WYY 10-Q
Widepoint Corp (WYY)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
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| For the quarterly period ended |
or | |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
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| For the transition period from __________________ to ___________________ |
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| Commission File Number: |
(Exact name of Registrant as specified in its charter) |
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(State or other jurisdiction of |
| (I.R.S. employer |
incorporation or organization) |
| identification no.) |
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(Address of principal executive offices) |
| (Zip Code) |
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(Registrant’s telephone number, including area code) |
Securities Registered pursuant to Section 12(b) of the Act:
Title of Each Class | Trading Symbol | Name of Exchange on Which Registered |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days:
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files):
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☐ | Accelerated filer | ☐ |
☒ | Smaller reporting company | ||
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| Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. Yes ☐ No ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes
As of November 10, 2021, there were
WIDEPOINT CORPORATION
INDEX
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Condensed Consolidated Balance Sheets as of September 30, 2021 and December 31, 2020 (unaudited) |
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Notes to Condensed Consolidated Financial Statements (unaudited) |
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Management's Discussion and Analysis of Financial Condition and Results of Operations |
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CERTIFICATIONS |
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| Table of Contents |
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
WIDEPOINT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
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| THREE MONTHS ENDED |
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| NINE MONTHS ENDED |
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REVENUES |
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COST OF REVENUES (including amortization and depreciation of $ |
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GROSS PROFIT |
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OPERATING EXPENSES |
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Sales and marketing |
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General and administrative expenses (including share-based compensation of |
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Depreciation and amortization |
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Total operating expenses |
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INCOME FROM OPERATIONS |
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OTHER (EXPENSE) INCOME |
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Interest income |
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Interest expense |
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Other income |
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Total other expense |
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INCOME BEFORE INCOME TAX PROVISION |
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INCOME TAX PROVISION |
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NET INCOME |
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| $ | 915,577 |
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BASIC EARNINGS PER SHARE |
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BASIC WEIGHTED-AVERAGE SHARES OUTSTANDING |
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DILUTED EARNINGS PER SHARE |
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DILUTED WEIGHTED-AVERAGE SHARES OUTSTANDING |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
| 3 |
| Table of Contents |
WIDEPOINT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
|
| THREE MONTHS ENDED |
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| NINE MONTHS ENDED |
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| SEPTEMBER 30, |
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| NET INCOME |
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| Other comprehensive income (loss): |
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| Foreign currency translation adjustments, net of tax |
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| Other comprehensive income (loss) |
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| COMPREHENSIVE INCOME |
| $ |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
| 4 |
| Table of Contents |
WIDEPOINT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
|
| SEPTEMBER 30, |
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| DECEMBER 31, |
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| 2021 |
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| 2020 |
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| (Unaudited) |
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ASSETS |
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CURRENT ASSETS |
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Cash and cash equivalents |
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Accounts receivable, net of allowance for doubtful accounts of $ |
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Unbilled accounts receivable |
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Other current assets |
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Total current assets |
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NONCURRENT ASSETS |
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Property and equipment, net |
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Operating lease right of use asset, net |
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Intangible assets, net |
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Goodwill |
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Deferred tax assets, net |
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Other long-term assets |
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Total assets |
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LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
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CURRENT LIABILITIES |
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Accounts payable |
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Accrued expenses |
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Deferred revenue |
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Current portion of operating lease liabilities |
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Total current liabilities |
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NONCURRENT LIABILITIES |
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Operating lease liabilities, net of current portion |
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Other liabilities |
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Deferred revenue, net of current portion |
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Total liabilities |
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Commitments and contingencies (Note 14) |
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STOCKHOLDERS' EQUITY |
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Preferred stock, $ |
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Common stock, $ |
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Additional paid-in capital |
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Accumulated other comprehensive loss |
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Accumulated deficit |
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Total stockholders’ equity |
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Total liabilities and stockholders’ equity |
| $ |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
| 5 |
| Table of Contents |
WIDEPOINT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
|
| NINE MONTHS ENDED |
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| SEPTEMBER 30, |
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| 2021 |
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| 2020 |
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| (Unaudited) |
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CASH FLOWS FROM OPERATING ACTIVITIES |
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Net income |
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Adjustments to reconcile net income to net cash provided by (used in) operating activities: |
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Deferred income tax (benefit) expense |
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Depreciation expense |
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(Recovery) provision for doubtful accounts |
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Amortization of intangibles |
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Amortization of deferred financing costs |
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Share-based compensation expense |
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Changes in assets and liabilities: |
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Accounts receivable and unbilled receivables |
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Inventories |
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Prepaid expenses and other current assets |
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Other assets |
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Accounts payable and accrued expenses |
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Income tax payable |
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Deferred revenue and other liabilities |
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Other liabilities |
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Net cash provided by operating activities |
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CASH FLOWS FROM INVESTING ACTIVITIES |
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Purchases of property and equipment |
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Capitalized hardware and software development costs |
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Net cash used in investing activities |
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CASH FLOWS FROM FINANCING ACTIVITIES |
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Advances on bank line of credit |
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Repayments of bank line of credit advances |
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Principal repayments under finance lease obligations |
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Withholding taxes paid on behalf of employees on net settled restricted stock awards |
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Common stock repurchased |
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Issuance of common stock/At-the-market offering, net of issuance costs |
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Proceeds from exercise of stock options |
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Net cash provided by (used in) financing activities |
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Net effect of exchange rate on cash and equivalents |
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NET INCREASE IN CASH AND CASH EQUIVALENTS |
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CASH AND CASH EQUIVALENTS, beginning of period |
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CASH AND CASH EQUIVALENTS, end of period |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
| 6 |
| Table of Contents |
WIDEPOINT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
|
| NINE MONTHS ENDED |
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| SEPTEMBER 30, |
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| 2021 |
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| 2020 |
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| (Unaudited) |
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| SUPPLEMENTAL CASH FLOW INFORMATION |
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| Cash paid for interest |
| $ | 207,613 |
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| $ |
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| Cash paid for income taxes |
| $ |
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| NONCASH INVESTING AND FINANCING ACTIVITIES |
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Capitalized hardware and software development costs in accounts payable |
| $ |
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| Cashless exercise of stock options |
| $ |
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| $ |
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| Leased assets obtained in exchange for new lease liabilities |
| $ |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
| 7 |
| Table of Contents |
WIDEPOINT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
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| Additional |
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| Accumulated |
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| Accumulated |
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| Shares |
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| Amount |
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| Capital |
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| OCI |
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| Deficit |
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| Total |
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Balance, January 1, 2020 |
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Common stock repurchased |
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Stock compensation expense — |
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restricted |
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Stock compensation expense — |
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non-qualified stock options |
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Foreign currency translation — |
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(loss) |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 31, 2020 |
|
|
|
| $ |
|
| $ |
|
| $ | ( | ) |
| $ | ( | ) |
| $ |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
restricted |
|
|
|
|
|
|
|
| ( | ) |
|
|
|
|
|
|
|
|
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock compensation expense — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
restricted |
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock compensation expense — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
non-qualified stock options |
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
gain |
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2020 |
|
|
|
| $ |
|
| $ |
|
| $ | ( | ) |
| $ | ( | ) |
| $ |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
options exercises |
|
|
|
|
|
|
|
| ( | ) |
|
|
|
|
|
|
|
|
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock compensation expense — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
restricted |
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock compensation expense — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
non-qualified stock options |
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
gain |
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2020 |
|
|
|
| $ |
|
| $ |
|
| $ | ( | ) |
| $ | ( | ) |
| $ | 27,674,866 |
| |||
| 8 |
| Table of Contents |
|
|
|
|
| Additional |
|
|
|
|
|
|
|
|
|
| |||||||||
|
| Common Stock |
|
| Paid-In |
|
| Accumulated |
|
| Accumulated |
|
|
| ||||||||||
|
| Issued |
|
| Amount |
|
| Capital |
|
| OCI |
|
| Deficit |
|
| Total |
| ||||||
|
| (Unaudited) |
| |||||||||||||||||||||
Balance, January 1, 2021 |
|
|
|
| $ |
|
| $ |
|
| $ | ( | ) |
| $ | ( | ) |
| $ |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
options exercises |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
restricted |
|
|
|
|
|
|
|
| ( | ) |
|
|
|
|
|
|
|
| ( | ) | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock through at-the-market offering |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
program, net of issuance costs of $45,392 |
|
|
|
|
| 101 |
|
|
|
|
|
| - |
|
|
| - |
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock compensation expense — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
restricted |
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock compensation expense — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
non-qualified stock options |
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(loss) |
|
| - |
|
|
|
|
|
|
|
|
| ( | ) |
|
| - |
|
|
| ( | ) | ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
| - |
|
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 31, 2021 |
|
|
|
| $ |
|
| $ |
|
| $ | ( | ) |
| $ | ( | ) |
| $ |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
restricted |
|
|
|
|
|
|
|
| ( | ) |
|
|
|
|
|
|
|
|
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock compensation expense — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
restricted |
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock compensation expense — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
non-qualified stock options |
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Offering costs for the issuance of common stock/ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At-the-market offering |
|
| - |
|
|
|
|
|
| ( | ) |
|
|
|
|
|
|
|
| ( | ) | |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
income |
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
| - |
|
|
|
|
|
|
|
|
|
|
|
| ( | ) |
|
| ( | ) | |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, June 30, 2021 |
|
|
|
| $ |
|
| $ |
|
| $ | ( | ) |
| $ | ( | ) |
| $ |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
options exercises |
|
|
|
|
|
|
| $ |
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock compensation expense — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
restricted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock compensation expense — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
non-qualified stock options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ( | ) |
|
|
|
|
|
| ( | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2021 |
|
|
|
| $ |
|
| $ |
|
| $ | ( | ) |
| $ | ( | ) |
| $ |
| ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 9 |
| Table of Contents |
WIDEPOINT CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Organization and Nature of Operations
Organization
WidePoint Corporation (“WidePoint” or the “Company”) was incorporated in Delaware on May 30, 1997 and conducts operations through its wholly-owned operating subsidiaries throughout the continental United States, Ireland, the Netherlands and the United Kingdom. The Company’s principal executive and administrative headquarters is located in Fairfax, Virginia.
Nature of Operations
The Company is a leading provider of trusted mobility management (TM2). The Company’s TM2 platform and service solutions enable its customers to efficiently secure, manage and analyze the entire lifecycle of their mobile communications assets through its federally compliant platform Intelligent Telecommunications Management System (ITMS™). The Company’s ITMS™ platform is SSAE 18 compliant and was granted an Authority to Operate by the U.S. Department of Homeland Security and the U.S. Department of Commerce. Additionally, the Company was granted an Authority to Operate by the General Services Administration with regard to its identity credentialing component of its TM2 platform. The Company is one of two DoD designated External Certificate Authorities and offers ECA certificates, including digital certificates for IOT and machine identity, PIV (Personal Identity Verification) and PIV-I (Personal Identity Verification Interoperability) for the Federal Government including all contractors to the Federal Government. The Company’s Identity Management division is FISMA moderate certified and is a Trusted Root Certificate Authority offering certificates that are cross-certified under the Federal Bridge. The Company’s TM2 platform is internally hosted and accessible on-demand through a secure customer portal that is specially configured for each customer. The Company can deliver these solutions in a number of configurations ranging from utilizing the platform as a service to a full-service solution that includes full lifecycle support for all end users and the organization.
The Company also provides digital interactive billing and analytics to both communications service providers (CSPs) and enterprises. Our customized solutions give their end customers the ability to view and analyze their bills online via our advanced self-serve user portal 24/7. Our solutions are delivered in a hosted and secure environment and provide our CSPs with full visibility into their revenue model which drives a stronger customer experience and reduces their operating costs and improves profitability.
The Company derives a significant amount of its revenues from contracts funded by federal government agencies for which WidePoint’s subsidiaries act in the capacity as the prime contractor, or as a subcontractor. The Company believes that contracts with federal government agencies will be the primary source of revenues for the foreseeable future. External factors outside of the Company’s control such as delays and/or a change in government administrations, budgets and other political matters that may impact the timing and commencement of such work could result in variations in operating results and directly affect the Company’s financial performance. Successful contract performance and variation in the volume of activity as well as in the number of contracts commenced or completed during any quarter may cause significant variations in operating results from quarter to quarter.
A significant portion of the Company’s expenses, such as personnel and facilities costs, are fixed in the short term and may not be easily modified to manage through changes in the Company’s market place that may create pressure on pricing and/or costs to deliver its services.
The Company has periodic capital expense requirements to maintain and upgrade its internal technology infrastructure tied to its hosted solutions and other such costs may be significant when incurred in any given quarter.
| 10 |
| Table of Contents |
COVID-19
The coronavirus (“COVID-19”) pandemic has created significant macroeconomic uncertainty, volatility and disruption. The assessment of how COVID-19 or any variant thereof will impact our business is on-going and encompasses all aspects of our business, including how COVID-19 or an variant thereof will impact our customers, employees, subcontractors, business partners and the capital markets. Although the Company did not experience significant disruptions during the nine months ended September 30, 2021, we have experienced significant reduction in new customer acquisitions due to lack of customer demand. We are unable to fully predict the impact the COVID-19 pandemic will have on our future financial position, results of operations, or cash flows.
Additionally, changes in spending policies, budget priorities and funding levels are a key factor influencing the purchasing levels of government customers. With the current COVID-19 pandemic, future budget priorities and funding levels for these customers may be adversely affected.
2. Basis of Presentation and Accounting Policies
Basis of Presentation
The unaudited condensed consolidated financial statements as of September 30, 2021 and for each of the three and nine month periods ended September 30, 2021 and 2020, respectively, included herein have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Pursuant to such regulations, certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) have been condensed or omitted. It is the opinion of management that all adjustments (which include normal recurring adjustments) necessary for a fair statement of financial results are reflected in the financial statements for the interim periods presented. The condensed consolidated balance sheet as of December 31, 2020 was derived from the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020. The results of operations for the three and nine month periods ended September 30, 2021 are not necessarily indicative of the operating results for the full year.
Principles of Consolidation
The accompanying condensed consolidated financial statements include the accounts of the Company, its wholly owned subsidiaries and acquired entities since their respective dates of acquisition. All significant inter-company amounts were eliminated in consolidation.
Common Stock Reverse Split
Government Subsidies
On March 27, 2020, the U.S. government enacted the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), which among other things, provides employer payroll tax credits for qualified wages and options to defer payroll tax payments for a limited period. Based on our evaluation of the CARES Act, in certain circumstances, we qualify for certain employer payroll tax credits as well as the deferral of payroll tax payments in the future. The Company records government subsidies as offsets to the related operating expenses. During the three months periods ended September 30, 2021, qualified payroll credits reduced general and administrative expenses by $1.3 million on our condensed consolidated statements of operations.
As of September 30, 2021, deferred payroll tax payments of $246,000 were included in both accrued liabilities and other long-term liabilities, each, on our condensed consolidated balance sheets. As of December 31, 2020, total deferred payroll tax payments of $492,000 were included in accrued liabilities and other long-term liabilities on our consolidated balance sheets.
| 11 |
| Table of Contents |
Foreign Currency
Assets and liabilities denominated in foreign currencies are translated into U.S. dollars based upon exchange rates prevailing at the end of each reporting period. The resulting translation adjustments, along with any related tax effects, are included in accumulated other comprehensive income, a component of stockholders’ equity. Translation adjustments are reclassified to earnings upon the sale or substantial liquidation of investments in foreign operations. Revenues and expenses are translated at the average month-end exchange rates during the year. Gains and losses related to transactions in a currency other than the functional currency, including operations outside the U.S. where the functional currency is the U.S. dollar, are reported net in the Company’s condensed consolidated statements of operations, depending on the nature of the activity.
Use of Estimates
The preparation of condensed consolidated financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The more significant areas requiring use of estimates and judgment relate to revenue recognition, accounts receivable valuation reserves, ability to realize intangible assets and goodwill, ability to realize deferred income tax assets, fair value of certain financial instruments and the evaluation of contingencies and litigation. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results could differ from those estimates. There were no significant changes in accounting estimates used by management during the quarter.
Segment Reporting
Our TM2 solution offerings comprise an overall single business from which the Company earns revenues and incurs costs. The Company’s TM2 solution offerings are centrally managed and reported on that basis to its Chief Operating Decision Maker who evaluates its business as a single segment. See Note 13 for detailed information regarding the composition of revenues.
Significant Accounting Policies
There were no significant changes in the Company’s significant accounting policies during the first nine months of 2021 from those disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 filed with the SEC on March 23, 2021.
Recently Adopted Accounting Standards
In December 2019, the FASB issued Accounting Standards Update (“ASU”) No. 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes” as part of its initiative to reduce complexity in the accounting standards. The standard eliminates certain exceptions related to the approach for intra-period tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The standard also clarifies and simplifies other aspects of the accounting for income taxes. The standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. The Company adopted the standard on January 1, 2021 and it had no material impact on the Company’s condensed consolidated financial statements.
| 12 |
| Table of Contents |
Accounting Standards under Evaluation
In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“Topic 326”). Topic 326 amends guidance on reporting credit losses for assets held at amortized cost basis and available for sale debt securities. For assets held at amortized cost basis, Topic 326 eliminates the probable initial recognition threshold in current GAAP and, instead, requires an entity to reflect its current estimate of all expected credit losses. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial assets to present the net amount expected to be collected. For available for sale debt securities, credit losses should be measured in a manner similar to current GAAP, however Topic 326 will require that credit losses be presented as an allowance rather than as a write-down. This ASU update affects entities holding financial assets and net investment in leases that are not accounted for at fair value through net income. This update is effective for the company for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Company is currently evaluating the impact of the pending adoption of this new standard on its consolidated financial statements.
3. Accounts Receivable and Significant Concentrations
A significant portion of the Company’s receivables are billed under firm fixed price contracts with agencies of the U.S. federal government and similar pricing structures with several corporations. Accounts receivable consist of the following by customer type in the table below as of the periods presented:
(1) Government contracts are generally firm fixed price not to exceed arrangements with a term of five (5) years, which consists of a base year and four (4) annual option year renewals. Government receivables are billed under a single consolidated monthly invoice and are billed approximately thirty (30) to sixty (60) days in arrears from the date of service and payment is generally due within thirty (30) days of the invoice date. Government accounts receivable payments could be delayed due to administrative processing delays by the government agency, continuing budget resolutions that may delay availability of contract funding, and/or administrative only invoice correction requests by contracting officers that may delay payment processing by our government customers.
(2) Commercial contracts are generally fixed price arrangements with contract terms ranging from two (2) to three (3) years. Commercial accounts receivables are billed based on the underlying contract terms and conditions which generally have repayment terms that range from thirty (30) to ninety (90) days. Commercial receivables are stated at amounts due from customers net of an allowance for doubtful accounts if deemed necessary.
(3) For the nine months ended September 30, 2021, the Company recognized $
|
| SEPTEMBER 30, |
|
| DECEMBER 31, |
| ||
|
| 2021 |
|
| 2020 |
| ||
|
| (Unaudited) |
| |||||
Government (1) |
| $ |
|
| $ |
| ||
Commercial (2) |
|
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|
| ||
Gross accounts receivable |
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| ||
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Less: allowances for doubtful accounts (3) |
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| ||
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Accounts receivable, net |
| $ |
|
| $ |
| ||
| 13 |
| Table of Contents |
Significant Concentrations
The following table presents revenue by customer in the current and/or comparative periods:
|
| THREE MONTHS ENDED |
|
| NINE MONTHS ENDED |
| ||||||||||
|
| SEPTEMBER 30, |
|
| SEPTEMBER 30, |
| ||||||||||
Customer Type |
| 2021 |
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| 2020 |
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| 2021 |
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| 2020 |
| ||||
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| (Unaudited) |
| |||||||||||||
U.S. Federal Government (1) |
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| |||||
U.S. State & Local and Foreign Governments |
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| ||||
Commercial |
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(1) Sales to the U.S. federal government include sales from contracts for which we are the prime contractor, as well as those for which we are a subcontractor and the ultimate customer is the U.S. government.
4. Unbilled Accounts Receivable
Unbilled accounts receivable represent revenues earned but not invoiced to the customer at the balance sheet date due to either timing of invoice processing or delays due to fixed contractual billing schedules. A significant portion of our unbilled accounts receivable consist of carrier services and hardware and software products delivered but not invoiced at the end of the reporting period.
The following table presents customers that represent ten (10) percent or more of consolidated unbilled accounts receivable as of the dates presented below:
|
| SEPTEMBER 30, |
|
| DECEMBER 31, |
| ||
|
| 2021 |
|
| 2020 |
| ||
|
| As a % of |
|
| As a % of |
| ||
Customer Type |
| Receivables |
|
| Receivables |
| ||
|
| (Unaudited) |
| |||||
| U.S. Federal Government |
|
|
|
|
|
| ||
Commercial |
|
|
|
|
|
| ||
5. Other Current Assets and Accrued Expenses
Other current assets consisted of the following as of the dates presented below:
|
| SEPTEMBER 30, |
|
| DECEMBER 31, |
| ||
|
| 2021 |
|
| 2020 |
| ||
|
| (Unaudited) |
| |||||
Inventories |
| $ |
|
| $ |
| ||
Prepaid rent, insurance and other assets |
|
|
|
|
|
| ||
Employee retention credit receivable |
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
Total other current assets |
| $ |
|
| $ |
| ||
| 14 |
| Table of Contents |
Accrued expenses consisted of the following as of the dates presented below:
|
| SEPTEMBER 30, |
|
| DECEMBER 31, |
| ||
|
| 2021 |
|
| 2020 |
| ||
|
| (Unaudited) |
| |||||
| Carrier service costs |
| $ |
|
| $ |
| ||
| Salaries and payroll taxes |
|
|
|
|
|
| ||
| Inventory purchases, consultants and other costs |
|
|
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|
| ||
| Other |
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
|
| $ |
|
| $ |
| ||
6. Property and Equipment
Major classes of property and equipment consisted of the following as of the dates presented below:
|
| SEPTEMBER 30, |
|
| DECEMBER 31, |
| ||
|
| 2021 |
|
| 2020 |
| ||
|
| (Unaudited) |
| |||||
Computer hardware and software |
| $ |
|
| $ |
| ||
Furniture and fixtures |
|
|
|
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| ||
Leasehold improvements |
|
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| ||
Automobiles |
|
|
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|
| ||
Gross property and equipment |
|
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|
| ||
Less: accumulated depreciation and amortization |
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
Property and equipment, net |
| $ |
|
| $ |
| ||
During the three and nine month periods ended September 30, 2021, property and equipment depreciation expense was approximately $
During the nine month periods ended September 30, 2021 and 2020, there were no material disposals of owned property and equipment.
There were no changes in the estimated useful lives used to depreciate property and equipment during the nine month periods ended September 30, 2021 and 2020.
7. Goodwill and Intangible Assets
The Company has recorded goodwill of $
| 15 |
| Table of Contents |
Intangible assets consists of the following:
|
| SEPTEMBER 30, 2021 |
| |||||||||
|
| Gross Carrying |
|
| Accumulated |
|
| Net Book |
| |||
|
| Amount |
|
| Amortization |
|
| Value |
| |||
|
| (Unaudited) |
| |||||||||
Channel Relationships |
| $ |
|
| $ | ( | ) |
| $ |
| ||
Internally Developed Software |
|
|
|
|
| ( | ) |
|
|
| ||
Trade Name and Trademarks |
|
|
|
|
| ( | ) |
|
|
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ |
|
| $ | ( | ) |
| $ |
| ||
|
| DECEMBER 31, 2020 |
| |||||||||
|
|
|
|
|
|
|
|
|
| |||
|
| Gross Carrying |
|
| Accumulated |
|
| Net Book |
| |||
|
| Amount |
|
| Amortization |
|
| Value |
| |||
|
| (Unaudited) |
| |||||||||
Customer Relationships |
| $ |
|
| $ | ( | ) |
| $ |
| ||
Channel Relationships |
|
|
|
|
| ( | ) |
|
|
| ||
Internally Developed Software |
|
|
|
|
| ( | ) |
|
|
| ||
Trade Name and Trademarks |
|
|
|
|
| ( | ) |
|
|
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ |
|
| $ | ( | ) |
| $ |
| ||
For the three and nine month periods ended September 30, 2021, the Company capitalized $
For the three and nine month periods ended September 30, 2020, the Company capitalized $
During the nine month period ended September 30, 2021, the Company disposed of fully amortized intangible assets with a historical cost and accumulated amortization of $
The aggregate amortization expense recorded for the three month periods ended September 30, 2021 and 2020 were approximately $
As of September 30, 2021, estimated annual amortization for our intangible assets for each of the next five years is approximately:
Remainder 2021 |
| $ |
| |
2022 |
|
|
| |
2023 |
|
| 491,976 |
|
2024 |
|
|
| |
2025 |
|
|
| |
Thereafter |
|
|
| |
Total |
| $ |
|
| 16 |
| Table of Contents |
8. Line of Credit
On June 15, 2017, the Company entered into a Loan and Security Agreement with Atlantic Union Bank (formerly known as Access National Bank) (the “Loan Agreement”). The Loan Agreement provides for a $5.0 million working capital revolving line of credit.
Effective, April 30, 2021, the Company entered into a sixth modification agreement (“Modification Agreement”) with Atlantic Union Bank to amend the existing Loan Agreement. The Modification Agreement extended the maturity date of the facility from
The Loan Agreement requires that the Company meet the following financial covenants on a quarterly basis: (i) maintain a minimum adjusted tangible net worth of at least $
The available amount under the working capital line of credit is subject to a borrowing base, which is equal to the lesser of (i) $
9. Income Taxes
The Company files U.S. federal income tax returns with the Internal Revenue Service (“IRS”) as well as income tax returns in various states and certain foreign countries. The Company may be subject to examination by the IRS or various state taxing jurisdictions for tax years 2003 and forward. The Company may be subject to examination by various foreign countries for tax years 2014 forward. As of September 30, 2021, the Company was not under examination by the IRS, any state or foreign tax jurisdiction. The Company did not have any unrecognized tax benefits at either September 30, 2021 or December 31, 2020. In the future if applicable, any interest and penalties related to uncertain tax positions will be recognized in income tax expense.
As of September 30, 2021, the Company had approximately $
| 17 |
| Table of Contents |
Management assesses the available positive and negative evidence to estimate if sufficient future taxable income will be generated to use the existing deferred tax assets. Under existing income tax accounting standards such objective evidence is more heavily weighted in comparison to other subjective evidence such as our projections for future growth, tax planning and other tax strategies. During 2020, in part because the Company achieved three years of cumulative pretax income in the U.S. federal tax jurisdiction, management determined that there was sufficient positive evidence to conclude that it was more likely than not that deferred tax assets were realizable. It therefore reduced the valuation allowance accordingly and the Company released $
10. Stockholders’ Equity
Common Stock
The Company is authorized to issue
During the nine month period ended September 30, 2020, there were
Shares of common stock issued as a result of stock option exercises and realized gross proceeds for the nine month period ended September 30, 2021, were
At The Market Offering Agreement
On August 18, 2020, the Company entered into an At-The-Market Issuance Sales Agreement (the “Sales Agreement”) with B. Riley Securities, Inc. (“B. Riley FBR”), The Benchmark Company, LLC (“Benchmark”) and Spartan Capital Securities, LLC (“Spartan”, and together with B. Riley FBR and Benchmark, the “Sales Agents”) which establishes an at-the-market equity program pursuant to which the Company may offer and sell shares of our common stock, par value $
The Sales Agreement will terminate upon the earlier of sale of all of the Shares under the Sales Agreement or termination of the Sales Agreement as permitted.
The Company has no obligation to sell any of the Shares, and, at any time, we may suspend offers under the Sales Agreement or terminate the Sales Agreement. The Company did not sell any shares during the three month period ended September 30, 2021. During the nine month period ended September 30, 2021, the Company sold
| 18 |
| Table of Contents |
11. Share-based Compensation
Share-based compensation (including restricted stock awards) represents both stock option based expense and stock grant expense. The following table sets forth the composition of stock compensation expense included in general and administrative expense for the periods then ended:
|
| THREE MONTHS ENDED |
|
| NINE MONTHS ENDED |
| ||||||||||
|
| SEPTEMBER 30, |
|
| SEPTEMBER 30, |
| ||||||||||
|
| 2021 |
|
| 2020 |
|
| 2021 |
|
| 2020 |
| ||||
|
| (Unaudited) |
| |||||||||||||
Restricted stock compensation expense |
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
Non-qualified option stock compensation expense |
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total share-based compensation before taxes |
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
The Company’s stock incentive plan is administered by the Compensation Committee of the Board of Directors and authorizes the grant or award of incentive stock options, nonqualified stock options (NQSO), restricted stock awards (RSA), stock appreciation rights, dividend equivalent rights, performance unit awards and phantom shares. The Company issues new shares of common stock upon the exercise of stock options.
Restricted Stock
The Company records the fair value of all restricted stock awards based on the grant date fair value and amortizes stock compensation on a straight-line basis over the vesting period. Restricted stock award shares are issued when vested and included in the total number of common shares issued and outstanding. During the nine month period ended September 30, 2021, the Company granted
Non-Qualified Stock Options
The Company estimates the fair value of nonqualified stock awards using a Black-Scholes Option Pricing model (“Black-Scholes model”). The fair value of each stock award is estimated on the date of grant using the Black-Scholes model, which requires an assumption of dividend yield, risk free interest rates, volatility, forfeiture rates and expected option life. The risk-free interest rates are based on the U.S. Treasury yield for a period consistent with the expected term of the option in effect at the time of the grant. Expected volatilities are based on the historical volatility of our common stock over the expected option term. The expected term of options granted is based on analyses of historical employee termination rates and option exercises. There were no non-qualified stock option awards granted during the nine month periods ended September 30, 2021 and 2020.
At September 30, 2021, the Company had approximately $
| 19 |
| Table of Contents |
12. Earnings Per Common Share (EPS)
The computations of basic and diluted earnings per share were as follows for the periods presented below:
|
| THREE MONTHS ENDED |
|
| NINE MONTHS ENDED |
| ||||||||||
|
| SEPTEMBER 30, |
|
| SEPTEMBER 30, |
| ||||||||||
|
| 2021 |
|
| 2020 |
|
| 2021 |
|
| 2020 |
| ||||
|
| (Unaudited) |
| |||||||||||||
Basic Earnings Per Share Computation: |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Net income |
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
Weighted average number of common shares |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Basic Earnings Per Share |
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
|
|
|
|
|
|
|
|
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|
|
|
|
Diluted Earnings Per Share Computation: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Incremental shares from assumed conversions of dilutive securities |
|
|
|
|
|
|
|
|
|
|
|
| ||||
Adjusted weighted average number of common shares |
|
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| ||||
|
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|
|
Diluted Earnings Per Share |
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
13. Revenue from Contracts with Customers
The following table was prepared to provide additional information about the composition of revenues from contracts with customers for the periods presented:
|
| THREE MONTHS ENDED |
|
| NINE MONTHS ENDED |
| ||||||||||
|
| SEPTEMBER 30, |
|
| SEPTEMBER 30, |
| ||||||||||
|
| 2021 |
|
| 2020 |
|
| 2021 |
|
| 2020 |
| ||||
|
| (Unaudited) |
| |||||||||||||
| Carrier Services |
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
| Managed Services |
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
| 20 |
| Table of Contents |
The Company recognized revenues from contracts with customers for the following customer types as set forth below:
|
| THREE MONTHS ENDED |
|
| NINE MONTHS ENDED |
| ||||||||||
|
| SEPTEMBER 30, |
|
| SEPTEMBER 30, |
| ||||||||||
|
| 2021 |
|
| 2020 |
|
| 2021 |
|
| 2020 |
| ||||
|
| (Unaudited) |
| |||||||||||||
| U.S. Federal Government |
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
| U.S. State and Local Governments |
|
|
|
|
|
|
|
|
|
|
|
| ||||
| Foreign Governments |
|
|
|
|
|
|
|
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|
| ||||
| Commercial Enterprises |
|
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| ||||
|
|
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|
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|
|
|
|
|
|
|
|
|
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
The Company recognized revenues from contracts with customers in the following geographic regions:
|
| THREE MONTHS ENDED |
|
| NINE MONTHS ENDED |
| ||||||||||
|
| SEPTEMBER 30, |
|
| SEPTEMBER 30, |
| ||||||||||
|
| 2021 |
|
| 2020 |
|
| 2021 |
|
| 2020 |
| ||||
|
| (Unaudited) |
| |||||||||||||
| North America |
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
| Europe |
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
During the three months ended September 30, 2021 and 2020, the Company recognized approximately $
During the nine months ended September 30, 2021 and 2020, the Company recognized approximately $
14. Commitments and Contingencies
Employment Agreements
The Company has employment agreements with certain executives that set forth compensation levels and provide for severance payments in certain instances.
Litigation
The Company is not involved in any material legal proceedings.
| 21 |
| Table of Contents |
15. Subsequent Event
Acquisition
On October 1, 2021, the Company completed the acquisition of specified assets of IT Authorities, Inc. (ITA). The closing purchase price paid by the Company consisted of $
As of the date of filing this quarterly report on Form 10-Q, total consideration transferred and the acquisition-date fair value information is not provided because the preliminary purchase accounting has not yet been finalized due primarily to the timing of information being provided to our valuation specialist and the pending receipt of a preliminary valuation report for certain assets and liabilities, including identified intangible assets. The Company expects to update this information in the fourth quarter.
Supplemental Unaudited Pro Forma Information
The following unaudited pro forma information presents the condensed consolidated results of operations of the Company and ITA for the three and nine month periods ended September 30, 2021 and 2020 as if the acquisition of ITA had been completed on January 1, 2020. These unaudited pro forma condensed consolidated financial results have been prepared for comparative purposes only and include certain adjustments that reflect pro forma results of operations, such as removal of revenue and expenses that were not part of the asset purchase agreement, and does not reflect the potential amortization for the fair value of acquired intangible assets and fair value adjustment for deferred revenue, adjustments for revenue and contract costs in connection with the adoption of Accounting Standards Codification 606 “Revenue from Contracts with Customers” for the IT Authorities business, and adjustments relating to the tax effect of combining the Company and IT Authorities businesses.
The unaudited pro forma results do not reflect any operating efficiencies or potential cross-selling of product and services which may result from the consolidation of the operations of the Company and ITA. Accordingly, these unaudited pro forma results are presented for informational purposes only and are not necessarily indicative of the results of operations that actually would have been achieved had the acquisition occurred as of January 1, 2020, nor are they intended to represent or be indicative of future results of operations.
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| (a) |
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| (a) |
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| Revenues |
| $ |
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| Net income |
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(a) To reflect on a pro forma basis unaudited consolidated financial information for the three and nine month periods ended September 30, 2021 and 2020 for the Company. The unaudited financial information presented herein were derived from unaudited historical internally prepared financial statements for ITA and WidePoint’s Form 10-Q quarterly unaudited financial statements.
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| Table of Contents |
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 expand scope of services on existing contracts; |
| · | 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 identify potential acquisition targets and close such acquisitions; |
| · | Our ability to successfully integrate acquired businesses with our existing operations; |
| · | Our ability to maintain a sufficient level of inventory necessary to meet our customers demand due to supply shortage and pricing; |
| · | Our ability to retain key personnel; and |
| · | The risk factors set forth in our Annual Report on Form 10-K for the year ended December 31, 2020 filed with the SEC on March 24, 2021. |
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.
| 23 |
| Table of Contents |
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 our Annual Report on Form 10-K for the year ended December 31, 2020 filed with the SEC on March 23, 2021.
Strategic Focus and Notable Events
We believe that demand for our TM2 solutions will continue to grow as public and private sectors seek to address the additional requirements for supporting a mobile workforce. We also believe that the current COVID-19 pandemic and the post pandemic environment will increase the need for WidePoint’s services as our customers and potential customers seek to manage, secure and gain visibility into their mobility assets as a result of a larger number of employees working remotely. 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.
In fiscal 2021, we will continue to focus on the following key goals:
| · | focusing sales on managed services, versus lower margin Carrier Services, |
| · | growing our sales pipeline by investing in our business development and sales team assets, |
| · | pursuing additional opportunities with our key systems integrator and strategic 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 deliver and expand the scope of work under the newly awarded DHS CWMS 2.0 IDIQ, |
| · | expanding our solution offerings into the commercial space, and |
| · | integrate our newly acquired service offerings from our recent acquisition of the assets of ITA Authorities, Inc. (ITA) into our proposals and to cross-sell to our offering to the existing ITA customer base |
On October 1, 2021, we completed the acquisition of ITA. The closing purchase price consisted of $4.75 million in cash and 75,000 warrants to purchase shares of our common stock at an exercise price of $5.33 per share (“Warrants”) exercisable for a period of four years. The acquisition is expected to:
| · | Enhance our expertise in delivering ITaaS solutions to existing and prospective customers; |
| · | Expand our footprint and presence in the bourgeoning commercial enterprise sector, especially with small and mid-sized businesses; |
| · | Provide meaningful cross-sell opportunities, including layering on WidePoint’s Identity Management solution on top of ITA’s managed cybersecurity offerings; and |
| · | Offer significant upsell opportunities to sell our Identity Management (IdMaaS) offering to ITA’s customer base |
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| Table of Contents |
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 to expand our marketplace share and increase the breadth of our offerings in order to improve company sustainability and growth. Our strategy for achieving our longer-term goals include:
| · | pursuing accretive and strategic acquisitions to expand our solutions and our customer base, such as the ITA acquisition described above, |
| · | 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.
Results of Operations
Three Months Ended September 30, 2021 as Compared to Three Months Ended September 30, 2020
Revenues. Revenues for the three month period ended September 30, 2021 were approximately $22.2 million, a decrease of approximately $35.3 million (or 61%), as compared to approximately $57.5 million in 2020. Our mix of revenues for the periods presented is set forth below:
|
| THREE MONTHS ENDED |
|
|
|
| ||||||
|
| SEPTEMBER 30, |
|
| Dollar |
| ||||||
|
| 2021 |
|
| 2020 |
|
| Variance |
| |||
|
| (Unaudited) |
|
|
|
| ||||||
| Carrier Services |
| $ | 13,100,500 |
|
| $ | 45,029,570 |
|
| $ | (31,929,070 | ) |
| Managed Services: |
|
|
|
|
|
|
|
|
|
|
|
|
| Managed Service Fees |
|
| 5,347,641 |
|
|
| 9,954,284 |
|
|
| (4,606,643 | ) |
| Billable Service Fees |
|
| 885,114 |
|
|
| 2,236,590 |
|
|
| (1,351,476 | ) |
| Reselling and Other Services |
|
| 2,918,027 |
|
|
| 286,117 |
|
|
| 2,631,910 |
|
|
|
| 9,150,782 |
|
|
| 12,476,991 |
|
|
| (3,326,209 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ | 22,251,282 |
|
| $ | 57,506,561 |
|
| $ | (35,255,279 | ) |
Our carrier services decreased primarily due to completion of the U.S. Department of Commerce contract supporting the 2020 Census and to a lesser extent increased usage with our other federal government customers.
Our managed service fees decreased largely due to higher sales of mobile device accessories in the third quarter of 2020 that was caused by the remote work due to COVID-19 pandemic and to a lesser extent lower number of devices managed in 2021.
Billable service fee revenue decreased as compared to last year due to completion of the U.S. Department of Commerce project supporting the 2020 Census.
| 25 |
| Table of Contents |
Reselling and other services increased as compared to last year due to product resales to federal government customers. 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 months period ended September 30, 2021 were approximately $18.6 million (or 84% of revenues), as compared to approximately $51.9 million (or 90% of revenues) in 2020. The decrease was driven by lower carrier services, partially offset by higher product resale.
Gross Profit. Gross profit for the three months period ended September 30, 2021 was approximately $3.7 million (or 16% of revenues), as compared to approximately $5.6 million (or 11% of revenues) in 2020. The increase in gross profit percentage was driven by the increase in higher margin managed services revenue, partially offset by lower margin product resale. Our gross profit percentage will vary from quarter to quarter due to revenue mix between carrier services and managed services revenue.
Sales and Marketing. Sales and marketing expense for the three months period ended September 30, 2021 was approximately $0.5 million (or 2% of revenues), as compared to approximately $0.5 million (or 1% of revenues) in 2020. We continue to invest in our business development and sales team assets as identified as one of our key goals for 2021.
General and Administrative. General and administrative expenses for the three months period ended September 30, 2021 were approximately $2.1 million (or 9% of revenues), as compared to approximately $3.7 million (or 6% of revenues) in 2020. The decrease in general and administrative expense reflects recognition of qualified payroll tax credit of $1.3 million, partially offset by increased data center costs and acquisition related costs.
Depreciation and Amortization. Depreciation and amortization expense for the three month period ended September 30, 2021 was approximately $263,200 as compared to approximately $285,100 in 2020. The decrease in depreciation and amortization expense reflects the decrease in our depreciable asset base.
Other (Expense) Income. Net other expense for the three month period ended September 30, 2021 was approximately $(41,250) as compared to approximately an expense of $(69,400) in 2020. The decrease in net expense substantially reflects lower interest expense related to less borrowings on the line of credit and lease liability compared to prior year.
Income Taxes. Income tax expense for the three month period ended September 30, 2021 was approximately $232,900, as compared to $12,500 in 2020. Income taxes were accrued at an estimated effective tax rate of 27.4% for the three months ended September 30, 2021 compared to 19.1% for the three months ended September 30, 2020.
Net Income. As a result of the cumulative factors annotated above, net income for the three month period ended September 30, 2021 was approximately $534,900, as compared to net income of approximately $1.1 million in the same period last year.
Nine Months Ended September 30, 2021 as Compared to Nine Months Ended September 30, 2020
Revenues. Revenues for the nine month period ended September 30, 2021 were approximately $62.9 million, a decrease of approximately $89.1 million (or 59%), as compared to approximately $151.9 million in 2020. Our mix of revenues for the periods presented is set forth below:
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|
| NINE MONTHS ENDED |
|
|
|
| ||||||
|
| SEPTEMBER 30, |
|
| Dollar |
| ||||||
|
| 2021 |
|
| 2020 |
|
| Variance |
| |||
|
| (Unaudited) |
|
|
|
| ||||||
| Carrier Services |
| $ | 36,347,669 |
|
| $ | 118,116,989 |
|
| $ | (81,769,320 | ) |
| Managed Services: |
|
|
|
|
|
|
|
|
|
|
|
|
| Managed Service Fees |
|
| 20,241,104 |
|
|
| 25,295,949 |
|
|
| (5,054,845 | ) |
| Billable Service Fees |
|
| 2,924,300 |
|
|
| 5,246,307 |
|
|
| (2,322,007 | ) |
| Reselling and Other Services |
|
| 3,372,472 |
|
|
| 3,296,462 |
|
|
| 76,010 |
|
|
|
| 26,537,876 |
|
|
| 33,838,718 |
|
|
| (7,300,842 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ | 62,885,545 |
|
| $ | 151,955,707 |
|
| $ | (89,070,162 | ) |
Our carrier services decreased primarily due to winding down of the U.S. Department of Commerce contract supporting the 2020 Census and to a lesser extent pass through of carrier credit.
Our managed service fees decreased largely due to higher sales of mobile device accessories in 2020 that was caused by the remote work due to COVID-19 pandemic and to a lesser extent lower number of devices managed in 2021.
Billable service fee revenue decreased as compared to last year due to completion of the U.S. Department of Commerce project supporting the 2020 Census, partially offset by additional services to other federal government customers.
Reselling and other services increased slightly due to timing of higher demand of product resale to federal government customers in 2021. 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 nine month period ended September 30, 2021 were approximately $50.5 million (or 80% of revenues), as compared to approximately $136.3 million (or 90% of revenues) in 2020. The decrease was driven by lower carrier services related to the U.S. Department of Commerce contract and lower accessories cost of sale as compared to last year.
Gross Profit. Gross profit for the nine month period ended September 30, 2021 was approximately $12.4 million (or 20% of revenues), as compared to approximately $15.6 million (or 10% of revenues) in 2020. The increase in gross profit percentage was driven by the increase in higher margin managed services revenue. Our gross profit percentage will vary from quarter to quarter due to revenue mix between carrier services and managed services revenue.
Sales and Marketing. Sales and marketing expense for the nine month period ended September 30, 2021 was approximately $1.5 million (or 2% of revenues), as compared to approximately $1.4 million (or 1% of revenues) in 2020, due to increased business development efforts.
General and Administrative. General and administrative expenses for the nine month period ended September 30, 2021 were approximately $8.7 million (or 14% of revenues), as compared to approximately $10.9 million (or 7% of revenues) in 2020. The decrease in general and administrative expense reflects recognition of qualified payroll tax credit of $1.3 million and to a lesser extent lower payroll costs, partially offset by increased data center costs and acquisition related costs.
Depreciation and Amortization. Depreciation and amortization expense for the nine month period ended September 30, 2021 was approximately $768,000 as compared to approximately $814,800 in 2020. The decrease in depreciation and amortization expense reflects a decrease in our depreciable asset base
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Other (Expense) Income. Net other expense for the nine month period ended September 30, 2021 was approximately $(176,500) as compared to approximately $(224,300) in 2020. The decrease in net expense reflects lower interest expense related to lease liability compared to prior year and a gain recognized on a sale of asset in 2021.
Income Taxes. Income tax expense for the nine month period ended September 30, 2021 was approximately $329,300, as compared to $242,800 in 2020. Income taxes were accrued at an estimated effective tax rate of 26.5% for the nine months ended September 30, 2021 compared to 10.6% for the nine month period ended September 30, 2020.
Net Income. As a result of the cumulative factors annotated above, net income for the nine month period ended September 30, 2021 was approximately $916,000, as compared to net income of approximately $2.0 million 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. During 2020, we established an at-the-market (ATM) equity sales program (described below) that permits us to sell, from time to time, up to $24.0 million of our common stock through the sales agents under the program. There is no assurance that, if needed, we will be able to raise capital on favorable terms or at all.
At September 30, 2021, our net working capital was approximately $14.6 million as compared to $13.0 million at December 31, 2020. The increase in net working capital was primarily driven by proceeds from issuance of common stock through the ATM sales program, and temporary payable timing differences. 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.
ATM Sales Program
On August 18, 2020, we entered into an At-The-Market Issuance Sales Agreement (the “Sales Agreement”) with B. Riley Securities, Inc., The Benchmark Company, LLC and Spartan Capital Securities, LLC which establishes an ATM equity program pursuant to which we may offer and sell up to $24.0 million of shares of our common stock, par value $0.001 per share, from time to time as set forth in the Sales Agreement. We have no obligation to sell any of the Shares, and, at any time, we may suspend offers under the Sales Agreement or terminate the Sales Agreement. We sold 100,687 shares during the nine months ended September 30, 2021 under the ATM program and had remaining capacity of $18.6 million as of September 30, 2021. No shares were sold during the three months ended September 30, 2021.
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 nine months ended September 30, 2021, net cash used in operations was approximately $3.5 million driven by collections of accounts receivable and temporary payable timing differences, as compared to approximately $6.0 million net cash provided for the nine months ended September 30, 2020.
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| Table of Contents |
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 nine months ended September 30, 2021, cash used in investing activities was approximately $1.9 million and consisted of computer hardware and software purchases and capitalized internally developed software costs, primarily associated with upgrading our ITMS™ platform, secure identity management technology and network operations center, and TDI™.
For the nine months ended September 30, 2020, cash used in investing activities was approximately $978,700 and consisted of computer hardware and software purchases and capitalized internally developed software costs, primarily associated with upgrading our ITMS™ platform, secure identity management technology and network operations center.
Cash Flows from Financing Activities
Cash provided by (used in) financing activities provides an indication of our debt financing and proceeds from capital raise transactions and stock option exercises.
For the nine months ended September 30, 2021, cash provided by financing activities was approximately $681,000 and reflects proceeds from issuance of common stock through ATM sales of $1.1 million, net of issuance costs, proceeds of approximately $179,300 from the exercise of stock options, offset by lease principal repayments of approximately $428,400 and withholding taxes paid on behalf of employees on net settled restricted stock awards of approximately $140,900.
For the nine months ended September 30, 2020, cash used in financing activities was approximately $594,300 and reflects line of credit advances and payments of approximately $1.9 million, common stock repurchases of approximately $10,100, offering costs related to the ATM program offering of $131,400, and finance lease principal repayments of approximately $452,800.
Net Effect of Exchange Rate on Cash and Equivalents
For the nine months ended September 30, 2021 and 2020, the gradual depreciation of the Euro relative to the US dollar decreased the translated value of our foreign cash balances by approximately $96,100 as compared to last year.
Off-Balance Sheet Arrangements
The Company has no existing off-balance sheet arrangements as defined under SEC regulations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not required.
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| Table of Contents |
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures Under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Based on this evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this quarterly report on Form 10-Q to ensure information required to be disclosed in the reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported, within the time period specified in the SEC’s rules and forms. These disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed by us in the reports we file or submit is accumulated and communicated to management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There were no changes in the Company’s internal control over financial reporting during the three month period ended September 30, 2021 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II – OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
The Company is not currently involved in any material legal proceeding.
ITEM 1A RISK FACTORS
Our risk factors have not changed materially from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2020.
ITEM 2 UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Stock Repurchase Plan
On October 7, 2019, the Company announced that its Board of Directors approved a stock repurchase plan (the “Repurchase Plan”) to purchase up to $2.5 million of the Company’s common stock. Any repurchases will be made in compliance with the SEC’s Rule 10b-18 if applicable, and may be made in the open market or in privately negotiated transactions, including the entry into derivatives transactions. During the three months ended March 31, 2020, we repurchased 2,416 shares for a total of $10,100 under the Repurchase Plan. This Repurchase Plan was suspended on March 9, 2020, as a precaution due to the COVID-19 pandemic, which suspension was removed on September 27, 2021. No shares were repurchased during the three months ended September 20, 2021. As of September 30, 3021, $2.1 million remained available for future purchases under the Repurchase Plan. During November 2021, the Board increased the size of the Repurchase Plan to up to $5.0 million of the Company’s common stock, increasing the amount available for future purchases under the Repurchase Plan to $4.6 million.
ITEM 3 DEFAULT UPON SENIOR SECURITIES
None
ITEM 4 MINE SAFETY DISCLOSURES
None
ITEM 5 OTHER INFORMATION
None
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| Table of Contents |
ITEM 6. EXHIBITS
* Certain schedules and similar attachments have been omitted pursuant to Item 601(a)(5) of Regulation S-K. The Company undertakes to furnish supplemental copies of any of the omitted schedules upon request by the SEC
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| Table of Contents |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| WIDEPOINT CORPORATION | |||
| Date: November 15, 2021 | /s/ JIN H. KANG | ||
|
| Jin H. Kang | |
| President and Chief Executive Officer | |||
|
|
|
|
Date: November 15, 2021 |
| /s/ KELLIE H. KIM |
|
|
| Kellie H. Kim |
|
|
| Chief Financial Officer |
|
| 32 |