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Business Combinations
 12 Months Ended
Dec. 31, 2011
Business Combinations [Abstract]  
Business Combination Disclosure [Text Block]
8. Business Combinations

 

Avalon Global Solutions, Inc. (“AGS”)

 

On December 30, 2011, the Company together with its wholly-owned subsidiary, WidePoint Solutions Corp. (WSC), 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 integral internally developed software upon which managed services are delivered by AGS. This business combination falls within the Company’s Communications Management segment.

 

The following table sets forth the consideration paid in connection with the asset purchase agreement with AGS:

 

Cash   $ 7,500,000  
Subordinated seller financed note payable     4,000,000  
Fair value of total consideration transferred   $ 11,500,000  

 

Cash consideration paid totaled $7.5 million and came from the use of $3.5 million in operating cash on hand and use of $4.0 million bank loan proceeds. As required under the agreement a portion of the cash proceeds were held in escrow until certain transitional matters were completed by AGS. There may be adjustments to the purchase consideration arising from a minimum net working capital requirement based on the December 31, 2011 balance sheet of AGS. The Company incurred approximately $120,000 in acquisition related due diligence, legal and accounting and transaction costs in connection with this business combination. These transaction-related costs were expensed as incurred and reflected in general and administrative expense in the consolidated statements of operations for the year ended December 31, 2011.

 

The subordinated seller financed notes payable are described in Note 7 and are comprised of notes for $1 million and $3 million. The $3.0 million seller financed note payable is subject to certain claw back provisions as defined in “Annex A” to the Asset Purchase Agreement. Under the terms of the claw back, in order to obtain full payment, AGS is required to meet certain Adjusted Gross Profit (“AGP”) targets for fiscal years ending December 31, 2012 and 2013 of $5,428,000 and $6,752,000, respectively. Under the agreement, the 2013 AGP targets may be adjusted downward depending on the failure to meet 2012 AGP targets. In the event that AGS fails to achieve the AGP target for either 2012 or 2013, the principal amount due under the $3.0 million seller financed note will be reduced by up to $1.5 million in both 2012 and 2013.

  

The Company incurred approximately $120,000 in acquisition related due diligence, legal and accounting and transaction costs in connection with this business combination. These transaction-related costs were expensed as incurred and reflected in general and administrative expense in the consolidated statements of operations for the year ended December 31, 2011. In connection with this business combination, the Company entered into employment agreements with certain senior officers of AGS. Also, the Company did not incur exit or termination charges in connection with this business acquisition.

 

The following table summarizes the preliminary fair values of the assets acquired and liabilities assumed in the AGS business combination:

 

Fair value of identifiable assets acquired and liabilities assumed:        
Accounts receivable and unbilled receivables   $ 3,029,344  
Other current assets     206,069  
Customer relationships     2,220,364  
Channel partners     572,064  
Noncompete agreements     150,000  
Internally developed software     1,550,000  
Other assets     17,782  
Current liabilities     (2,762,055 )
Total identifiable net assets acquired     4,983,568  
         
Goodwill     6,516,432  
         
Total purchase price   $ 11,500,000  

 

In connection with the Company’s adoption of ASU 2010-29, Disclosure of Supplementary Pro Forma Information for Business Combinations, the following unaudited pro forma consolidated statements of operations for the years ended December 31, 2011 and 2010 have been prepared as if the acquisition of AGS had occurred at January 1, 2010 (unaudited):

 

    Year Ended December 31,  
    2011     2010  
Revenues, net   $ 49,882,694     $ 60,680,037  
Net income (loss) (1),(2)   $ (705,689 )   $ 3,899,057  
Basic earnings per share   $ (0.011 )   $ 0.063  
Diluted earnings per share   $ (0.011 )   $ 0.062  

 

The following footnotes explain the nonrecurring pro forma adjustments made to arrive at the unaudited pro forma consolidated results presented above:

 

(1) Pro forma adjustments of $1,160,607 were charged against net income (loss) for the years ended December 31, 2011 and 2010, respectively, to reflect increased intangible asset amortization recorded in connection with the AGS business combination.

 

(2) Pro forma adjustments of $5,417 and $49,411 were charged against net income (loss) for the years ended December 31, 2011 and 2010, respectively, to reflect increased borrowings to finance a portion of the purchase price for the AGS business combination.

 

The pro forma adjustments above differ from those included in the Company’s Form 8-K/A filing due to subsequent changes in preliminary intangible asset fair values. The unaudited pro forma consolidated results of operations do not purport to be indicative of the results that would have been obtained if the above acquisition had actually occurred as of the dates indicated or of those results that may be obtained in the future. These unaudited pro forma consolidated results of operations were derived, in part, from the historical consolidated financial statements of AGS and other available information and assumptions believed to be reasonable under the circumstances.

 

Vuance

 

On January 29, 2010, the Company, together with its wholly-owned subsidiary, ARCC, entered into an Asset Purchase Agreement with Vuance, Inc., (the “Vuance Agreement”), pursuant to which ARCC acquired all assets of the collective business of Vuance relating to its Government Services Division.

 

The purchased assets include, but are not limited to, the operation by Vuance of identity assurance and priority resource management solutions; crime scene management and information protection, and other activities related or incidental thereto; and the development, maintenance, enhancement and provision of software, services, products and operations for identity management and information protection, which are offered primarily to state and local government agency markets.

 

The operations of ARCC have been included in the Company’s results of operations beginning on January 29, 2010, the acquisition date. The earnout provision of the Vuance Agreement provides for additional consideration of up to $1,500,000 during the earnout period of the calendar years 2010 - 2012, subject to ARCC receiving minimum qualified revenues of at least $4,000,000 per year. In the event ARCC receives at least $4,000,000 in qualified revenues in an earnout year, then Vuance will have the right to receive an earnout payment equal to twenty percent (20%) of the amount by which such qualified revenues for that earnout year exceed $4,000,000; provided, however, that the first $270,000 of any such earnout payment will be retained by the Company for its sole account as reimbursement for certain accounts payable and deferred revenue liabilities assumed by ARCC in connection with the Vuance Agreement.

 

There was no additional consideration paid in fiscal years 2011 or 2012 as ARCC did not meet its minimum qualified revenues of at least $4,000,000 per year. As such the Company reversed the contingent consideration liability of $153,000 previously recorded on the consolidated balance sheets under the caption “fair value earnout liability” during fiscal 2010.

 

The following table summarizes the final fair values of the assets acquired and liabilities assumed in this business combination during the year ended December 31, 2010.

 

Cash   $ 383,701  
Cash to be paid     10,000  
Contingent consideration arrangement     153,000  
Fair value of total consideration transferred   $ 546,701  
         
Fair value of identifiable assets acquired and liabilities assumed:        
Accounts receivable and unbilled receivables        
Other current assets        
Current assets   $ 42,000  
Property and equipment, net     43,675  
Internally developed software     355,000  
Current liabilities     (410,212 )
Total identifiable net assets acquired     30,463  
         
Goodwill     516,238  
         
Total purchase price   $ 546,701  

 

In connection with this business combination the Company did not incur exit or termination charges.