ITEM 2. MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
Cautionary Note Regarding Forward-Looking Statements
This
Quarterly Report on Form 10-Q contains forward-looking statements
concerning our business, operations and financial performance and
condition as well as our plans, objectives and expectations for our
business operations and financial performance and condition that
are subject to risks and uncertainties. All statements other than
statements of historical fact included in this Form 10-Q are
forward-looking statements. You can identify these statements by
words such as “aim,” “anticipate,”
“assume,” “believe,” “could,”
“due,” “estimate,” “expect,”
“goal,” “intend,” “may,”
“objective,” “plan,”
“potential,” “positioned,”
“predict,” “should,” “target,”
“will,” “would” and other similar
expressions that are predictions of or indicate future events and
future trends. These forward-looking statements are based on
current expectations, estimates, forecasts and projections about
our business and the industry in which we operate and our
management's beliefs and assumptions. These statements are not
guarantees of future performance or development and involve known
and unknown risks, uncertainties and other factors that are in some
cases beyond our control. All forward-looking statements are
subject to risks and uncertainties that may cause actual results to
differ materially from those that we expected,
including:
●
The impact of the
COVID-19 pandemic on our business and operations;
●
Our ability to
successfully execute our strategy;
●
Our ability to
sustain profitability and positive cash flows;
●
Our ability to gain
market acceptance for our products;
●
Our ability to win
new contracts, execute contract extensions and expansion of
services of existing contracts;
●
Our ability to
re-win our Blanket Purchase Agreement with the Department of
Homeland Security;
●
Our ability to
compete with companies that have greater resources than
us;
●
Our ability to
penetrate the commercial sector to expand our
business;
●
Our ability to
borrow funds against our credit facility and renew or replace our
credit facility on favorable terms or at all;
●
Our ability to
raise additional capital on favorable terms or at all;
and
●
Our ability to
retain key personnel.
●
The risk factors
set forth in our Annual Report on Form 10-K for the year ended
December 31, 2019 filed with the SEC on March 24,
2020.
The
forward-looking statements included in this Form 10-Q are made only
as of the date hereof. We undertake no obligation to publicly
update or revise any forward-looking statement as a result of new
information, future events or otherwise, except as otherwise
required by law. Readers are cautioned not to put undue reliance on
forward-looking statements. In this Quarterly Report on
Form 10-Q, unless the context indicates otherwise, the terms
“Company” and “WidePoint,” as well as the
words “we,” “our,” “ours” and
“us,” refer collectively to WidePoint Corporation and
its consolidated subsidiaries.
Business Overview
We are
a leading provider of Trusted Mobility Management (TM2) that
consists of federally certified communications management, identity
management, and interactive bill presentment and analytics
solutions. We help our clients achieve their organizational
missions for mobility management and security objectives in this
challenging and complex business environment.
We
offer our TM2 solutions through a flexible managed services model
which includes both a scalable and comprehensive set of functional
capabilities that can be used by any customer to meet the most
common functional, technical and security requirements for mobility
management. Our TM2 solutions were designed and implemented with
flexibility in mind such that it can accommodate a large variety of
customer requirements through simple configuration settings rather
than through costly software development. The flexibility of our
TM2 solutions enables our customers to be able to quickly expand or
contract their mobility management requirements. Our TM2 solutions
are hosted and accessible on-demand through a secure federal
government certified proprietary portal that provides our customers
with the ability to manage, analyze and protect their valuable
communications assets, and deploy identity management solutions
that provide secured virtual and physical access to restricted
environments.
Revenue Mix
Our
revenue mix fluctuates due to customer driven factors including: i)
timing of technology and accessory refresh requirements from our
customers; ii) onboarding of new customers that require carrier
services; iii) subsequent decreases in carrier services as we
optimize their data and voice usage; iv) delays in delivering
products or services; and v) changes in control or leadership of
our customers that lengthens our sales cycle, changes in laws or
funding, among other circumstances that may unexpectedly change the
revenue earned and/or duration of our services. As a result, our
revenue will vary by quarter.
For
additional information related to our business operations, see the
description of our business set forth in the Company's Annual
Report on Form 10-K for the year ended December 31, 2019 filed with
the SEC on March 24, 2020.
Strategic Focus and Notable Events
Our
longer-term strategic focus and goals are driven by our need to
expand our critical mass so that we have more flexibility to fund
investments in technology solutions and introduce new sales and
marketing initiatives in order to expand our marketplace share and
increase the breadth of our offerings in order to improve company
sustainability and growth.
During fiscal 2020,
we are focused on the following key goals:
■
continued focus on
selling high margin managed services,
■
growing our sales
pipeline by investing in our business development and sales team
assets,
■
pursuing additional
opportunities with our key systems integrator
partners,
■
improving our
proprietary platform and products, which includes pursuing FedRAMP
certification for ITMS™ and maintaining our ATOs with our
federal government agencies, as well as upgrading our secure
identity management technology,
■
working to
successfully renew our existing U.S. Department of Homeland
Security Blanket Purchase Agreement (DHS BPA), and
■
expanding our
solution offerings into the commercial space.
Our
longer-term goals include:
■
pursuing accretive
and strategic acquisitions to expand our solutions and our customer
base,
■
delivering new
incremental offerings to add to our existing TM2
offering,
■
developing and
testing innovative new offerings that enhance our TM2 offering,
and
■
transitioning our
data center and support infrastructure into a more cost-effective
and federally approved cloud environment to comply with perceived
future contract requirements.
We
believe these actions could drive a strategic repositioning of our
TM2 offering and may include the sale of non-aligned offerings
coupled with acquisitions of complementary and supplementary
offerings that could result in a more focused core set of TM2
offerings.
During
the three months ended March 31, 2020, we accomplished the
following:
●
Generated strong
double-digit growth in revenue and GAAP net income in the three
months ended March 31, 2020, compared to the same quarter a year
ago.
●
U.S. Department of
Commerce – 2020 Census: Successfully completed the Address
Canvassing Program, with approximately 60,000 mobile devices
deployed, returned, and decommissioned.
●
Recorded 39
contractual actions with value of approximately $20 million during
the quarter, including new contract wins as well as exercised
option periods and contract extensions with current
clients
●
Signed a strategic
vendor agreement with a leading business process services
company.
●
Transitioned
seamlessly to a work-from-home environment for majority of our
employees in mid-March.
●
The
U.S. Department of Homeland Security issued a notice of intent to
solicit and award an interim Sole Service Indefinite Delivery
Indefinite Quantity Contract to us for the procurement of
cellularmanaged services for twelve months to serve as an interim
contract until the DHS plans for a competitive process in the
future.
Results of Operations
Three Months Ended March 31, 2020 as Compared to Three Months Ended
March 31, 2019
Revenues. Revenues for the three month
period ended March 31, 2020 were approximately $39.6 million, an
increase of approximately $17.7 million (or 81%), as compared to
approximately $21.9 million in 2019. Our mix of revenues for the
periods presented is set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrier
Services
|
$28,143,269
|
$14,343,011
|
$13,800,258
|
|
Managed
Services:
|
|
|
|
|
Managed
Service Fees
|
7,475,440
|
6,207,960
|
1,267,480
|
|
Billable
Service Fees
|
1,304,541
|
1,080,617
|
223,924
|
|
Reselling
and Other Services
|
2,742,106
|
285,314
|
2,456,792
|
|
|
11,522,087
|
7,573,891
|
3,948,196
|
|
|
|
|
|
|
|
$39,665,356
|
$21,916,902
|
$17,748,454
|
Our
carrier services increased primarily due to activities of the
U.S. Department of Commerce contract supporting the 2020 Census, as
well as U.S. Coast Guard, U.S. Immigration and Customs Enforcement
and U.S. Federal Air Marshall Service. The activities supporting
the 2020 Census are scheduled to wind down in the fourth quarter of
2020
Our
managed service fees increased due to expansion of managed services
for existing government and commercial customers, as well as
increases in sales of accessories to our government customers as
compared to last year.
Billable service
fee revenue increased as compared to last year due to ramp up of
the Census program, partially offsete by the impact of
discontinuation of lower margin commercial billable
projects.
Reselling and other
services increased as compared to last due to timing of large
product resales. Reselling and other services are transactional in
nature and as a result the amount and timing of revenue will vary
significantly from quarter to quarter.
Cost of Revenues. Cost of revenues for
the three month period ended March 31, 2020 were approximately
$34.7 million (or 87% of revenues), as compared to approximately
$17.7 million (or 81% of revenues) in 2019. The increase was driven
by higher carrier services related to the U.S. Department of
Commerce contract, accessories cost of sale and cost of product
resale as compared to last year.
Gross Profit. Gross profit for the three
month period ended March 31, 2020 was approximately $4.9 million
(or 13% of revenues), as compared to approximately $4.3 million (or
19% of revenues) in 2019. The decrease in gross profit percentage
was driven by the increase in carrier services and lower margin
reselling services during the quarter. Our gross profit percentage
will vary from quarter to quarter and could be negatively impacted
due to recognition of low margin reselling transactions and
expansion of carrier services with our U.S. federal government
customers.
Sales and Marketing. Sales and marketing
expense for the three month period ended March 31, 2020 was
approximately $0.5 million (or 1% of revenues), as compared to
approximately $0.4 million (or 2% of revenues) in
2019.
General and Administrative. General and
administrative expenses for the three month period ended March 31,
2020 were approximately $3.5 million (or 9% of revenues), as
compared to approximately $3.1 million (or 14% of revenues) in
2019. The increase in general and administrative expense reflects
overhead and administrative costs to support the increased business
as well as an increase in share-based compensation expense compared
to last year.
Depreciation and Amortization.
Depreciation and amortization expense for the three month period
ended March 31, 2020 was approximately $263,200 as compared to
approximately $240,500 in 2019. The increase in
depreciation and amortization expense reflects the increase in our
depreciable asset base.
Other (Expense) Income. Net other
expense for the three month period ended March 31, 2020 was
approximately $78,700, as compared to approximately $73,100 in
2019. The increase in net expense substantially reflects
higher interest expense related to an increase in lease liabilities
compared to prior year.
Income
Taxes. Income tax
expense for the three month period ended March 31, 2020 was
approximately $177,200, as compared to $28,000 in 2019.
Income taxes were accrued
at an estimated effective tax rate of 26.8% for the three
months ended March 31, 2020 compared to 6.8% for the three
month period ended March 31, 2019.
Net Income. As a result of the cumulative
factors annotated above, net income for the three month period
ended March 31, 2020 was approximately $483,888, as compared to net
income of approximately $384,100 in the same period last
year.
Liquidity
and Capital Resources
We
have, since inception, financed operations and capital expenditures
through our operations, credit facilities and the sale of
securities. Our immediate sources of liquidity include cash and
cash equivalents, accounts receivable, unbilled receivables and
access to a working capital credit facility with Atlantic Union
Bank for up to $5.0 million.
At
March 31, 2020, our net working capital was approximately $5.8
million as compared to $5.0 million at December 31, 2019. The
increase in net working capital was primarily driven by increases
in revenue, strong receivable collections, and temporary payable timing differences.
We utilized our credit facility to manage short term cash flow
requirements during the quarter. We may need to raise additional
capital to fund major growth initiatives and/or acquisitions and
there can be no assurance that additional capital will be available
on acceptable terms or at all.
Cash Flows from Operating Activities
Cash
provided by operating activities provides an indication of our
ability to generate sufficient cash flow from our recurring
business activities. Our single largest cash operating expense is
the cost of labor and company sponsored healthcare benefit
programs. Our second largest cash operating expense is our facility
costs and related technology communication costs to support
delivery of our services to our customers. We lease most of our
facilities under non-cancellable long term contracts that may limit
our ability to reduce fixed infrastructure costs in the short term.
Any changes to our fixed labor and/or infrastructure costs may
require a significant amount of time to take effect depending on
the nature of the change made and cash payments to terminate any
agreements that have not yet expired. We experience temporary
collection timing differences from time to time due to customer
invoice processing delays that are often beyond our
control.
For the
three months ended March 31, 2020, net cash provided by operations
was approximately $3.0 million driven by collections of accounts receivable and temporary
payable timing differences, as compared to approximately $2.4 million for the three months
ended March 31, 2019.
Cash Flows from Investing Activities
Cash
used in investing activities provides an indication of our long
term infrastructure investments. We maintain our own technology
infrastructure and may need to make additional purchases of
computer hardware, software and other fixed infrastructure assets
to ensure our environment is properly maintained and can support
our customer obligations. We typically fund purchases of long term
infrastructure assets with available cash or capital lease
financing agreements.
For the
three months ended March 31, 2020, cash used in investing
activities was approximately $393,000 and consisted of computer
hardware and software purchases and capitalized internally
developed software costs, primarily associated with upgrading our
secure identity management technology and network operations
center.
For the
three months ended March 31, 2019, cash used in investing activities was
approximately $142,300 and consisted computer hardware and software
purchases and capitalized internally developed software costs
related to our TDI Optimiser™ solutions.
Cash Flows from Financing Activities
Cash
used in financing activities provides an indication of our debt
financing and proceeds from capital raise transactions and stock
option exercises.
For the
three months ended March 31, 2020, cash used in financing
activities was approximately $153,800 and reflects line of credit
advances and payments of approximately $1.8 million, and finance
lease principal repayments of approximately $143,600.
For the
three months ended March 31, 2019, cash used in financing activities was
approximately $122,300 and reflects line of credit advances and
payments of approximately $6.1 million, and finance lease principal
repayments of approximately $122,300.
Off-Balance Sheet Arrangements
The
Company has no existing off-balance sheet arrangements as defined
under SEC regulations.
