net
cash used in investing activities
|
(490,346
)
|
(772,960
)
|
|
|
|
|
|
CASH FLOWS FROM
FINANCING ACTIVITIES
|
|
|
|
Advances on bank
line of credit
|
14,048,741
|
20,339,250
|
|
Repayments of bank
line of credit advances
|
(14,048,741
)
|
(20,339,250
)
|
|
Principal
repayments of long-term debt
|
-
|
(82,440
)
|
|
Principal
repayments under capital lease obligations
|
(101,698
)
|
(79,737
)
|
|
Debt
issuance costs
|
-
|
(31,273
)
|
|
Contingent
consideration payment
|
(100,000
)
|
-
|
|
Restricted stock
award tax liability payment
|
-
|
(122,336
)
|
|
Proceeds from
exercise of stock options
|
44,000
|
17,100
|
|
|
|
|
|
Net
cash used in financing activities
|
(157,698
)
|
(298,686
)
|
|
|
|
|
|
Net
effect of exchange rate on cash and equivalents
|
(57,631
)
|
212,366
|
|
|
|
|
|
NET DECREASE IN
CASH
|
(2,840,565
)
|
(3,851,041
)
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS, beginning of period
|
5,272,457
|
9,123,498
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS, end of period
|
$
2,431,892
|
$
5,272,457
|
The accompanying
notes are an integral part of these consolidated financial
statements.
F-6
WIDEPOINT
CORPORATION AND SUBSIDIARIES
Consolidated
Statements of Cash Flows
|
|
YEARS
ENDED
|
|
|
|
DECEMBER
31,
|
|
|
|
2018
|
2017
|
|
|
|
|
|
SUPPLEMENTAL CASH
FLOW INFORMATION
|
|
|
|
Cash
paid for interest
|
$
51,953
|
$
23,674
|
|
Cash
paid for income taxes
|
$
44,633
|
$
8,969
|
|
Cash
received from income tax refund
|
$
-
|
$
2,674
|
|
|
|
|
|
NONCASH INVESTING
AND FINANCING ACTIVITIES
|
|
|
|
Fair
value of contingent consideration paid in connection
|
|
|
|
with
software asset purchase (Note 3)
|
$
-
|
$
100,000
|
|
Insurance policies
financed by short term notes payable (Note 13)
|
$
195,246
|
$
191,438
|
|
Acquisition of
assets under capital lease obligation (Notes 8 and 13)
|
$
-
|
$
391,105
|
The accompanying
notes are an integral part of these consolidated financial
statements.
F-7
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
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 in the
United States, Ireland, the Netherlands and the United Kingdom. The
Company’s principal executive and administrative headquarters
is located in Fairfax, Virginia.
Nature of Operations
The
Company is a leading provider of 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.
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.
Significant
Accounting Policies
Basis of Presentation
The
accompanying consolidated financial statements were prepared in
accordance with accounting principles generally accepted in the
United States of America (“GAAP”) and the financial
statement rules and regulations of the Securities and Exchange
Commission.
Principles of Consolidation
The
accompanying consolidated financial statements include the accounts
of the Company, its wholly owned subsidiaries and acquired entities
since their respective dates of acquisition. All significant
inter-company amounts were eliminated in
consolidation.
Reclassifications
Certain
reclassifications have been made to prior period consolidated
balance sheet to conform to current period presentation. Such
reclassifications had no effect on net income as previously
reported.
F-8
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 there
were no significant changes 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.
The
Company reports products and services under the categories managed
services and carrier services as described below:
●
Managed Service
Fees:
The Company delivers
managed services under firm fixed price contracts that include
multiple performance obligations.
o
Revenue
for fixed price services are generally completed and billed in the
same accounting period and we charge a fixed fee for each
performance obligation which may be tied to the number of units
managed, percentage of supplier spend and/or savings, units
delivered, certificates issued by the Company, certificate
validation services installed in a customer’s environment,
accessories sold and billable hours. Revenue from this service
requires significant accounting estimates due to delays between
completion of the service and the normal billing
cycle.
o
Revenue
for fixed price software licenses that are sold as a perpetual
license with no significant customization are recognized when the
software is delivered. 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.
F-9
●
Billable Service
Fees.
The Company delivers
subject matter expertise either offsite or onsite for certain
customers at a fixed hourly rate or fixed monthly fee. Billable
services are generally completed and billed in the same accounting
period and the Company charges a fixed fee based on actual hours
worked and actual costs incurred. 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.
●
Reselling and Other
Service Fees.
The Company
delivers third party products and services to satisfy customer
contractual obligations. The Company recognizes revenues and
related costs on a gross basis for such arrangements whenever
primary economic risk exists. The Company has significant economic
risk in these transactions as the Company is seen as the primary
creditor,
the Company
carries inventory risk for undelivered products
and services, the Company directly issues purchase orders to third
party suppliers, and the Company has discretion in sourcing among
many different suppliers. For those transactions in which the
Company procures and delivers products and services to customers on
its own account the Company does not recognize revenues and related
costs on a gross basis for these arrangements. We only recognize
revenues earned for arranging the transaction and any related
costs.
Carrier
Services.
The Company bills for
costs incurred to deliver phone, data and satellite and related
mobile services for a connected device or end point. These services
require us to procure, process and pay communications carrier
invoices. The Company recognizes revenues and related costs on a
gross basis for such arrangements whenever it has primary economic
risk. The Company has economic risk in these transactions when it
is seen as the primary creditor, it directly issue purchase orders
directly to communications carriers for wireline and wireless
services, and/or it has discretion in choosing optimal providers
and rate plans. For arrangements in which the Company does not have
such economic risk it recognizes revenues and related costs on a
net basis. A significant portion of the Company's overall reported
revenue is tied to this service component; however, it represents
an insignificant portion of the Company's overall reported gross
profit. This is a commodity type service and margins are nominal,
but this is a necessary service to deliver to federal government
customers that engage the Company to provide a full-service
solution. The Company does not provide these services at risk for
commercial customers due to the increased credit risk
involved.
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.
F-10
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. Payment terms and conditions for government and
commercial customers are described below:
●
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
contracts 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.
F-11
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.
In
March 2016, ASU No. 2016-09, “Improvements to Employee
Share-Based Payment Accounting” was issued. This ASU provides
for areas of simplification for several aspects of the accounting
for share-based payment transactions, including the income tax
consequences, classification of awards as either equity or
liabilities, and classification on the statement of cash flows. The
amendments in this ASU are effective for annual periods beginning
after December 15, 2016, and interim periods within those annual
periods. The Company adopted this ASU in the three months ended
March 31, 2017, and the Company did not recognize any adjustments
due to the fact that the Company had a tax-effected full valuation
allowance of approximately $9.3 million applied against its U.S.
based deferred tax assets, of which approximately $352,200 was
applied against unrealized stock option benefits. In the event the
Company generates sufficient taxable income to utilize its deferred
tax assets the Company may be required to recognize up to $352,200
in deferred tax assets relating to unrealized stock option
benefits. The Company estimates forfeiture rates and adjusts such
rates when appropriate.
In
August 2016, ASU No. 2016-15, “Classification of Certain Cash
Receipts and Cash Payments” was issued. This ASU provides
guidance on eight specific cash flow issues with the objective of
reducing the existing diversity in practice for those issues. The
amendments in this ASU are effective for annual periods beginning
after December 15, 2017, and interim periods within those annual
periods. The Company early adopted this ASU during the year ended
December 31, 2017. The adoption of this accounting standard did not
have a material effect on the Company’s consolidated
statements of cash flows presented herein.
Accounting Standards under Evaluation
In
February 2016, the FASB issued new accounting guidance on leases.
The guidance, which is effective January 1, 2019, with early
adoption permitted, requires virtually all leases to be recognized
on the Consolidated Balance Sheets. The Company currently
anticipates adopting the standard effective January 1, 2019, using
the modified retrospective approach, which requires recording
existing operating leases on the Consolidated Balance Sheets upon
adoption and in the comparative period. The Company estimates that
the adoption of the guidance will result in the recognition of
additional right-of-use assets and lease liabilities for operating
leases of approximately $5.8 million to $6.0
million as of January 1, 2019. The Company does not believe
the guidance will have a material impact on its consolidated
statements of operations.
F-12
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.
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 Consolidated Statements of Operations,
depending on the nature of the activity. See Note 18 for additional
information.
Segment Reporting
Segments are
defined by authoritative guidance as components of a company in
which separate financial information is available and is evaluated
by the chief operating decision maker (CODM), or a decision-making
group, in deciding how to allocate resources and in assessing
performance. The Company’s CODM is its chief executive
officer.
The
Company’s customers view our market as a singular business
and demand an integrated and scalable suite of enterprise-wide
solutions. The Company’s TM2 offerings are substantially
managed service driven solutions that use our proprietary
technology platform to deliver our services. The amount of labor
required to perform our contract obligations may vary significantly
contract to contract depending on the customer’s specific
requirements; however, the way in which we perform these services
is consistent across the company and requires a connected group of
internal subject matter experts and support
personnel.
In
order to evaluate a managed service business model the
Company’s CODM and the senior executive team measure
financial performance based on our overall mixture of managed and
carrier services and related margins. These financial metrics
provide a stronger indication of how we are managing our key
customer relationships; and it also determines our overall
profitability.
The
Company presents a single segment for purposes of financial
reporting and prepared its consolidated financial statements upon
that basis.
F-13
The
preparation of 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.
Fair Value Measurements
Fair
value is defined as the price that would be received to sell an
asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date, based on the
Company’s principal or, in the absence of a principal, most
advantageous market for the specific asset or liability. GAAP
provides for a three-level hierarchy of inputs to valuation
techniques used to measure fair value, defined as
follows:
Level 1
- Inputs that are
quoted prices (unadjusted) for identical assets or liabilities in
active markets that the entity can access.
Level 2
- Inputs other than
quoted prices included within Level 1 that are observable for the
asset or liability, either directly or indirectly, for
substantially the full term of the asset or liability,
including:
■
Quoted prices for
similar assets or liabilities in active markets
■
Quoted prices for
identical or similar assets or liabilities in markets that are not
active
■
Inputs other than
quoted prices that are observable for the asset or
liability
■
Inputs that are
derived principally from or corroborated by observable market data
by correlation or other means
Level 3
- Inputs that are
unobservable and reflect the Company’s own assumptions about
the assumptions market participants would use in pricing the asset
or liability based on the best information available in the
circumstances (e.g., internally derived assumptions surrounding the
timing and amount of expected cash flows). The Company measured the
fair value of contingent seller financed promissory notes presented
on the consolidated balance sheets at fair value on a recurring
basis using significantly unobservable inputs (Level 3) during the
years ended December 31, 2018 and 2017. See Note 4 for additional
information regarding financial liabilities carried at fair
value.
F-14
The
Company monitors the market conditions and evaluates the fair value
hierarchy levels at least quarterly. For any transfers in and out
of the levels of the fair value hierarchy, the Company elects to
disclose the fair value measurement at the beginning of the
reporting period during which the transfer occurred. See Note 4 for
financial assets and liabilities subject to fair value
measurements.
Going Concern Evaluation
The
Company has performed an annual assessment of its ability to
continue as a going concern as required under ASU No. 2014-15,
Presentation of Financial Statements – Going Concern
(“ASU No. 2014-15”) and concluded no additional
disclosures are required.
Financial Instruments
Financial
instruments that potentially subject the Company to credit risk
consist of cash and cash equivalents and accounts
receivable.
Cash and Cash Equivalents
The
Company maintains interest-bearing cash deposits and short-term
overnight investments with large financial institutions. The
Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents for
purposes of these consolidated financial statements.
Interest-bearing cash deposits maintained by financial institutions
in the United States of America are insured by the Federal Deposit
Insurance Corporation (“FDIC”) up to a maximum of
$250,000. At December 31, 2018 and 2017, the Company had deposits
in excess of FDIC limits of approximately $521,878 and $3,786,300,
respectively.
The
Company also maintains deposits with a financial institution in
Ireland that are insured by the Central Bank of Ireland up to a
maximum of €100,000 per financial institution. The Company
also maintains deposits with a financial institution in the United
Kingdom that are insured by Financial Services Compensation Scheme
up to a maximum of £75,000 per financial institution. At
December 31, 2018 and 2017, the Company had foreign bank deposits
in excess of insured limits of approximately $1,021,800 and
$956,500, respectively.
Allowances for Doubtful Accounts
The
Company determines its allowance for doubtful accounts by
considering a number of factors, including the type of customer,
credit worthiness, payment history, length of time accounts
receivable are past due, the Company’s previous loss history,
the customer’s current ability to pay its obligation to the
Company, and the condition of the general economy and the industry
as a whole. The Company writes off accounts receivable when they
become uncollectible, and payments subsequently received on such
receivables are credited to the allowance for doubtful
accounts.
Customer account
balances outstanding longer than the contractual payment terms are
reviewed for collectability and after 90 days are considered past
due unless arrangements were made at the time of the transaction
that specified different payment terms. 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.
F-15
Customer account
balances outstanding longer than 120 days that have not been
settled in accordance with contract terms and for which no firm
payment commitments exist are placed with a third party collection
agency and a reserve is established. 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.
Inventories
Inventories consist
of mobile devices and accessories and identity credential hardware
components. Inventories are valued at the lower of cost, using
first-in, first-out method, or net realizable value. Such amounts
are recorded within other current assets in the consolidated
balance sheet. The Company may record a write-down for inventories
which have become obsolete or are in excess of anticipated demand
or net realizable value. If future demand or market conditions for
our products are less favorable than forecasted or if unforeseen
technological changes negatively impact the utility of inventory,
we may be required to record additional write-downs, which would
adversely affect our gross profit. For the years ended December 31,
2018 and 2017, there were no inventory write-downs.
Property and Equipment
Property and
equipment (including assets acquired under capital lease
arrangements) are stated at historical cost, net of accumulated
depreciation and amortization. Depreciation and amortization
expense is computed using the straight-line method over the
estimated useful lives based upon the classification of the
property and/or equipment or lease period for assets acquired under
capital lease arrangements. The estimated useful lives of the
assets are as follows:
|
|
|
Estimated
|
|
|
|
Useful
Life
|
|
|
|
|
|
Computer hardware
and software
|
|
3-5
years
|
|
Furniture and
fixtures
|
|
5
years
|
|
Mobile
equipment
|
|
3
years
|
The
Company assesses the recoverability of property and equipment by
determining whether the depreciation of property and equipment over
its remaining life can be recovered through projected undiscounted
future cash flows. The amount of property and equipment impairment
if any, is measured based on fair value and is charged to
operations in the period in which property and equipment impairment
is determined by management. As of December 31, 2018 and 2017, the
Company’s management has not identified any material
impairment of its property and equipment.
Goodwill and Other Intangible Assets
The
Company accounts for goodwill and other indefinite-lived intangible
assets in accordance with ASC Topic 350 “
Intangibles
”. Under ASC Topic
350, goodwill and certain indefinite-lived intangible assets are
not amortized but are subject to an annual impairment test, and
between annual tests if indicators of potential impairment
exist.
The
Company evaluates goodwill for impairment annually as of December
31st and between annual tests if events occur or circumstances
change that would more likely than not reduce the fair value of the
reporting unit below its carrying value. The Company has the option
to first assess qualitative factors to determine whether it is more
likely than not that the fair value of a reporting unit is less
than its carrying amount as a basis for determining whether it is
necessary to perform the two-step quantitative goodwill impairment
test or bypass the qualitative assessment for any reporting period
and proceed to performing the first step of the two-step goodwill
impairment test.
F-16
Goodwill impairment
testing involves management judgment, requiring an assessment of
whether the carrying value of the reporting unit can be supported
by its fair value using widely accepted valuation techniques. The
quantitative goodwill impairment test utilizes a two-step approach.
The first step identifies whether there is potential impairment by
comparing the fair value of a reporting unit to the carrying
amount, including goodwill. If the fair value of a reporting unit
is less than its carrying amount, the second step of the impairment
test is required to measure the amount of any impairment
loss.
The
Company uses a combination of the income approach (discounted cash
flow method) and market approach (market multiples). When preparing
discounted cash flow models under the income approach, the Company
uses internal forecasts to estimate future cash flows expected to
be generated by the reporting units. Our internal forecasts are
developed using observable (Level 2) and unobservable (Level 3)
inputs. Actual results may differ from forecasted results. When
preparing the market approach the Company may adjust market
multiples to reflect the Company’s risk profile and other
factors deemed appropriate to properly apply the market
approach.
The
Company uses the expected weighted average cost of capital,
estimated using a capital asset pricing model, to discount future
cash flows for each reporting unit. Our cost of equity estimate is
developed using a combination of observable (Level 2) and
unobservable (Level 3) inputs with appropriate adjustments that
take into consideration our risk profile and other factors deemed
appropriate. The Company believes the discount rates used
appropriately reflect the risks and uncertainties in the financial
markets generally and specifically in the Company’s
internally developed forecasts. Further, to assess the
reasonableness of the valuations derived from the discounted cash
flow models, the Company also analyzes market-based multiples for
similar industries of the reporting unit, where
available.
Product Development
Product
development expenses include payroll, employee benefits, and other
employee related expenses associated with product development.
Product development expenses also include third-party development
and programming costs, subject matter experts, localization costs
incurred to translate software for international markets, and the
amortization of purchased software code and services content. Costs
related to product development are expensed until the point that
technological feasibility is reached, which for our software
products, is generally shortly before the products are commercially
available for release. Once technological feasibility is reached,
such costs are not normally material. To the extent costs are
significant such costs are capitalized and amortized to cost of
revenue over the estimated lives of the solution.
For the
years ended December 31, 2018 and 2017, the Company incurred
product development costs of approximately $229,000, which was
capitalized and $579,800, of which we capitalized approximately
$360,700, respectively. See Note 9 to the consolidated financial
statements for additional information about capitalization of
product development costs.
Income Taxes
The
Company accounts for income taxes in accordance with authoritative
guidance which requires that deferred tax assets and liabilities be
computed based on the difference between the financial statement
and income tax bases of assets and liabilities using the enacted
marginal tax rate. The guidance requires that the net deferred tax
asset be reduced by a valuation allowance if, based on the weight
of available evidence, it is more likely than not that some portion
or all of the net deferred tax asset will not be
realized.
F-17
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.
The
Company recognizes the impact of an uncertain tax position taken or
expected to be taken on an income tax return in the financial
statements at the amount that is more likely than not to be
sustained upon audit by the relevant taxing authority. An uncertain
income tax position will not be recognized in the financial
statements unless it is more likely than not of being sustained
upon audit by the relevant taxing authority.
Basic and Diluted Earnings Per Share (EPS)
Basic
EPS includes no dilution and is computed by dividing net income by
the weighted-average number of common shares outstanding for the
period. Diluted EPS includes the potential dilution that could
occur if securities or other contracts to issue common and
restricted stock were exercised or converted into common and
restricted stock. The number of incremental shares from assumed
conversions of stock options and unvested restricted stock awards
included in the calculation of diluted EPS was calculated using the
treasury stock method. See Note 17 to the consolidated financial
statements for computation of EPS.
Employee Stock-Based Compensation
The
Company accounts for stock-based employee compensation arrangements
under provisions of ASC 718-10. The Company recognizes the cost of
employee stock awards granted in exchange for employee services
based on the grant-date fair value of the award using a
Black-Scholes option-pricing model, net of expected forfeitures.
Those costs are recognized ratably over the vesting period. Each
stock option has an exercise price equal to the market price of the
Company’s common stock on the date of grant and a contractual
term ranging from 3 to 10 years. See Note 16 to the consolidated
financial statements for additional information about stock-based
compensation programs.
Non-Employee Stock-Based Compensation
The
Company accounts for stock-based non-employee compensation
arrangements using the fair value recognition provisions of ASC
505-50, “Equity-Based Payments to Non-Employees”
(formerly known as FASB Statement 123,
Accounting for Stock-Based Compensation
and “Emerging Issues Task Force”
EITF 96-18, Accounting for Equity Instruments
That Are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services).
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 year ended December 31, 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.
F-18
4.
Fair
Value Measurements
The
consolidated financial statements include financial instruments for
which the fair market value may differ from amounts reflected on a
historical basis.
Financial Assets and Financial Liabilities Carried at Other Than
Fair Value
The
Company’s financial instruments include cash equivalents,
accounts receivable, short and long-term debt (except for
contingent promissory notes) and other
financial
instruments associated with the
issuance of the common stock. The carrying values of cash
equivalents and accounts receivable approximate their fair value
because of the short maturity of these instruments and past
evidence indicates that these instruments settle for their carrying
value. The carrying amounts of the Company’s bank borrowings
under its credit facility approximate fair value because the
interest rates reflect current market rates.
5.
Accounts
Receivable and Significant Concentrations
A
significant portion of the Company’s revenue arrangements
consist of firm fixed price contracts with agencies of the U.S.
federal government and 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:
|
|
DECEMBER 31,
|
|
|
|
2018
|
2017
|
|
|
|
|
|
Government
(1)
|
$
7,332,338
|
$
6,055,397
|
|
Commercial
(2)
|
3,863,710
|
2,183,246
|
|
Gross accounts
receivable
|
11,196,048
|
8,238,643
|
|
|
|
|
|
Less: allowances
for doubtful
accounts (3)
|
106,733
|
107,618
|
|
|
|
|
|
Accounts
receivable, net
|
$
11,089,315
|
$
8,131,025
|
(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.
F-19
(3)
During the years ended December 31, 2018 and 2017, the Company
recorded provisions for bad debt expense related to commercial
customers totaling approximately $4,800, and $62,500, respectively.
The Company has not historically maintained a bad debt reserve for
its government customers as it has not experienced material or
recurring bad debt charges and the nature and size of the contracts
has not necessitated the Company’s establishment of such a
bad debt reserve.
Significant Concentrations
Customers
representing ten percent or more of consolidated accounts
receivable are set forth in the table below as of the periods
presented:
|
|
DECEMBER 31,
|
|
|
|
2018
|
2017
|
|
|
As a %
of
|
As a %
of
|
|
Customer Name
|
Receivables
|
Receivables
|
|
|
|
|
|
U.S. Customs Border
Patrol
|
14%
|
12%
|
|
U.S.
Immigration and Customs Enforcement
|
--
|
13%
|
|
U.S.
Federal Air Marshall Service
|
3%
|
10%
|
|
Iron
Bow Technologies
|
15%
|
--
|
Customers
representing ten percent or more of consolidated revenues are set
forth in the table below for each of the periods
presented:
|
|
YEARS
ENDED
|
|
|
|
DECEMBER
31,
|
|
|
|
2018
|
2017
|
|
|
As a %
of
|
As a %
of
|
|
Customer
Name
|
Revenues
|
Revenues
|
|
|
|
|
|
U.S. Immigration
and Customs Enforcement
|
16%
|
17%
|
|
U.S. Customs Border
Patrol
|
11%
|
11%
|
6.
Unbilled
Accounts Receivable and Significant Concentrations
Unbilled accounts
receivable represent revenues earned in connection with products
and/or services delivered for which we are unable to issue a formal
billing to the customer at the balance sheet 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 cybersecurity hardware
and software products delivered but not invoiced at the end of the
reporting period. Unbilled receivables consist of the following by
customer type as of the periods presented below:
|
|
DECEMBER 31,
|
|
|
Customer
Type
|
2018
|
2017
|
|
|
|
|
|
Government
|
$
9,253,586
|
$
7,872,675
|
|
Commercial
|
312,584
|
258,773
|
|
|
|
|
|
Unbilled accounts
receivable
|
$
9,566,170
|
$
8,131,448
|
F-20
Significant Concentrations
Customers
representing ten percent or more of consolidated unbilled accounts
receivable are set forth in the table below as of the periods
presented:
|
|
DECEMBER 31,
|
|
|
|
2018
|
2017
|
|
|
As a %
of
|
As a %
of
|
|
Customer Name
|
Receivables
|
Receivables
|
|
|
|
|
|
U.S.
Department of Homeland Security Headquarters
|
11%
|
11%
|
|
U.S.
Immigration and Customs Enforcement
|
37%
|
27%
|
|
U.S.
Coast Guard
|
11%
|
--
|
|
U.S. Transportation
Safety Administration
|
10%
|
12%
|
7.
Other
Current Assets
Other
current assets consisted of the following as of the periods
presented below:
|
|
DECEMBER 31,
|
|
|
|
2018
|
2017
|
|
|
|
|
|
Inventories
|
$
183,900
|
$
157,058
|
|
Prepaid
rent, insurance and other assets
|
902,786
|
610,886
|
|
|
|
|
|
Total
other current assets
|
$
1,086,686
|
$
767,944
|
8.
Property
and Equipment
Major
classes of property and equipment consisted of the following as of
the periods presented below:
|
|
DECEMBER 31,
|
|
|
|
2018
|
2017
|
|
|
|
|
|
Computer hardware
and software
|
$
2,110,298
|
$
1,943,180
|
|
Furniture and
fixtures
|
333,539
|
296,316
|
|
Leasehold
improvements
|
268,561
|
260,748
|
|
Automobiles
|
178,597
|
188,238
|
|
Gross property and
equipment
|
2,890,995
|
2,688,482
|
|
|
|
|
|
Less: accumulated
depreciation and
amortization
|
1,878,311
|
1,370,062
|
|
|
|
|
|
Property and
equipment, net
|
$
1,012,684
|
$
1,318,420
|
During
the year ended December 31, 2018 and 2017, the Company purchased
for cash property and equipment totaling approximately $261,500 and
$695,600, respectively.
During
the year ended December 31, 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 non-cash loss on disposal of
approximately $176,700 as a result of the move.
F-21
During
the year ended December 31, 2018, there were disposals of fully
depreciated owned property and equipment with related cost and
accumulated depreciation of approximately $129,600. During the year
ended December 31, 2017, there were disposals of fully depreciated
owned property and equipment with related cost and accumulated
depreciation of approximately $398,600 and building and leasehold
improvements with a net book value of approximately
$176,700.
There
were no changes in the estimated useful lives used to depreciate
property and equipment during the years ended December 31, 2018 and
2017.
Assets
under capital lease included in the table above consisted of the
following as of the periods presented below:
|
|
DECEMBER 31,
|
|
|
|
2018
|
2017
|
|
|
|
|
|
Automobiles
|
$
95,600
|
$
100,882
|
|
Computer hardware
and software
|
290,223
|
290,223
|
|
Gross leased
property and equipment
|
$
385,823
|
$
391,105
|
|
Less:
accumulated amortization
|
115,570
|
20,890
|
|
|
|
|
|
Capital
lease assets, net
|
$
270,253
|
$
370,215
|
During
the years ended December 31, 2018, there were no new capital leases
recorded. During the year ended December 31, 2017, the Company
recorded capital lease assets and related obligations of
approximately $391,100, of which approximately $93,300 relates to
two automobiles under capital lease arrangements and the remainder
relates to computer hardware and software for our internal customer
facing infrastructure.
During
the year ended December 31, 2018, the Company did not sell or
dispose of any assets under capital leases
.
During the year ended December 31, 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
lease property) was as follows for the periods presented
below:
|
|
YEARS ENDED
|
|
|
|
DECEMBER
31,
|
|
|
|
2018
|
2017
|
|
|
|
|
|
Owned property and
equipment depreciation
|
$
429,605
|
$
400,837
|
|
Leased
property and equipment amortization
|
121,700
|
13,800
|
|
|
|
|
|
Total property and
equipment depreciation and
|
|
|
|
amortization
|
$
551,305
|
$
414,637
|
F-22
9.
Intangible
Assets
The
Company’s intangible assets are comprised of purchased
intangibles consisting of customer relationships, channel
relationships, telecommunications software, trade names and
trademarks and non-compete agreements. Intangible assets acquired
in connection with a business combination are valued at fair value
and amortized on a straight-line basis over the expected useful
life which may range from three (3) to ten (10) years or more
depending on the intangible asset characteristics.
The
Company’s intangible assets also include internally developed
software used in the sales and delivery of its information
technology service offerings. The Company capitalizes certain
internal costs related to software development to deliver its
information technology services including but not limited to its
Intelligent Telecommunications Management System (ITMS™),
Public Key Infrastructure (PKI) and Optimiser Telecom Data
Intelligence (TDI™) applications. Significant development
costs are capitalized from the point of demonstrated technological
feasibility until the point in time that the product is available
for general release to customers. Once the product is available for
general release, capitalized costs are amortized based on units
sold, or on a straight-line basis generally over the expected
functional life which may range from two (2) to five (5)
years.
The
following tables summarize purchased and internally developed
intangible assets subject to amortization as of the periods
presented below:
|
|
DECEMBER 31,
2018
|
|||
|
|
|
|
|
Weighted
|
|
|
|
|
|
Average
|
|
|
Gross
Carrying
|
Accumulated
|
Net
Book
|
Amortization
|
|
|
Amount
|
Amortization
|
Value
|
Period
|
|
|
|
|
|
|
|
Customer
Relationships
|
$
1,980,000
|
$
(1,732,500
)
|
$
247,500
|
8
|
|
Channel
Relationships
|
2,628,080
|
(817,625
)
|
1,810,455
|
5
|
|
Internally
Developed Software
|
1,476,623
|
(630,927
)
|
845,696
|
3
|
|
Trade
Name and Trademarks
|
290,472
|
(90,370
)
|
200,102
|
5
|
|
|
|
|
|
|
|
|
$
6,375,175
|
$
(3,271,422
)
|
$
3,103,753
|
|
|
|
DECEMBER 31,
2017
|
|||
|
|
|
|
|
Weighted
|
|
|
|
|
|
Average
|
|
|
Gross
Carrying
|
Accumulated
|
Net
Book
|
Amortization
|
|
|
Amount
|
Amortization
|
Value
|
Period
|
|
|
|
|
|
|
|
Customer
Relationships
|
$
1,980,000
|
$
(1,485,000
)
|
$
495,000
|
8
|
|
Channel
Relationships
|
2,628,080
|
(642,420
)
|
1,985,660
|
5
|
|
Internally
Developed Software
|
3,181,794
|
(2,246,650
)
|
935,144
|
3
|
|
Cybersecurity
Authority to Operate
|
444,662
|
(408,427
)
|
36,235
|
3
|
|
Trade
Name and Trademarks
|
290,472
|
(71,005
)
|
219,467
|
5
|
|
|
|
|
|
|
|
|
$
8,525,008
|
$
(4,853,502
)
|
$
3,671,506
|
|
F-23
Purchased Intangibles
For the
years ended December 31, 2018 and 2017, the Company did not
recognize any acquisition related intangible assets.
For the
year ended December 31, 2018, the Company disposed of fully
amortized purchased intangible assets with a historical cost and
accumulated amortization of approximately $2,374,700. For the year
ended December 31, 2017, there were no disposals or sales of
purchased intangible assets.
Internally Developed
For the
year ended December 31, 2018, the Company recorded capitalized
software costs related to our capitalized internally developed
software costs of approximately $224,900 related to costs
associated with our next generation TDI™
application.
For the
year ended December 31, 2017 the Company recorded capitalized
software costs related to our capitalized internally developed
software costs of approximately $385,000 related to costs
associated with our next generation TDI™
application.
The
total weighted average remaining life of purchased and internally
developed intangible assets is approximately 5.5 years and 1.5
years, respectively, at December 31, 2018.
The
following table summarizes the estimated future amortization by
purchased intangible asset type for fiscal years ending December
31:
|
Intangible Asset
Type
|
2019
|
2020
|
2021
|
2022
|
2023
|
Thereafter
|
Total
|
|
|
|
|
|
|
|
|
|
|
Customer
Relationships
|
$
247,500
|
$
-
|
$
-
|
$
-
|
$
-
|
$
-
|
$
247,500
|
|
Channel
Relationships
|
175,205
|
175,205
|
175,205
|
175,205
|
175,205
|
934,430
|
1,810,455
|
|
Internally
Developed Software
|
149,002
|
321,961
|
272,197
|
102,535
|
-
|
-
|
845,696
|
|
Trade
Name and Trademarks
|
19,365
|
19,365
|
19,365
|
19,365
|
19,365
|
103,278
|
200,102
|
|
|
|
|
|
|
|
|
|
|
|
$
591,072
|
$
516,531
|
$
466,767
|
$
297,105
|
$
194,570
|
$
1,037,708
|
$
3,103,753
|
The
aggregate amortization expense recorded was approximately $756,000
and $1,078,600 for the years ended December 31, 2018 and 2017,
respectively.
10.
Goodwill
There
were no changes in goodwill during the years ended December 31,
2018 and 2017. As of December 31, 2018 and 2017, goodwill was not
impaired and there were no accumulated impairment
losses.
F-24
11.
Other
Current Liabilities
Accrued
expenses consisted of the following as of the periods presented
below:
|
|
DECEMBER 31,
|
|
|
|
2018
|
2017
|
|
|
|
|
|
Carrier service
costs
|
$
8,476,110
|
$
7,339,150
|
|
Salaries and
payroll taxes
|
1,308,726
|
1,259,331
|
|
Inventory
purchases, consultants and other costs
|
913,038
|
762,770
|
|
Severance
costs
|
1,634
|
328,109
|
|
U.S. income tax
payable
|
8,550
|
8,850
|
|
Foreign income tax
payable (receivable)
|
8,380
|
(1,860
)
|
|
Contingent
consideration (Note 3)
|
-
|
100,000
|
|
|
|
|
|
Total
accrued expenses
|
$
10,716,438
|
$
9,796,350
|
12.
Line
of Credit
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. As of December 31, 2018, the Company was in compliance with
all covenants.
The
available amount under the working capital line of credit is
subject to a borrowing base, which is equal to the lesser of (i)
$5.0 million or (ii) 70% of the net unpaid balance of the
Company’s eligible accounts receivable. The interest rate for
the working capital line of credit is the Wall Street Journal prime
rate plus 1.0%. The facility is secured by a first lien security
interest on all of the Company’s personal property, including
its accounts receivable, general intangibles, inventory and
equipment maintained in the United States.
The
Loan Agreement requires that the Company (i) maintain a minimum
adjusted tangible net worth of at least $2.0 million for each
quarter and (ii) maintain a current ratio of 1.10:1 tested
quarterly.
Under
the current credit facility with Access National Bank the Company
was advanced and repaid approximately $14.0 million during the year
ended December 31, 2018.
As of
December 31, 2018, the Company was eligible to borrow up to $4.9
million under the borrowing base formula.
F-25
13.
Long
Term Debt and Other Term Obligations
Long term debt and
other obligations consisted of the following as of the periods
presented below:
|
|
DECEMBER 31, 2018
|
DECEMBER 31,
2017
|
||||
|
|
Current
|
Non-Current
|
|
Current
|
Non-Current
|
|
|
|
Portion
|
Portion
|
Total
|
Portion
|
Portion
|
Total
|
|
|
|
|
||||
|
Capital
Lease Obligations (1)
|
$
107,325
|
$
122,040
|
$
229,365
|
$
101,591
|
$
232,109
|
$
333,700
|
|
|
|
|
|
|
|
|
|
Deferred
Rent Liability (2)
|
46,332
|
73,952
|
120,284
|
70,021
|
78,336
|
148,357
|
|
Short
term installment borrowings (3)
|
145,931
|
-
|
145,931
|
133,250
|
-
|
133,250
|
|
Total
Other Term Obligations
|
$
192,263
|
$
73,952
|
$
266,215
|
$
203,271
|
$
78,336
|
$
281,607
|
|
|
|
|
|
|
|
|
|
Total
Capital Leases and Other
|
|
|
|
|
|
|
|
Term
Obligations
|
$
299,588
|
$
195,992
|
|
$
304,862
|
$
310,445
|
|
(1) As
more fully described in Note 8, the Company entered into capital
leases to acquire computer hardware and software for its customer
facing infrastructure and two new automobiles that expire between
2020 and 2021.
(2) The
Company has two significant 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. During the
years ended December 31, 2018 and 2017, the Company financed
approximately $195,200 and $191,400, respectively.
Future
repayments on long-term and other obligations are as follows for
fiscal years ending December 31:
|
|
Capital
|
Other Term
|
|
|
|
Leases
|
Obligations
|
Total
|
|
|
|
|
|
|
2019
|
$
107,325
|
$
192,263
|
$
299,588
|
|
2020
|
116,208
|
10,224
|
126,432
|
|
2021
|
5,832
|
1,251
|
7,083
|
|
2022
|
-
|
5,566
|
5,566
|
|
2023
|
-
|
9,880
|
9,880
|
|
Thereafter
|
-
|
47,031
|
47,031
|
|
|
|
|
|
|
|
$
229,365
|
$
266,215
|
$
495,580
|
The
following sets forth the Company’s future minimum payment
obligations under capital lease agreements for fiscal years ending
December 31:
|
2019
|
$
121,421
|
|
2020
|
121,421
|
|
2021
|
6,042
|
|
|
|
|
Total principal and
interest payments
|
248,884
|
|
Less:
portion representing interest
|
19,519
|
|
Present value of
minimum lease payments
|
|
|
under capital
leases
|
229,365
|
|
Less:
current portion
|
107,325
|
|
Capital
leases, net of current portion
|
$
122,040
|
14.
Income
Taxes
During
the fourth quarter ended December 31, 2018, the Company recorded an
adjustment of $1.2 million to deferred tax liabilities related to
amortization of goodwill that erroneously had not been established
in prior periods. This adjustment was a non-cash expense and
increased tax expense and net loss by $1.2 million for the fourth
quarter and year ended December 31, 2018. The Company determined
that the adjustment was not material to the consolidated financial
statements for any previously reported annual or interim
periods.
F-26
Income
tax provision (benefit) is as follows for the years
ended:
|
|
DECEMBER
31,
|
|
|
|
2018
|
2017
|
|
|
|
|
|
Current
provision
|
|
|
|
State
|
$
10,000
|
$
10,000
|
|
Foreign
|
55,113
|
29,586
|
|
Total
|
65,113
|
39,586
|
|
|
|
|
|
Deferred provision
(benefit)
|
|
|
|
Federal
|
633,073
|
-
|
|
State
|
514,220
|
-
|
|
Foreign
|
(19,080
)
|
(1,619
)
|
|
Total
|
1,128,213
|
(1,619
)
|
|
|
|
|
|
Income
tax provision
|
$
1,193,326
|
$
37,967
|
Income
tax provision (benefit) effective rates, which differs from the
federal and state statutory rate as follows for the years
ended:
|
|
DECEMBER
31,
|
|
|
|
2018
|
2017
|
|
|
|
|
|
Statutory federal
income tax rate
|
21.0%
|
34.0%
|
|
State, net of
federal benefit
|
-2.1%
|
-0.3%
|
|
Non-deductible
expenses
|
5.4%
|
-5.4%
|
|
Change in valuation
allowance
|
-200.1%
|
6.9
|
|
Foreign rate
differential
|
3.1%
|
0.9%
|
|
Return to accrual
difference true-ups
|
0.6%
|
-0.6%
|
|
Other
|
6.9%
|
3.8%
|
|
Deferred tax
adjustment and true-up
|
-84.1%
|
69.2%
|
|
Change
in federal statutory rate
|
0.0%
|
-109.5%
|
|
Combined effective
tax rate
|
-249.4%
|
-1.0%
|
The tax
effects of temporary differences that give rise to significant
portions of the Company’s deferred tax assets (liabilities)
consisted of the following:
|
|
DECEMBER
31,
|
|
|
|
2018
|
2017
|
|
Deferred tax
assets:
|
|
|
|
Net operating loss
carryforwards
|
$
10,513,224
|
$
10,526,231
|
|
Alternative minimum
tax credit
|
45,650
|
45,650
|
|
Share-based
compensation
|
536,223
|
358,360
|
|
Intangible
amortization
|
565,013
|
740,685
|
|
Other
assets
|
423,394
|
233,447
|
|
|
|
|
|
Total deferred tax
assets
|
12,083,504
|
11,904,373
|
|
Less:
valuation allowance
|
(10,507,891
)
|
(9,550,279
)
|
|
Total
deferred tax assets, net
|
1,575,613
|
2,354,094
|
|
|
|
|
|
Deferred tax
liabilities:
|
|
|
|
Goodwill
amortization
|
2,293,533
|
2,203,154
|
|
Depreciation
|
345,136
|
86,506
|
|
Foreign intangible
amortization
|
447,811
|
447,811
|
|
Other
liabilities
|
12,643
|
8,852
|
|
|
|
|
|
Total
deferred tax liabilities
|
3,099,123
|
2,746,323
|
|
|
|
|
|
Net
deferred tax liability
|
$
(1,523,510
)
|
$
(392,229
)
|
F-27
As of
December 31, 2018, 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 2036. 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.
Changes
in the valuation allowance for the years ended were as
follows:
|
|
DECEMBER
31,
|
|
|
|
2018
|
2017
|
|
|
|
|
|
Beginning
balance
|
$
(9,550,279
)
|
$
(9,791,680
)
|
|
(Increases)
decreases
|
(957,612
)
|
241,401
|
|
|
|
|
|
Ending
balance
|
$
(10,507,891
)
|
$
(9,550,279
)
|
The
Company’s valuation allowance predominantly consisted of
domestic net operating loss carryforwards and certain state net
operating loss carryforwards. 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.
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 for tax years 2003 and forward.
The Company may be subject to examinations by 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 December 31, 2018, the Company is currently not
under examination by the IRS, any state or foreign tax
jurisdiction. The Company did not have any unrecognized tax
benefits at either December 31, 2018 or 2017. In the future, any
interest and penalties related to uncertain tax positions will be
recognized in income tax expense.
15.
Stockholders’
Equity
Preferred Stock
The
Company’s Certificate of Incorporation authorizes the Company
to issue up to 10,000,000 shares of preferred stock, $0.001 par
value per share. Under the terms of the Company’s Certificate
of Incorporation, the board of directors is authorized, subject to
any limitations prescribed by law, without stockholder approval, to
issue such shares of preferred stock in one or more series. Each
such series of preferred stock shall have such rights, preferences,
privileges and restrictions, including voting rights, dividend
rights, conversion rights, redemption privileges and liquidation
preferences, as shall be determined by the board of directors. In
November 2004, the Company filed a certificate of designation
designating 2,045,714 shares of the Company’s preferred stock
as shares of Series A Convertible Preferred Stock, which shares
were later issued. All of the shares of Series A Convertible
Preferred Stock that were issued was converted into common stock
and may not be reissued. Accordingly, as of December 31, 2018,
there were 7,954,286 undesignated shares of preferred stock
remaining available for issuance. There were no issuances of
preferred stock during the year ended December 31,
2018.
F-28
Common Stock
The
Company is authorized to issue 110,000,000 shares of common stock,
$.001 par value per share. As of December 31, 2018, there were
84,112,446 shares issued and outstanding (including 300,000
restricted shares not vested).
Common Stock Issuances - Employee Stock Option
Exercises
Shares
of common stock issued as a result of stock option exercises and
realized gross proceeds for the year ended December 31, 2018 were
100,000 and $43,900, respectively. See Note 16 for additional
information regarding stock option plans.
16.
Stock
Options and Award Programs
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
The
Company estimates the fair value of nonqualified stock awards using
a Black-Scholes Option Pricing model (“Black-Scholes
model”). The fair value of each stock award is estimated on
the date of grant using a Black-Scholes option pricing model
(“Black-Scholes model”), which requires an assumption
of dividend yield, risk free interest rates, volatility, forfeiture
rates and expected option life. The risk-free interest rates are
based on the U.S. Treasury yield for a period consistent with the
expected term of the option in effect at the time of the grant.
Expected volatilities are based on the historical volatility of our
common stock over the expected option term. The expected term of
options granted is based on analyses of historical employee
termination rates and option exercises.
F-29
Restricted Stock Awards
A
summary of RSA activity as of December 31, 2018 and 2017, and
changes for the years then ended are set forth below:
|
|
2018
|
|
2017
|
|
|
NON-VESTED
AWARDS
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested awards
outstanding, January 1,
|
-
|
|
250,000
|
|
|
Granted
(+)
|
980,851
|
(1
)
|
300,000
|
(2
)
|
|
Cancelled
(-)
|
-
|
|
150,000
|
(3
)
|
|
Vested
(-)
|
680,851
|
(1
)
|
400,000
|
(3
)(4)(5)
|
|
Non-vested awards
outstanding, December 31,
|
300,000
|
|
-
|
|
|
|
|
|
|
|
|
Weighted-average
remaining contractual life (in years)
|
2.01
|
|
-
|
|
|
|
|
|
|
|
|
Unamortized RSA
compensation expense
|
$
136,310
|
|
$
-
|
|
|
|
|
|
|
|
|
Aggregate intrinsic
value of RSAs non-vested, December 31
|
$
126,000
|
|
$
-
|
|
|
|
|
|
|
|
|
Aggregate intrinsic
value of RSAs vested, December 31
|
$
320,000
|
|
$
244,000
|
|
(1) During
the year ended December 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.
(2)
During the year ended December 31, 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.
(3) In
connection with the resignation of Jeff Nyweide (former Chief
Executive Officer) on June 30, 2017, 150,000 shares immediately
vested and the remaining 150,000 were cancelled. As a result of
share withholdings to satisfy tax liabilities, the Company issued
102,525 shares of the Company’s common stock to Mr. Nyweide
and recognized a non-cash stock based compensation expense of
approximately $94,400 in conjunction with this acceleration event.
The Company's payment of the tax liability associated with this
accelerated vesting was recorded as a cash flow from financing
activity on the consolidated statements of cash flows.
(4)
During the year ended December 31, 2017, 125,000 RSAs vested upon
expiration of the employment agreement between Steve L. Komar (the
former Chief Executive Officer) and the Company on January 3, 2017.
On January 3, 2017, the Company issued 84,188 shares of the
Company’s common stock. Mr. Komar received less than 125,000
shares vested because he elected to have 40,812 of such shares
withheld in satisfaction of the corresponding tax liability of
approximately $46,000. The Company's payment of this tax liability
was recorded as a cash flow from financing activity on the
consolidated statements of cash flows.
(5) In
connection with the resignation of James McCubbin (former Chief
Financial Officer) on October 31, 2017, 125,000 shares immediately
vested. As a result of share withholdings to satisfy tax
liabilities, the Company issued 84,750 shares of the
Company’s common stock to Mr. McCubbin and recognized a
non-cash stock based compensation expense of approximately $1,100
in conjunction with this acceleration event. The Company's payment
of the tax liability associated with this accelerated vesting was
recorded as a cash flow from financing activity on the consolidated
statements of cash flows.
F-30
Non-Qualified Stock Option Awards
Option
pricing model assumptions for NQSO awards granted were valued using
the following assumptions for the years then ended as set forth
below:
|
|
|
|
YEAR ENDED DECEMBER 31, 2018
|
|
YEAR ENDED
DECEMBER 31, 2017
|
||||||
|
|
|
|
Non-Qualified Stock Option Awards
|
|
Non-Qualified
Stock Option Awards
|
||||||
|
|
|
|
Employees
|
Directors
|
Non-Employees
|
Total
|
|
Employees
|
Directors
|
Non-Employees
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
granted
|
|
|
100,000
|
--
|
50,000
|
150,000
|
|
3,090,000
|
350,000
|
75,000
|
3,515,000
|
|
Expected
dividend yield
|
|
|
0%
|
--
|
0%
|
0%
|
|
0%
|
0%
|
0%
|
0%
|
|
Expected
volatility
|
|
|
65.2%-66.7%
|
--
|
69.5%
|
65.2%-6.95%
|
|
68.2%-74.2%
|
69.6% -
70.1%
|
72.5%
|
68.2%-72.5%
|
|
Risk-free
interest rate
|
|
|
2.72% - 2.73%
|
--
|
1.0%
|
1.0%-2.73%
|
|
1.8% -
2.1%
|
1.7% -
2.0%
|
1.7%
|
1.7%-2.1%
|
|
Forfeiture
rate
|
|
|
4.43% - 4.81%
|
--
|
10.3%
|
4.43%-10.3%
|
|
4.6% -
6.8%
|
4.2% -
5.9%
|
6.6%
|
4.2%-6.8%
|
|
Expected
life
|
|
|
5 years
|
--
|
3 years
|
3-5 years
|
|
5
years
|
7
years
|
3
years
|
3-7
years
|
A
summary of NQSO activity as of December 31, 2018 and 2017, and
changes during the years then ended are set forth
below:
|
|
2018
|
2017
|
||||
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
Average
|
|
|
Average
|
|
|
|
|
Grant Date
|
|
|
Grant
Date
|
|
NON-VESTED AWARDS
|
Shares
|
|
Fair Value
|
Shares
|
|
Fair
Value
|
|
|
|
|
|
|
|
|
|
Non-vested
balances, January 1,
|
2,685,004
|
|
$
0.35
|
920,000
|
|
$
0.59
|
|
Granted
(+)
|
150,000
|
(1
)
|
$
0.25
|
3,515,000
|
(2
)
|
$
0.36
|
|
Cancelled
(-)
|
50,000
|
(3
)
|
$
0.32
|
860,000
|
(3
)
|
$
0.68
|
|
Vested/Excercised
(-)
|
717,501
|
|
$
0.30
|
889,996
|
|
$
0.36
|
|
Non-vested
balances, December 31,
|
2,067,503
|
|
$
0.36
|
2,685,004
|
|
$
0.35
|
|
|
2018
|
2017
|
||||
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
Average
|
|
|
Average
|
|
OUTSTANDING AND EXERCISABLE AWARDS
|
Shares
|
|
Exercise Price
|
Shares
|
|
Exercise
Price
|
|
|
|
|
|
|
|
|
|
Awards
outstanding, January 1,
|
4,173,334
|
|
$
0.60
|
2,090,668
|
|
$
0.86
|
|
Granted
(+)
|
150,000
|
(1
)
|
$
0.50
|
3,515,000
|
(2
)
|
$
0.59
|
|
Cancelled
(-)
|
210,000
|
(3
)
|
$
0.83
|
1,402,334
|
(3
)
|
$
0.97
|
|
Exercised
(-)
|
100,000
|
(4
)
|
$
0.44
|
30,000
|
(4
)
|
$
0.57
|
|
Awards
outstanding, December 31,
|
4,013,334
|
|
$
0.58
|
4,173,334
|
|
$
0.60
|
|
|
|
|
|
|
|
|
|
Awards
vested and expected to vest,
|
|
|
|
|
|
|
|
December
31,
|
3,422,491
|
|
$
0.58
|
3,577,089
|
|
$
0.60
|
|
|
|
|
|
|
|
|
|
Awards
outstanding and exercisable,
|
|
|
|
|
|
|
|
December
31,
|
1,945,831
|
|
$
0.56
|
1,488,330
|
|
$
0.61
|
(1)
During the year ended December 31, 2018,
there
were non-qualified stock option grants of 150,000, as further
described below:
●
Employees.
The Company granted 100,000
non-qualified stock options as part of an additional compensation
to align a key employee with the Company’s long term
financial goals.
●
Non-Employees
. 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.
F-31
(2)
During the year ended December 31, 2017,
there
were non-qualified stock option grants of 3,515,000, as further
described below:
●
Director Grants
. The Company granted
250,000 non-qualified stock options, of which 50,000 options were
granted to each director as part of their annual board retainer
fee.
●
Non-Director Grants
. The Company
granted 3,265,000 non-qualified stock options, of which i)
2,665,000 stock options were awarded as part of additional
compensation plan to align key employees with the Company’s
long term financial goals, and ii) 600,000 stock options were
awarded to the Company’s former CEO.
(3)
During the year ended December 31, 2018, there were 210,000
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 year
ended December 31, 2018, there were 417,000 that were cancelled, of
which 230,000 were cancelled due to termination of employment and
the remainder expired unexercised at the end of the option
term.
(4)
The total intrinsic value of stock options exercised during the
years ended December 31, 2018 and 2017 was approximately $10,000
and $9,000, respectively
There
was no intrinsic value associated with options outstanding,
exercisable and expected to vest as of December 31, 2018 as the
stock price was below the lowest option exercise price. Aggregate
intrinsic value represents total pretax intrinsic value (the
difference between WidePoint’s closing stock price on
December 31, 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
December 31, 2018. The intrinsic value will change based on the
fair market value of WidePoint’s stock.
The
weighted-average remaining contractual life of the non-qualified
stock options outstanding, exercisable, and vested and expected to
vest was 4.1 years, 3.9 years and 3.9 years, respectively, as of
December 31, 2018.
Stock Compensation Expense
Share-based
compensation recognized under ASC 718-10 (including restricted
stock awards) represents both stock options based expense and stock
grant expense. The Company recognized share-based compensation
expense for the years then ended December 31 as set forth
below:
|
|
YEAR ENDED DECEMBER 31, 2018
|
YEAR ENDED
DECEMBER 31, 2017
|
||||||
|
|
Shared-Based Compensation Expense
|
Shared-Based
Compensation Expense
|
||||||
|
|
Employees
|
Directors
|
Non-Employees
|
Total
|
Employees
|
Directors
|
Non-Employees
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Restricted
stock compensation expense
|
$
67,690
|
$
320,000
|
$
-
|
$
387,690
|
$
157,857
|
$
-
|
$
-
|
$
157,857
|
|
Non-qualified
option stock compensation expense
|
291,625
|
-
|
4,089
|
295,714
|
118,964
|
103,335
|
7,054
|
229,353
|
|
|
|
|
|
|
|
|
|
|
|
Total
share-based compensation before taxes
|
$
359,315
|
$
320,000
|
$
4,089
|
$
683,404
|
$
276,821
|
$
103,335
|
$
7,054
|
$
387,210
|
F-32
At
December 31, 2018, the Company had approximately $613,800 of total
unamortized compensation expense, net of estimated forfeitures,
related to NQSOs that will be recognized over the weighted average
period of 2.2 years.
17.
Earnings Per Common Share (EPS)
The
computations of basic and diluted EPS for the years ended were as
follows:
|
|
YEARS ENDED
|
|
|
|
DECEMBER 31,
|
|
|
|
2018
|
2017
|
|
|
|
|
|
Basic Loss Per Share Computation:
|
|
|
|
Net
loss
|
$
(1,456,476
)
|
$
(3,533,937
)
|
|
Weighted
average number of common shares
|
83,274,171
|
82,911,730
|
|
Basic
Loss Per Share
|
$
(0.02
)
|
$
(0.04
)
|
|
|
|
|
|
Diluted Loss Per Share Computation:
|
|
|
|
Net
loss
|
$
(1,456,476
)
|
$
(3,533,937
)
|
|
|
|
|
|
Weighted
average number of common shares
|
83,274,171
|
82,911,730
|
|
Incremental
shares from assumed conversions
|
|
|
|
of
stock options
|
-
|
-
|
|
Adjusted
weighted average number of
|
|
|
|
common
shares
|
83,274,171
|
82,911,730
|
|
|
|
|
|
Diluted
Loss Per Share
|
$
(0.02
)
|
$
(0.04
)
|
The
dilutive effect of unexercised stock options and unvested
restricted stock awards outstanding under the Company's stock plan
excludes 4,313,334 and 4,173,334 of options from the computation of
EPS for the years ended December 31, 2018 and 2017,
respectively.
18.
Accumulated Other Comprehensive Loss
Changes
in the Company’s cumulative foreign currency translation
adjustments due to translation of its foreign subsidiaries’
Euro currency financial statements into the Company’s
reporting currency were as and for the periods presented
below:
|
|
YEARS
ENDED
|
|
|
|
DECEMBER 31,
|
|
|
|
2018
|
2017
|
|
|
|
|
|
Balances, January
1
|
$
(122,461
)
|
$
(309,369
)
|
|
|
|
|
|
Net foreign currency
translation (loss) gain
|
(64,024
)
|
186,908
|
|
|
|
|
|
Balances, December
31
|
$
(186,485
)
|
$
(122,461
)
|
19.
Commitments and Contingencies
Operating Lease Commitments
The
Company entered into property and equipment leasing arrangements
that expire at various times between August 2019 and March 2029,
with optional renewal periods. Minimum lease payments range from
$1,000 to $28,000 per month and may require additional rent to
cover a proportionate share of taxes, maintenance, insurance and
other shared expenses. Rents are generally increased annually by
fixed amounts, subject to certain maximum amounts defined within
individual agreements. Base rent expense under these operating
leases for the years ended December 31, 2018 and 2017 were
approximately $909,200 and $877,900, respectively.
F-33
Future
minimum payments by year (excluding related party leases) required
under remaining lease obligations consist of the following for
fiscal years ending December 31 by geographic region:
|
|
North
|
|
|
|
|
America
|
Europe
|
Total
|
|
|
|
|
|
|
2019
|
$
623,000
|
$
186,000
|
$
809,000
|
|
2020
|
481,000
|
186,000
|
667,000
|
|
2021
|
499,000
|
186,000
|
685,000
|
|
2022
|
527,000
|
186,000
|
713,000
|
|
2023
|
471,000
|
46,000
|
517,000
|
|
Thereafter
|
2,660,000
|
-
|
2,660,000
|
|
|
|
|
|
|
Total
|
$
5,261,000
|
$
790,000
|
$
6,051,000
|
Employment Agreements
The
Company has employment agreements with certain executives that set
forth compensation levels and provide for severance payments in
certain instances.
Litigation
The
Company is not involved in any material legal
proceedings.
20.
Revenue by Service Type, Customer Type and by Geographic
Region
The
Company recognized revenues by the following broad service
types:
|
|
YEARS
ENDED
|
|
|
|
DECEMBER
31,
|
|
|
|
2018
|
2017
|
|
|
|
|
|
Carrier
Services
|
$
50,050,000
|
$
45,003,335
|
|
Managed
Services:
|
|
|
|
Managed
Service Fees
|
25,232,019
|
22,810,476
|
|
Billable
Service Fees
|
1,838,018
|
3,257,840
|
|
Reselling
and Other Services
|
6,558,859
|
4,812,595
|
|
|
|
|
|
|
$
83,678,896
|
$
75,884,246
|
The
Company recognized revenues for the following customer types as set
forth below:
|
|
YEARS
ENDED
|
|
|
|
DECEMBER
31,
|
|
|
|
2018
|
2017
|
|
|
|
|
|
U.S.
Federal Government
|
$
66,346,922
|
$
58,625,389
|
|
U.S.
State and Local Governments
|
445,855
|
394,704
|
|
Foreign
Governments
|
148,155
|
193,565
|
|
Commercial
Enterprises
|
16,737,964
|
16,670,588
|
|
|
|
|
|
|
$
83,678,896
|
$
75,884,246
|
The
Company recognized revenues from customers in the following
geographic regions:
|
|
YEARS
ENDED
|
|
|
|
DECEMBER
31,
|
|
|
|
2018
|
2017
|
|
|
|
|
|
North
America
|
$
78,702,974
|
$
71,357,018
|
|
Europe
|
4,975,922
|
4,527,228
|
|
|
|
|
|
|
$
83,678,896
|
$
75,884,246
|
F-34
TABLE OF CONTENTS
Part IItem 1. BusinessItem 1A. Risk FactorsItem 1B. Unresolved Staff CommentsItem 2. PropertiesItem 3. Legal ProceedingsItem 4. Mine Safety DisclosuresPart IIItem 5. Market For Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases Of Equity SecuritiesItem 6. Selected Financial DataItem 7. Management's Discussion and Analysis Of Financial Condition and Results Of OperationsItem 7A. Quantitative and Qualitative Disclosures About Market RiskItem 8. Financial Statements and Supplemental DataItem 9A. Controls and ProceduresPart IIIItem 10. Directors, Executive Officers and Corporate GovernanceItem 11. Executive CompensationItem 12. Security Ownership Of Certain Beneficial Owners and Management and Related Stockholder MattersItem 13. Certain Relationships and Related Transactions, and Director IndependenceItem 14. Principal Accounting Fees and ServicesPart IVItem 15. Exhibits and Financial Statement Schedules