UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A No. 1
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): December 30, 2011
WIDEPOINT CORPORATION
(Exact Name of Registrant as Specified in Charter)
| Delaware | 001-33035 | 52-2040275 |
|
(State or Other Jurisdiction of Incorporation) |
(Commission File Number) | (I.R.S. Employer Identification No.) |
|
18W100 22nd Street, Oakbrook Terrace,
(Address of Principal Executive Office) |
60181 (Zip Code) |
| Registrant’s telephone number, including area code: (703) 349-2577 |
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
¨ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
¨ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
¨ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
¨ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
Explanatory Note
This Amendment No. 1 to Current Report on Form 8-K/A restates in its entirety the Current Report on Form 8-K filed on January 5, 2012 and is being filed solely to amend Items 9.01(a) and 9.01(b) to provide historical and pro-forma financial statements relative to the acquisition of certain of the assets of Avalon Global Solutions, Inc., a Florida corporation, as described below.
Item 1.01 Entry into a Material Definitive Agreement.
On December 31, 2011, WidePoint Corporation (the “Company”) entered into an Asset Purchase Agreement (the “Agreement”) by and among the Company, WidePoint Solutions Corporation, a Delaware corporation which is a wholly-owned subsidiary of the Company (“WidePoint Solutions”), Avalon Global Solutions, Inc., a Florida corporation (“AGS”), and certain of the shareholders of AGS. In accordance with the Agreement, WidePoint Solutions acquired certain of the assets of AGS, a provider of communications lifecycle management services, technology, and solutions predominately to the commercial sector.
WidePoint Solutions acquired the assets of AGS in exchange for (i) the payment of cash in the amount of $7.5 million, (ii) the delivery of subordinated two promissory notes in the aggregate principal amount of $4.0 million (collectively, the “Notes”) and (iii) the assumption of approximately $1.6 million of liabilities. The Notes accrue interest at the annual rate of 3%, are guaranteed by the Company and provide for three lump sum payments of principal and interest on each of April 15, 2013, April 15, 2014 and April 15, 2015; provided, however, that in the event that WidePoint Solutions fails to achieve a specified gross profit for the calendar years ending December 31, 2012 and 2013, the Company will receive a reduction in the amount due under the Notes of up to $3.0 million.
The foregoing summary of the Agreement is not intended to be complete and is qualified in its entirety by reference to the Agreement, a copy of which is attached hereto as Exhibit 2.1 and is incorporated herein by reference. The information set forth below under Item 2.03 with respect to the Cardinal Loans (as defined below) is incorporated herein by reference.
Item 2.01 Completion of Acquisition or Disposition of Assets.
The information set forth above under Item 1.01 with respect to the Agreement is incorporated herein by reference.
Item 2.03 Creation of a Direct Financial Obligation or an Obligation under an Off-Balance Sheet Arrangement of a Registrant.
On December 30, 2011, the Company and its subsidiaries entered into a $4.0 million commercial loan agreement with Cardinal Bank (the “$4.0 Million Loan”) and a $8.0 million commercial loan with Cardinal Bank (the “$8.0 Million Loan” and together with the $4.0 Million Loan, the “Cardinal Loans”). The $4.0 Million Loan was for the specific purpose of acquiring the assets of AGS. Advances under the $4.0 Million Loan bear interest at 4.5% and mature on December 30, 2016. The $8.0 Million Loan is for working capital purposes and refinances and modifies a prior Promissory Note with Cardinal Bank dated August 16, 2007 in the principal amount of $2.0 million. Advances under the $8.0 Million Loan bear interest at a variable rate equal to the prime rate plus 0.5% and mature on June 30, 2013. The Company was advanced an aggregate of $12.0 million on December 31, 2011 under the Cardinal Loans.
The Cardinal Loans require the Company to maintain certain financial covenants, including maintaining (i) a funded debt to EBITDA ratio not to exceed 4.5:1.0 at December 31, 2011 and declining to 2.5:1.0 at December 31, 2012, (ii) a debt service ratio of at least 1.2:1.0, (iii) a tangible net worth of at least $2,500,000 and increasing to $4,000,000 at December 31, 2012 and (iv) a current ratio of at least 1.1:1.0. For a full description of the terms of the Cardinal Loans, see the $4.0 Million Loan and the $8.0 Million Loan filed herewith as Exhibits 10.3 and 10.4, respectively.
The information set forth above under Item 1.01 with respect to the Notes is incorporated herein by reference. The Notes are attached hereto as Exhibits 10.1 and 10.2 and are incorporated herein by reference.
Item 5.02 Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain Officers; Compensatory Arrangements of Certain Officers.
In connection with the acquisition of assets of AGS, on December 31, 2011, the Company and WidePoint Solutions entered into an Employment and Non-Compete Agreement with Michael Mansouri, the former Chief Executive Officer of AGS (the “Employment Agreement”), for Mr. Mansouri to serve as the Chief Executive Officer of WidePoint Solutions. The Employment Agreement is for a term of two years and provides for an annual base salary of $150,000, standard employee benefits and bonus compensation of up to $50,000 per annum.
The Employment Period will continue unless terminated earlier by (i) Mr. Mansouri’s death or permanent disability, (ii) Mr. Mansouri’s resignation (other than for Good Reason, as defined in the Employment Agreement) upon two hundred seventy (270) days prior written notice, (iii) the Company or WidePoint Solutions for Cause (as defined in the Employment Agreement) or (iv) the Company or WidePoint Solutions without Cause. Upon any termination by the Company or WidePoint Solutions for Cause, death or permanent disability or upon Mr. Mansouri’s decision to leave WidePoint Solutions other than for Good Reason, Mr. Mansouri shall be entitled to be paid the base salary to the date of termination. Upon any termination by the Company or WidePoint Solutions without Cause or by Mr. Mansouri for Good Reason, WidePoint Solutions shall pay to Mr. Mansouri (i) any unpaid base salary accrued as of the date of termination, (ii) in the event that the termination occurs prior to the second anniversary of the Agreement, base salary at the annual rate in effect on the date of termination from such date of termination until the second anniversary of the Agreement as well as any earned bonuses and (iii) reimbursement of any outstanding business expenses.
The foregoing summary of the Employment Agreement is not intended to be complete and is qualified in its entirety by reference to the Employment Agreement, a copy of which is attached hereto as Exhibit 10.8 and is incorporated herein by reference.
Item 8.01. Other Events.
On January 4, 2012, the Company issued a press release pursuant to which it announced that it had acquired the assets of AGS. A copy of the press release is filed as Exhibit 99.1 hereto and incorporated herein by reference.
Item 9.01 Financial Statements and Exhibits
(a) Financial Statements for Businesses Acquired.
The following financial statements are filed as exhibits hereto:
Exhibit 23.1 Consent of Independent Auditor
Exhibit 99.2 Audited Financial Statements of AGS for the fiscal years ended June 30, 2011 and 2010.
Exhibit 99.3 Unaudited Financial Statements of AGS for the three months ended September 30, 2011.
(b) Unaudited Pro Forma Financial Information.
The following unaudited pro forma financial statements are filed as exhibits hereto:
Exhibit 99.4 Unaudited Proforma Financial Information of AGC and WidePoint Corporation for the fiscal year ended December 31, 2010 and the nine months ended September 30, 2011, respectively, related to the acquisition of assets of AGC.
(d) Exhibits:
Exhibit 2.1: Asset Purchase Agreement, dated as of December 30, 2011, by and among WidePoint Corporation, WidePoint Solutions Corporation, Avalon Global Solutions, Inc. and certain of the shareholders of Avalon Global Solutions, Inc., and Amendment No. 1 thereto, dated as of January 2, 2012.*
Exhibit 10.1: $1.0 Million Promissory Note, dated December 31, 2011, by WidePoint Solutions Corporation in favor of Avalon Global Solutions, Inc.*
Exhibit 10.2: $3.0 Million Promissory Note, dated December 31, 2011, by WidePoint Solutions Corporation in favor of Avalon Global Solutions, Inc.*
Exhibit 10.3: $4.0 Million Commercial Loan Agreement, dated December 30, 2011, by WidePoint Corporation and its subsidiaries and Cardinal Bank.*
Exhibit 10.4: $8.0 Million Commercial Loan Agreement, dated December 30, 2011, by WidePoint Corporation and its subsidiaries and Cardinal Bank.*
Exhibit 10.5: $4.0 Million Promissory Note, dated December 30, 2011, in favor of Cardinal Bank.*
Exhibit 10.6: $8.0 Million Promissory Note, dated December 30, 2011, in favor of Cardinal Bank.*
Exhibit 10.7: Security Agreement, dated December 30, 2011, by WidePoint Corporation and its subsidiaries and Cardinal Bank.*
Exhibit 10.8: Employment and Non-Compete Agreement, dated December 31, 2011, between WidePoint Corporation, WidePoint Solutions Corporation and Michael Mansouri.*
Exhibit 99.1: Press Release issued by the Company on January 4, 2012.*
| * | Previously filed with Form 8-K dated January 5, 2012. |
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 hereunto duly authorized.
| WIDEPOINT CORPORATION | ||
| /s/ James T. McCubbin | ||
| Date: March 9, 2012 | James T. McCubbin | |
| Vice President and Chief Financial Officer |
CONSENT OF INDEPENDENT AUDITOR
The Board of Directors
WidePoint Corporation
We have issued our report dated March 6, 2012 with respect to the consolidated financial statements of Avalon Global Solutions, Inc. for the years ended June 30, 2011 and 2010 included in this Current Report on Form 8-K/A dated March 9, 2012. We hereby consent to the use of the aforementioned report in this Form 8-K/A and to the incorporation by reference in the previously filed registration statements of WidePoint Corporation on Forms S-8, File Nos. 333-124867 and 333-158772, and Form S-1, File No. 333-121858.
/s/ McPhillips Roberts & Deans PLC
Norfolk, Virginia
March 9, 2012
EXHIBIT 99.2
AUDITED FINANCIAL STATEMENTS FOR BUSINESS ACQUIRED
Avalon Global Solutions, Inc.
Hampton, Virginia
FINANCIAL REPORT
June 30, 2011 and 2010
TABLE OF CONTENTS
| Independent Auditor’s Report | 1 |
| Consolidated Balance Sheets | 2 |
| Consolidated Statements of Operations | 3 |
| Consolidated Statements of Changes in Stockholders’ Deficit | 4 |
| Consolidated Statements of Cash Flows | 5-6 |
| Notes to Consolidated Financial Statements | 7-26 |
INDEPENDENT AUDITOR’S REPORT
To the Board of Directors of
Avalon Global Solutions, Inc.
We have audited the accompanying consolidated balance sheets of Avalon Global Solutions, Inc. (the “Company”) as of June 30, 2011 and 2010 and the related consolidated statements of operations and changes in stockholders’ deficit and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, 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. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements as well as assessment of the accounting principles used and significant estimates made by management, and evaluation of the overall financial statement presentation. We believe our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Avalon Global Solutions, Inc. as of June 30, 2011 and 2010 and the results of its operations and cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
/s/ McPhillips Roberts & Deans PLC
Norfolk, Virginia
March 6, 2012
| 1 |
| AVALON GLOBAL SOLUTIONS, INC. |
| CONSOLIDATED BALANCE SHEETS |
| June 30, 2011 and 2010 |
| 2011 | 2010 | |||||||
| ASSETS | ||||||||
| Current Assets | ||||||||
| Cash and cash equivalents | $ | 1,042 | $ | 6,631 | ||||
| Accounts receivable | 2,143,613 | 1,599,430 | ||||||
| Unbilled accounts receivable | 608,994 | 384,620 | ||||||
| Prepaid expenses and other assets | 34,600 | 30,723 | ||||||
| Total Current Assets | 2,788,249 | 2,021,404 | ||||||
| Noncurrent Assets | ||||||||
| Property and equipment, net | 351,976 | 556,672 | ||||||
| Goodwill | 890,354 | - | ||||||
| Intangibles, net | 1,849,641 | 808,068 | ||||||
| Deferred financing fees, net | 184,066 | 217,033 | ||||||
| Deposits and other assets | 10,964 | 4,093 | ||||||
| TOTAL ASSETS | $ | 6,075,250 | $ | 3,607,270 | ||||
| LIABILITIES AND STOCKHOLDERS' DEFICIT | ||||||||
| Current Liabilities | ||||||||
| Line of credit | $ | 649,156 | $ | 844,938 | ||||
| Current portion of notes payable | 876,625 | 26,418 | ||||||
| Accounts payable | 1,752,714 | 1,434,883 | ||||||
| Accrued expenses | 86,570 | 174,892 | ||||||
| Deferred revenue | 451,861 | 199,534 | ||||||
| Capital lease payable | 1,244 | 9,077 | ||||||
| Total Current Liabilities | 3,818,170 | 2,689,742 | ||||||
| Long Term Liabilities | ||||||||
| Deferred income taxes | 130,000 | - | ||||||
| Notes payable, net of current portion | 3,283,639 | 2,437,102 | ||||||
| Total Liabilities | 7,231,809 | 5,126,844 | ||||||
| Stockholders' Deficit | ||||||||
| Common stock | 17,002 | 14,010 | ||||||
| Additional paid-in capital | 497,008 | - | ||||||
| Accumulated deficit | (1,670,569 | ) | (1,533,584 | ) | ||||
| Total Stockholders' Deficit | (1,156,559 | ) | (1,519,574 | ) | ||||
| TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT | $ | 6,075,250 | $ | 3,607,270 | ||||
| See Accompanying Notes to Consolidated Financial Statements | 2 |
| AVALON GLOBAL SOLUTIONS, INC. |
| CONSOLIDATED STATEMENTS OF OPERATIONS |
| For the Years Ended June 30, 2011 and 2010 |
| 2011 | 2010 | |||||||
| Revenues | $ | 7,425,015 | $ | 9,883,661 | ||||
| Cost of Sales | 4,456,254 | 7,589,551 | ||||||
| Gross Profit | 2,968,761 | 2,294,110 | ||||||
| Operating Expenses | 2,771,681 | 3,105,278 | ||||||
| Income (Loss) From Operations | 197,080 | (811,168 | ) | |||||
| Other Income (Expense) | ||||||||
| Interest income | 518 | 2,703 | ||||||
| Interest expense | (204,583 | ) | (161,204 | ) | ||||
| Loss on merger | - | (326,438 | ) | |||||
| Total Other Expense | (204,065 | ) | (484,939 | ) | ||||
| Loss Before Taxes | (6,985 | ) | (1,296,107 | ) | ||||
| Income Tax Expense | (130,000 | ) | - | |||||
| NET LOSS | $ | (136,985 | ) | $ | (1,296,107 | ) | ||
| See Accompanying Notes to Consolidated Financial Statements | 3 |
| AVALON GLOBAL SOLUTIONS, INC. |
| CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT |
| For the Years Ended June 30, 2011 and 2010 |
| Common Stock | Additional | Accumulated | ||||||||||||||||||
| Issued | Amount | Paid-In Capital | Deficit | Total | ||||||||||||||||
| Balance, June 30, 2009 | 5,922,721 | $ | 5,923 | $ | - | $ | (237,477 | ) | $ | (231,554 | ) | |||||||||
| Issuance of common stock | 8,087,282 | 8,087 | - | - | 8,087 | |||||||||||||||
| Net loss | - | - | - | (1,296,107 | ) | (1,296,107 | ) | |||||||||||||
| Balance, June 30, 2010 | 14,010,003 | 14,010 | - | (1,533,584 | ) | (1,519,574 | ) | |||||||||||||
| Issuance of common stock | 2,991,548 | 2,992 | 497,008 | - | 500,000 | |||||||||||||||
| Net loss | - | - | - | (136,985 | ) | (136,985 | ) | |||||||||||||
| Balance, June 30, 2011 | 17,001,551 | $ | 17,002 | $ | 497,008 | $ | (1,670,569 | ) | $ | (1,156,559 | ) | |||||||||
| See Accompanying Notes to Consolidated Financial Statements | 4 |
| AVALON GLOBAL SOLUTIONS, INC. |
| CONSOLIDATED STATEMENTS OF CASH FLOWS |
| For the Years Ended June 30, 2011 and 2010 |
| 2011 | 2010 | |||||||
| Cash Flows from Operating Activities | ||||||||
| Net loss | $ | (136,985 | ) | $ | (1,296,107 | ) | ||
| Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | ||||||||
| Depreciation expense | 240,983 | 239,912 | ||||||
| Amortization of intangibles | 477,895 | 306,043 | ||||||
| Amortization of deferred financing costs | 32,967 | 32,967 | ||||||
| Loss on merger | - | 326,438 | ||||||
| Deferred income taxes | 130,000 | - | ||||||
| Changes in operating assets and liabilities | ||||||||
| Accounts receivable and unbilled accounts receivable | (440,714 | ) | 1,060,006 | |||||
| Prepaid expenses and other assets | 28,141 | 21,318 | ||||||
| Deposits and other assets | 2,354 | - | ||||||
| Accounts payable and accrued expenses | 42,912 | (965,029 | ) | |||||
| Deferred revenue | (27,833 | ) | (9,793 | ) | ||||
| Net Cash Provided by (Used In) Operating Activities | 349,720 | (284,245 | ) | |||||
| Cash Flows from Investing Activities | ||||||||
| Cash contributed in connection with NRG merger | - | 171,405 | ||||||
| Acquisition of CSLLC, net of cash acquired | (185,971 | ) | - | |||||
| Purchase of property and equipment | - | (65,975 | ) | |||||
| Software development costs | (319,468 | ) | (309,854 | ) | ||||
| Net Cash Used In Financing Activities | (505,439 | ) | (204,424 | ) | ||||
| Cash Flows from Financing Activities | ||||||||
| Net short-term repayments | (195,782 | ) | (23,777 | ) | ||||
| Borrowings on notes payable | 490,000 | 516,000 | ||||||
| Principal payments on notes payable | (136,255 | ) | (123,293 | ) | ||||
| Principal payments under capital lease obligation | (7,833 | ) | (34,602 | ) | ||||
| Issuance of common stock | - | 3,723 | ||||||
| Net Cash Provided by Financing Activities | 150,130 | 338,051 | ||||||
| Decrease in Cash and Cash Equivalents | (5,589 | ) | (150,618 | ) | ||||
| Cash and cash equivalents, beginning of year | 6,631 | 157,249 | ||||||
| CASH AND CASH EQUIVALENTS, END OF YEAR | $ | 1,042 | $ | 6,631 | ||||
Continued
| See Accompanying Notes to Consolidated Financial Statements | 5 |
| AVALON GLOBAL SOLUTIONS, INC. |
| CONSOLIDATED STATEMENTS OF CASH FLOWS |
| For the Years Ended June 30, 2011 and 2010 |
| 2011 | 2010 | |||||||
| Supplemental Cash Flow Information | ||||||||
| Cash paid for interest | $ | 194,611 | $ | 159,541 | ||||
| Noncash Investing and Financing Activities | ||||||||
| Debt issued in connection with acquisition of CSLLC | $ | 1,200,000 | $ | - | ||||
| Issuance of common stock in connection with acquisition of CSLLC | $ | 500,000 | $ | - | ||||
| Accounts payable converted to note payable | $ | 137,406 | $ | - | ||||
| See Accompanying Notes to Consolidated Financial Statements | 6 |
| AVALON GLOBAL SOLUTIONS, INC. |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
NOTE 1 – ORGANIZATION AND NATURE OF OPERATIONS
Organization Avalon Global Solutions, Inc. (the “Company” or “Avalon”) was incorporated under the laws of the State of Florida on February 18, 2009. The Company’s corporate headquarters is located in Hampton, Virginia. The Company has an operational sales office, invoice processing and helpdesk centers, logistics and data storage facilities located in Virginia, California, Michigan, Tennessee and North Carolina.
Nature of Operations The Company specializes in providing both wireline and wireless telecommunications lifecycle management services. Services are characterized as follows:
| § | Managed services - Consists of providing telecommunication device and asset management, telecommunications expense management, helpdesk services, telecom expense optimization, invoice billing, management and payment services. |
| § | Asset management services – Consists of providing asset management for wireline and wireless communications. Services include wireless equipment rental, replacement and repair and wireless warranty services. |
| § | Compliance services – Consists of performing permission based audits, accounts payable audits, and compliance reviews. |
| § | Consulting services – Consists of performing telecommunications network assessments, contract negotiations, information security consulting services, and infrastructure consulting services. |
NOTE 2 – SUMMARY OF 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”).
Principles of Consolidation The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany amounts have been eliminated in consolidation.
Use of Estimates The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America 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, realizability of intangible assets, realizability of deferred income tax assets 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.
| 7 |
| AVALON GLOBAL SOLUTIONS, INC. |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
Significant Customers Significant customer concentrations expressed as a percentage of our consolidated revenues is set forth in the table below:
| Customer Name | 2011 As a % of Revenues | 2010 As a % of Revenues | ||||||
| U.S. Customs Border Patrol | - | % | 22 | % | ||||
| U.S. Department of Transportation | 9 | % | 9 | % | ||||
| U.S. Department of Veteran Affairs | 8 | % | 9 | % | ||||
| Alcohol, Tobacco and Firearms (ATF) | 7 | % | 8 | % | ||||
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 could have a material adverse effect on our results of operations.
Concentrations of Credit Risk Significant customer accounts receivable concentrations expressed as a percentage of our consolidated accounts receivable is set forth in the table below:
| Customer Name | 2011 As a % of Receivables | 2010 As a % of Receivables | ||||||
| Alcohol, Tobacco and Firearms (ATF) | 24 | % | 35 | % | ||||
| Oracle America, Inc. | - | % | 6 | % | ||||
| Siemens Enterprise Communications | 3 | % | 6 | % | ||||
| Sonoco Products | 20 | % | 5 | % | ||||
| U.S. Customs Border Patrol | 3 | % | 7 | % | ||||
| U.S. Department of Transportation | 5 | % | 5 | % | ||||
| U.S. Department of Veterans Affairs | 4 | % | 10 | % | ||||
Fair Value of Financial instruments The consolidated financial statements include financial instruments for which the fair market value may differ from amounts reflected on a historical basis. The Company’s financial instruments include cash equivalents, accounts receivable, notes receivable, accounts payable, short-term debt and other financial instruments associated with the issuance of the common stock. The carrying values of cash equivalents, accounts receivable, notes receivable, and accounts payable 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 are reset periodically to reflect current market rates.
| 8 |
| AVALON GLOBAL SOLUTIONS, INC. |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
Cash and Cash Equivalents The Company maintains interest-bearing cash deposits and short-term overnight investments with a large financial institution. The Company considers all highly liquid investments with original maturities of three months or less are considered to be cash equivalents for purposes of these consolidated financial statements.
At various times during the years presented, the Company may have had on deposit with a single financial institution more than $250,000, which is the limit currently insured by the Federal Deposit Insurance Corporation.
Accounts Receivable The Company's accounts receivable is due from federal and state governments and established publicly-traded and private sector companies in the following industries: broadcasting and communications, consumer retail, manufacturing, healthcare, and financial services. Credit is extended based on evaluation of a customer’s financial condition and, generally, collateral is not required. Accounts receivable are generally due within 45 to 60 days and are stated at amounts due from customers net of an allowance for doubtful accounts if deemed necessary. 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. Past due accounts are not charged a monthly finance charge.
The Company determines its allowance by considering a number of factors, including the 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.
The Company has not historically maintained an allowance for doubtful accounts for our federal government or commercial customers as the Company has not witnessed any material or recurring bad debt charges and the nature and size of the contracts has not necessitated the Company’s establishment of such a reserve. Upon specific review and our determination that a reserve may be required, we will reserve such amount if we view the account as potentially uncollectable.
Unbilled Accounts Receivable Unbilled accounts receivable consists of consulting services provided and invoice billing and payment services performed near the period-end but not billed until the following period or not billable until certain contractually agreed upon billing milestones are met.
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:
| 9 |
| AVALON GLOBAL SOLUTIONS, INC. |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| Mobile devices | 3 years | |
| Computer hardware and equipment | 3 - 5 years | |
| Furniture and fixtures | 7 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 June 30, 2011, the Company’s management has not identified any material impairment of its property and equipment.
Software Development Costs The Company capitalizes costs related to software and implementation in connection with its telecommunications expense management software application Clarity and ICERT and its helpdesk software application Foresight. For software development costs (or “internally developed intangible assets”) related to software products for sale, lease or otherwise marketed, 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 over a three-year period or such other such shorter period as may be required.
Research and Development Costs We engage in certain research and development activities to develop customized software, IT and other appropriate products and solutions for customers. In developing customized products and solutions for our customers, we work closely with our customers and are responsive to their feedback throughout the process. In addition, we have acquired assets in research and development through our strategic acquisitions. While we do engage in research and development of products and services, including customized software products for our customers, we did not have material research and development expenses in 2011 or 2010.
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 during the fourth quarter of each year, and between annual tests if indicators of potential impairment exist. The Company has elected to perform this review annually on June 30th of each calendar year. We have not identified any impairment of goodwill as of June 30, 2011 or 2010.
Deferred Revenue Deferred revenue arises from advanced customer billings as permitted under contractual arrangements or from advance payments from customers for telecommunication expense managed services. Certain federal and state governments and their agencies may pay for services and/or devices in advance. These advance payments are recorded as deferred revenue and recognized as services are performed and/or devices delivered. Amounts recorded as deferred revenue are released when the monthly services are complete at the end of the month. The Company’s revenue recognition policy is below under the caption “revenue recognition”.
| 10 |
| AVALON GLOBAL SOLUTIONS, INC. |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
Deferred revenue may also consist of deferred implementation fees charged for the initial portal set up of telecommunications expense management customers. Deferred implementation fees are amortized over the estimated customer life and any related deferred implement costs are amortized over the same period. There were no significant implementation costs incurred during the years ended June 30, 2011 or June 30, 2010.
Revenue Recognition Revenue is recognized when persuasive evidence of an arrangement exists, services have been rendered, the contract price is fixed or determinable and collectability is reasonably assured. The Company has a standard internal process that is used to determine whether all required criteria for revenue recognition have been met. Revenue is recognized as follows for the following services:
| § | Managed Services – User access and device management services are delivered on a monthly basis and recognized as revenue based on fixed price per device. Management service charges include a service handling charge based on a percentage of services billed. Initial customer portal implementation fees, if any, are deferred and amortized ratably over the estimated customer life which ranges from 36 to 48 months. Invoice billing and payment services are performed on monthly basis. Revenue and related costs are recognized on a net basis as we do not have discretion in choosing providers, rate plans, and devices in providing the services to our customers. Certain federal and state governments and their agencies may pay for services and/or devices in advance. These advance payments are recorded as deferred revenue and recognized as services are performed and/or devices delivered. |
| § | Asset Management Services – Equipment sales, rental, replacement and repair and wireless warranty services are delivered on a monthly basis. Revenue is recognized on the sale of telecommunications devices upon receipt of inventory and bills for services at cost plus applicable contractual administrative handling and shipping fees earned. Equipment rental, replacement and repair services are recognized as revenue based on a fixed price per device. Nonrefundable early termination fees are recognized when termination is known. |
| § | Compliance Services – Consists of performing permission based audits, accounts payable audits, and compliance reviews. Revenue is recognized to the extent of billable rates times hours delivered plus material and other reimbursable costs incurred to deliver consulting services. |
| § | Consulting Services – Consists of performing telecommunications network assessments, contract negotiations, information security consulting services, and infrastructure consulting services. Revenue is recognized on certain contingency-based consulting arrangements to the extent expected savings are realized and the customer signs-off on our value billing. |
Advertising Costs The Company expenses advertising costs as they are incurred. Advertising expense was $62,292 and $70,943 for the years ended June 30, 2011 and 2010, respectively.
| 11 |
| AVALON GLOBAL SOLUTIONS, INC. |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
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. 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.
The Company files income tax returns in the U.S. federal jurisdiction and in one state. Generally, the Company is subject to examination by U.S. federal (or state and local) income tax authorities for three years from the filing of a tax return.
Subsequent Events Subsequent events are events or transactions that occur after the balance sheet date but before financial statements are issued. The Company recognizes in the consolidated financial statements the effects of all subsequent events that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing the financial statements. The Company’s consolidated financial statements do not recognize subsequent events that provide evidence about conditions that did not exist at the date of the balance sheet but arose after the balance sheet date and before financial statements are issued.
The Company has evaluated subsequent events through March 6, 2012, which is the date the financial statements were issued. See Note 15 to the consolidated financial statements for additional information regarding the Company’s asset sale transaction to a publicly-traded company.
Accounting Standards Update
Revenue Recognition – In October 2009 the FASB issued Accounting Standards Update (ASU) ASU 2009-13, “Revenue Recognition (Topic 605) – Multiple-Deliverable Revenue Arrangements – a Consensus of the FASB Emerging issues Task Force”. This update provides guidance for separating consideration in multiple-deliverable arrangements by establishing a selling price hierarchy based on vendor-specific objective evidence (VSOE) if available, third party evidence if VSOE is not available, or estimated selling price if neither VSOE nor third-party evidence is available. This update eliminates the residual method of allocating consideration to all the deliverables using the relative selling price method. ASU 2009-13 is effective for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, which means that it became effective for the Company’s fiscal year beginning July 1, 2010. This update did not have a material impact on the Company’s financial statements.
| 12 |
| AVALON GLOBAL SOLUTIONS, INC. |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
Supplementary Pro Forma Information for Business Combinations – In December 2010, the FASB issued ASU 2010-29, Disclosure of Supplementary Pro Forma Information for Business Combinations. This update requires disclosure of pro forma information as if the business combination occurred at the beginning of the prior annual reporting period as well a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination. ASU 2010-29 is effective for business combinations for which the acquisition date is on or after the Company’s fiscal year beginning on or after December 15, 2010, which means that it will be effective for the Company’s fiscal year beginning July 1, 2011. This disclosure requirement will not impact the Company’s 2012 financial statements.
Goodwill Impairment Testing – In December 2010, the FASB issued ASU 2010-28, Intangibles – Goodwill and Other (Topic 350): When to perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts. ASU 2010-28 requires an entity to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. An entity should consider whether there are any adverse qualitative factors indicating that impairment may exist. ASU 2010-28 is effective for fiscal years and interim period beginning on or after December 15, 2010, which means that it will be effective for the Company’s fiscal year beginning July 1, 2011. This update is not expected to have a material impact on the Company’s method of evaluating goodwill for impairment.
NOTE 3 – TRADE ACCOUNTS RECEIVABLE AND UNBILLED RECEIVABLES
Accounts receivable consist of the following at June 30:
| 2011 | 2010 | |||||||
| Commercial trade receivables | $ | 1,305,818 | $ | 596,484 | ||||
| Government trade receivables | 837,795 | 1,002,946 | ||||||
| Gross trade receivables | 2,143,613 | 1,599,430 | ||||||
| Less: allowances for doubtful accounts | - | - | ||||||
| Trade receivables, net | $ | 2,143,613 | $ | 1,599,430 | ||||
| 13 |
| AVALON GLOBAL SOLUTIONS, INC. |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
NOTE 4 – PROPERTY AND EQUIPMENT
Property and equipment consist of the following at June 30, 2011 and 2010:
| 2011 | 2010 | |||||||
| Mobile devices | $ | 560,464 | $ | 560,464 | ||||
| Computer hardware and equipment | 131,754 | 103,073 | ||||||
| Furniture and fixtures | 140,653 | 133,047 | ||||||
| Total | 832,871 | 796,584 | ||||||
| Less: accumulated depreciation | (480,895 | ) | (239,912 | ) | ||||
| Property and equipment, net | $ | 351,976 | $ | 556,672 | ||||
For the years ended June 30, 2011 and 2010, depreciation expense recorded was $240,983 and $239,912.
NOTE 5 – INTANGIBLE ASSETS AND GOODWILL
Intangible Assets
The Company has material intangible assets consisting of purchased and internally developed software used in the conduct of business. The following table summarizes purchased and internally developed intangible assets subject to amortization at June 30:
| 2011 | ||||||||||||||||
| Gross Carrying Amount | Accumulated Amortization | Net Book Value | Weighted Average Amortization Period | |||||||||||||
| Purchased and internally developed software | $ | 2,633,629 | $ | (783,988 | ) | $ | 1,849,641 | 3.00 | ||||||||
| 2010 | ||||||||||||||||
| Gross Carrying Amount | Accumulated Amortization | Net Book Value | Weighted Average Amortization Period | |||||||||||||
| Purchased and internally developed software | $ | 1,114,161 | $ | (306,093 | ) | $ | 808,068 | 3.00 | ||||||||
| 14 |
| AVALON GLOBAL SOLUTIONS, INC. |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
The following table summarizes estimated future amortization for purchased and internally developed intangible assets for fiscal years ending June 30:
| Year | Amount | |||
| 2012 | $ | 877,860 | ||
| 2013 | 570,790 | |||
| 2014 | 400,991 | |||
| Total | $ | 1,849,641 | ||
Amortization expense was $477,895 and $306,093 for the years ended June 30, 2011 and 2010, respectively.
Goodwill
The changes in the carrying amount of goodwill were as follows for the years ended June 30:
| 2011 | 2010 | |||||||
| Beginning balances, July 1 | $ | - | $ | - | ||||
| Additions: | ||||||||
| Comstructure LLC (CSLLC) goodwill | 890,354 | - | ||||||
| Reductions: | - | - | ||||||
| Ending balances, June 30 | $ | 890,354 | $ | - | ||||
NOTE 6 – COMMISSIONS PAYABLE
The Company entered into exclusive sales agent and distribution channel agreements in an effort to expand its reach into the commercial and federal market space. These agreements have a customary term of two years and may be terminated with mutual agreement by both parties. The commission rates on first time customer agreements can range from 10% to 20%. The commission rate on customer renewals can range from 2% to 5%. Commissions are payable based on net revenue collected and remitted within 30 days of collection from the customer.
Commissions paid for the years ended June 30, 2011 and 2010 were $230,524 and $171,156 and are included in cost of sales. Unpaid commissions at June 30, 2011 and 2010 were $58,205 and $72,468, respectively.
| 15 |
| AVALON GLOBAL SOLUTIONS, INC. |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
NOTE 7 – DEFERRED REVENUE
Deferred revenue consists of the following at June 30:
| 2011 | 2010 | |||||||
| Advance customer billings | $ | 271,861 | $ | 31,534 | ||||
| Advance customer payments | 180,000 | 168,000 | ||||||
| $ | 451,861 | $ | 199,534 | |||||
There were no deferred revenue related to customer billings or payments that extend more than one year. Advance customer payments represent customer device and accessory prepayments that will be used against future customer orders. Advance customer payments are refundable.
NOTE 8 – LINE OF CREDIT
On July 23, 2010, the Company entered into a revolving loan and security agreement with First Virginia Community Bank to borrow up to $1,000,000 for operational purposes. The revolving loan borrowing base is based on eligible accounts receivable which is defined as 85% of billed government receivables, 80% of billed government subcontract receivables and 80% of billed commercial receivables aged less than 91 days. Additionally, the Company is required to maintain a lockbox with the lender to facilitate collection of customer receivables and controlled by the lender to apply first to outstanding line of credit balances. As a result of the lockbox requirement the Company is required to present its letter of credit as a current liability.
The Company subsequently entered into loan modifications on July, 29, 2010, February 15, 2011 and October 31, 2011. These modifications were made to extend the line of credit maturity to January 31, 2012. The line of credit is secured by the assets of the Company and is personally guaranteed by two separate stockholders in an amount up to $600,000 each, or $1,200,000 combined.
At June 30, 2011 and 2010, the line of credit had an outstanding balance of $649,156 and $844,938, respectively. The line of credit bore interest at the Wall Street Journal prime rate plus 1.50%, which was 4.75% and 4.50% at June 30, 2011 and 2010, respectively.
Under the terms of the agreement the Company has access to a $150,000 letter of credit facility. The line of credit requires annual payment of an unused letter of credit fee equal to 1.50% of the face of amount of the letter of credit and a documentation fee of $250. For the years ended June 30, 2011 and 2010, the Company paid fees of $2,500 and $2,500, respectively. The Company had no outstanding letters of credit issued at June 30, 2011 or 2010.
The Company is required to maintain financial covenants to comply with the terms of its letter of credit agreement such as minimum tangible capital funds of $775,000, minimum interest coverage ratio of 1.50 to 1.00 and a maximum leverage ratio of 2.75 to 1.00. The Company was not in compliance with its financial covenants at June 30, 2011 or 2010. All outstanding lines were paid in full when the Company was purchased by Wide Point Corporation (See Note 15).
| 16 |
| AVALON GLOBAL SOLUTIONS, INC. |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
NOTE 9 – NOTES PAYABLE
Notes payable consists of the following at June 30:
| 2011 | 2010 | |||||||
| Senior Debt | ||||||||
| Net Results, Inc. Self-liquidating trust notes payable (1) | $ | 1,541,102 | $ | 1,555,591 | ||||
| Subordinated Debt | ||||||||
| Comstructure LLC notes payable (2) | 1,200,000 | - | ||||||
| Shareholder notes payable (3) | 516,000 | 516,000 | ||||||
| Seed money notes payable (4) | 388,313 | - | ||||||
| Avalon Technology, Inc. notes payable (5) | 380,000 | 380,000 | ||||||
| Vendor promissory note payable (6) | 130,906 | - | ||||||
| Bank note payable | 3,943 | 11,929 | ||||||
| Total long term notes payable | 4,160,264 | 2,463,520 | ||||||
| Less current portion | (876,625 | ) | (26,418 | ) | ||||
| Notes payable, net | $ | 3,283,639 | $ | 2,437,102 | ||||
Future repayments on long-term notes payable for succeeding years are as follows:
| Year | Amount | |||
| 2012 | $ | 876,625 | ||
| 2013 | 1,189,317 | |||
| 2014 | 554,365 | |||
| 2015 | 146,082 | |||
| 2016 | 139,851 | |||
| Thereafter | 1,254,024 | |||
| Total | $ | 4,160,264 | ||
| (1) | Net Results Inc. Self-liquidating Trust (the “Trust”) notes payable was assumed by the Company in connection with the July 1, 2009 merger of Net Results Group, Inc. Effective June 20, 2011, the Trust notes payable were separated into individual notes payable to the beneficiaries of the Trust. These obligations bear interest at 7.0% per annum and require monthly payment of principal and interest of $13,000. All unpaid interest and principal are payable at maturity. On April 30, 2011, the Company entered into a unified debt and subordination agreement (UDSA) to provide senior security for the First Virginia Community Bank line of credit and seed money notes payable obligations. As a result of the UDSA agreement this obligation is a subordinated obligation. There are no early prepayment penalties for early retirement of these obligations. These obligations were repaid in full out of the proceeds received from the sale of the Company on December 31, 2011. See Note 15 to the consolidated financial statements for additional information regarding the sale transaction. |
| 17 |
| AVALON GLOBAL SOLUTIONS, INC. |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| (2) | Comstructure LLC seller financed notes payable were issued on April 29, 2011 at principal amounts ranging from $16,327 to $468,258 to five current shareholders and mature on April 29, 2014. The proceeds from the note issuance were used to finance a portion of the purchase price. These obligations bear interest at 5.0% per annum with monthly installments based on savings formula as set forth in the note agreement which was approximately $37,500 at June 30, 2011. All unpaid interest and principal are payable at maturity. These promissory notes are subordinated to the First Virginia Community Bank promissory note agreement there are no early prepayment penalties for early retirement of these obligations. This obligation was repaid in full out of the proceeds received from the sale of the Company on December 31, 2011. See Note 15 to the consolidated financial statements for additional information regarding the sale transaction. |
| (3) | Individual shareholder notes payable were issued on February 22, 2010 at principal amounts ranging from $25,000 to $150,000 to six current shareholders and maturing between January 31, 2013 and January 13, 2014. The proceeds from the note issuance were used to provide additional operating capital to the company. These obligations bear interest at 9.0% per annum payable in monthly interest-only installments ranging from $375 to $1,125. All unpaid interest and principal are payable at maturity. These promissory notes are subordinated to the First Virginia Community Bank loan and security agreement described in Note 8 to the consolidated financial statements. There are no early prepayment penalties for early retirement of these obligations. These promissory notes are secured by all of the assets of the Company. In conjunction with financing agreement, the Company sold 2,750,000 shares of common stock for $2,750 to these same shareholders. As additional consideration for the equity interest granted certain shareholders bound by this agreement personally guaranteed up to $300,000 on the First Virginia Community Bank line of credit balance. These obligations were repaid in full out of the proceeds received from the sale of the Company on December 31, 2011. See Note 15 to the consolidated financial statements for additional information regarding the sale transaction. |
| (4) | Seed money promissory notes were issued on April 30, 2011 in the amount of $98,000 payable to five current shareholders and mature on January 31, 2014. The proceeds from the note issuance were used to provide additional operating capital to the company. These obligations bear interest at 5.25% per annum payable in monthly interest-only installments of $1,522. All unpaid interest and principal are payable at maturity. On April 30, 2011, the Company entered into a unified debt and subordination agreement (UDSA) to provide senior security for the First Virginia Community Bank line of credit and seed money notes payable obligations. As a result of the UDSA agreement this obligation is a subordinated obligation. There are no early prepayment penalties for early retirement of these obligations. These obligations were repaid in full out of the proceeds received from the sale of the Company on December 31, 2011. See Note 15 to the consolidated financial statements for additional information regarding the sale transaction. |
| 18 |
| AVALON GLOBAL SOLUTIONS, INC. |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| (5) | Avalon Technology, Inc. promissory notes were issued on June 30, 2009 in the amount of $600,000. The proceeds from the note issuance were used to finance a portion of the purchase price. This is a non-interest bearing obligation which requires principal-only payments of $12,000 per month. On January 15, 2010 the Company exercised its right to offset required future payments of this obligation against unexpected costs and obligations that existed at the transaction date but were not disclosed by the seller. The unpaid balance of the original promissory note was $546,852 at the time payments ceased. |
| As more fully described in Note 10 to the consolidated financial statements, the Company and ATI litigated this matter in civil court and reached a settlement agreement prior to trial. As part of the settlement the Company issued a promissory note in the amount of $230,000 and $50,000 which was less than the remaining unpaid balance of $546,852 at January 15, 2010 when the Company ceased paying the original promissory note. This obligation, along with an additional $100,000 due at settlement, was repaid in full out of the proceeds received from the sale of the Company on December 31, 2011. See Note 15 to the consolidated financial statements for additional information regarding the sale transaction. |
| (6) | Vendor promissory note payable was issued on April 20, 2011 for $137,406 in settlement of unpaid obligations owed by the Company in the performance of certain customer contractual obligations. The promissory note matures on January 15, 2013. This obligation has no stated interest rate and payable in accreting monthly payments initially starting at $3,000 and increasing at increments of $250 to $500 per month. This obligation was repaid in full out of the proceeds received from the sale of the Company on December 31, 2011. See Note 15 to the consolidated financial statements for additional information regarding the sale transaction. |
NOTE 10 – COMMITMENT AND CONTINGENCIES
Lease Commitments
The Company has entered into leasing arrangements with unrelated entities for its corporate executive and administrative offices, sales office, call centers, satellite client office for consultants and a secured data facility. These leases provide that the Company pay taxes, maintenance, insurance and other expenses as periodically determined by the landlord. Lease rates are generally increased annually by fixed amounts, subject to certain maximum amounts defined within individual agreements. Rent expense under these operating leases for 2011 and 2010 was approximately $183,000 and $237,000, respectively.
| 19 |
| AVALON GLOBAL SOLUTIONS, INC. |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
Future minimum payments by year required under lease obligations consist of the following for fiscal years ending June 30:
| Year | Amount | |||
| 2012 | $ | 298,796 | ||
| 2013 | 259,272 | |||
| 2014 | 220,167 | |||
| 2015 | 142,496 | |||
| 2016 | 98,716 | |||
| Thereafter | 88,183 | |||
| Total | $ | 1,107,630 | ||
Employment Agreements
The Company has six employment and non-disclosure agreements with certain key senior executives that set forth compensation levels and provide for termination severance payments and continuation of benefits in certain instances. Additionally these employment agreements contain a non-compete provision for executives that own more than 2.0% of the Company’s common stock.
Certain employment agreements are structured as at-will employment agreements with initial terms of two to three years and a few agreements have no termination date. Employment agreements terminated with cause relieve the Company of the obligation to provide any termination severance payments and continuation of benefits. Additionally, certain senior executives with outstanding notes payable due from the Company are entitled to full repayment of such notes at the time of termination regardless of the cause of termination. There were no terminations during fiscal years ended June 30, 2011 or 2010 that would create an obligation for the Company.
Litigation
On June 30, 2009, the Company acquired certain business assets, contracts, and liabilities from Avalon Technology, Inc. (ATI). The Company made the acquisition so that it could enter into the federal government marketplace through ATI’s existing contracts. ATI was a provider of telecom-related and wireless management services to federal government agencies and large businesses. ATI ceased actively conducting business on the acquisition date.
| 20 |
| AVALON GLOBAL SOLUTIONS, INC. |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
In connection with the acquisition the Company issued equity and debt instruments as purchase consideration. Subsequent to the acquisition date, the Company discovered material unrecorded accounts payable and other unexpected costs and obligations. Under the material adverse terms of the ATI Purchase Agreement and Promissory Note, the Company asserted it had the right to offset such obligations against the promissory note and ceased paying on the note. ATI and its sole shareholder disputed the Company actions and filed a lawsuit in Virginia against the Company to recover the balance of the note, $546,852. The Company counter sued and claimed its right to offset the obligations against the note. On October 27, 2011, both parties reached an agreement and mutually agreed to vacate the proceedings with prejudice. Under the terms of the settlement, the Company issued two non-interest bearing notes with principal balances of $230,000 and $50,000, respectively, and an additional $100,000 due at settlement. The amount owed to ATI and its sole shareholder as a result of final settlement is reflected in the financial statements as of June 30, 2011 and 2010 as presented in Note 9 to the consolidated financial statements. As of June 30, 2011 and 2010, the unpaid balance was $380,000, respectively. These obligations were subsequently repaid in January 2012.
NOTE 11 – INCOME TAXES
The Company has adopted the provisions of ASC 740-10-15. The Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more-likely-than-not threshold, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon ultimate settlement with the relevant tax authority. The Company does not have any unrecognized tax benefits at June 30, 2010 or 2011, including interest and penalties. In the future, any interest and penalties related to uncertain tax positions will be recognized in income tax expense.
The Company files U.S. federal income tax returns and various states income tax returns. The Company may be subject to examination by the IRS for tax years 2009 forward. Additionally, the Company may be subject to examinations by various state taxing jurisdictions for tax years 2009 forward. The Company is currently not under examination by the IRS or any state tax jurisdiction.
As of June 30, 2011, the Company had net operating loss (NOL) carry forwards of approximately $720,000 to offset future taxable income for federal and state income tax purposes, which is net of the potential limitation discussed below. These carry forwards begin to expire in 2030. In assessing the ability to realize deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible.
| 21 |
| AVALON GLOBAL SOLUTIONS, INC. |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
The significant components of the deferred tax assets (liabilities) consisted of the following as of June 30:
| 2011 | 2010 | |||||||
| Deferred tax assets: | ||||||||
| Net operating loss carryforwards | $ | 228,000 | $ | 338,000 | ||||
| Depreciation and amortization of property and equipment | 95,000 | 48,000 | ||||||
| Total deferred tax assets | 323,000 | 386,000 | ||||||
| Less: valuation allowance | - | (364,000 | ) | |||||
| Total deferred tax assets, net | 323,000 | 22,000 | ||||||
| Deferred tax liabilities: | ||||||||
| Capitalized software costs | (453,000 | ) | - | |||||
| Depreciation and amortization of intangibles | - | (22,000 | ) | |||||
| Total deferred tax liabilities | (453,000 | ) | (22,000 | ) | ||||
| Net deferred tax liability | $ | (130,000 | ) | $ | - | |||
Changes in the valuation allowance for the years ended June 30, are as follows:
| 2011 | 2010 | |||||||
| Beginning balance | $ | 364,000 | $ | - | ||||
| Increase (decrease) in valuation allowance | (364,000 | ) | 364,000 | |||||
| Ending balance | $ | - | $ | 364,000 | ||||
| 22 |
| AVALON GLOBAL SOLUTIONS, INC. |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
NOTE 12 – STOCKHOLDER’S EQUITY
The Company is authorized to issue up to 20,000,000 shares of common stock with a par value of $0.001 per share. The Company’s equity capital raise transactions for the years ended June 30, 2010 and 2011 are set forth in the table below:
| Equity Transaction Description |
Transaction Date |
Common Shares Outstanding (000s) |
|||
| Balance June 30, 2009 | 5,923 | ||||
| Issuance of common shares as consideration for the asset purchase of Net Results Group, Inc. | 7/1/09 | 4,364 | |||
| Issuance of common shares sold to employees at par value | 10/6/09 | 473 | |||
| Issuance of common shares sold to shareholders as capital financing transaction | 2/27/10 | 2,750 | |||
| Issuance of common shares in exchange for shareholder guarantee of bank debt | 3/23/10 | 500 | |||
| Balance June 30, 2010 | 14,010 | ||||
| Issuance of common shares sold to employees at par value | 4/30/11 | 1,061 | |||
| Issuance of common shares sold to shareholders as capital financing transaction | 4/30/11 | 664 | |||
| Issuance of common shares as consideration for Comstructure LLC business combination | 4/30/11 | 1,067 | |||
| Issuance of common shares as consideration as capital financing transaction | 4/30/11 | 200 | |||
| Balance June 30, 2011 | 17,002 |
NOTE 13 – RELATED PARTY TRANSACTIONS
As described in Note 9, the Company has a note payable to a Trust of which some of its shareholders are also beneficiaries. Interest paid on this note was approximately $54,152 and $108,000 for 2011 and 2010, respectively.
| 23 |
| AVALON GLOBAL SOLUTIONS, INC. |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
As described in Note 9, the Company has $516,000 of loans payable to stockholders. These loans are interest-only with the principal payable in full on January 31, 2013. These loans bear interest at 9.00%, which is computed and payable monthly, and are subordinated to the line of credit. Total interest paid to stockholders on these loans was approximately $54,000 in 2011 and 2010, respectively. See Note 9 for a listing and description of all related party notes payable.
At June 30, 2011 and 2010, the Company owed its stockholders an additional $4,407 for unreimbursed expenses. This amount is included in accounts payable at June 30, 2011 and 2010.
The Company had a lease agreement with a shareholder for its principal office in Hampton, VA through December 1, 2011. The lease required monthly payments of approximately $4,500. Total lease payments made to this shareholder for the years ended June 30, 2011 and 2010 were approximately $52,300 and $49,800, respectively. The Company did not renew the lease agreement at expiration. The Company signed a new lease agreement with an unrelated party for office space in Hampton, VA effective December 1, 2011.
NOTE 14 – BUSINESS COMBINATIONS
Net Results Group, Inc.
Effective July 1, 2009, the Company acquired Net Results Group, Inc. (NRG) in exchange for 4,363,709 of the Company’s common shares. The merger was primarily a technical undertaking, as the Company was formed specifically for the purpose of merging with NRG. NRG provided telecom consulting and expense management services.
The following table summarizes the final fair values of consideration given and the values of assets acquired and liabilities assumed recognized at the acquisition date:
| Fair value of consideration given: | ||||
| 4,363,709 shares of AGS | $ | - | ||
| Fair value of identifiable assets and liabilities assumed: | ||||
| Cash | $ | 171,405 | ||
| Trade receivables | 288,471 | |||
| Other current assets | 6,052 | |||
| Software | 582,853 | |||
| Deferred subordinated loan fees | 250,000 | |||
| Accounts payable | (1,159 | ) | ||
| NRG Self liquidation trust notes payable | (1,619,696 | ) | ||
| Net liabilities assumed | (322,074 | ) | ||
| Par value of shares issued | (4,364 | ) | ||
| Loss on acquisition | $ | (326,438 | ) |
| 24 |
| AVALON GLOBAL SOLUTIONS, INC. |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
Comstructure, LLC
Effective April 30, 2011, Avalon Global Solutions, Inc. ("AGS") entered into a securities purchase agreement (“SPA”) to purchase the outstanding membership interests and business operations of Comstructure, LLC ("CLLC") for $2,000,000. The purchase price consisted of cash of $300,000, a 3-year $1.2MM promissory note payable bearing interest at 5.0% and issuance of 1,066,700 shares of AGS common stock valued by AGS at $500,000. CLLC provided telecom consulting and expense management services.
The following table summarizes the final fair values of consideration given and the values of assets acquired and liabilities assumed recognized at the acquisition date:
| Fair value of consideration given: | ||||
| Cash | $ | 300,000 | ||
| Issuance of debt | 1,200,000 | |||
| 1,066,700 shares of AGS common stock | 500,000 | |||
| Total | $ | 2,000,000 | ||
| Fair value of identifiable assets and liabilities assumed: | ||||
| Cash | $ | 114,029 | ||
| Trade receivables | 327,843 | |||
| Prepaid expenses and other assets | 32,018 | |||
| Property and equipment, net | 36,287 | |||
| Software | 1,200,000 | |||
| Deposits and other assets | 9,225 | |||
| Accounts payable | (96,156 | ) | ||
| Loan due from AGS | (210,356 | ) | ||
| Accrued expenses | (17,491 | ) | ||
| Customer trust funds | (124,430 | ) | ||
| Deferred revenue | (155,730 | ) | ||
| Bank note payable | (5,593 | ) | ||
| Total | 1,109,646 | |||
| Goodwill | 890,354 | |||
| Total | $ | 2,000,000 |
| 25 |
| AVALON GLOBAL SOLUTIONS, INC. |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
NOTE 15 – SUBSEQUENT EVENTS
On December 30, 2011, WidePoint Corporation (a publicly-traded company) together with its wholly-owned subsidiary, WidePoint Solutions Corp. (WSC), a Delaware corporation, entered into an Asset Purchase Agreement (“APA”) with AGS pursuant to which WSC acquired certain assets and assumed certain liabilities of AGS. The purchased assets include, but are not limited to, customer contracts and relationships; assembled workforce talent and expertise necessary to manage the telecommunications and consulting operations and internally developed software upon which managed services are delivered by AGS. Assumed liabilities consist of customary trade vendor obligations incurred in the ordinary course of business and property and equipment leasing obligations required to operate the business. Total purchase price was $11,500,000 million consisting of cash of $7,500,000, and two subordinated seller financed promissory notes with face amounts of $1,000,000 and $3,000,000.
This sale transaction alleviated doubt raised about the Company’s ability to remain a going concern as a result of its accumulated net operating losses and net working capital deficiencies and extensive use of debt financing.
| 26 |
| EXHIBIT 99.3 |
| UNAUDITED FINANCIAL STATEMENTS OF BUSINESS ACQUIRED |
| AVALON GLOBAL SOLUTIONS, INC. |
| UNAUDITED FINANCIAL STATEMENTS |
| BALANCE SHEET |
| As of September 30, 2011 |
| (Unaudited) |
| Assets | ||||
| Current assets: | ||||
| Accounts receivable | $ | 1,742.976 | ||
| Unbilled accounts receivable | 283.046 | |||
| Prepaid expenses and other assets | 319.168 | |||
| Total current assets | 2,345.190 | |||
| Other assets | 17.783 | |||
| Total assets | $ | 2,362.973 | ||
| Liabilities and stockholders’ equity | ||||
| Current liabilities: | ||||
| Checks issued in excess of bank balances | $ | 81.919 | ||
| Accounts payable | 1,568.788 | |||
| Accrued expenses | 24.658 | |||
| Deferred revenue | 364.438 | |||
| Total Current liabilities | 2,039.803 | |||
| Stockholders’ equity | ||||
| Additional paid - in capital | 323.170 | |||
| Total stockholders’ equity | 323.170 | |||
| Total liabilities and stockholders' equity | $ | 2,362.973 |
The accompanying notes are an integral part of this unaudited financial information
| AVALON GLOBAL SOLUTIONS, INC. |
| UNAUDITED FINANCIAL STATEMENTS |
| STATEMENT OF OPERATIONS |
| For the Three Months Ended September 30, 2011 |
| (Unaudited) |
| Revenues, net | $ | 2,176,923 | ||
| Cost of Sales | 1,696,356 | |||
| Gross Profit | 480,567 | |||
| Operating Expenses | 398,768 | |||
| Income from Operations | 81,799 | |||
| Other Income (Expense) | ||||
| Interest Income | 3,820 | |||
| Interest Expense | (52,500 | ) | ||
| Other Expense | - | |||
| Total Other Expense | (48,680 | ) | ||
| Net Income Before Provision for Income Taxes | 33,119 | |||
| Income Tax Expense | - | |||
| Net Income | $ | 33,119 |
The accompanying notes are an integral part of this unaudited financial information
| AVALON GLOBAL SOLUTIONS, INC. |
| NOTES TO UNAUDITED FINANCIAL STATEMENTS |
Note 1 - Organization and Nature of Operations
Organization
Avalon Global Solutions, Inc. (the “Company” or “Avalon” or “AGS”) was incorporated under the laws of the state of Florida on February 18, 2009. The Company’s corporate headquarters is located in Hampton, Virginia. The Company has an operational sales office, invoice management and processing and helpdesk centers, logistics and data storage facilities located in Virginia, California, Michigan, Tennessee and North Carolina.
Nature of Operations
The Company specializes in providing both wireline and wireless telecommunications lifecycle management services. Services are characterized as follows:
| § | Managed services - Consists of providing telecommunication device and asset management, telecommunications expense management, helpdesk services, telecom expense optimization, invoice billing, management and payment services. |
| § | Asset management services – Consists of providing asset management for wireline and wireless communications. Services include wireless equipment rental, replacement and repair and wireless warranty services. |
| § | Compliance services – Consists of performing permission based audits, accounts payable audits, and compliance reviews. |
| § | Consulting services – Consists of performing telecommunications network assessments, contract negotiations, information security consulting services, and infrastructure consulting services. |
Note 2 - Summary of Significant Accounting Policies
Basis of Presentation
The condensed balance sheet as of September 30, 2011 and the condensed statement of operations for the three months ended September 30, 2011 have been prepared based on the assets acquired and liabilities assumed as outlined in the Asset Purchase Agreement entered into on December 31, 2011, by and among Widepoint Corporation, Widepoint Solution Corp. (a wholly-owned subsidiary of Widepoint Corporation) and Avalon Global Solution, Inc. and certain of the shareholders of AGS. This presentation is unaudited and all significant intercompany accounts and excluded assets and liabilities were eliminated in this presentation.
| AVALON GLOBAL SOLUTIONS, INC. |
| NOTES TO UNAUDITED FINANCIAL STATEMENTS |
Note 2 - Summary of Significant Accounting Policies (continued)
Use of Estimates
The preparation of 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, fair value of intangible assets recorded in connection with a business combination. 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.
Significant Customers
Two government customers and one commercial customer comprised more than 5% of our revenues. These three customers accounted for more than 23% of our revenues for the three months ended September 30, 2011.
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 could have a material adverse effect on our results of operations.
Concentrations of Credit Risk
One government customer and one commercial customer comprised more than 5% of our accounts receivable. These two customers accounted for more than 42% of our accounts receivable at September 30, 2011.
Fair value of Financial instruments
The financial statements include financial instruments for which the fair market value may differ from amounts reflected on a historical basis. The Company’s financial instruments include cash equivalents and accounts receivable. The carrying values of cash equivalents, accounts receivable and accounts payable approximate their fair value because of the short maturity of these instruments and past evidence 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 are reset periodically to reflect current market rates.
Cash and Cash Equivalents
The Company maintains interest-bearing cash deposits and short-term overnight investments with a large financial institution. The Company considers all highly liquid investments with original maturities of three months or less are considered to be cash equivalents for purposes of these financial statements.
| AVALON GLOBAL SOLUTIONS, INC. |
| NOTES TO UNAUDITED FINANCIAL STATEMENTS |
Note 2 - Summary of Significant Accounting Policies (continued)
Accounts Receivable
The Company's accounts receivable is due from federal and state governments and established publicly-traded and private sector companies in the following industries: broadcasting and communications, consumer retail, manufacturing, healthcare, and financial services. Credit is extended based on evaluation of a customer’s financial condition and, generally, collateral is not required. Accounts receivable are usually due within 45 to 60 days and are stated at amounts due from customers net of an allowance for doubtful accounts if deemed necessary. 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.
The Company determines its allowance by considering a number of factors, including the 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. Upon specific review and our determination that a bad debt reserve may be required, we will reserve such amount if we view the account as potentially uncollectable.
Unbilled Accounts Receivable
Unbilled accounts receivable consists of consulting services provided and invoice billing and payment services performed near the period-end but not billed until the following period or not billable until certain contractually agreed upon billing milestones are met, if applicable.
Software Development Costs
The Company capitalizes costs related to software and implementation in connection with its telecommunications expense management software application Clarity and its helpdesk software application Foresight. For software development costs (or “internally developed intangible assets”) related to software products for sale, lease or otherwise marketed, 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 over a four-year period or such other such shorter period as may be required.
| AVALON GLOBAL SOLUTIONS, INC. |
| NOTES TO UNAUDITED FINANCIAL STATEMENTS |
Note 2 - Summary of Significant Accounting Policies (continued)
Advance Billings and Customer Payments
Deferred revenue arises from advanced customer billings as permitted under contractual arrangements or from advance payments from customers for telecommunication expense managed services. Certain federal and state governments and their agencies may pay for services and/or devices in advance. These advance payments are recorded as deferred revenue and recognized as services are performed and/or goods delivered. Our revenue recognition policy is below under the caption “revenue recognition”.
Revenue Recognition
Revenue is recognized when persuasive evidence of an arrangement exists, services have been rendered, the contract price is fixed or determinable and collectability is reasonably assured. The Company has a standard internal process that is used to determine whether all required criteria for revenue recognition have been met. Revenue is recognized as follows for the following services:
| § | Managed services – User access and device management services are delivered on a monthly basis and recognized as revenue based on fixed price per device. Management service charges include a service handling charge based on a percentage of services billed. Initial customer portal implementation fees are deferred and amortized ratably over the estimated customer life which ranges from 36 to 48 months. Invoice billing and payment services are performed on monthly basis. Revenue and related costs are recognized on a net basis as we do not have discretion in choosing providers, rate plans, and devices in providing the services to our customers. Certain federal and state governments and their agencies may pay for services and/or devices in advance. These advance payments are recorded as deferred revenue and recognized as services are performed and/or devices delivered. |
| § | Asset management services – Equipment sales, rental, replacement and repair and wireless warranty services are delivered on a monthly basis. Revenue is recognized on the sale of telecommunications devices upon receipt of inventory and bills for services at cost plus applicable contractual administrative handling and shipping fees earned. Equipment rental, replacement and repair services are recognized as revenue based on a fixed price per device. Nonrefundable early termination fees are recognized when termination is known. |
| § | Compliance services – Consists of performing permission based audits, accounts payable audits, and compliance reviews. Revenue is recognized to the extent of billable rates times hours delivered plus material and other reimbursable costs incurred to deliver consulting services. |
AVALON GLOBAL SOLUTIONS, INC.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
| § | Consulting services – Consists of performing telecommunications network assessments, contract negotiations, information security consulting services, and infrastructure consulting services. Revenue is recognized on certain contingency-based consulting arrangements to the extent expected savings are realized and the customer signs-off on our value billing. |
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. 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.
The Company was recently formed and has not yet filed its federal or state income tax returns and expects to its fiscal 2011 tax return in fiscal 2012. Generally, the Company is subject to examination by U.S. federal (or state and local) income tax authorities for three years from the filing of a tax return.
Note 3 – Commitment and Contingencies
Lease Commitments
The Company has entered into leasing arrangements with unrelated entities for its corporate executive and administrative offices, sales office, call centers, satellite office for consultants and a secured data facility. These leases provide that the Company pay taxes, maintenance, insurance and other expenses as periodically determined by the landlord. Lease rates are generally increased annually by fixed amounts, subject to certain maximum amounts defined within individual agreements. Future minimum payments by year required under lease obligations consist of the following for fiscal years ending September 30:
| 2012 | $ | 279,709 | ||
| 2013 | 268,476 | |||
| 2014 | 213,889 | |||
| 2015 | 110,879 | |||
| 2016 | 69,569 | |||
| Total | $ | 942,521 |
Note 3 – Commitment and Contingencies (continued)
Employment Agreements
The Company has six employment and non-disclosure agreements with certain key senior executives that set forth compensation levels and provide for termination severance payments and continuation of benefits in certain instances.
EXHIBIT 99.4
UNAUDITED PRO FORMA FINANCIAL INFORMATION
| PRO FORMA FINANCIAL INFORMATION |
| WIDEPOINT CORPORATION |
| UNAUDITED PRO FORMA CONDENSED |
| CONSOLIDATED |
| FINANCIAL INFORMATION |
The unaudited pro forma condensed consolidated financial information has been prepared by WidePoint Corporation (“WidePoint”) and gives effect to the asset purchase transaction between WidePoint’s wholly-owned subsidiary WidePoint Solutions Corp. (“WSC”) and Avalon Global Solutions, Inc. (“AGS”) completed on December 31, 2011.
The unaudited pro forma condensed consolidated statement of operations for the year ended December 31, 2010 has been prepared to give effect to the WSC acquisition as if it had occurred on January 1, 2011. The unaudited pro forma condensed consolidated statement of operations for the nine month period ended September 30, 2011 has been prepared to give effect to the WSC acquisition as if it had occurred on January 1, 2011. The unaudited pro forma condensed consolidated balance sheet as of September 30, 2011 has been prepared to give effect to the acquisition as if it has occurred on September 30, 2011.
The pro forma adjustments, which are based on available information and certain assumptions that WidePoint believes are reasonable under the circumstances, are applied to the historical financial statements of WidePoint and WSC. WidePoint’s preliminary determination of the fair value of current assets and liabilities assumed and the fair value of intangibles purchased in the WSC purchase price is based upon preliminary estimates of the fair value of net assets acquired. Management believes that the preliminary fair value estimate is reasonable, however, in some cases; the final fair value will be based upon an independent valuation that is not yet complete. As a result, the fair value estimates are subject to revision as additional information becomes available, and such final valuation estimates could differ from the preliminary presentation.
The accompanying unaudited pro forma condensed consolidated financial information should be read in conjunction with the historical financial statements and the notes thereto for WidePoint and WSC. The unaudited pro forma condensed consolidated financial information is provided for informational purposes only and does not purport to represent what WidePoint’s financial position or results of operations would actually have been had the acquisition occurred on such dates or to project WidePoint’s results of operations or financial position for any future period.
These pro forma financial statements contain certain costs, including expenses allocated to WSC that WidePoint’s management does not expect will continue. As a result, actual results may differ significantly from the pro forma information presented herein.
| WIDEPOINT CORPORATION AND SUBSIDIARIES |
| UNAUDITED PRO FORMA CONDENSED |
| CONSOLIDATED STATEMENT OF OPERATIONS |
| For the Twelve Months Ended December 31, 2010 |
| (a) | (b) | |||||||||||||||
| Historical | Pro Forma | Pro Forma | ||||||||||||||
| Proforma Financial Information | WidePoint | AGS | Adjustments | Combined | ||||||||||||
| Revenues, net | $ | 50,812,776 | $ | 9,867,261 | $ | - | $ | 60,680,037 | ||||||||
| Cost of Sales | 37,548,018 | 7,707,197 | 612,245 | (c) | 45,867,460 | |||||||||||
| Gross Profit | 13,264,758 | 2,160,064 | (612,245 | ) | 14,812,577 | |||||||||||
| Operating Expenses | 10,460,438 | 2,947,519 | - | 13,407,957 | ||||||||||||
| Income (Loss) from Operations | 2,804,320 | (787,455 | ) | (612,245 | ) | 1,404,620 | ||||||||||
| Other Income (Expense) | ||||||||||||||||
| Interest Income | 18,440 | 2,703 | 21,143 | |||||||||||||
| Interest Expense | (90,052 | ) | (160,589 | ) | (49,411) | (d) | (300,052 | ) | ||||||||
| Other Expense | - | (326,438 | ) | 326,438 | (e) | - | ||||||||||
| Total Other Expense | (71,612 | ) | (484,324 | ) | 277,027 | (278,909 | ) | |||||||||
| Net Income (Loss) Before Provision for Income Taxes | 2,732,708 | (1,271,780 | ) | (335,218 | ) | 1,125,710 | ||||||||||
| Income Tax Expense | (3,648,146 | ) | - | - | (3,648,146 | ) | ||||||||||
| Net Income (Loss) | $ | 6,380,854 | $ | (1,271,780 | ) | $ | (335,218 | ) | $ | 4,773,856 | ||||||
| Basic Earnings per Share | $ | 0.104 | $ | 0.078 | ||||||||||||
| Basic Weighted -Average Shares Outstanding | 61,555,664 | 61,555,664 | ||||||||||||||
| Diluted Earnings per Share | $ | 0.102 | $ | 0.076 | ||||||||||||
| Diluted Weighted -Average Shares Outstanding | 62,862,978 | 62,862,978 | ||||||||||||||
The accompanying notes are an integral part of this unaudited pro forma condensed consolidated financial information
| WIDEPOINT CORPORATION AND SUBSIDIARIES |
| UNAUDITED PRO FORMA CONDENSED |
| CONSOLIDATED STATEMENT OF OPERATIONS |
| For the Nine Months Ended September 30, 2011 |
| (a) | (b) | |||||||||||||||
| Historical | Pro Forma | Pro Forma | ||||||||||||||
| Proforma Financial Information | WidePoint | AGS | Adjustments | Combined | ||||||||||||
| Revenues, net | $ | 31,176,820 | $ | 6,367,627 | $ | - | $ | 37,544,447 | ||||||||
| Cost of Sales | 24,066,355 | 3,994,089 | 459,184 | (c) | 28,519,628 | |||||||||||
| Gross Profit | 7,110,465 | 2,373,538 | (459,184 | ) | 9,024,819 | |||||||||||
| Operating Expenses | 6,961,796 | 2,129,843 | - | 9,091,639 | ||||||||||||
| Income (Loss) from Operations | 148,669 | 243,695 | (459,184 | ) | (66,820 | ) | ||||||||||
| Other Income (Expense) | ||||||||||||||||
| Interest Income | 9,391 | (66,471 | ) | - | (57,080 | ) | ||||||||||
| Interest Expense | (54,808 | ) | (152,083 | ) | (5,417) | (d) | (212,308 | ) | ||||||||
| Other Expense | 199 | - | - | 199 | ||||||||||||
| Total Other Expense | (45,218 | ) | (218,554 | ) | (5,417 | ) | (269,189 | ) | ||||||||
| Net Income (Loss) Before Provision for Income Taxes | 103,451 | 25,141 | (464,601 | ) | (336,009 | ) | ||||||||||
| Income Tax Expense | (11,559 | ) | 130,000 | (130,000) | (f) | (11,559 | ) | |||||||||
| Net Income (Loss) | $ | 115,010 | $ | (104,859 | ) | $ | (334,601 | ) | $ | (324,450 | ) | |||||
| Basic Earnings per Share | $ | 0.002 | $ | - | ||||||||||||
| Basic Weighted -Average Shares Outstanding | 62,882,100 | 62,882,100 | ||||||||||||||
| Diluted Earnings per Share | $ | 0.002 | $ | - | ||||||||||||
| Diluted Weighted -Average Shares Outstanding | 64,230,693 | 62,882,100 | ||||||||||||||
The accompanying notes are an integral part of this unaudited pro forma condensed consolidated financial information
| WIDEPOINT CORPORATION AND SUBSIDIARIES |
| NOTES TO UNAUDITED PRO FORMA CONDENSED |
| CONSOLIDATED STATEMENTS OF OPERATION |
The following notes relate to the Unaudited Pro Forma Condensed Consolidated Statement of Operations:
(a) To reflect the reported historical operating results for WidePoint Corporation for the year ended December 31, 2010 and the unaudited operating results for the nine months ended September 30, 2011 which included its wholly-owned subsidiary WidePoint Solution Corp.'s acquisition of Avalon Global Solutions, Inc.
(b) To reflect the historical results of operations for AGS for the nine months ended September 30, 2011, whose most recent fiscal year end is June 30, 2011. The unaudited operating results were derived from historical results of operations for the nine months ended September 30, 2011.
(c) To record estimated amortization expense adjustments of $612,245 and $459,184 for the twelve months ended December 31, 2010 and the nine months ended September 30, 2011, related to the identifiable intangible assets associated with the asset purchase agreement with Avalon Global Solutions, Inc. The pro forma adjustments herein are based on management's preliminary estimates of fair value. WidePoint Corporation has retained an outside firm to do an independent appraisal to determine the fair value of intangible assets acquired in this business combination. As of the date of this filing the appraisal has not yet been completed. In the event the preliminary estimates of fair value for intangible assets are not accurate then the value of intangibles and the associated life assigned and respective useful lives and method of amortization may change. Based upon the most current budget for the acquired operations WidePoint Corporation recorded on a preliminary basis approximately $4.5 million in intangible assets consisting of capitalized software costs related to acquired communications management software, customer relationships, channel partner relationships and covenants not to compete. The estimated useful life for capitalized software costs, customer relationships, channel partner relationships were approximately 4 years. The estimated useful life for covenants not to compete is approximately 2 years.
(d) In conjunction with the asset purchase agreement with Avalon Global Solutions, Inc., WidePoint Corporation obtained a senior term facility of $4 million and issued two subordinated seller financed notes payable for $1 million and $3 million and utilized the proceeds towards the total purchase price. The adjustment reflected records the incremental interest expense incurred on a borrowing base of $4 million at 4.5% and $1 million at 3%. The remaining subordinated borrowing of $3 million was excluded as it is subject to a clawback provision tied to attainment of certain performance metrics in the future. The incremental interest expense increased by $49,411 and $5,417 for the twelve months ended December 31, 2010 and the three months ended September 30, 2011, respectively.
(e) To adjust for noncash charge related to debt settlement for Avalon Global Solutions, Inc. This charge is nonrecurring and specific to a litigation settlement.
(f) Assumes the utilization of WidePoint Corporation's net operating loss carryforwards.
WIDEPOINT CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
As of September 30, 2011
| (a) | (b) | |||||||||||||||
| Historical | Pro Forma | Pro Forma | ||||||||||||||
| WidePoint | AGS | Adjustments | Combined | |||||||||||||
| Assets | ||||||||||||||||
| Current assets: | ||||||||||||||||
| Cash and cash equivalents | $ | 5,998,041 | $ | - | $ | (3,500,000) | (c) | $ | 2,498,041 | |||||||
| Accounts receivable | 4,472,654 | 1,742,976 | - | 6,215,630 | ||||||||||||
| Unbilled accounts receivable | 1,920,010 | 283,046 | - | 2,203,056 | ||||||||||||
| Prepaid expenses and other assets | 422,606 | 319,168 | 23,819 | (d) | 765,593 | |||||||||||
| Current deferred income tax asset | 468,200 | - | - | 468,200 | ||||||||||||
| Total current assets | 13,281,511 | 2,345,190 | (3,476,181 | ) | 12,150,520 | |||||||||||
| Property and equipment, net | 1,306,780 | - | - | 1,306,780 | ||||||||||||
| Goodwill | 11,329,917 | - | 6,660,583 | (e) | 17,990,500 | |||||||||||
| Other intangibles, net | 1,038,621 | - | 4,492,428 | (e) | 5,531,049 | |||||||||||
| Noncurrent deferred income tax asset, net | 3,116,705 | - | - | 3,116,705 | ||||||||||||
| Other assets | 55,170 | 17,783 | - | 72,953 | ||||||||||||
| Total assets | $ | 30,128,704 | $ | 2,362,973 | $ | 7,676,830 | $ | 40,168,507 | ||||||||
| Liabilities and stockholders' equity | ||||||||||||||||
| Current liabilities: | ||||||||||||||||
| Short term note payable | $ | 25,947 | $ | - | $ | - | $ | 25,947 | ||||||||
| Checks issued in excess of bank balances | - | 81,919 | - | 81,919 | ||||||||||||
| Accounts payable | 4,936,599 | 1,568,788 | - | 6,505,387 | ||||||||||||
| Accrued expenses | 1,679,770 | 24,658 | - | 1,704,428 | ||||||||||||
| Income taxes payable | - | - | - | - | ||||||||||||
| Deferred revenue | 26,994 | 364,438 | - | 391,432 | ||||||||||||
| Current portion of long term debt | 210,518 | - | - | 210,518 | ||||||||||||
| Current portion of deferred rent | 33,457 | - | - | 33,457 | ||||||||||||
| Current portion of capital lease obligation | 32,485 | - | - | 32,485 | ||||||||||||
| Total current liabilities | 6,945,770 | 2,039,803 | - | 8,985,573 | ||||||||||||
| Deferred income tax liability, net | - | - | - | - | ||||||||||||
| Long-term debt, net of current portion | 502,763 | - | 8,000,000 | (f) | 8,502,763 | |||||||||||
| Fair value of earnout liability | 153,000 | - | - | 153,000 | ||||||||||||
| Deferred rent, net of current portion | 74,706 | - | - | 74,706 | ||||||||||||
| Capital lease obligation, net of current portion | - | - | - | - | ||||||||||||
| Total liabilities | 7,676,239 | 2,039,803 | 8,000,000 | 17,716,042 | ||||||||||||
| Stockholders' equity | ||||||||||||||||
| Common stock, $0.001 par value; 110,000,000 shares authorized; 62,930,873 shares issued and outstanding | 62,931 | 323,170 | (323,170) | (g) | 62,931 | |||||||||||
| Additional paid-in capital | 69,075,170 | - | - | 69,075,170 | ||||||||||||
| Accumulated deficit | (46,685,636 | ) | - | - | (46,685,636 | ) | ||||||||||
| Total stockholders' equity | 22,452,465 | 323,170 | (323,170 | ) | 22,452,465 | |||||||||||
| Total liabilities and stockholders' equity | $ | 30,128,704 | $ | 2,362,973 | $ | 7,676,830 | $ | 40,168,507 | ||||||||
The accompanying notes are an integral part of this unaudited pro forma condensed consolidated financial information
WIDEPOINT CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED BALANCE SHEET
The following notes relate to the Unaudited Pro Forma Condensed Consolidated Balance Sheet:
(a) To reflect the historical unaudited financial position of WidePoint Corporation as of the most recent reporting period.
(b) To reflect the historical unaudited financial position of Avalon Global Solutions, Inc. as of the most recent reporting period.
(c) To record cash used to finance a portion of the $11.5 million total purchase price in connection with the asset purchase agreement with Avalon Global Solutions, Inc. WidePoint Corporation utilized $3.5 million in available cash balances and $8.0 million consisting of a $4.0 senior bank term loan with Cardinal Bank and two subordinated seller financed notes payable in the amount of $1 million and $3 million.
(d) To record an adjustment of $23,819 to reflect expected monthly prepaid rent and unexpired insurance premiums.
(e) To record fair value of identifiable intangible assets associated with the asset purchase agreement. WidePoint Corporation has retained an outside firm to do an independent appraisal to determine the fair value of intangible assets acquired in this business combination. As of the date of this filing the appraisal has not yet been completed. As such the preliminary fair values assigned and respective useful lives and method of amortization may change. Based upon the most current budget for the acquired operations WidePoint Corporation recorded on a preliminary basis approximately $4.5 million in intangible assets consisting of capitalized software costs related to acquired communications management software, customer relationships, channel partner relationships and covenants not to compete. The estimated useful life for capitalized software costs, customer relationships, channel partner relationships were approximately 4 years. The estimated useful life for covenants not to compete is approximately 2 years. The following table sets forth the estimated fair values of assets acquired and liabilities assumed as of September 30, 2011:
| Current assets | $ | 2,369,009 | ||
| Other intangibles | 6,660,583 | |||
| Goodwill | 4,492,428 | |||
| Other assets | 17,783 | |||
| Current liabilities | (2,039,803 | ) | ||
| Total | $ | 11,500,000 |
(f) In conjunction with the asset purchase agreement with Avalon Global Solutions, Inc., WidePoint Corporation utilized $8.0 million in debt financing. WidePoint Corporation secured a $4MM term loan on the purchase date with Cardinal Bank. The term loan bears interest at 4.5% and requires monthly principal and interest payments of $74,694.22 beginning on January 30, 2012 and every 30th of the month thereafter. The term loan matures on December 30, 2016. See Exhibit 10.5 to Form 8-K filed on January 5, 2012. The term loan requires maintenance of certain financial covenants as indicated on Exhibit 10.3 to Form 8-K filed on January 5, 2012 as follows: Audited financial statements due within 120 days of year end, reviewed financial statements due within 45 days of quarter end, minimum tangible net worth of $2.5MM at December 31, 2011 and increases to $5.5MM for the fiscal period ending December 31, 2012 and beyond and tested annually, minimum current ratio of 1.1 to 1.0 and tested quarterly, minimum debt service ratio of 1.20 to 1.0 tested quarterly beginning on June 30, 2012 and measured on a 4-quarter rolling basis and maximum funded debt to earnings before interest taxes depreciation and amortization of 4.5 to 1.0 through December 31, 2011 and then decreases to 2.5 to 1.0 and tested quarterly. The subordinated seller financed notes payable do not contain financial covenants.
(g) To adjust for net assets difference acquired that is eliminated in consolidation.