SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 000-23967
WIDEPOINT CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 52-2040275
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
One Lincoln Centre, 18W140 Butterfield Road, Suite 1100, Oakbrook
Terrace, Ill 60181
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (630) 629-0003
One Mid America Plaza, Suite 403, Oakbrook Terrace, Ill 60181 Former name,
former address and former fiscal year, if changed since last report.
Indicate by check 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 [X] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares
outstanding of each of the issuer's classes of common stock, as of November 11,
2002: 15,579,913 shares of common stock, $.001 par value per share.
WIDEPOINT CORPORATION
INDEX
Page No.
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets as of September 30, 2002
(unaudited) and December 31, 2001 (unaudited) 1
Condensed Consolidated Statements of Operations for the three
and nine months ended September 30, 2002 and 2001 (unaudited) 2
Condensed Consolidated Statements of Cash Flows for the three
and nine months ended September 30, 2002 and 2001 (unaudited) 3
Notes to Condensed Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 16
Item 4. Controls and Procedures 16
Part II. OTHER INFORMATION
Item 5. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
CERTIFICATIONS 19-20
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
WIDEPOINT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
September 30, December 31,
2002 2001
---------------- ------------------
ASSETS
Current assets:
Cash and cash equivalents $ 1,109,893 $ 1,563,544
Accounts receivable,
net of allowance of $23,849 and $30,000, respectively 524,625 459,983
Prepaid expenses and other current assets 150,025 47,941
---------------- ------------------
Total current assets 1,784,543 2,071,468
Property and equipment, net 16,716 63,758
Other assets 177,337 58,113
---------------- ------------------
Total assets $ 1,978,596 $ 2,193,339
================ ==================
LIABILITIES & SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 70,610 $ 110,339
Accrued expenses 221,786 447,159
Short term notes payable 27,500 -
Current portion of capital lease obligation 10,079 18,009
---------------- ------------------
Total current liabilities 329,975 575,507
---------------- ------------------
Long-term capital lease obligation, net of current portion - 6,421
---------------- ------------------
Total liabilities 329,975 581,928
Shareholders' equity
Preferred stock, $0.001 par value, 10,000,000 shares
authorized,
None issued and outstanding - -
Common stock, $0.001 par value, 50,000,000 shares authorized,
15,579,913 and 12,984,913 shares issued and
outstanding as of September 30, 2002 and
December 31, 2001, respectively. 15,580 12,985
Stock warrants 140,000 140,000
Additional paid-in capital 42,110,539 41,931,484
Accumulated deficit (40,617,498) (40,473,058)
---------------- ------------------
Total shareholders' equity 1,648,621 1,611,411
---------------- ------------------
Total liabilities & shareholders' equity $ 1,978,596 $ 2,193,339
================ ==================
The accompanying notes are an integral part of these statements.
1
WIDEPOINT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- --------------------
2002 2001 2002 2001
---- ---- ---- ----
Revenues $ 916,781 $ 1,252,994 $ 2,618,676 $ 5,098,733
Operating expenses:
Cost of sales 657,518 632,633 1,832,353 2,668,738
Sales and marketing 130,735 103,383 411,707 532,032
General and administrative 121,748 506,937 484,132 2,021,771
Depreciation and amortization 10,017 135,666 47,042 410,376
------------ ------------ ------------ ------------
Income (loss) from operations (3,237) (125,625) (156,558) (534,184)
Other income (expenses), net 3,872 9,404 12,118 31,670
------------ ------------ ------------ ------------
Net income (loss) $ 635 $ (116,221) $ (144,440) $ (502,514)
============ ============ ============ ============
Basic net income (loss) per share $ 0.00 $ (0.01) $ (0.01) $ (0.04)
============ ============ ============ ============
Basic weighted average shares outstanding 15,406,913 12,984,913 13,711,513 12,984,913
============ ============ ============ ============
Diluted net income (loss) per share $ 0.00 $ (0.01) $ (0.01) $ (0.04)
============ ============ ============ ============
Diluted weighted average shares outstanding 15,406.913 12,984,913 13,711,513 12,984,913
============ ============ ============ ============
The accompanying notes are an integral part of these statements.
2
WIDEPOINT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- --------------------
2002 2001 2002 2001
---- ---- ---- ----
Cash flows from operating activities:
Net Income (loss) $ 635 $ (116,221) $ (144,440) $ (502,514)
Adjustments to reconcile net income (loss)
to net cash:
Depreciation and amortization expense 10,017 135,666 47,042 410,376
Gain (loss) on sale of property and equipment -- 207 -- (357)
Changes in assets and liabilities:
Accounts receivable 10,972 255,532 (64,642) 1,240,744
Prepaid expenses and current other assets (12,345) 78,854 (41,156) 129,740
Other assets (4,419) -- 1,498 1,899
Accounts payable and accrued expenses (3,997) (291,358) (273,032) (729,017)
----------- ----------- ----------- -----------
Net cash provided by (used in) operating
activities 863 62,680 (474,730) 550,871
----------- ----------- ----------- -----------
Net cash provided by (used in) investing
activities:
Purchases of property and equipment -- -- -- (17,733)
Proceeds from sale of property and equipment -- 250 -- 3,250
----------- ----------- ----------- -----------
Net cash provided by (used in) investing
activities -- 250 -- (14,483)
----------- ----------- ----------- -----------
Net cash provided by (used in) provided by
financing Activities:
Net borrowings (payments) on notes payable (28,325) -- 27,500 --
Net (payments) on long-term obligations (657) (7,550) (6,421) (22,122)
----------- ----------- ----------- -----------
Net cash provided by (used in) provided by (28,982) (7,550) 21,079 (22,122)
financing activities
Net (decrease) increase in cash (28,119) (55,380) (453,651) 514,266
----------- ----------- ----------- -----------
Cash, beginning of period 1,138,012 1,544,582 1,563,544 1,085,696
----------- ----------- ----------- -----------
Cash, end of period $ 1,109,893 $ 1,599,962 $ 1,109,893 $ 1,599,962
=========== =========== =========== ===========
Issuance of note receivable $ 181,650 $ -- $ 181,650 $ --
The accompanying notes are an integral part of these statements.
3
WIDEPOINT CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation, Organization and Nature of Operations:
The accompanying unaudited financial statements have been prepared in accordance
with Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by accounting principles generally accepted
in the United States of America ("US GAAP") for complete financial statements.
In the opinion of management, all adjustments, consisting only of normal
recurring adjustments, considered necessary for a fair presentation have been
included. These financial statements should be read in conjunction with the
financial statements of WidePoint Corporation, as of December 31, 2001, and the
notes thereto included in the Annual Report on Form 10-K filed by the Company.
The results of operations for the three and nine months ended September 30,
2002, are not necessarily indicative of the results that may be expected for the
year ending December 31, 2002.
WidePoint Corporation is a consulting services firm specializing in planning,
managing and implementing Information Technology solutions. Its staff consists
of business and technical specialists that help clients improve their bottom
line and maintain a competitive edge in today's rapidly changing business
environment.
In 1996, the Company acquired all of the outstanding shares of Century Services,
Inc. ("CSI"), a corporation that provided re-engineering and information
processing services to users of large-scale computer systems. In December 1998,
the Company acquired all of the outstanding shares of Eclipse Information
Systems, Inc. ("Eclipse"), a corporation that provided IT consulting services
through several practice areas focused in distributed client server
technologies. In October 1999, the Company acquired all of the outstanding
shares of Parker Management Consulting, Ltd. ("PMC"), a corporation that
provided IT consulting services focused in Enterprise Resource Planning ("ERP").
During 1999, the Company established a new subsidiary named WidePoint
Corporation ("WidePoint-Subsidiary") and initiated operations in 2000 through
this subsidiary in an effort to fully transition the Company from a Year 2000
strategic solutions provider to an Internet Services company. In 2000, the
Company changed its corporate name from ZMAX Corporation to WidePoint
Corporation and changed the trading symbol for its common stock from "ZMAX" to
"WDPT." During this transition in 2000, the Company experienced several economic
reversals that included an unexpected rapid deterioration in Year 2000 services
and a severe contraction in Internet related services. These negative events
prompted the Company to initiate a refinement in its strategy during 2000 and on
September 29, 2000, the Company sold all of the outstanding shares of its PMC
subsidiary to a third-party purchaser that resulted in the elimination of
materially all of the Company's long-term debt.
During 2001, the Company continued to further refine its strategy and
consolidate its operations in an attempt to minimize losses, conserve working
capital, and provide a flexible, scaleable and efficient business model that was
more responsive to the evolving needs of the Company's markets and customers.
Although these actions served to somewhat limit losses, they did not
4
result in a resumption of revenue growth for the Company. Late in 2001, the
Board of Directors of the Company decided that an updated assessment of
strategic alternatives was in order, and soon thereafter decided that a newly
focused strategic direction, plan and leadership were required. These mandated
changes were initiated prior to the end of 2001 and continued through the third
quarter of 2002. Consistent with the re-focus mandated by the Board, and the
materially deteriorated values of assets acquired in earlier acquisitions, the
Company recorded an impairment of the remaining intangible assets associated
with the acquisition of Eclipse that were acquired in December 1998.
The Company's operations are subject to certain risks and uncertainties,
including among others: rapidly changing technology; current and potential
competitors with greater financial, technological, production and marketing
resources; reliance on certain significant customers; the need to develop
additional products and services; the integration of acquired businesses;
dependence upon strategic alliances; the need for additional technical
personnel; dependence on key management personnel; management of growth;
uncertainty of future profitability; and possible fluctuations in financial
results. The Company has devoted substantial resources to shifting its business
mix to comprehensive e-business services and implementing a refined strategy. As
a result, the Company experienced operating losses and negative cash flows in
2000 and in 2001. The Company achieved net income in the third quarter of 2002,
but there are no assurances that the Company can mitigate future losses and
negative operating cash flows that may recur in additional periods in the
future. There can be no assurance that the Company's future operations will
continue to be profitable or will produce positive cash flows. The Company
intends to fund its operational and capital requirements using cash on hand and
with debt financing that it may be able to arrange in the future. There can be
no assurance that such new financing will be available on terms management finds
acceptable or at all.
2. Significant Accounting Policies:
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the
acquired entities since their respective dates of acquisition. All significant
inter-company amounts have been eliminated.
Use of Estimates
The preparation of consolidated financial statements in conformity with US GAAP
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, 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. Actual results could differ
from those estimates.
Cash and Cash Equivalents
Investments purchased with maturities of three months or less are considered
cash equivalents for purposes of these consolidated financial statements. The
Company maintains cash and cash
5
equivalents with various major financial institutions. At September 30, 2002 and
2001, cash and cash equivalents included $975,370 and $1,628,826, respectively,
on investments in overnight sweep accounts. At times, cash balances held at
financial institutions were in excess of federally insured limits. The Company
places its temporary cash investments with high-credit, quality financial
institutions, and, as a result, the Company believes that no significant
concentration of credit risk exists with respect to these cash investments.
Revenue Recognition
Revenue on time-and-materials contracts is recognized based upon hours incurred
at contract rates plus direct costs. Revenue on fixed-price contracts is
recognized on the percentage-of-completion method based on costs incurred in
relation to total estimated costs. Anticipated losses are recognized as soon as
they become known. Provisions for estimated losses on uncompleted contracts are
made in the period in which such losses are determined. Revenue from the resale
of hardware products is recognized upon shipment.
Unbilled accounts receivable on time-and-materials contracts represent costs
incurred and gross profit recognized near the period-end but not billed until
the following period. Unbilled accounts receivable on fixed-price contracts
consist of amounts incurred that are not yet billable under contract terms.
Unbilled accounts receivable totaled $1,219 and $5,227 at September 30, 2002 and
2001, respectively.
Significant Customers
For the three months ended September 30, 2002, three customers individually
represented 27%, 15%, and 13%, respectively, of revenue. For the nine months
ended September 30, 2002, three customers individually represented 22%, 15%, and
13%, respectively, of revenue. For the three months ended September 30, 2001,
three customers individually represented 16%, 13%, and 11%, respectively, of
revenue. For the nine months ended September 30, 2001, two customers represented
18% and 10%, respectively, of revenue. Due to the nature of the Company's
business and the relative size of certain contracts, the loss of any single
significant customer could have a material adverse effect on the Company's
results of operations.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to credit risk
consist of cash and cash equivalents and accounts receivable. Accounts
receivable materially include amounts due from relatively large companies in a
variety of industries. As of September 30, 2002, two customers individually
represented 37% and 27%, respectively, of accounts receivable. As of September
30, 2001, two customers individually represented 16% and 12% percent of accounts
receivable.
Income Taxes
The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes. Under SFAS
No.109, deferred tax assets and liabilities are computed based on the difference
between the financial statement and income tax bases of assets and liabilities
using the enacted marginal tax rate. SFAS No. 109
6
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.
Basic and Diluted Net Loss Per Share
Basic income or loss per share includes no dilution and is computed by dividing
net income or loss by the weighted average number of common shares outstanding
for the period. Diluted income or loss per share includes the potential dilution
that could occur if securities or other contracts to issue common stock were
exercised or converted into common stock. The dilutive stock effect of options
and warrants to purchase shares of common stock outstanding for the three month
period ending September 30, 2001, and for the nine month period ending September
30, 2002 and 2001, respectively, has not been included in the calculation of the
net loss per share as such effect would be anti-dilutive. The calculation of the
basic and diluted weighted average shares is shown below:
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
2002 2001 2002 2001
---- ---- ---- ----
(unaudited) (unaudited)
Basic weighted average shares of common stock
outstanding: 15,406,913 12,984,913 13,711,513 12,984,913
Dilutive stock effect of options and warrants: -- -- -- --
---------- ---------- ---------- ----------
Diluted weighted average shares outstanding: 15,406,913 12,984,913 13,711,513 12,984,913
========== ========== ========== ==========
Options and warrants to purchase 1,578,200 shares of common stock at prices
ranging from $0.12 to $14.06 a share were outstanding during the three months
ended September 30, 2002. They were not included in the computation of diluted
EPS because the options' exercise price was greater than the average market
price of the common shares.
Reclassifications
Certain amounts in prior years' financial statements have been reclassified to
conform with the current year presentation.
7
Stock-based compensation
The Company accounts for stock-based employee compensation arrangements using
the intrinsic value method in accordance with the provisions of Accounting
Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to
Employees," and complies with the disclosure provisions of SFAS No. 123
"Accounting for Stock-Based Compensation." Under APB Opinion No. 25,
compensation cost is generally recognized based on the difference, if any, on
the date of grant between the fair value of the Company's common stock and the
amount an employee must pay to acquire the stock.
New accounting pronouncements
On July 20, 2001, the FASB issued Statement of Financial Accounting Standards
No.141 ("SFAS No. 141"), "Business Combinations," and Statement of Financial
Accounting Standards No. 142 ("SFAS No. 142"), "Goodwill and Intangible Assets."
SFAS No. 141 is effective for all business combinations completed after June 30,
2001. SFAS No. 142 is effective for fiscal years beginning after December 15,
2001; however, certain provisions of such SFAS No. 142 apply to goodwill and
other intangible assets acquired between July 1, 2001, and the effective date of
SFAS No. 142. Major provisions of these Statements and their effective dates for
the Company are as follows:
1. All business combinations initiated after June 30, 2001, must use the
purchase method of accounting. The pooling of interest method of accounting is
prohibited except for transactions initiated before July 1, 2001.
2. Intangible assets acquired in a business combination must be recorded
separately from goodwill if they arise from contractual or other legal rights or
are separable from the acquired entity and can be sold, transferred, licensed,
rented or exchanged, either individually or as part of a related contract, asset
or liability.
3. Goodwill, as well as intangible assets with indefinite lives, acquired after
June 30, 2001, will not be amortized. Effective January 1, 2002, all previously
recognized goodwill and intangible assets with indefinite lives will no longer
be subject to amortization.
4. Effective January 1, 2002, goodwill and intangible assets with indefinite
lives will be tested for impairment annually and whenever there is an impairment
indicator. 5. All acquired goodwill must be assigned to reporting units for
purposes of impairment testing and segment reporting.
As of December 31, 2001, the Company does not have any intangible assets
recorded on the books, and, therefore, will not be currently affected by SFAS
No. 141 or SFAS No. 142.
During 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," to address significant implementation issues
related to SFAS No.121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of," and to develop a single accounting
model to account for long-lived assets to be disposed of. SFAS No. 144 carries
over the recognition and measurement provisions of SFAS No.121. Accordingly, an
entity should recognize an impairment loss if the carrying amount of a
long-lived asset or asset group (a) is not recoverable and (b) exceeds its fair
value. Similar to SFAS No.121, SFAS No.144 requires an entity to test an asset
or asset group for impairment whenever events or
8
circumstances indicate that its carrying amount may not be recoverable. SFAS
No.144 provides guidance on estimating future cash flows to test recoverability.
SFAS No.144 includes criteria that have to be met for an entity to classify a
long-lived asset or asset group as held for sale. However, if the criteria to
classify an asset as held for sale are met after the balance sheet date but
before the issuance of the financial statements, the asset group would continue
to be classified as held and used in those financial statements when issued,
which is a change from current practice. The measurement of a long-lived asset
or asset group classified as held for sale is at the lower of its carrying
amount of fair value less cost to sell. Expected future losses associated with
the operations of a long-lived asset or asset group classified as held for sale
are excluded from that measurement.
SFAS No.144 is effective for financial statements issued for fiscal years
beginning after December 15, 2001, and interim periods within those fiscal
years. However, the provisions of SFAS No.144 related to assets to be disposed
of are effective for disposal activities initiated by an entity's commitment to
a plan after the effective date or after the Statement are initially applied.
The Company does not believe that adoption of these standards will have an
effect on its financial statements.
3. Promissory Notes:
Promissory Notes
Pursuant to stock purchase agreements entered into on July 8, 2002, between the
Company and each of Steve L. Komar, James T. McCubbin and Mark M. Mirabile, the
Company privately sold 865,000 shares of its common stock to each such person
without registration under the Securities Act of 1933, pursuant to the private
offering exemption under Section 4(2) thereof, in consideration of a three (3)
year full-recourse, five percent (5%) interest bearing promissory note with
equal annual principal payments due, issued by each such person to the Company
in the principal amount of $60,550.00, or $181,650.00 in the aggregate (which
equals $0.07 per share, being the closing price of the Company's common stock on
July 8, 2002).
4. Stock Warrants:
Stock Warrants
On September 20, 1999, the Company entered in a two-year agreement with an
international investment banking firm to provide investment banking, mergers and
acquisitions and strategic planning services. In conjunction with this
agreement, the Company issued a stock warrant to purchase 200,000 shares of
common stock at $2.75 per share, an amount that exceeded the stock's trading
price on that date. The Company used a fair-value option pricing model to value
this stock warrant, and it was determined to have a fair value of approximately
$140,000 at the date of grant. The deferred compensation associated with the
warrant was reflected as a separate component of stockholders' equity. As of
September 30, 2002, because the exercise price of the warrant significantly
exceeded the fair value of the Company's common stock, the fair value of the
warrant as measured under a fair-value option pricing model was zero.
9
On October 1, 1999, the Company issued a stock warrant to purchase 200,000
shares of common stock at $5.00 per share, an amount that exceeded the stock's
trading price on that date, as part of the PMC acquisition. The warrant has a
term of 3 years. The Company used a fair-value option pricing model to value
this stock warrant at approximately $140,000. This value has been reflected as
part of stock warrants in the stockholders' equity section of the consolidated
balance sheet and has been included as part of the Company's purchase accounting
for the PMC acquisition. This warrant remains outstanding subsequent to the sale
of the PMC subsidiary and expired on October 1, 2002, with a subsequent
reversing entry occurring during the 4th quarter of 2002.
5. Commitments and Contingencies:
Litigation
The Company is periodically a party to disputes arising from normal business
activities. In the opinion of management, resolution of these matters will not
have a material adverse effect upon the financial position or future operating
results of the Company and adequate provision for any potential losses has been
made in the accompanying consolidated financial statements.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis of the financial condition and results of
operations of the Company should be read in conjunction with the financial
statements and the notes thereto which appear elsewhere in this quarterly report
and the Company's Annual Report on Form 10-K for the year ended December 31,
2001.
The information set forth below includes forward-looking statements. Certain
factors that could cause results to differ materially from those projected in
the forward-looking statements are set forth below. Readers are cautioned not to
put undue reliance on forward-looking statements. The Company disclaims any
intent or obligation to update publicly these forward-looking statements,
whether as a result of new information, future events or otherwise.
Overview
WidePoint Corporation is a consulting services firm specializing in planning,
managing and implementing Information Technology (IT) solutions. Its staff
consists of business and technical specialists that help clients maintain a
competitive edge in today's rapidly changing business environment. WidePoint
focuses on providing end results with significant, tangible business benefits.
Our consultants possess recognized industry-standard certifications and years of
successful project experience. Since 1996, WidePoint has focused on leveraging
leading edge technologies, methodologies and consultants to help clients improve
their business performance. WidePoint's clients are increasingly looking to
harness the power of the Internet and leading IT technologies by integrating
these technologies with their existing systems as they transition, expand, and
refine their business environments.
In 1996, the Company acquired all of the outstanding shares of Century Services,
Inc. ("CSI"), a corporation that provided re-engineering and information
processing services to users of large-scale computer systems. In December 1998,
the Company acquired all of the outstanding shares of Eclipse Information
Systems, Inc. ("Eclipse"), a corporation that provided IT consulting services
through several practice areas focused in distributed client server
technologies. In October 1999, the Company acquired all of the outstanding
shares of Parker Management Consultants, Ltd. ("PMC"), a corporation that
provided IT consulting services focused in Enterprise Resource Planning ("ERP").
During 1999, the Company established a new subsidiary named WidePoint
Corporation ("WidePoint-Subsidiary") and initiated operations in 2000 through
this subsidiary in an effort to fully transition the Company from a Year 2000
strategic solutions provider to an Internet services company. In 2000, the
Company changed its corporate name from ZMAX Corporation to WidePoint
Corporation and changed the trading symbol for its common stock from "ZMAX" to
"WDPT." During this transition in 2000, the Company experienced several economic
reversals that included an unexpectedly rapid deterioration in Year 2000
services and a severe contraction in Internet related services. These negative
events prompted the Company to initiate a refinement in its strategy during 2000
and on September 29, 2000, the Company sold all of the outstanding shares of its
PMC subsidiary to a third-party purchaser that resulted in the elimination of
substantially all of the Company's long-term debt.
11
During 2001, the Company continued to refine its strategy and consolidate its
operations in an attempt to minimize losses, conserve working capital and
provide a flexible, scaleable and efficient business model that was more
responsive to the evolving needs of the Company's markets and customers.
Although these actions served to decrease losses, they did not result in a
resumption of revenue growth for the Company. In the latter part of 2001, the
Board of Directors of the Company decided that an updated assessment of
strategic alternatives was in order, and soon thereafter decided that a newly
focused strategic direction, plan and leadership were required. These mandated
changes were initiated prior to the end of 2001 and continued during the first
and second calendar quarters of 2002. Consistent with such changes initiated by
the Board, and the materially deteriorated values of assets acquired in earlier
acquisitions, the Company recorded an impairment of the remaining intangible
assets associated with the acquisition of Eclipse that were acquired in December
1998.
For the quarter ended September 30, 2002, the Company's revenues decreased from
approximately $1.3 million in 2001 to approximately $0.9 million in 2002. For
the nine month period ended September 30, 2002, the Company's revenues decreased
from approximately $5.1 million in 2001 to approximately $2.6 million in 2002.
This decrease was materially due to a reduction in demand for the Company's
billable consultants as a result of an economic slowdown that constrained
technology investment in the marketplace during 2001 and 2002. The Company
continues to operate within an environment of constrained technology investment
in 2002. The Company anticipates a leveling of revenue in the 4th quarter of
2002 as a result of an increase in paid-time-off due to the holidays. While the
Company anticipates a leveling of revenue growth during the 4th quarter, we
anticipate future positive revenue growth in the long-term.
Most of the Company's current costs consist primarily of the salaries and
benefits paid to the Company's technical, marketing and administrative personnel
and depreciation expenses related to property and equipment. Consistent with the
development of a new focused strategic direction, the Company expects to expand
its operations through internal growth and by potential merger and acquisition
of new personnel and assets. Therefore, the Company anticipates these costs may
increase.
The Company's profitability depends upon both the volume of services performed
and the Company's ability to manage operating margins and general expenses.
Because a significant portion of the Company's cost structure is labor related,
the Company must effectively manage these costs to achieve profitability. To
date, the Company has attempted to manage its operating margins by offsetting
increases in consultant salaries with increases in consultant fees received from
clients. During this economic slowdown the Company witnessed a degradation of
its operating margins. To partially offset the decrease in operating margins the
Company has decreased general expenses. To be successful the Company must
continue to obtain new business and manage its operating margins along with its
general overhead costs.
12
Results of Operations
Three Months Ended September 30, 2002, as Compared to Three Months Ended
September 30, 2001
Revenues. Revenues for the three month period ended September 30, 2002,
were $0.9 million, a decrease of approximately $0.4 million, as compared to
revenues of $1.3 million for the three month period ended September 30, 2001.
The decrease was materially due to a reduction in billable consultants as a
result of the economic slowdown that constrained technology investment and new
technology software development projects in the marketplace in 2001 and 2002.
Gross profit. Gross profit for the three month period ended September 30,
2002, was $0.3 million, or 28% of revenues, a decrease of $0.3 million from
gross profit of $0.6 million, or 49% of revenues, for the three month period
ended September 30, 2001. The decline of gross profit was materially
attributable to a decline in revenues and a reduction in gross margin as a
result of negative pricing pressures that are present within the current
marketplace for the company's services.
Sales and marketing. Sales and marketing expenses for the three month
period ended September 30, 2002, were $0.13 million, or 14% of revenues, an
increase of $0.03 million, as compared to $0.1 million, or 8% of revenues, for
the three month period ended September 30, 2001. The increase in sales and
marketing expenses for the three months ended September 30, 2002, was primarily
attributable to an increase in sales staff as part of the Company's strategy to
increase market breath and downstream revenue growth.
General and administrative. General and administrative expenses for the
three month period ended September 30, 2002, were $0.1 million, or 13% of
revenues, a decrease of $0.4 million, as compared to $0.5 million, or 40% of
revenues, incurred by the Company for the three month period ended September 30,
2001. The decrease in general and administrative expenses for the three months
ended September 30, 2002, was primarily attributable to a reduction in general
personnel support and overhead costs associated with the Company's goals of
attempting to match future expenses with future revenue streams.
Depreciation and amortization. Depreciation and amortization expenses for
the three month period ended September 30, 2002, was $10,017, or 1% of revenues,
a decrease of $125,649, as compared to $135,666 of such expenses, or 11% of
revenues, incurred by the Company for the three month period ended September 30,
2001. The decrease in depreciation and amortization expenses for the three month
period ended September 30, 2002, was primarily attributable to the impairment
charge associated with the write-off of certain intangible assets associated
with the Company's Eclipse subsidiary in the fourth quarter of 2001 and a
reduction in capital purchases by the Company during the 2002.
Other income (expense), net. Interest income (expense), net for the three
month period ended September 30, 2002, was $3,872, or less than 1% of revenues,
a decrease of $5,532 as compared to $9,404, or less than 1% of revenues, for the
three month period ended September 30, 2001. The decrease in interest income
(expense), net for the three month period ended September 30, 2002,
13
was primarily attributable to lesser amounts of cash and cash equivalents along
with lower short term interest rates that were available to the Company on
investments in overnight sweep accounts.
Income taxes. A full valuation allowance has been recorded against
deferred tax liabilities as a result of operating loss carry-forwards.
Net income (loss). As a result of the above, the net income for the three
month period ended September 30, 2002, was $635 as compared to the net loss of
$116,211 for the three months ended September 30, 2001.
Nine Months Ended September 30, 2002, as Compared to Nine Months Ended September
30, 2001
Revenues. Revenues for the nine month period ended September 30, 2002,
were $2.6 million, a decrease of approximately $2.5 million, as compared to
revenues of $5.1 million for the nine month period ended September 30, 2001. The
decrease resulted from a reduction in new technology software development
projects by the Company's clients which reduced demand for the Company's
billable consultants.
Gross profit. Gross profit for the nine month period ended September 30,
2002, was $0.8 million, or 30% of revenues, a decrease of $1.6 million from
gross profit of $2.4 million, or 48% of revenues, for the nine month period
ended September 30, 2001. The decline of gross profit was materially
attributable to negative pricing pressures within a more competitive environment
due lesser demand for the Company's services within the current marketplace.
Sales and marketing. Sales and marketing expenses for the nine month
period ended September 30, 2002, were $0.4 million, or 16% of revenues, a
decrease of $0.1 million, as compared to $0.5 million, or 10% of revenues, for
the nine month period ended September 30, 2001. The decrease in sales and
marketing expenses for the nine months ended September 30, 2002, was primarily
attributable to a reduction in sales commissions earned and other administrative
actions the Company undertook in the first half of 2002 that attempted to align
sales and marketing expenses to those of future anticipated revenue streams.
General and administrative. General and administrative expenses for the
nine month period ended September 30, 2002, were $0.5 million, or 18% of
revenues, a decrease of $1.5 million, as compared to $2.0 million, or 40% of
revenues, incurred by the Company for the nine month period ended September 30,
2001. The decrease in general and administrative expenses for the nine months
ended September 30, 2002, was primarily attributable to a reduction in general
personnel overhead and support costs associated with Company's goals of
attempting to match future expenses with future revenue streams.
Depreciation and amortization. Depreciation and amortization expenses for
the nine month period ended September 30, 2002, was $47,042, or 2% of revenues,
a decrease of $363,334, as compared to $410,376 of such expenses, or 8% of
revenues, incurred by the Company for the nine month period ended September 30,
2001. The decrease in depreciation and amortization expenses
14
for the nine month period ended September 30, 2002, was primarily attributable
to the impairment charge associated with the write-off of certain intangible
assets associated with the Company's Eclipse subsidiary in the fourth quarter of
2001 and a reduction in capital purchases by the Company during 2002.
Other income (expense),net. Interest income (expense), net for the nine
month period ended September 30, 2002, was $12,118, or less than 1% of revenues,
a decrease of $19,552 as compared to $31,670, or less than 1% of revenues, for
the nine month period ended September 30, 2001. The decrease in interest income
(expense), net for the nine month period ended September 30, 2002, was primarily
attributable to lesser amounts of cash and cash equivalents along with lower
short term interest rates that were available to the Company on investments in
overnight sweep accounts.
Net loss. As a result of the above, the net loss for the nine month period
ended September 30, 2002, was approximately $144,000 as compared to the net loss
of approximately $503,000 for the nine months ended September 30, 2001.
Liquidity and Capital Resources
The Company has, since inception, financed its operations and capital
expenditures through the sale of stock, seller notes, convertible notes,
convertible exchangeable debentures and the proceeds from the exchange offer and
exercise of the warrants related to the convertible exchangeable debentures.
Cash provided by operating activities for the quarter ended September 30, 2002,
was approximately $2,000 as compared to cash used by operating activities of
approximately $63,000 for the quarter ended September 30, 2001. The increase in
cash provided by operations during the third quarter of 2002 was primarily a
result of a decrease in general and administrative expenses in the third quarter
of 2002 that produced an operationally profitable quarter. There was no material
amount of capital expenditures on property for the quarters ended September 30,
2002 and 2001.
As of September 30, 2002, the Company had net working capital of
approximately $1.4 million. The Company's primary source of liquidity consists
of approximately $1.1 million in cash and cash equivalents and approximately
$0.5 million of accounts receivable. The Company's current liabilities include
approximately $0.3 million in accounts payable and accrued expenses.
Pursuant to stock purchase agreements entered into on July 8, 2002,
between the Company and each of Steve L. Komar, James T. McCubbin and Mark M.
Mirabile, the Company privately sold 865,000 shares of its common stock to each
such person without registration under the Securities Act of 1933, pursuant to
the private offering exemption under Section 4(2) thereof, in consideration of a
three (3) year full-recourse, five percent (5%) interest bearing promissory note
with equal annual principal payments due, issued by each such person to the
Company in the principal amount of $60,550.00, or $181,650.00 in the aggregate
(which equals $0.07 per share, being the closing price of the Company's common
stock on July 8, 2002).
15
Other
Inflation has not had a significant effect on the Company's operations,
as increased costs to the Company have generally been offset by increased prices
of services sold.
The preparation of financial statements in conformity with US GAAP
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. Actual results could differ
from those estimates.
This report contains forward-looking statements setting forth the
Company's beliefs or expectations relating to future revenues and profitability.
Actual results may differ materially from projected or expected results due to
changes in the demand for the Company's products and services, uncertainties
relating to the results of operations, dependence on its major customers, risks
associated with rapid technological change and the emerging services market,
potential fluctuations in quarterly results, its dependence on key employees and
other risks and uncertainties affecting the technology industry generally. The
Company disclaims any intent or obligation to update publicly these
forward-looking statements, whether as a result of new information, future
events or otherwise.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
ITEM 4. CONTROLS AND PROCEDURES
Our Chief Executive Officer and Chief Financial Officer have concluded,
based on their evaluation within 90 days of the filing date of this report, that
our disclosure controls and procedures are effective for gathering, analyzing
and disclosing the information we are required to disclose in our reports filed
under the Securities Exchange Act of 1934. There have been no significant
changes in our internal controls or in other factors that could significantly
affect these controls subsequent to the date of the previously mentioned
evaluation.
16
PART II.
OTHER INFORMATION
ITEM 5. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The following Exhibits are filed herewith:
Exhibit Number Document
99.1 Certification of Chief Executive Officer Pursuant to
18 U.S.C. Section 1350
99.2 Certification of Principal Financial and Accounting
Officer Pursuant to 18 U.S.C. Section 1350
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the three month period ended
September 30, 2002.
17
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 on the 14th day of
November, 2002.
WIDEPOINT CORPORATION
Date: November 14, 2002
By:/s/ STEVE L. KOMAR
--------------------------------
Steve L. Komar
Chief Executive Officer
By:/s/ JAMES T. MCCUBBIN
--------------------------------
James T. McCubbin
Vice President - Principal
Financial and Accounting Officer
18
Certifications
I, Steve L. Komar, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Widepoint Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Dated: November 14, 2002
/s/ STEVE L. KOMAR
--------------------------------
Steve L. Komar
Chief Executive Officer
19
I, James T. McCubbin, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Widepoint Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Dated: November 14, 2002
/s/ JAMES T. MCCUBBIN
------------------------------------
James T. McCubbin
Vice President - Principal Financial
and Accounting Officer
20