Widepoint Corp ARS, filed Apr 29, 2024
Widepoint Corp (WYY)
2024 | ANNUAL REPORT
www.widepoint.com
April 29, 2024
Dear Fellow Shareholders,
I extend my heartfelt gratitude for your unwavering interest in and support of WidePoint Corporation. Our journey through 2023 has been one marked by resilience and growth, a testament to the dedication of our exceptional team. I wish to express my deepest appreciation to each member of our staff whose diligence and commitment have propelled WidePoint forward, positioning us for continued success.
Despite facing a multitude of macroeconomic challenges, including the lingering effects of the COVID-19 pandemic, rising interest rates, and inflation, WidePoint emerged from 2023 on a solid footing. We achieved revenue of approximately $106 million, surpassing the higher end of our full-year guidance, and maintained our positive Adjusted EBITDA streak for the 26th consecutive quarter. Notably, we closed the fourth quarter with positive free cash flow, a trend we aim to sustain throughout 2024 and beyond, which is crucial in the current high-interest rate environment.
At WidePoint, we remain at the forefront of innovation with our Trusted Mobility Management (TM2) solution, delivered through a technology management-as-a-service model. Our robust suite of solutions, including Identity and Access Management (IAM), Managed Mobility Services (MMS), Digital Billing and Analytics (DB&A), Unified Communication as a Service (UCaaS), and IT as a Service (ITaaS), continues to address the evolving needs of cybersecurity and mobility management.
Looking ahead to fiscal year 2024, we anticipate revenue between $120 million and $133 million, with adjusted EBITDA ranging between $2.1 million and $2.4 million. Moreover, we expect free cash flow to range between $2 million and $2.3 million, reflecting our commitment to sustainable growth.
In 2023, we secured key customers such as FEMA, FAA, Heartland Bottling, FCC, Frontier Communications, Cox Communications, PlayFly, and others, paving the way for a promising 2024.
To realize our vision, we are focused on attracting top talent and enhancing our sales and marketing efforts. Strategic hires will bolster our sales pipeline and increase our win rate, while investments in marketing and branding will amplify our presence and generate inbound sales calls. Collaborations with industry experts, analysts, and established system integrators will further expand our reach and customer base.
As we pursue profitable growth, we remain steadfast in our commitment to driving sustainable shareholder value and maintaining a strong cash position to seize opportunities as they arise.
In closing, I extend my deepest gratitude to our dedicated staff and shareholders for their invaluable contributions and unwavering support. Together, we will continue to chart a path of growth and success for WidePoint Corporation.
Sincerely,
Jin Kang
Jin Kang
Chief Executive Officer
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
| ☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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| For the Fiscal Year Ended December 31, 2023 |
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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 ___________________ |
Commission File Number: 001-33035
| WidePoint Corporation |
| (Exact name of Registrant as specified in its charter) |
| Delaware |
| 52-2040275 |
| (State or other jurisdiction of |
| (I.R.S. Employer |
| incorporation or organization) |
| Identification No.) |
| 11250 Waples Mill Road, South Tower, Suite 210, Fairfax, Virginia |
| 22030 |
| (Address of principal executive offices) |
| (Zip Code) |
| (703) 349-2577 |
| (Registrant’s telephone number, including area code) |
Securities registered pursuant to Section 12(b) of the act:
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Title of each class |
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Trading Symbol(s) |
| Name of each exchange on which registered |
| Common Stock, $0.001 par value per share |
| WYY |
| NYSE AMERICAN |
| Securities registered pursuant to Section 12(g) of the act: |
| None |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
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: Yes ☒ No ☐
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): Yes ☒ No ☐
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 | ☐ |
| Non-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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
The aggregate market value of the registrant’s Common Stock held by non-affiliates of the registrant, computed by reference to the closing price of the Common Stock on the NYSE American on the last business day of the registrant’s most recently completed second fiscal quarter, was approximately $14.9 million.
As of March 20, 2024, there were 8,843,673 shares of the registrant’s Common Stock issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of WidePoint Corporation's proxy statement in connection with its 2024 Annual Meeting of Stockholders are incorporated by reference in Part III.
Cautionary Note Regarding Forward Looking Statements and Risk Factor Summary
This Annual Report on Form 10-K 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 Annual Report on Form 10-K 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 following risk factor summary:
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| · | Our market is highly competitive and we may not be able to compete effectively or gain market acceptance of our products and service. |
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| · | We may not be able to respond to rapid technological changes with new software products and services, especially in the area of artificial intelligence, which could harm our sales and profitability and our competitiveness in the market. |
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| · | Inflationary pressures on costs, such as costs for devices, labor and distribution costs may impact our financial condition or results of operations. |
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| · | Our financial resources are limited and the failure of one or more new product or service offerings could materially harm our financial results. |
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| · | We have significant fixed operating costs, which may be difficult to adjust in response to unanticipated fluctuations in revenues. |
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| · | We may be unable to sustain profitability. |
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| · | The loss of significant federal customer contracts could also have an adverse impact on our financial results. |
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| · | Federal agencies and certain large customers can unexpectedly terminate their contracts with us at any time without penalty and the loss of such customers would have an adverse impact on our financial results. |
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| · | The loss of key personnel or an inability to attract and retain additional personnel may impair our ability to grow our business. |
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| · | Acquisitions we undertake may present integration challenges, fail to perform as expected, increase our liabilities, and/or reduce our earnings. |
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| · | We may be unable to successfully acquire complementary businesses, services or technologies to support our growth strategy. |
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| · | Federal government contracts contain provisions giving government customers a variety of rights that are unfavorable to us, including the ability to terminate a contract at any time for convenience. |
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| · | Federal government shutdowns or the failure of the Federal government to approve a budget or a debt-ceiling increase would have a negative impact on our cash flows. |
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| · | A new revolving line of credit has been successfully executed; however we must achieve and maintain compliance with bank covenants or our access to working capital will be restricted which could negatively impact our business. |
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| · | Security breaches or cybersecurity events could result in the loss of customers and negative publicity and materially harm our business. |
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| · | Actual or perceived breaches of our security measures, or governmental required disclosure of customer information could diminish demand for our solution and subject us to substantial liability. |
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| · | The negative impact of any catastrophic events, including acts of terrorism, civil unrest, pandemics, such as the COVID-19 pandemic, outbreak of war or hostilities, such as the current conflict between Russia and Ukraine and other regional low-intensity conflicts, adverse climate or weather events or other public health emergencies, as well as our response to any of the aforementioned factors. |
For the discussion of these risks and uncertainties and others that could cause actual results to differ materially from those contained in our forward-looking statements, please refer to “Risk Factors” in this Annual Report on Form 10-K. The forward-looking statements included in this Annual Report on Form 10-K 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.
In this Annual Report on Form 10-K, 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.
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PART I
ITEM 1. BUSINESS
Company Overview
We are a leading provider of Technology Management as a Service (TMaaS) that consists of federally certified communications management, identity management, interactive bill presentment and analytics, and Information Technology as a Service solutions. We help our clients achieve their organizational missions for mobility management, information technology management, and cybersecurity objectives in this challenging and complex business environment.
We offer our TMaaS 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 TMaaS 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 TMaaS solutions enables our customers to be able to quickly expand or contract their mobility management requirements. Our TMaaS solutions are hosted and accessible on-demand through both a secure federal government certified proprietary portal and/or through a secure enterprise 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.
Our Solutions
Our TMaaS framework combines the strengths of our core capabilities into a single secure comprehensive enterprise-wide solution set that offers our customer’s the ability to securely enable and manage their mobile IT and telecommunication assets as described below:
Telecom Lifecycle Management
We offer comprehensive telecom lifecycle management solutions to enterprises both in the public and the private sectors. Our solutions are delivered in a hosted and secure multi-modal delivery environment. Our solutions provide full visibility of telecom assets for our clients thereby enabling our clients to securely and efficiently manage all aspects of telecom assets, while reducing the overall cost of ownership. We offer state-of-the-art call centers that are available 24/7 to help our customers stay productive.
Mobile and Identity Management
As one of two DoD designated External Certificate Authorities, we offer several different federally certified digital certificates and credentials that enable our customers to provide the strong multifactor authentication (MFA) solution to conduct business through secure portals owned and managed by the U.S. federal government, access government facilities and secure mobile devices that are used to access corporation networks, databases and other IT assets. We also offer comprehensive mobile security solutions that protect users, devices, and corporate resources, including establishing effective policies to create a scalable, adaptable, successful mobile program. We also offer the same MFA solution to enterprise in the private sectors with the same level of cybersecurity assurance.
Digital Billing and Unified Communications Analytics Solutions
We offer innovative and interactive billing communications and analytics solutions to large communications service providers (CSPs). 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.
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IT as a Service
We provide comprehensive information technology (IT) as a service offerings (ITaaS), including cybersecurity, cloud services, network operations, and professional services. We provide a complete outsourcing solution that includes hardware, software, network and associated management for our clients’ IT needs. Additionally, we provide development operations support, artificial intelligence implementation, and the Microsoft stack of technologies to help our customers to be productive, agile, and efficient in a secure environment. provide the above solutions from the cloud that ensures scalability, resiliency, and security. We also provide “migration to the cloud” services that enables our customers to take advantage of cost savings through economies of scale and elimination of redundancy as well as taking advantage of built in scalability and resiliency of the cloud.
Sales Cycle
We sell service solutions to government and business enterprises. Our ability to successfully sell our services depends upon the relationships we build and maintain relationships with key decisions makers at existing customers and prospective customer organizations. Our sales cycle is long and is often affected by many factors outside of our control including but not limited to customer specific proposal and acquisition processes, unique customer service requirements, the customer’s timetable and urgency, changes in key leadership and/or personnel that slows down the proposal or project, an evaluation by different functional groups within the prospective customers organization before a purchase decision is made by the organization, budgetary funding delays, intermittent U.S. federal government shutdowns, competitive bidding processes and other policy constraints, as well as additional factors that may lengthen the sales cycle. Many of these variables are outside our control and we attempt to manage the financial impact on us by building a large pipeline with opportunities that have overlapping sales cycles.
It could take more than 12 months to enter into a contract with a customer from the time we first actively engage a prospective customer and then a full implementation could range from mere weeks to several months depending on the complexity of the customers statement of work and level of engagement by us and the customer to get the deployment completed. Contract closing and implementation timelines vary as a result of these factors, many of which are outside our control.
Sales Approaches
We approach selling our services under either a direct sales model under which we control the contract and key relationships or we partner with a large systems integrator and other strategic partners to provide our TMaaS solution as part of their overall total solution offering to the end customer. We have historically grown our business under the direct sales model; however, more recently we have closed a significant portion of our new sales through our partnerships with large systems integrators. While we believe we can continue to be successful growing our sales through both models, larger scale opportunities tend to require partnerships with large entrenched systems integrators and other strategic partners.
Our sales approaches are summarized below:
Systems Integrators. We partner with large systems integrators to collectively pursue large market opportunities that include some or all of our TMaaS solution within the scope of the solicitations. In these types of arrangements, we generally operate as a subcontractor and manage the customer relationship closely with the prime contractor. We do not utilize any channel partners or third-party firms in this sales approach.
Strategic Partnerships. We partner with vendors who are leaders in their industries such as Healthcare, Telecommunication, Transportation, etc. to leverage their channels or reseller networks to sell our TMaaS solution. This approach allows us to sell into markets that would be otherwise be costly and difficult to reach. By leveraging these partners’ existing customer relationships, we can shorten the sale cycle and have a higher success rate.
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Internal Sales Force. We have a team of sales professionals, account managers and project managers that are responsible for identifying and pursuing commercial and government opportunities for our TMaaS offerings. We take a team approach for engaging with a potential customer. Our sales teams consists of sales lead, account managers, solution experts and other subject matter experts to assist with execution of product demonstrations, proposal creation and submission, contract negotiation, relationship management, sales closing and final transition of closed deals to the operations team. Sales commissions, when applicable, are calculated and paid based on net collected gross managed service revenues times a fixed commission rate that declines over the base term of the contract. There are no commissions paid after the base term expires. We plan to add resources for this effort to help manage our system integrator and strategic partnership efforts as well as increasing the number of qualified leads in our sales pipeline to further spur growth.
Upselling and Cross Selling. After a customer is on boarded, we focus on delivering our service as contracted and then upsell and cross sell our TMaaS solution offerings. We may enter into preferred supplier network programs agreements with our customers and offer our TMaaS solutions on similar terms and conditions to their suppliers and customer which in turn could increase our potential sales opportunities. We also directly ask our customers for referrals into their professional network, customer and supplier groups to drive additional sales opportunities.
Indirect Sales Approach. We may use an indirect sales approach to reach new target markets by outsourcing our lead generation and certain business development activities through a third-party channel partner. We do not use this sales approach very often due to the high cost of commissions charged by these channel partners as their commission terms often span the entire life of the customer relationship which may not be financially viable to the customer or us. We do not anticipate using this sales approach extensively to drive sales opportunities.
Our sales team has a wide variety of skills and expertise to cultivate qualified leads and guide our prospective customers towards finding a solution that meets their organization’s goals and objectives.
Marketing and Branding
Our marketing strategy is to build our brand and increase market awareness of our solutions in our target markets that will allow us to successfully build strong relationships with key decision markers involved in the sales process on the customer side. Key decisions makers typically consist of information technology executives, finance executives and managers of communications assets and networks.
We engage in a wide variety of broad-based and targeted marketing campaigns designed to broaden market awareness of our solutions and expertise. Broad-based marketing campaigns include attending and speaking at industry and tradeshows, website marketing, publishing technical whitepapers and use case studies, topical webcasts, public relations campaigns, subject matter expert forums and industry visibility initiatives. Targeted marketing campaigns including internet search engine optimization, directed e-mail and direct mail, co-marketing strategies designed to leverage existing customer and network relationships.
Customer Concentrations
We derive a significant amount of our revenues from contracts funded by federal government agencies for which we act in capacity as the prime contractor, or as a subcontractor. We believe that contracts with federal government agencies in particular, will be the primary source of our revenues for the foreseeable future although we are working to increase our footprint with commercial customers through our relationships with large systems integrators and strategic partners. Accordingly, negative changes in federal government fiscal or spending policies (including continuing budget resolutions and government shutdowns) that impact the spending budgets of our key government customers, including Department of Homeland Security, will directly affect our financial performance.
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We expect all of our customers to be motivated to meet their organizational needs for mobile management, IT management, and security objectives in this challenging environment. As a result of delivering our TMaaS service solution we can often save our customers a significant portion of their total spend on mobility and security management which translates into real cash savings. While most of our customers use their savings to purchase and upgrade their managed services, our customers could potentially negatively impact our billable revenue base and result in lower profit margins if they decide to retain the savings and not purchase additional higher margin services. We have an attractive set of solutions and we believe that government spending for mobility management and for cybersecurity services and solutions will increase for the foreseeable future.
Our government customer base is located predominantly in the Mid-Atlantic region of the U.S. while our commercial customer base is located throughout the continental U.S., Canada, Europe and the Middle East. Historically, we have derived, and may continue to derive in the future, a significant percentage of our total revenues from federal government contracts in the United States.
Due to the nature of our business and the relative size of certain contracts which are entered into in the ordinary course of business, the loss of any single significant customer would have a material adverse effect on our results of operations. In future periods, we will continue to focus on diversifying our revenue by increasing the size and number of customer contracts both in public and private sectors.
Government Contracts
We have numerous government contracts and contract vehicles. Our contracts with the federal government, and many contracts with other entities, permit the government customer to modify, curtail or terminate the contract at any time for the convenience of the government, or for default by the contractor. If a contract is terminated for convenience, we are generally reimbursed for our allowable costs through the date of termination and are paid a proportionate amount of the stipulated profit or fee attributable to the work actually performed.
Contract vehicles include Government Wide Acquisition Contracts (“GWACs”), and Blanket Purchase Agreements (“BPAs”) based upon GSA Schedule 70, and customer specific contracts. We also hold a number of Indefinite Delivery/Indefinite Quantity (“ID/IQ”) contracts, including, but not limited to:
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| · | Department of Homeland Security for Cellular Wireless Managed Services (CWMS) 2.0 ID/IQ Contract (DHS CWMS 2.0 IDIQ). |
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| · | Subsidiaries of WidePoint are approved subcontractors for the following ID/IQ contracts: |
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| o | NASA End-User Services and Technologies (NEST) |
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| o | GSA Alliant 2 |
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| o | GSA Enterprise Infrastructure Solutions (EIS) |
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| o | GSA Connections II |
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| o | National Institutes of Health Chief Information Officer Solutions and Partners (CIO-SP3) |
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| o | NASA Solutions for Enterprise-Wide Procurement (SEWP) |
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| o | Department of Justice (DOJ) Enterprise Standard Architecture V (ESA V) |
We will continue to build on our partnerships with key systems integrators and strategic partners to compete for public and private sector opportunities.
Product Development and Technology Solution Enhancements
We believe that our existing technology platforms are adequate and meet our operational obligations to our customers. We may fund certain product development initiatives to enhance or customize existing client facing platforms and software solutions. These initiatives are aimed at improving the efficiency and effectiveness of our software solutions and meeting our customer’s changing organizational requirements, as necessary. We determine which enhancements to further develop after assessing the market capabilities sought by potential customers, considering technological advances, feedback on enhancements from our current customer user groups and other factors. Our current development activities are focused on the integration of our heterogeneous services delivery platforms, and improving the security posture and delivery of our information technology services.
We utilize a standard architecture to ensure enhancements are subject to appropriate oversight and scrutiny and follow a consistent and efficient process. Our development team is comprised of professionals with hands-on technical and practical customer-side development experience. We believe this allows us to design and deploy enhancements that can resolve real-world problems in a timely manner.
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We funded strategic product development initiatives as well as platform and portal integrations and other product and portal enhancements during the year. For the years ended December 31, 2023 and 2022, we incurred product development costs associated with our next generation TMaaS platform application, Secure Identity Management Solutions, Unified Communications Analytics (UCAS) solution, and data center of approximately $0.9 million and $3.2 million, respectively, which were capitalized. At December 31, 2023, we believe we have substantially completed our capital investments related to our delivery platforms for the foreseeable future; however, future updates and enhancements will be likely to address the changes in technology.
Security Certification and Accreditation
Our TMaaS solution framework has received multiple security certifications and accreditations from the federal government. As a result we have multiple authorizations to operate (ATOs) from the Department of Homeland Security, the General Services Administration, the Department of Defense, and the Department of Commerce. The ATOs attest to the fact that we meet all of the cybersecurity requirements for processing sensitive data as ascribed by the Federal Information Management Act at the Moderate and High levels. These ATOs are difficult, time consuming, and costly to attain. Our security certification and accreditation represents a significant reduction of security risk for our customers both in public and private sectors.
Data Centers
We host our proprietary solutions and operate all servers, systems and networks multiple data centers located in North America and Europe, which we may consolidate in the future. We also host our proprietary solutions in the cloud and have plans to migrate more customers to the cloud in the future. Our agreements with our customers contain guarantees regarding specified levels of system availability, and we regularly provide our customers with performance reports against those standards. We utilize monitoring technology software tools that continuously check our servers and key underlying components at regular intervals for issues with system availability and performance, server and application security and penetration vulnerabilities, and other factors that may impact the availability of our systems to our customers. Each data center provides security measures, redundant environmental controls, fire suppression systems and redundant electrical generators to meet our service level agreements. To facilitate data loss recovery, we operate a multi-tiered system configuration with load-balanced web server tools, replicated database servers and fault-tolerant storage devices. The architecture is designed to ensure near real-time data recovery in the event of a malfunction of a primary server. Based on customer requirements, we can also provide near real-time asynchronous data replication between operational and disaster recovery backup sites.
Intellectual Property
Our intellectual property rights are important to our business. We rely on a combination of patent, copyright, trademark, service mark, trade secret and other rights in the United States and other jurisdictions, as well as confidentiality procedures and contractual provisions to protect our proprietary service as a solution, technology, operational processes and other intellectual property. We protect our intellectual property rights in a number of ways including entering into confidentiality and other written agreements with our employees, customers, consultants and partners in an attempt to control access to and distribution of our software, documentation and other proprietary technology and other information. Despite our efforts to protect our proprietary rights, third parties may, in an unauthorized manner, attempt to use, copy or otherwise obtain and market or distribute our intellectual property rights or technology or otherwise develop software or services with the same functionality as our software and services.
U.S. patent filings are intended to provide the holder with a right to exclude others from making, using, selling or importing in the United States the inventions covered by the claims of granted patents. Our patents may be contested, circumvented or invalidated. Moreover, the rights that may be granted in those patents may not provide us with proprietary protection or competitive advantages, and we may not be able to prevent third parties from infringing those patents. Therefore, the exact benefits of our patents and the other steps that we have taken to protect our intellectual property cannot be predicted with certainty.
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Market Competition
Our TMaaS market is centered on mobile management, identity management, ITaaS and digital billing and analytics.
Target Markets. Our target market is highly fragmented and we compete with small and large companies that offer different components of TMaaS. We believe that we are presently the only provider of all four of these critical services offerings. We believe that our TMaaS solution offering gives us a strong competitive advantage over our competitors due to our distinctive technical competencies, long-standing client relationships, successful past contract performance with large commercial and government organizations, governmental certifications and authorizations to operate (ATOs) within this space, price and value of services delivered, reputation for quality, and key management personnel with subject matter expertise.
Market Pricing. Pricing for services in our market lacks transparency due to the way in which our competitors price their services. Our competitors take advantage of this lack of pricing transparency and prospective customer’s lack of understanding and awareness of market pricing for services. Our competitors often take advantage of a prospective customer and will often heavily discount their prices to unprofitable levels thereby creating a commodity pricing environment that affects the value of the solution perceived by prospective customers, severely limits profitability for other service providers that provide better solutions, discourages further innovation and harms the customer in the end. The costs to switch solutions can be high for a prospective customer even if they know their current solution is not working.
Our prices for services are transparent and we attempt to match our customers need with the right level of services for a single inclusive fee whenever practical. We practice transparent pricing strategies that allow our customers to purchase our entire full-service solution or select only the services they require to meet their needs. We do not use introductory teaser rates to attract new customers or conduct bait and switch pricing tactics with our customers as is often practiced by our competitors. Pricing for our TMaaS offering will vary depending on our prospective customer’s technology infrastructure, scale of their operations, workflow requirements and many other factors that can affect pricing.
We do not view our services as a commodity, and comparability of our TMaaS offering against other competitors’ service offerings is not practical due to differences in pricing models described above and overall capabilities among competitors. As a result of this pricing differences between us and our competitors it can be difficult to compare to pricing models in our market.
All prospective customers tend to initially have price sensitivity and that often changes after we are able to demonstrate that our solutions are superior and will save them time and money. We believe our TMaaS solution pricing is competitive and reflects the value of the solutions provided to our customers. Our goal is providing the best solution for our customers that meets their needs.
Competition. Our TMaaS solution crosses into several different market segments and as a result we do not have competitors that compete in all of the market segments in which we conduct business. Some of our principal competitors include: MDSL/Calero Sortware LLC, Tangoe, Inc., Brightfin, DMI, A&T Systems, and Turning Point Global Services, LLC; Identity Management – Entrust Corp., IdenTrust and XTec Inc.; Digital Billing & Analytics – Amdocs Britebill and Globys Inc.; ITaaS - BMC Software, HPE, StratCore; Next Level Technologies, and many others.
Our larger competitors often have more size and financial resources than us and they may be able to provide a wider array of technology solutions outside of our core capabilities. Due to our significant federal government contract concentrations, we also experience competition from a variety of both large and small companies, including divisions of large federal government integrators such as Leidos, Peraton, SAIC, Booz Allen Hamilton, CACI International, and other large and mid-sized federal contractors, as well as a limited number of small to mid-sized subject matter expert organizations offering specialized capabilities within the identity management space.
If we are unable to keep pace with the intense competition in our marketplace, deliver cost-effective and relevant solutions to our target market, our business, financial condition and results of operations will suffer.
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Contracting
We prefer to serve as the prime contractor when we win contract awards; however, we will often serve as a subcontractor and partner with a large systems integrator to win a larger market opportunity. We also may enter into strategic teaming agreements with another competitor or a vertical supplier to capture a market opportunity. Prospective customers in our target market use a wide array of contract vehicles to purchase technology services ranging from individual purchase orders, awards or consolidated service contracts (including blanket purchase agreements and similar indefinite delivery indefinite quantity contracts) that cover a range of technology services, of which we may or may not be able to provide all of the services to serve as the prime contractor.
Seasonality
Our business is not seasonal. However, our revenues and operating results may vary significantly from quarter to quarter, due to revenues earned on contracts, the number of billable days in a quarter, the timing of the carrier services revenues and other direct costs, the commencement and completion of contracts during any particular quarter; as well as the schedule of the government agencies for awarding contracts, the term of each contract that we have been awarded and general economic conditions. Because a significant portion of our expenses, such as personnel and facilities costs, are fixed in the short term, 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. Additionally, because we derive a large percentage of our revenue from the U.S. Federal Government, their budgeting process also affects the purchasing patterns of our the agency customers that will significantly impact the quarter to quarter financial performance
Regulation
Our most significant source of regulation relates to compliance with laws and regulations relating to the formation, administration, and performance of U.S. government contracts, including:
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| · | the Federal Acquisition Regulation, and agency regulations analogous or supplemental to the Federal Acquisition Regulation, which comprehensively regulate the formation, administration, and performance of government contracts; |
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| · | the Truthful Cost or Pricing Data Act (formerly known as Truth in Negotiations Act), which requires certification and disclosure of all cost or pricing data in connection with some contract negotiations; |
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| · | the Procurement Integrity Act; |
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| · | the Cost Accounting Standards, which impose cost accounting requirements that govern our right to reimbursement under some cost-based government contracts; and |
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| · | laws, regulations, and executive orders restricting (i) the use and dissemination of information classified for national security purposes, (ii) the exportation of specified solutions, technologies and technical data, and (iii) the use and dissemination of sensitive but unclassified data; |
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| · | the General Data Protection Regulation is a regulation in EU law on data protection and privacy in the European Union (EU) and the European Economic Area (EEA). It also regulates the transfer of personal data outside the EU and EEA areas |
The federal government has audit rights and may review matters such as our performance on contracts, pricing practices, cost structure, and compliance with applicable laws, regulations, and standards. If a government audit uncovers improper or illegal activities, we may be subject to civil and criminal penalties and administrative sanctions, including termination of contracts, forfeiture of profits, suspension of payments, fines, and suspension or debarment from doing business with U.S. government agencies.
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Human Capital
As of December 31, 2023, we employed 206 full time employees (176 in United States and 30 in Europe), 10 consultants, 10 part-time staff, and 8 subcontractors.
We consider our human capital to be one of the most important strategic assets or our company. As such, we seek to foster and maintain a safe, professional, and harassment free work environment. Each employee is required to conduct himself or herself as required by WidePoint’s business code of conduct and ethics policy contained in the WidePoint Employee Handbook. Our core values are:
People. Attract, develop, and retain the best and the brightest talent for our business and strongly encourage intellectual curiosity to learn new ways to efficiently and effectively deliver our services. Value diversity of our people, foster an open and inclusive environment and treat each person in a manner that reflects our values.
Service. Deliver long-term customer satisfaction in all our TMaaS service offerings in a manner that enables WidePoint to meet or exceed established financial targets that will ultimately deliver greater shareholder value.
Integrity. Act with the highest integrity and ethics and inspire trust from our customers, employees, vendors, and other stakeholders by matching our behaviors to our words and taking responsibility for our actions.
We expect every WidePoint employee to adhere to these core values when dealing with colleagues, customers, suppliers, and any other potential stakeholder of WidePoint.
WidePoint provides a compensation package that we believe is competitive within our industry such that we will attract, retain, motivate and reward superior employees who must operate in a highly competitive and technologically challenging environment. We seek to link annual changes in compensation to overall Company performance, as well as each individual’s contribution to the results achieved. The emphasis on overall Company performance is intended to align the employee’s financial interests with the interests of shareholders. Our compensation package also include a broad range of benefits such as healthcare insurance, career training and education tuition reimbursement, 401K retirement plan, annual paid time off, and many others.
We believe the combination of competitive compensation package and career growth and development opportunities have helped increase employee tenure and reduce voluntary turnover. As of December 31, 2023, the average tenure of our employees was approximately eight (8) years and more than one fourth of our employees have been employed by us for more than ten (10) years.
Corporate Information
We were incorporated on May 30, 1997 under the laws of the State of Delaware. Our principal executive offices are located at 11250 Waples Mill Rd., South Tower, Suite 210, Fairfax, Virginia 22030. Our internet address is www.widepoint.com. Information on our website is not incorporated into this Form 10-K. We make available free of charge through our website our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after we electronically file such material with, or furnish it to, the United States Securities and Exchange Commission (the “SEC”). The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at http://www.sec.gov.
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ITEM 1A. RISK FACTORS
You should carefully consider the risk factors set forth below and in other reports that we file from time to time with the Securities and Exchange Commission and the other information in this Annual Report on Form 10-K. The matters discussed in the risk factors, and additional risks and uncertainties not currently known to us or that we currently deem immaterial, could have a material adverse effect on our business, financial condition, results of operation and future growth prospects and could cause the trading price of our common stock to decline.
RISKS RELATED TO OUR BUSINESS
Our market is highly competitive and we may not be able to compete effectively or gain market acceptance of our products and service.
We operate in a market that is highly fragmented, price sensitive and subject to fierce competition. Additionally, rapid changes in technology affect our ability to respond timely with new and innovative product offerings to address new market needs. We have a significant presence in the U.S federal marketplace and we expect the intensity of competition for government contracts, as well as commercial contracts to continue to increase in the future as existing competitors develop additional capabilities that better align with our core competencies and those of our target customer segment.
While we believe our customer service, strong customer retention and integrated technology solution sets are among our key differentiators, our competitors may offer introductory pricing and significantly discount their services to gain market share and/or in exchange for revenues with higher margin services in other areas or at later dates. Increased competition could result in additional pricing pressure, reduced sales, shorter term lengths for customer contracts, lower margins or the failure of our solution to achieve or maintain broad market acceptance. In addition, many of our competitors have greater financial resources than we have. If we are unable to compete effectively, it will be difficult for us to maintain our pricing rates and add and retain customers, have adequate financial resources to pay for and retain key personnel, and our business, financial condition and results of operations will be harmed.
We may not be able to respond to rapid technological changes with new software products and services, which could harm our sales and profitability.
Our portfolio of products, services, and solutions could become obsolete due to rapid technological changes such as the advancement and application of artificial intelligence and frequent new product and service introductions by our competitors in the mobile world. Additionally, frequent changes in mobile computing hardware and software technology, and resulting inconsistencies between the billing platforms utilized by major communications carriers and the changing demands of customers regarding the means of delivery of communications management solutions could affect our ability to efficiently deliver our services and harm our profit margins.
To achieve and maintain market acceptance for our solution, we must effectively anticipate these changes and offer software products and services that respond to them in a timely manner. Customers may require customized transactional and reporting capabilities that our current solution does not have and/or may be cost prohibitive to develop to meet the customer’s requirements and ensure our contract is profitable. In addition, the development of new products and services comes with a high degree of uncertainty with regard to return on investment and involves significant time and financial resources to action, as there is no guarantee that the funds and time spent on developing such products will ever generate a return. If we fail to develop software products and services that satisfy customer preferences in a timely and cost-effective manner, our ability to renew our agreements with existing customers and our ability to create or increase demand for our solution will be harmed.
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The loss of significant customer contracts, including our IDIQ with the Department of Homeland Security, could also have an adverse impact on our financial results.
While we believe that our business relationships with key decision makers are strong and represent a strong competitive advantage for us; however, it is possible that the strength of our relationship could diminish if our primary customer contacts leave their firm or the customer is acquired by another firm that uses a competitor to deliver the same services. We estimate that the loss of any large contract, without any offsetting aggregate contract wins, could have a significant adverse impact on our operating cash flow and financial results; and we would likely be faced with a decision to initiate cost reduction actions that would largely include reductions in force for personnel and assets affected by the contract loss. Approximately 45% of our managed service revenue in 2023 was generated under our DHS contracts. If DHS CWMS 2.0 IDIQ were terminated or we did not re-win the contract upon re-bidding in November 2025, it would have a material adverse impact on our future revenue, profitability and cash flows.
Inflationary pressures on costs, such as inputs for devices, labor and distribution costs may impact our financial condition or results of operations.
As a provider of TMaaS services, we sell equipment manufactured by various suppliers and depend on suppliers to provide us, directly or through other suppliers, with items such as network equipment, customer premises equipment, and wireless-related equipment and other connected devices. In 2021 and throughout 2023, the costs of these inputs and the costs of labor necessary to develop and maintain our networks and our products and services rapidly increased. In addition, many of these inputs are subject to price fluctuations and supply issues from a number of factors, including, but not limited to, market conditions, demand for raw materials used in the production of these devices and network components, weather, climate change, energy costs, currency fluctuations, supplier capacities, governmental actions, wars or other low-intensity conflicts, acts of terror, import and export requirements (including tariffs), and other factors beyond our control. Although we are unable to predict the impact on our ability to source materials in the future, we expect these supply and inflationary pressures to continue into 2024.
Our attempts to offset these cost pressures, such as through increases in the selling prices of some of our products and services, may not be successful and in certain events we may be required to honor contractual prices that are no longer profitable to us. Higher product prices may result in reductions in sales volume. Consumers may be less willing to pay a price differential for our products and may increasingly purchase lower-priced offerings, or may forego some purchases altogether, during an economic downturn. To the extent that price increases are not sufficient to offset these increased costs adequately or in a timely manner, and/or if they result in significant decreases in sales volume, our business, financial condition or operating results may be adversely affected. Furthermore, we may not be able to offset any cost increases through productivity and cost-saving initiatives.
Risks from acquisitions include integration challenges, a failure to achieve objectives, and the assumption of liabilities.
Acquisitions, such as our acquisition of IT Authorities, Inc., often present significant challenges and risks. The risks from an acquisition include the Company failing to achieve strategic objectives and anticipated revenue and profit improvements, as well as failing to retain the key personnel of the acquired business. Additionally, failure to meet financial objectives of an acquisition could lead to impairment charges of intangible assets and goodwill in future periods. Finally, the assumption of liabilities related to litigation or other legal proceedings involving the acquired business may present a significant risk. There can be no assurance that any acquisition we complete achieves the results and/or synergies that we expected.
Our sales cycles can be long, unpredictable and require considerable time and expense, which may cause our operating results to fluctuate.
Our sales cycle, which is the time between initial contact with a potential customer and the ultimate sale, is often lengthy and unpredictable. Some of our potential customers may already have partial managed mobility solutions in place under fixed-term contracts, which may limit their ability to commit to purchase our solution in a timely fashion. In addition, our potential customers typically undertake a significant evaluation process that can last up to a year or more, and which requires us to expend substantial time, effort and money educating them about the capabilities of our offerings and the potential cost savings they can bring to an organization. Furthermore, the purchase of our solution typically also requires coordination and agreement across many departments within a potential customer’s organization, which further contributes to our lengthy sales cycle. As a result, we have limited ability to forecast the timing and size of specific sales. Any delay in completing, or failure to complete, sales in a particular quarter or year could harm our business and could cause our operating results to vary significantly.
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Our financial resources are limited and the failure of one or more new product or service offerings could materially harm our financial results.
Product research and development can be time consuming and costly, without any guarantee of a return on our investment. The failure of one of our products or services to gain market acceptance could cause us financial harm due to the costs involved in developing or acquiring new products and services and , thereafter, marketing such new products and services. Any failure to gain market acceptances of our products and services could have a material adverse impact on our financial results. In addition, many of our competitors have greater resources than us and we if we cannot keep pace with the intense competition in our marketplace, our business, financial condition and results of operations will suffer.
We have significant fixed operating costs, which may be difficult to adjust in response to unanticipated fluctuations in revenues.
A high percentage of our operating cash outlays, particularly personnel, rent and communications costs, are fixed in advance of any particular quarter. As a result, an unanticipated or prolonged decrease in the number or average size of, or an unanticipated delay in the scheduling for our projects may cause significant variations in operating results in any particular quarter and could have a material adverse effect on operations and cash flow for that quarter. An unanticipated termination, decrease or delay in the implementation of a significant anticipated customer contract could require us to maintain underutilized employees and that could have a material adverse effect on our cash flow, financial condition and results of operations. Other factors that may negatively affect our earnings from quarter to quarter include changes in:
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| · | the contractual terms and timing of completion of projects, including achievement of certain business results; |
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| · | acceptance of our products to commercial or government customers; |
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| · | budgets for government customers; |
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| · | the implementation of new projects; |
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| · | the adequacy of provisions for losses and bad debts; |
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| · | the accuracy of our estimates of resources required to complete ongoing projects; |
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| · | personnel, including the loss of key highly skilled personnel necessary to complete projects; |
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| · | labor shortages; |
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| · | supply chain issues; |
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| · | inflationary pressures; |
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| · | natural disasters, cyberattacks, war and/or terrorist attacks; |
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| · | global pandemics,; and |
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| · | general economic conditions and international hostilities including war. |
These factors could adversely affect customer demand, the Company’s operations, and its ability to source and deliver services to its customers, which could have a material adverse effect on the Company’s financial results.
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We currently have access to a credit facility, which provides for short term cashflow needs and requires us to maintain financial covenants and failure to achieve and maintain such covenants could limit our access to debt.
We have access to a new credit facility, which consists of a variable line of credit primarily to meet short-term working capital requirements. Our credit facility agreement requires us to maintain certain financial covenants measured annually commencing on December 31, 2024. If we are unable to meet future covenants, our lender could take adverse actions that might include accelerating in part or in full payment of all unpaid principal and interest, reducing the amount of our credit facility, or offering renewal terms that are unfavorable, or refusing to renew our credit agreement, all of which could have a material adverse impact on our ability to meet periodic short term operational cash flow requirements and manage through prolonged government shutdowns. If we are unable to achieve and maintain our covenants under our credit facility, our business and operating results could suffer and we may need to obtain additional funding or raise capital, which may not be available on favorable terms or at all.
We may be unable to sustain profitability.
We have a history of operating losses. A significant contributing factor driving such prior net operating losses were investments in sales and marketing and product development projects that did not produce the expected return on investment; and as a result placed a significant cumulative strain on our networking capital and overall financial position. There is no guarantee that we will be able to leverage our recent improvements in financial performance and meet our financial goals of growing top line revenue and positive net income without closing significant new business and incremental contract expansions and maintain control over operating costs. An inability to successfully grow our sales pipeline and close on new business that is profitable could affect our long-term viability, profitability and ultimately limit the financial resources we have available to grow our business and achieve our desired financial results.
Federal agencies and certain large customers can unexpectedly terminate their contracts with us at any time without penalty.
All of our government contracts, including but not limited to the DHS IDIQ, contain a standard clause which allows the government to cancel our contract for convenience without penalty. In addition, our contracts with the federal government permit the governmental agency to modify, curtail or terminate the contract at any time for the convenience of the government.
Some of our commercial contracts with large enterprises also contain contract clauses that include the ability to cancel a contract for convenience by the customer for convenience with limited advance notice and without significant penalty. Termination, delay or modification of a contract by any large government or commercial customer could result in a loss of expected revenues and additional expenses for staff that were allocated to that customer’s project. We could be required to maintain underutilized employees who were assigned to the terminated contract or we could ultimately lose the subject matter expertise for that contract and be required to retain more expensive staffing resources to perform the contract when it resumes. The unexpected cancellation or significant reduction in the scope of any of our large projects could have an immediate material adverse effect on our business, financial condition and results of operations.
Our inability to accurately price and sell our product offerings at an acceptable profit margin that customers are willing to pay will have a negative impact on our business that could extend for a number of years.
Most of our contracts with customers have terms of three (3) to five (5) years, with optional additional renewal periods. Our government contracts generally consist of a base period award with 4 option periods depending on the needs of the agency issuing the contract award. Our commercial contracts have contractual terms of 3 or more years with automatic annual renewals in most cases. Most of our contracts are offered at firm fixed price per performance obligation such as price per unit managed. Due to the long-term nature of our firm fixed price contracts, any failure on our part to accurately define the scope of work and properly manage scope creep, properly price our products to match the customer’s operating environment to properly factor in inflation and labor costs, or to effectively manage our costs to deliver against these performance obligations could have an adverse negative impact to our financial position and results of operations over a number of years. Accordingly, we may be unable to pass on the recent increases in costs for labor and supplies as a result of general inflationary conditions to such customers. Additionally, our failure to complete our contractual performance obligations in a manner consistent with the contract could adversely affect our overall profitability and could have a material adverse effect on our business, financial condition and results of operations.
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If we fail to effectively manage and develop our strategic relationships with key systems integrators, or if those third parties choose not to market and sell our TMaaS offering, our operating results would suffer.
The successful implementation of our strategic goals is dependent in part on strategic relationships with key systems integrators and other strategic partners. While our relationships with key systems integrators and other strategic partners is relatively a new strategy, we believe that our business relationship is strong and continuing to grow and we believe that our key systems integrators and other strategic partners will continue to support the inclusion of our TMaaS offering as part of their overall technology solution offering.
Some of our strategic relationships are relatively new and, therefore, it is uncertain whether these third parties will be able to market and sell our solution successfully or provide the volume and quality of customers that we believe may exist. If we are unable to manage and develop our strategic relationships, the growth of our customer base may be harmed and we may have to devote substantially more resources to the distribution, sales and marketing of our solution, which would increase our costs and decrease our earnings.
The loss of key personnel or an inability to attract and retain additional personnel may impair our ability to grow our business.
We are highly dependent upon the continued service and performance of our key executives, operational managers and subject matter experts to run our core operations. The replacement of these individuals likely would involve expenditure of significant time and financial resources, and their loss might significantly delay or prevent the achievement of our business objectives. We do not maintain key person life insurance with respect to any of our key executives and subject matter experts.
We plan to continue to replenish our ranks with the best available talent to optimize our workforce to do more with less resources. We face intense competition for qualified individuals from numerous consulting, technology, software and communications companies. Our ability to achieve significant revenue growth will depend, in large part, on our success in recruiting, training and retaining sufficient numbers of qualified personnel to support our growth. New hires may require significant training and may take significant time before they achieve full productivity. If our recruiting, training and retention efforts are not successful or do not generate a corresponding increase in revenue, our business will be harmed.
In addition, if our key employees resign from us or our subsidiaries to join a competitor or to form a competing company, the loss of such personnel and any resulting loss of existing or potential customers to any such competitor could have a material adverse effect on our business, financial condition and results of operations. Although we require certain of our employees to sign agreements prohibiting them from joining a competitor, forming a competing company or soliciting our customers or employees for certain periods of time, we cannot be certain that these agreements will be effective in preventing our key employees from engaging in these actions or that courts or other adjudicative entities will substantially enforce these agreements.
We provide minimum service-level commitments to many of our customers, and our inability to meet those commitments could result in significant loss of customers, harm to our reputation and costs to us.
Many of our customer agreements currently, or may in the future, require that we meet minimum service level commitments regarding items such as platform availability, invoice processing speed and order processing speed. If we are unable to meet the stated service level commitments under these agreements, many of our customers will have the right to terminate their agreements with us and we may be contractually obligated to provide our customers with credits or pay other penalties. If our software products are unavailable for significant periods of time, we may lose a substantial number of our customers as a result of these contractual rights, we may suffer harm to our reputation, and we may be required to provide our customers with significant credits or pay our customers significant contractual penalties, any of which could harm our business, financial condition, results of operations.
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A global pandemic similar to the COVID 19 pandemic, or an epidemic impacting our could have a material adverse impact on our business and operations..
Pandemics have in the past adversely affected certain elements of our business and our operations due to quarantines, government orders and guidance, facility closures, illness, travel restrictions, implementation of precautionary measures and other restrictions applicable to us and our business partners. The COVID-19 pandemic or another future pandemic or epidemic could lead to an extended disruption of economic activity and high unemployment levels, and disruption of the global supply chain, and as such, cause a material negative impact on our consolidated results of operations, financial position and cash flows.
Our long-term success in our industry depends, in part, on our ability to expand the sales of our solutions to customers located outside of the United States, and thus our business is susceptible to risks associated with international sales and operations.
We may to expand the international sales and operations of our portfolio of solutions. This international expansion will subject us to new risks that we have not faced in the United States. These risks include:
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| · | geographic localization of our software products, including translation into foreign languages and adaptation for local practices and regulatory requirements; |
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| · | lack of familiarity with and unexpected changes in foreign regulatory requirements; |
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| · | longer accounts receivable payment cycles and difficulties in collecting accounts receivable; |
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| · | difficulties in managing, staffing and overseeing international implementations and operations, including increased reliance on foreign subcontractors; |
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| · | challenges in integrating our software with multiple country-specific billing or communications support systems for international customers; |
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| · | challenges in providing procurement, help desk and fulfillment capabilities for our international customers; |
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| · | fluctuations in currency exchange rates; |
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| · | potentially adverse tax consequences, including the complexities of foreign value added or other tax systems and restrictions on the repatriation of earnings; |
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| · | the burdens of complying with a wide variety of foreign laws and legal standards; |
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| · | increased financial accounting and reporting burdens and complexities; |
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| · | potentially slower adoption rates of communications management solutions services internationally; |
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| · | political, social and economic instability abroad, terrorist attacks and security concerns in general; and |
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| · | reduced or varied protection for intellectual property rights in some countries. |
Operating in international markets also requires significant management attention and financial resources. The investment and additional resources required to establish operations and manage growth in other countries may not produce desired levels of revenue or profitability.
We may be unable to successfully acquire complementary businesses, services or technologies to support our growth strategy.
We have in the past and may in the future acquire or invest in complementary and supplementary businesses, services or technologies, such as our acquisition in October 2021 of substantially all of the assets of IT Authorities, Inc. Demand for businesses with credible business relationships and capabilities to provide services to large commercial enterprises and/or governmental agencies at the federal, state and local level is very competitive. To the extent that the price of such acquisitions may rise beyond reasonable levels where funding for such acquisitions is no longer available, we may not be able to acquire strategic assets. Further, these acquisitions, investments or new business relationships may result in unforeseen difficulties and expenditures. We may encounter difficulties assimilating or integrating the businesses, technologies, products, services, personnel or operations of companies we have acquired or companies that we may in the future acquire. These difficulties may arise if the key personnel of the acquired company choose not to work for us, the company’s technology or services do not easily integrate with ours or we have difficulty retaining the acquired company’s customers due to changes in its management or for other reasons. These acquisitions may also disrupt our business, divert our resources and require significant management attention that would otherwise be available for development of our business. Moreover, the anticipated benefits of any acquisition, investment or business relationship may not be realized or we may be exposed to unknown liabilities. In addition, any future acquisition may require us to:
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| · | issue additional equity securities that would dilute our stockholders; |
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| · | use cash that we may need in the future to operate our business; |
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| · | incur debt on terms unfavorable to us or that we are unable to repay; |
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| · | incur large charges or substantial liabilities; or |
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| · | become subject to adverse tax consequences, substantial depreciation or compensation charges. |
If any of these risks materializes, our business and operating results would be harmed.
The emergence of one or more widely used, standardized communications devices or billing or operational support systems could limit the value and operability of our TMaaS solution and our ability to compete with the manufacturers of such devices or the competitors using such systems in providing similar services.
Our TMaaS solution derives its value in significant part from our communications management software’s ability to interface with and support the interoperation of diverse communications devices, billing systems and operational support systems. The emergence of a single or a small number of widely used communications devices, billing systems or operational support systems using consolidated, consistent sets of standardized interfaces for the interaction between communications service providers and their enterprise customers could significantly reduce the value of our solution to our customers and potential customers. Furthermore, any such communications device, billing system or operational support system could make use of proprietary software or technology standards that our software might not be able to support. In addition, the manufacturer of such device, or the carrier using such billing system or operational support system, might actively seek to limit the interoperability of such device, billing system or operational support system with our software products for competitive or other reasons. The resulting lack of compatibility of our software products would put us at a significant competitive disadvantage, or entirely prevent us from competing, in that segment of the potential market if such manufacturer or carrier, or its authorized licensees, were to develop one or more communications management solutions competitive with our solution.
A continued proliferation and diversification of communications technologies or devices could increase the costs of providing our software products or limit our ability to provide our TMaaS offering to potential customers.
Our ability to provide our TMaaS offering is dependent on the technological compatibility of our products with the communications infrastructures and devices of our customers and their communications service providers. The development and introduction of new communications technologies and devices requires us to expend significant personnel and financial resources to develop and maintain interoperability of our software products with these technologies and devices. Continued proliferation of communications products and services could significantly increase our research and development costs and increase the lag time between the initial release of new technologies and products and our ability to provide support for them in our software products, which would limit the potential market of customers that we have the ability to serve and the financial feasibility of our TMaaS offering.
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If a communications carrier prohibits customer disclosure of communications billing and usage data to us, the value of our solution to customers of that carrier would be impaired, which may limit our ability to compete for their business.
Certain of our information technology-based solutions software functionality and services that we offer depend on our ability to access a customer’s communications billing and usage data. For example, our ability to offer outsourced or automated communications bill auditing, billing dispute resolution, bill payment, cost allocation and expense optimization depends on our ability to access this data. If a communications carrier were to prohibit its customers from disclosing this information to us, those enterprises would only be able to use these billing-related aspects of our solution on a self-serve basis, which would impair some of the value of our solution to those enterprises. This in turn could limit our ability to compete with the internally developed communications management solutions of those enterprises, require us to incur additional expenses to license access to that billing and usage data from the communications carrier, if such a license is made available to us at all, or put us at a competitive disadvantage against any third-party communications management solutions service provider that licenses access to that data.
RISKS RELATED TO BUSINESS WITH GOVERNMENT AGENCIES
A government shutdown or changes in the spending policies or budget priorities of the federal government could cause us to lose revenues.
We currently derive a majority of our annual revenues from contracts funded by federal government agencies. We believe that contracts with federal government agencies will continue to be a significant source of our revenues for the foreseeable future. Accordingly, shutdowns or changes in federal government fiscal or spending policies or the U.S. federal budget could directly affect our financial performance. Among the factors that could harm our business are:
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| · | curtailment of the federal government’s use of technology services firms; |
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| · | a significant decline in spending by the federal government, in general, or by specific agencies such as the Department of Homeland Security; |
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| · | reductions in federal government programs or requirements, including government agency shutdowns and/or reductions in connection with sequestration; |
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| · | any failure to raise the debt ceiling; |
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| · | government inability to approve a budget and operate under a “Continuing Resolution”; |
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| · | a shift in spending to federal programs and agencies that we do not support or where we currently do not have contracts; |
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| · | delays in the payment of our invoices by government payment offices; |
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| · | federal governmental shutdowns, and other potential delays in the government appropriations process; |
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| · | redirection of federal government funds to address priorities or unforeseen emergent events such as a pandemics, wars, etc., and |
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| · | general economic and political conditions, including any event, such as the coronavirus, that results in a change in spending priorities of the federal government. |
These or other factors could cause federal government agencies and departments to delay payments owed for our services, to reduce their purchases under contracts, to exercise their right to terminate contracts, or not to exercise options to renew contracts, any of which could cause us to lose revenues. In addition, any limitations imposed on spending by U.S. government agencies that result from efforts to reduce the federal deficit, including as a result of sequestration or otherwise, may limit both the continued funding of our existing contracts and our ability to obtain additional contracts.
We may incur substantial costs in connection with contracts awarded through a competitive procurement process, which could negatively impact our operating results.
Most if not all federal, state and local governments, as well as commercial contracts are awarded through a competitive procurement process that could be a year or more from the initial solicitation to final contract award. We expect that much of the business we seek in the foreseeable future will be awarded through competitive procedures and similar lengthy sales cycle. Competitive procurements impose substantial upfront costs and present a number of risks, including:
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| · | the substantial cost and managerial time and effort that we spend to prepare bids and proposals for contracts that may not be awarded to us; |
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| · | requirements to register to conduct business in another state or country could increase our compliance costs; |
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| · | requirements to post a bid guarantee or similar performance guarantee as part of a bid submission; and |
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| · | the expense and delay that we may face if our competitors protest or challenge contract awards made to us pursuant to competitive procedures, and the risk that any such protest or challenge could result in the resubmission of offers, or in termination, reduction, or modification of the awarded contract. |
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The costs we incur in the competitive procurement process may be substantial and, to the extent we participate in competitive procurements and are unable to win particular contracts, these costs could negatively affect our operating results. For example, our DHS contract is up for renewal in November 2025 and we may be unable to win such contract or may be required to incur significant concessions in order to renew it. In addition, the General Services Administration multiple award schedule contracts, government-wide acquisitions contracts, blanket purchase agreements, and other indefinite delivery/indefinite quantity contracts do not guarantee more than a minimal amount of work for us, but instead provide us access to work generally through further competitive procedures. This competitive process may result in increased competition and pricing pressure, requiring that we make sustained post-award efforts to realize revenues under the relevant contract.
Our failure to obtain and maintain security certifications and necessary security clearances may limit our ability to perform classified work directly for government customers as a prime contractor or subcontractor, which could cause us to lose business.
Some government contracts require us to maintain both federal and industry recognized security certifications of our systems, facility security clearances, and require some of our employees to maintain individual security clearances. If we are unable to maintain security certifications of our systems, or our employees lose or are unable to timely obtain security clearances, or we lose a facility clearance, our customer may have the right to terminate the contract or decide not to renew it upon its expiration. As a result, to the extent we cannot obtain or maintain the required security certifications and clearances for a particular contract, or we fail to obtain them on a timely basis, we may not derive the revenues anticipated from the contract, which, if not replaced with revenues from other contracts, could harm our operating results. To the extent we are not able to obtain facility security clearances or engage employees with the required security clearances for a particular contract, we will be unable to perform that contract and we may not be able to compete for or win new contracts for similar work.
Federal government contracts contain provisions giving government customers a variety of rights that are unfavorable to us, including the ability to terminate a contract at any time for convenience.
Federal government contracts contain provisions and are subject to laws and regulations that provide government customers with rights and remedies not typically found in commercial contracts. These rights and remedies allow government customers, among other things, to:
|
| · | terminate existing contracts, with short notice, for convenience, as well as for default; |
|
| · | reduce orders under or otherwise modify contracts; |
|
| · | for larger contracts subject to the Truth in Negotiations Act, reduce the contract price or cost where it was increased because a contractor or subcontractor during negotiations furnished cost or pricing data that was not complete, accurate, and current; |
|
| · | for GSA multiple award schedule contracts, government-wide acquisition agreements, and blanket purchase agreements, demand a refund, make a forward price adjustment, or terminate a contract for default if a contractor provided inaccurate or incomplete data during the contract negotiation process, or reduce the contract price under certain triggering circumstances, including the revision of pricelists or other documents |
|
| · | upon which the contract award was predicated, the granting of more favorable discounts or terms and conditions than those contained in such documents, and the granting of certain special discounts to certain customers; |
|
| · | terminate our facility security clearances and thereby prevent us from receiving classified contracts; |
|
| · | cancel multi-year contracts and related orders if funds for contract performance for any subsequent year become unavailable; |
| 20 |
|
| · | decline to exercise an option to renew a multi-year contract or issue task orders in connection with indefinite delivery/indefinite quantity contracts; |
|
| · | claim rights in solutions, systems, and technology produced by us; |
|
| · | prohibit future procurement awards with a particular agency due to a finding of organizational conflict of interest based upon prior related work performed for the agency that would give a contractor an unfair advantage over competing contractors or the existence of conflicting roles that might bias a contractor’s judgment; |
|
| · | subject the award of contracts to protest by competitors, which may require the contracting federal agency or department to suspend our performance pending the outcome of the protest and may also result in a requirement to resubmit offers for the contract or in the termination, reduction, or modification of the awarded contract; and |
|
| · | suspend or debar us from doing business with the federal government. |
If a federal government customer terminates one of our contracts for convenience, we may recover only our incurred or committed costs, settlement expenses, and profit on work completed prior to the termination. If a federal government customer were to unexpectedly terminate, cancel, or decline to exercise an option to renew with respect to one or more of our significant contracts, such as the DHS IDIQ, or suspend or debar us from doing business with the federal government, our revenues and operating results would be materially harmed.
RISKS RELATED TO PRIVACY, CYBERSECURITY AND TECHNOLOGY
Security breaches or cybersecurity events could result in the loss of customers and negative publicity and materially harm our business.
Many of the services we provide involve managing and protecting information involved in sensitive or classified government functions. A security breach or cybersecurity event in one of these systems could cause serious harm to our business, damage our reputation, and prevent us from being eligible for further work on sensitive or classified systems for federal government customers. In addition, sensitive personal data could be illegally accessed and/or stolen through a cybersecurity event. We could incur losses from such a security breach that could exceed the policy limits under our insurance. Damage to our reputation or limitations on our eligibility for additional work resulting from a security breach in one of the systems we develop, install, and maintain could materially reduce our revenues.
The US Federal Government and many states have enacted laws requiring companies to notify consumers of data security breaches involving their personal data. These mandatory disclosures regarding a security breach often lead to widespread negative publicity, which may cause our customers to lose confidence in the effectiveness of our data security measures. Any security breach or cybersecurity event, whether successful or not, would harm our reputation and could cause the loss of customers. Any of these events could have material adverse effects on our business, financial condition, and operating results.
Actual or perceived breaches of our security measures, or governmental required disclosure of customer information could diminish demand for our solution and subject us to substantial liability.
In the processing of communications transactions, we receive, transmit and store a large volume of sensitive customer information, including call records, billing records, contractual terms, and financial and payment information, including credit card information, and we have entered into contractual obligations to maintain the confidentiality of certain of this information. Any person who circumvents our security measures could steal proprietary or confidential customer information or cause interruptions in our operations and any such lapse in security could expose us to litigation, substantial contractual liabilities, and loss of customers or damage to our reputation or could otherwise harm our business. We incur significant costs to protect against security breaches and may incur significant additional costs to alleviate problems caused by any breaches. In addition, if we are required to disclose any of this sensitive customer information to governmental authorities, that disclosure could expose us to a risk of losing customers or could otherwise harm our business.
| 21 |
If customers believe that we may be subject to requirements to disclose sensitive customer information to governmental authorities, or that our systems and software products do not provide adequate security for the storage of confidential information or its transmission over the Internet or corporate extranets, or are otherwise inadequate for Internet or extranet use, our business will be harmed. Customers’ concerns about security could deter them from using the Internet to conduct transactions that involve confidential information, including transactions of the types included in our solution, so our failure to prevent security breaches, or the occurrence of well-publicized security breaches affecting the Internet in general, could significantly harm our business and financial results.
We may be liable to our customers for damages caused by our services or by our failure to remedy system failures.
Many of our projects involve technology applications or systems that are critical to the operations of our customers’ businesses. If we fail to perform our services correctly, we may be unable to deliver applications or systems to our customers with the promised functionality or within the promised time frame, or to satisfy the required service levels for support and maintenance. While we have created redundancy and back-up systems, any such failures by us could result in claims by our customers for substantial damages against us. Additionally, in the event we manage third party services on behalf of our customers and fail to execute in approved changes requested by our customers it could result in claims asserted by our customers for substantial damages against us.
Although we attempt to limit the amount and type of our contractual liability for defects in the applications or systems we provide, and carry insurance coverage that mitigates this liability in certain instances, we cannot be assured that these limitations and insurance coverages will be applicable and enforceable in all cases. Even if these limitations and insurance coverages are found to be applicable and enforceable, our liability to our customers for these types of claims could still exceed our insurance coverage and be material in amount and affect our business, financial condition and results of operations.
Our ability to provide services to our customers depends on our customers’ continued high-speed access to the internet and the continued reliability of the internet infrastructure.
Our business depends on our customers’ continued high-speed access to the internet, as well as the continued maintenance and development of the internet infrastructure. The future delivery of our solutions will depend on third-party internet service providers to expand high-speed internet access, to maintain a reliable network with the necessary speed, data capacity and security, and to develop complementary solutions and services, including high-speed modems, for providing reliable and timely internet access and services. All of these factors are out of our control. To the extent that the internet continues to experience an increased number of users, frequency of use, or bandwidth requirements, the internet may become congested and be unable to support the demands placed on it, and its performance or reliability may decline. Any internet outages or delays could adversely affect our ability to provide services to our customers.
Defects or errors in our TMaaS platform and/or processes could harm our reputation, impair our ability to sell our products and result in significant costs to us.
A key part of our service delivery involves the use of internally developed software solutions. If our software solutions contain undetected defects or errors that affect our ability to process customer transactions, prepare reports and/or deliver our services in general it may result in a failure to perform in accordance with customer expectations and could result in monetary damages against us. Because our customers use our software products for important aspects of their businesses, any defects or errors in, or other performance problems with, our software products could hurt our reputation and may damage our customers’ businesses. If that occurs, we could be required to issue substantial service credits that reduce amounts invoiced to our customers, lose out on future sales or our existing customers could elect to not renew their customer agreements with us. Product performance problems could result in loss of market share, failure to achieve market acceptance and the diversion of development resources from software enhancements. If our software products fail to perform or contain a technical defect, a customer might assert a claim against us for damages. Whether or not we are responsible for our software’s failure or defect, we could be required to spend significant time and money in litigation, arbitration or other dispute resolution, and potentially pay significant settlements or damages.
| 22 |
Assertions by a third party that our software products or technology infringes its intellectual property, whether or not correct, could subject us to costly and time-consuming litigation or expensive licenses.
Although we believe that our services and products do not infringe on the intellectual property rights of others, infringement claims may be asserted against us in the future. There is frequent litigation in the communications and technology industries based on allegations of infringement or other violations of intellectual property rights. As we face increasing competition, the possibility of intellectual property rights claims against us may increase. These claims, whether or not successful, could:
|
| · | divert management’s attention; |
|
| · | result in costly and time-consuming litigation; |
|
| · | require us to enter into royalty or licensing agreements, which may not be available on acceptable terms, or at all; or |
|
| · | require us to redesign our software products to avoid infringement. |
As a result, any third-party intellectual property claims against us could increase our expenses and impair our business. In addition, although we have licensed proprietary technology, we cannot be certain that the owners’ rights in such technology will not be challenged, invalidated or circumvented. Furthermore, many of our customer agreements require us to indemnify our customers for certain third-party intellectual property infringement claims, which could increase our costs as a result of defending such claims and may require that we pay damages if there were an adverse ruling related to any such claims. These types of claims could harm our relationships with our customers, may deter future customers from purchasing our software products or could expose us to litigation for these claims. Even if we are not a party to any litigation between a customer and a third party, an adverse outcome in any such litigation could make it more difficult for us to defend our intellectual property in any subsequent litigation in which we are a named party.
We may be unable to protect our proprietary software and methodology.
Our success depends, in part, upon our proprietary software, methodology and other intellectual property rights. We rely upon a combination of trade secrets, nondisclosure and other contractual arrangements, and copyright and trademark laws to protect our proprietary rights. We generally enter into nondisclosure and confidentiality agreements with our employees, partners, consultants, independent sales agents and customers, and limit access to and distribution of our proprietary information. We cannot be certain that the steps we take in this regard will be adequate to deter misappropriation of our proprietary information or that we will be able to detect unauthorized use and take appropriate steps to enforce our intellectual property rights. Furthermore, statutory contracting regulations protect the rights of federal agencies to retain access to, and utilization of, proprietary intellectual property utilized in the delivery of contracted services to such agencies. We have attempted to put in place certain safeguards in our policies and procedures to protect intellectual property developed by employees. Our policies and procedures stipulate that intellectual property created by employees and its consultants remain our property. If we are unable to protect our proprietary software and methodology, the value of our business may decrease, and we may face increased competition.
| 23 |
RISKS RELATED TO REGULATION
Our failure to comply with complex procurement laws and regulations could cause us to lose business and subject us to a variety of penalties.
We must comply with laws and regulations relating to the formation, administration, and performance of federal government contracts, which affect how we do business with our federal government customers and may impose added costs on our business. Among the most significant laws and regulations are:
|
| · | the Federal Acquisition Regulation, and agency regulations analogous or supplemental to the Federal Acquisition Regulation, which comprehensively regulate the formation, administration, and performance of government contracts; |
|
| · | the Truth in Negotiations Act, which requires certification and disclosure of all cost or pricing data in connection with some contract negotiations; |
|
| · | the Cost Accounting Standards, which impose cost accounting requirements that govern our right to reimbursement under some cost-based government contracts; and |
|
| · | laws, regulations, and executive orders restricting the use and dissemination of information classified for national security purposes and the exportation of specified solutions and technical data. |
If a government review or investigation uncovers improper or illegal activities, we may be subject to civil and criminal penalties and administrative sanctions, including the termination of our contracts, the forfeiture of profits, the suspension of payments owed to us, fines, and our suspension or debarment from doing business with federal government agencies. In particular, the civil False Claims Act provides for treble damages and potentially substantial civil penalties where, for example, a contractor presents a false or fraudulent claim to the government for payment or approval or makes a false statement in order to get a false or fraudulent claim paid or approved by the government. Actions under the civil False Claims Act may be brought by the government or by other persons on behalf of the government. These provisions of the civil False Claims Act permit parties, such as our employees, to sue us on behalf of the government and share a portion of any recovery. Any failure to comply with applicable laws and regulations could result in contract termination, price or fee reductions, or suspension or debarment from contracting with the government, each of which could lead to a material reduction in our revenues.
The adoption of new procurement laws or regulations could reduce the amount of services that are outsourced by the federal government and cause us to experience reduced revenues.
New legislation, procurement regulations, or labor organization pressure could cause federal agencies to adopt restrictive procurement practices regarding the use of outside service providers. The American Federation of Government Employees, the largest federal employee union, strongly endorses legislation that may restrict the procedure by which services are outsourced to government contractors. One such proposal, the Truthfulness, Responsibility, and Accountability in Contracting Act, would have effectively reduced the volume of services that is outsourced by the federal government by requiring agencies to give in-house government employees expanded opportunities to compete against contractors for work that could be outsourced. If such legislation, or similar legislation, were to be enacted, it would likely reduce the amount of IT services that could be outsourced by the federal government, which could materially reduce our revenues.
Unfavorable government audit results could subject us to a variety of penalties and sanctions, and could harm our reputation and relationships with our customers.
The federal government audits and reviews our performance on contracts, pricing practices, cost structure, and compliance with applicable laws, regulations, and standards. Like most large government contractors, our contracts are audited and reviewed on a regular basis by federal agencies, including the Defense Contract Audit Agency. An unfavorable audit of us, or of our subcontractors, could have a substantial adverse effect on our operating results. For example, any costs that were originally reimbursed could subsequently be disallowed. In this case, cash we have already collected may need to be refunded.
If a government audit uncovers improper or illegal activities, we may be subject to civil and criminal penalties and administrative sanctions, including termination of contracts, forfeiture of profits, suspension of payments, fines, and suspension or debarment from doing business with U.S. government agencies. In addition, we could suffer serious harm to our reputation if allegations of impropriety were made against us, whether true or not true.
| 24 |
RISKS RELATED TO OUR SECURITIES AND CAPITAL STRUCTURE
Our common stock price has been volatile and is likely to be volatile in the future.
The stock market has, from time to time, experienced extreme price and volume fluctuations. The market prices of the securities of companies in our industry have been especially volatile. Broad market fluctuations of this type may adversely affect the market price of our common stock. The market price of our common stock has experienced, and may continue to be subject to volatility due to a variety of factors, including:
|
| · | public announcements concerning us, our competitors or our industry; |
|
| · | externally published articles and analyses about us by retail investors and non-analysts; |
|
| · | changes in analysts’ earnings estimates; |
|
| · | information in third party chat rooms, third party publications and social media outlets; |
|
| · | the failure to meet the expectations of analysts; |
|
| · | fluctuations in operating results; |
|
| · | additional financings or capital raises; |
|
| · | introductions of new products or services by us or our competitors; |
|
| · | announcements of technological innovations; |
|
| · | additional sales of our common stock or other securities; |
|
| · | trading by individual investors that causes our stock prices to straddle at a low price for prolonged periods of time; |
|
| · | our inability to gain market acceptance of our products and services; |
|
| · | general economic conditions and events, including adverse changes in the financial markets, terrorist attacks, health pandemics, government shutdowns, war, adverse weather events and other disasters; and |
|
| · | Impairment of goodwill resulting from the fair value of our single reporting unit below its carrying value. |
In the past, some companies that have experienced volatility in the market price of their stock have been the object of securities class action litigation. If we were the object of securities class action litigation, we could incur substantial costs and experience a diversion of our management’s attention and resources and such securities class action litigation could have a material adverse effect on our business, financial condition and results of operations.
The future sale of shares of our common stock may negatively affect our common stock price and/or be dilutive to current stockholders.
If we or our stockholders sell substantial amounts of our common stock, the market price of our common stock could fall. Such stock issuances may be made at a price that reflects a discount from the then-current trading price of our common stock. These issuances would dilute our stockholders percentage ownership interest, which would have the effect of reducing our stockholders’ influence on matters on which our stockholders vote, and might dilute the book value of our common stock. There is no assurance that we will not seek to sell additional shares of our common stock in order to meet our working capital or other needs in a transaction that would be dilutive to current stockholders.
A third party could be prevented from acquiring shares of our common stock at a premium to the market price because of our anti-takeover provisions.
Various provisions of our certificate of incorporation, by-laws and Delaware law could make it more difficult for a third party to acquire us, even if doing so might be beneficial to you and our other stockholders. We are subject to the provisions of Section 203 of the General Corporation Law of Delaware. Section 203 prohibits a publicly held Delaware corporation from engaging in a “business combination” with any interested stockholder for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner. A “business combination” includes mergers, asset sales and other transactions resulting in a financial benefit to the interested stockholder. Subject to certain exceptions, an “interested stockholder” is (i) a person who, together with affiliates and associates, owns 15% or more of our voting stock or (ii) an affiliate or associate of ours who was the owner, together with affiliates and associates, of 15% or more of our outstanding voting stock at any time within the 3-year period prior to the date for determining whether such person is “interested.”
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Our certificate of incorporation also provides that any action required or permitted to be taken by our stockholders at an annual meeting or special meeting of stockholders may be taken without such meeting only by the unanimous consent of all stockholders entitled to vote on the particular action. In order for any matter to be considered properly brought before a meeting, a stockholder must comply with certain requirements regarding advance notice to us. The foregoing provisions could have the effect of delaying until the next stockholders’ meeting stockholder actions, which are favored by the holders of a majority of our outstanding voting securities. These provisions may also discourage another person or entity from making a tender offer for our common stock, because such person or entity, even if it acquired a majority of our outstanding voting securities, would be able to take action as a stockholder (such as electing new directors or approving a merger) only at a duly called stockholders’ meeting, and not by written consent.
The General Corporation Law of Delaware provides generally that the affirmative vote of a majority of the shares entitled to vote on any matter is required to amend a corporation’s certificate of incorporation or bylaws, unless a corporation’s certificate of incorporation or bylaws, as the case may be, requires a greater percentage. Our certificate of incorporation and bylaws do not require a greater percentage vote. Our board of directors is classified into three classes of directors, with approximately one-third of the directors serving in each such class of directors and with one class of directors being elected at each annual meeting of stockholders to serve for a term of three years or until their successors are elected and take office. Our bylaws provide that the board of directors will determine the number of directors to serve on the board. Our board of directors presently consists of five members.
Our certificate of incorporation and bylaws contain certain provisions permitted under the General Corporation Law of Delaware relating to the liability of directors. The provisions eliminate, to the fullest extent permitted by the General Corporation Law of Delaware, a director’s personal liability to us or our stockholders with respect to any act or omission in the performance of his or her duties as a director. Our certificate of incorporation and bylaws also allow us to indemnify our directors, to the fullest extent permitted by the General Corporation Law of Delaware. Our bylaws also provide that we may grant indemnification to any officer, employee, agent or other individual as our Board may approve from time to time. We believe that these provisions will assist us in attracting and retaining qualified individuals to serve as directors.
We do not expect to declare any dividends in the foreseeable future.
We do not anticipate declaring any cash dividends to holders of our common stock in the foreseeable future. Consequently, investors must rely on sales of their common stock after price appreciation, which may never occur, as the only way to realize any future gains on their investment. Investors seeking cash dividends should not purchase our common stock.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 1C. CYBERSECURITY
Our Board of Directors (Board) oversees the management of the risks inherent in the operation of the Company’s business, principally through the Governance Committee. Our Governance Committee oversees our risk management efforts, with cybersecurity being an element of our comprehensive Enterprise Risk Management (ERM) strategy. Our executive officers report information to the Board through the Governance Committee regarding the risks that impact the organization, including cybersecurity risks, and any material events.
| 26 |
Our cybersecurity framework utilizes the following National Institute of Standards and Technology (NIST) standards:
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| · | NIST SP 800-34, Rev 1, "Contingency Planning Guide for Federal Information Systems," November 2010 |
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| · | NIST SP 800-37 Rev. 2, "Risk Management Framework for Information Systems and Organizations: A System Life Cycle Approach for Security and Privacy," December 2018 |
|
| · | IST SP 800-53, Rev. 5, "Security and Privacy Controls for Information Systems and Organizations," September 20, 2020, updated December 10, 2020 |
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| · | NIST SP 800-61, Rev 2, "Computer Security Incident Handling Guide," August 2012 |
Our approach to cybersecurity aims to protect the confidentiality, integrity, and availability of the data we handle. This process involves measures to identify and prevent cybersecurity threats and mechanisms to mitigate and respond to cybersecurity incidents.
Risk Management and Strategy
Our cybersecurity program, a pivotal component of our overarching ERM framework, concentrates on several key areas:
Collaborative Approach: We employ a holistic, cross-functional strategy to identify, prevent, and mitigate cybersecurity threats. Our approach includes rapid escalation protocols for specific cybersecurity incidents, enabling timely decision-making on public disclosure and reporting by management.
Technical Safeguards: We utilize advanced technical safeguards to defend our information systems. These include firewalls, intrusion prevention and detection systems, anti-malware tools, and stringent access controls. Continuous vulnerability assessments and leveraging cybersecurity threat intelligence ensure these safeguards remain practical and up to date.
Incident Response and Recovery Planning: Our comprehensive incident response and recovery plans are designed to manage the aftermath of cybersecurity incidents. Regular testing and evaluation of these plans ensure preparedness and resilience.
Third-Party Risk Management: Recognizing the significance of external threats, we have implemented a risk-based strategy to manage cybersecurity risks associated with third parties, such as vendors and service providers. This strategy extends to these third parties' systems, which, if compromised, could impact our operations.
Education and Awareness: We understand the importance of informed personnel, so we conduct mandatory, regular training on cybersecurity threats. This training aims to equip our staff with the necessary tools to confront these threats effectively and disseminate updates on WidePoint's evolving information security policies, standards, processes, and practices.
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We are committed to maintaining robust cybersecurity defenses through regularly evaluating and improving our policies, standards, processes, and practices. This commitment is actualized through a diverse array of assessment and testing activities, which include:
Comprehensive Audits and Assessments: We conduct audits and assessments to scrutinize the efficacy of our cybersecurity measures.
Tabletop Exercises and Threat Modeling: Engaging in tabletop exercises and threat modeling allows us to simulate and prepare for potential cybersecurity scenarios, ensuring readiness and adaptability.
Vulnerability Testing: Vulnerability testing is performed to proactively identify and address potential security weaknesses.
External Evaluations: We regularly commission third parties to conduct in-depth assessments to ensure an unbiased and comprehensive evaluation. These include information security maturity assessments, audits, and independent reviews of our information security control environment and its operational effectiveness.
Based on the insights gleaned from these assessments, audits, and reviews, we dynamically adjust and refine our cybersecurity policies, standards, processes, and practices to continuously enhance our cybersecurity posture.
By engaging in these rigorous and diverse testing and assessment activities, we verify the current effectiveness of our cybersecurity measures and identifies areas for continual improvement, ensuring our defenses evolve in line with the dynamic nature of cyber threats.
Executive Experience and Qualifications
Our CEO, CFO, each with over thirty (30) years of risk management experience, and the COO with over twenty (20) years of experience including cybersecurity, possess deep expertise in their respective fields, evidenced by their academic qualifications and professional trajectories. This collective experience underpins our robust approach to managing cybersecurity risks. In addition, we have numerous employees with experience and qualifications related to cybersecurity. We expect to name a Chief Information Security Officer during 2024 as part our cybersecurity program. Our executive officers are responsible for informing the Board and Governance Committee of any material cyber events or risks.
Cybersecurity Threats are discussed in ITEM 1 A. RISK FACTORS, under the heading RISKS RELATED TO PRIVACY, CYBERSECURITY AND TECHNOLOGY in this Annual Report on Form 10-K. We are not aware of any material cybersecurity incidents in the past that have materially affected or are reasonably likely to affect us, including our business strategy, results of operations or financial condition.
| 28 |
ITEM 2. PROPERTIES
All of our property locations are leased. We believe we can obtain additional facilities required to accommodate projected needs without difficulty and at commercially reasonable prices, although no assurance can be given that we will be able to do so. The following table presents our property locations at December 31, 2023 for our U.S. locations:
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|
|
|
|
|
|
| Base |
|
| Base |
|
|
| ||||
|
|
|
|
| Lease |
| Approx. |
|
| Cost per |
|
| Annual |
|
|
| ||||
| Physical Street Address |
| City, State Zip Code |
| Expiration |
| Sqft |
|
| Sqft |
|
| Cost |
|
| Description of use | ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
| 11250 Waples Mill Rd S. Tower, Suite 210 |
| Fairfax, VA 22030 |
| March 2029 |
|
| 11,852 |
|
| $ | 28 |
|
| $ | 328,000 |
|
| Headquarters, Sales, Operations | |
| 8351 N High Street, Suite 200 |
| Columbus, OH 43235 |
| November 2038 |
|
| 18,833 |
|
| $ | 10 |
|
| $ | 195,000 |
|
| Sales and Operations | |
| 2101 Executive Drive, Suite 400 |
| Hampton, VA 23669 |
| December 2024 |
|
| 6,440 |
|
| $ | 17 |
|
| $ | 109,000 |
|
| Customer Support | |
The following table presents our property locations at December 31, 2023 for our international locations:
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|
|
|
|
|
|
|
|
| Base |
|
| Base |
|
|
| ||||
|
|
|
|
| Lease |
| Approx. |
|
| Cost per |
|
| Annual |
|
|
| ||||
| Physical Street Address |
| Country Postal Code |
| Expiration |
| Sqft |
|
| Sqft |
|
| Cost |
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| Description of use | ||||
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
| South County Business Park |
| Dublin 18, Ireland |
| March 2026 |
|
| 6,000 |
|
| $ | 31 |
|
| $ | 185,000 |
|
| Europe office | |
ITEM 3. LEGAL PROCEEDINGS
From time to time we may be involved in claims arising in the ordinary course of business. We are not currently involved in legal proceedings, governmental actions, investigations or claims currently pending against us or involve us that, in the opinion of our management, could reasonably be expected to have a material adverse effect on our business and financial condition.
ITEM 4. MINE SAFETY DISCLOSURES
None.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Our common stock is listed on the NYSE American under the symbol “WYY”.
Holders
As of the close of business on March 20, 2024, there were 72 registered holders of record of our common stock.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is Equiniti Trust Company, LLC.
Dividend Policy
We have never paid dividends on our Common Stock and intend to continue this policy for the foreseeable future. We plan to retain earnings for use in growing our business base. Any future determination to pay dividends will be at the discretion of our Board of Directors and will be dependent on our results of operations, financial condition, contractual and legal restrictions and any other factors deemed by the management and the Board to be a priority requirement of the business.
Unregistered Sale of Securities
None
Repurchases of Equity Securities
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 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. During the three-month period ended March 31, 2022, we repurchased 196,586 shares of our common stock for a total of $818,200 and subsequently in March of 2022, the Board suspended the repurchase plan in order to use the company’s excess funds to invest into the business.
ITEM 6. [RESERVED]
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This discussion should be read in conjunction with the other sections of this Form 10-K, including “Risk Factors,” and the Financial Statements and notes thereto. The various sections of this discussion contain a number of forward-looking statements, all of which are based on our current expectations and could be affected by the uncertainties and risk factors described throughout this Annual Report on Form 10-K. See “Cautionary Note Regarding Forward Looking Statements and Risk Factor Summary.” Our actual results may differ materially.
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Organizational Overview
We were incorporated on May 30, 1997 under the laws of the state of Delaware. We are a leading provider of Technology Management as a Service (TMaaS) that consists of federally certified communications management, identity management, and interactive bill presentment and unified communication analytics solutions and IT as a Service. We help our clients achieve their organizational missions for mobility management and security objectives in this challenging and complex business environment.
We offer our TMaaS 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 TMaaS 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 TMaaS solutions enables our customers to be able to quickly expand or contract their mobility management requirements. Our TMaaS 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.
Strategy
During 2023, we obtained FedRAMP “In Process” status for ITMS™ and completed the integration of the acquired assets of ITA. In addition, we focused on increasing our customer base and our sales pipeline and leveraging our strategic relationships with key system integrators and strategic partners to capture additional market share. In fiscal 2023, we will continue to focus on the following key goals:
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| · | selling high margin managed services, |
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| · | executing cross-sell and upsell opportunities identified from ITA acquisition, including Identity Management (IdM), Telecommunications Lifecycle Management (TLM) and Digital Billing & Unified Communication Analytics (DB&UCA) solutions, |
|
| · | rowing our sales pipeline by continue to invest in our business development and sales team assets, |
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| · | pursuing additional opportunities with our key systems integrator and strategic partners, and |
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| · | expanding our solution offerings into the commercial space. |
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 2024, we will continue to focus on the following key goals:
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| ■ | Continue to find additional avenues for capturing new sales opportunities in the post pandemic environment, |
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| ■ | Continue to provide unmatched level of services to our current customer base, |
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| ■ | Attain full FedRAMP certification in 2024, |
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| ■ | Grow our recurring high margin managed services revenues, |
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| ■ | Add incremental capabilities to our Technology Management solution set and develop and acquire new high margin business lines, |
|
| ■ | Leverage our software platforms to grow our SaaS revenues and take advantage of the opportunities emerging from the growth in remote working, |
| 31 |
|
| ■ | Expand our customer base organically, |
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| ■ | Continue to leverage the R2v3 Certification to further our ESG commitment, |
|
| ■ | Execute cross-sell opportunities identified from ITA acquisition, including Identity Management (IdM), Telecommunications Lifecycle Management (TLM) and Digital Billing & Analytics (DB&A) solution, |
|
| ■ | Growing our sales pipeline by continuing to invest in our business development and sales team assets, |
|
| ■ | Pursuing additional opportunities with our key systems integrator and strategic partners, and |
|
| ■ | Expanding our solution offerings into the commercial space, |
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| ■ | Explore integration of artificial intelligence into our solution to provide better information security, and improve service delivery while reducing response time and cost. |
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|
|
|
|
| Our strategy for achieving our longer-term goals include: |
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|
|
|
|
| ■ | Establishing a market leadership position in the trusted mobility management (TM2) sector, |
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| ■ | pursuing accretive and strategic acquisitions to expand our solutions and our customer base, |
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| ■ | delivering new incremental offerings to add to our existing TM2 offering, |
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| ■ | creating and testing innovative new offerings that enhance our TM2 offering, and |
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| ■ | 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 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.
Critical Accounting Policies
Refer to Note 2 to the consolidated financial statements for a summary of our significant accounting policies referenced, as applicable, to other notes. In many cases, the accounting treatment of a particular transaction is specifically dictated by U.S. GAAP and does not require management’s judgment in its application. Our senior management has reviewed these critical accounting policies and related disclosures with its Audit Committee. See Note 2 to consolidated financial statements, which contain additional information regarding accounting policies and other disclosures required by U.S. GAAP. The following section below provides information about certain critical accounting policies that are important to the consolidated financial statements and that require significant management assumptions and judgments.
Segments
Segments are defined by authoritative guidance as components of a company in which separate financial information is available and is evaluated by the chief operating decision maker (CODM), or a decision-making group, in deciding how to allocate resources and in assessing performance. Our CODM is our chief executive officer.
We operate in one segment based on the consolidated information used by our CODM in evaluating the financial performance of our business and allocation resources. This single segment represents our Company’s business, which is providing managed services for government and commercial clients that include Identity Management (IdM), secure Mobility Managed Services (MMS), Telecom Lifecycle Management, Digital Billing & Analytics and IT as a service (ITaaS).
We present a single segment for purposes of financial reporting and prepared consolidated financial statements upon that basis.
| 32 |
Revenue Recognition
Our managed services solutions may require a combination of labor, third party products and services. Our managed services are generally not interdependent and our contract performance obligations are delivered consistently on a monthly basis. We do not typically have undelivered performance obligations in these arrangements that would require us to spread our revenue over a longer period of time. In the event there are undelivered performance obligations our practice is to recognize the revenue when the performance obligation has been satisfied.
A substantial portion of our revenues are derived from firm fixed price contracts with the U.S. federal government that are fixed fee arrangements tied to the number of devices managed. Our actual reported revenue may fluctuate month to month depending on the hours worked, number of users, number of devices managed, actual or prospective proven expense savings, actual technology spend, or any other metrics as contractually agreed to with our customers.
Our revenue recognition policies for our managed services are summarized and shown below:
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| ■ | Managed services are delivered on a monthly basis based on a standard fixed pricing scale and sensitive to significant changes in per user or device counts which form the basis for monthly charges. Revenue is recognized upon the completion of the delivery of monthly managed services based on user or device counts or other metrics. Managed services are not interdependent and there are no undelivered elements in these arrangements. |
|
|
|
|
|
| ■ | Identity services are delivered as an on-demand managed service through the cloud to an individual or organization or sold in bulk to an organization capable of self-issuing credentials. There are two aspects to issuing an identity credential to an individual that consists of identity proofing which is a significant part of the service and monthly credential validation services which enable the credential holder to access third party systems. Identity proofing services are not bundled and do not generally include other performance obligations to deliver. Revenue is recognized from the sales of identity credentials to an individual or organization upon issuance less a portion deferred for monthly credential validation support services. In the case of bulk sales or credential management system revenue is recognized upon issue or availability to the customer for issuance. There is generally no significant performance obligation to provide post contract services in relation to identity consoles delivered. Identity certificates issued have a fixed life and cannot be modified once issued. |
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|
|
|
|
| ■ | Proprietary software revenue for software sold as a term license is recognized ratably over the license term from the date the software is accepted by the customer. Maintenance services, if contracted, are recognized ratably over the term of the maintenance agreement, generally twelve months. Revenue for fixed price software licenses that are sold as a perpetual license with no significant customization are recognized when the software is delivered. Implementation fees are recognized when the work is completed. Revenue from this service does not require significant accounting estimates. |
Our revenue recognition policy for our labor services is summarized and shown below:
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| ■ | Billable services are professional services provided on a project basis determined by our customers’ specific requirements. These technical professional services are billed based on time incurred and actual costs. We recognize revenues for professional services performed based on actual hours worked and actual costs incurred. |
Our revenue recognition policy for our reselling services is summarized and shown below:
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| ■ | § Reselling services require the Company to acquire third party products and services to satisfy customer contractual obligations. We recognize revenues and related costs on a gross basis for such arrangements whenever we control the products and services before they are transferred to the customer. We are the principal in these transactions as we are seen as the primary creditor, we carry inventory risk for undelivered products and services, we directly issue purchase orders third party suppliers, and we have discretion in sourcing among many different suppliers. For those transactions in which we procure and deliver products and services for our customers’ on their own account we do not recognize revenues and related costs on a gross basis for these arrangements. We only recognize revenues earned for arranging the transaction and any related costs. |
| 33 |
Our revenue recognition policies for our billable carrier services is summarized and shown below:
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| ■ | Carrier services are delivered on a monthly basis and consist of phone, data and satellite and related mobile services for a connected device or end point. These services require us to procure, process and pay communications carrier invoices. We recognize revenues and related costs on a gross basis for such arrangements whenever we control the services before they are transferred to the customer. We are the principal in these transactions when we are seen as the primary creditor, we directly issue purchase orders directly to communications carriers for wireline and wireless services, and/or we have discretion in choosing optimal providers and rate plans. For arrangements in which we do not have such control we recognize revenues and related costs on a net basis. |
Goodwill
Goodwill represents the excess of acquisition cost of an acquired company over the fair value of assets acquired and liabilities assumed. In accordance with GAAP, goodwill is not amortized but is tested for impairment at the reporting unit level annually at December 31 and between annual tests if events or circumstances arise, such as adverse changes in the business climate, that would more likely than not reduce the fair value of the reporting unit below its carrying value.
A reporting unit is defined as either an operating segment or a business one level below an operating segment for which discrete financial information is available that management regularly reviews. The Company has a single reporting unit for the purpose of impairment testing.
Goodwill impairment testing involves management judgment, requiring an assessment of whether the carrying value of the reporting unit can be supported by its fair value. As a result of the significant decrease in the Company’s publicly quoted share price and market capitalization during the second quarter of 2022, the Company conducted additional testing of its goodwill, definite-lived intangibles, and other long-lived assets as of June 30, 2022. As a result of this review and additional testing, the Company did not identify an impairment to its definite-lived intangible assets or other long lived assets, but the Company did identify an impairment to goodwill resulting in recording a $16.3 million non-cash goodwill impairment charge for the three month period ended June 30, 2022.
The Company performed its additional goodwill impairment test with support from an external consultant and estimated the fair value of its single reporting unit based on a combination of the income (estimates of future discounted cash flows) and the market approach (market multiples for similar companies). The income approach uses a discounted cash flow (DCF) method that utilizes the present value of cash flows to estimate fair value of our reporting unit. The future cash flows for the reporting unit were projected based upon our estimates of future revenue, operating income and other factors such as working capital and capital expenditures. As part of our DCF analysis, the Company projected revenue and operating profits, and assumed a long-term revenue growth rates in the terminal year. The market approach utilizes multiples of earnings before interest expense, taxes, depreciation and amortization (EBITDA) to estimate the fair value of our reporting unit. The market multiples used for our single reporting unit were based on a group of comparable companies’ market multiples applied to the Company’s revenue and EBITDA.
The Company performed its annual impairment assessment as of December 31, 2023, using the same external consultant as used in the previous impairment analyses. In connection with its annual budgeting and forecast process, the Company projected future cashflows based on existing business, projected new business as well considering modifications to the Company’s cost structure. The market approach utilizes multiples of earnings before interest expense, taxes, depreciation and amortization (EBITDA) to estimate the fair value of our reporting unit. The market multiples used for our single reporting unit were based on a group of comparable companies’ market multiples applied to the Company’s revenue and EBITDA. The assessment did not result in any additional impairment of goodwill at December 31, 2023.
| 34 |
Accounting for Income Taxes
Deferred tax assets and liabilities are determined based on the differences between the financial statement and tax bases of assets and liabilities using the enacted tax rates expected to be in effect for the years in which the differences are expected to reverse. A valuation allowance is established when management determines that it is more likely than not that all or some portion of the benefit of the deferred tax asset will not be realized.
Since deferred taxes measure the future tax effects of items recognized in the financial statements, certain estimates and assumptions are required to determine whether it is more likely than not that all or some portion of the benefit of a deferred tax asset will not be realized. In making this assessment, management analyzes and estimates the impact of future taxable income, reversing temporary differences and available tax planning strategies. These assessments are performed quarterly, taking into account any new information.
The Company’s significant deferred tax assets consist of net operating loss carryforwards, share-based compensation and intangible asset amortization related to prior business acquisitions. Should a change in facts or circumstances lead to a change in judgment about the ultimate ability to realize a deferred tax asset (including our utilization of historical net operating losses and share-based compensation expense), the Company records or adjusts the related valuation allowance in the period that the change in facts or circumstances occurs, along with a corresponding increase or decrease to the income tax provision.
During the year ended December 31, 2023, the Company recorded a valuation allowance against a portion of domestic deferred tax assets because management determined that is it more likely than not the Company will not earn income sufficient to realize the deferred tax assets during the carryforward period.
2023 Results of Operations
Year Ended December 31, 2023 Compared to the Year ended December 31, 2022
| 35 |
Revenues
Revenues for the year ended December 31, 2023 were $106.0 million, an increase of $11.9 million (or 13%), as compared to approximately $94.1 million in 2022. Our mix of revenues for the periods presented is set forth below:
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|
| YEARS ENDED |
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|
|
| ||||||
|
|
| DECEMBER 31, |
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| Dollar |
| ||||||
|
|
| 2023 |
|
| 2022 |
|
| Variance |
| |||
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|
|
|
|
|
|
|
| |||||
| Carrier Services |
| $ | 58,233,989 |
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| $ | 53,339,949 |
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| $ | 4,894,040 |
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| Managed Services: |
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|
|
|
|
|
|
|
|
|
| Managed Service Fees and Billable Fees |
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| 30,989,985 |
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| 28,102,695 |
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|
| 2,887,290 |
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| Reselling and Other Services |
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| 16,802,386 |
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| 12,660,721 |
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|
| 4,141,665 |
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| Total Managed Services: |
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| 47,792,371 |
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|
| 40,763,416 |
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|
| 7,028,955 |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ | 106,026,360 |
|
| $ | 94,103,365 |
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| $ | 11,922,995 |
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|
| ■ | Our carrier services revenues increased by $4.9 million to $58.2 million from $53.3 million last year, primarily due to increased contracting activity with our federal customers, where we pay carrier invoices on behalf of those customers. |
|
|
|
|
|
| ■ | Our managed and billable service fees increased by $2.9 million from $28.1 million to $31.0 million as a result of increased professional services being utilized by out Telecommunications Life-cycle Management customers and projects for Identity and Access Management customers. |
|
|
|
|
|
| ■ | Reselling and other services increased by $4.1 million from $12.7 million to $16.8 million as a result of selling third-party software for recording and storing text messages which is now required under an expansion of the Federal Records Act and identity management solution to our 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. |
Revenues by customer type for the periods presented is set forth below:
|
|
| YEARS ENDED |
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|
|
| ||||||
|
|
| DECEMBER 31, |
|
| Dollar |
| ||||||
| Customer Type |
| 2023 |
|
| 2022 |
|
| Variance |
| |||
|
|
|
|
|
|
|
|
|
|
| |||
| U.S. Federal Government |
| $ | 84,475,325 |
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| $ | 74,416,288 |
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| $ | 10,059,037 |
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| U.S. State and Local Governments |
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| 561,378 |
|
|
| 411,511 |
|
|
| 149,867 |
|
| Foreign Governments |
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| 79,556 |
|
|
| 146,538 |
|
|
| (66,982 | ) |
| Commercial Enterprises |
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| 20,910,101 |
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|
| 19,129,028 |
|
|
| 1,781,073 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ | 106,026,360 |
|
| $ | 94,103,365 |
|
| $ | 11,922,995 |
|
|
| ■ | Our sales to federal government customers increased primarily as a result of the increased carrier services revenues of $4.9 million and increased reselling and other services to US government customers of $4.1 million and the remaining increases of $1.2 million is related to a new customer in our IAM business and general increased contracting activity with our federal customers. |
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|
|
|
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| ■ | Our sales to state and local government customers increased primarily due to increased activity to Identity Management solutions. |
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|
|
|
|
| ■ | Our sales to foreign government customers decreased compared to last year due to reduction in managed services to one of our foreign customers. |
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|
|
|
|
| ■ | Our sales to commercial enterprise customers increased primarily as a result of new customers in our Unified Communications Analytics offering. |
| 36 |
Cost of Revenues
Our cost of revenues include employee labor, excluding fringe benefit costs, and subcontractors directly associated with satisfying customer performance obligations, and the associated cost of products and third-party software that we resell to our end customers. Cost of revenues also includes amortization of capitalized software related to delivering our solutions.
Cost of revenues for the year ended December 31, 2023 were $90.4 million (or 85% of revenues) as compared to $79.5 million (or 85% of revenues) in 2022. Increased carrier services costs as well as increased depreciation and amortization expense included in cost of revenues contributed to the increase. Our cost of revenues will fluctuate due to our revenue mix.
Gross Profit
Managed services gross profit increases were offset by lower gross profit experienced in our reselling and other services.
Gross profit for the year ended was $15.6 million (or 15% of revenues), as compared to $14.6 million (or 15% of revenues) in 2022. The percentage of gross profit to revenues is consistent from year to year.
Gross profit percentage for the year ended December 2023 excluding carrier services was 33% as compared to 36% in 2022 due to increased depreciation and amortization expense, an increase in reselling and other services which are lower margin revenues.
Operating Expenses
Sales and marketing expenses include employee labor, excluding fringe benefit costs, and sales commissions associated with our sales force, commission fees paid non-employee sales agents and partners, and costs associated with travel and trade shows. Sales and marketing expense were consistent between the year ended December 31, 2023 and 2022.
General and administrative expenses include employees in finance, human resources, information technology, and other administrative support functions; employee labor not associated with any single revenue producing activity, all company fringe benefits, including paid time off, employee health and medical insurance, 401k matching contributions, and payroll taxes. General and administrative expenses also include professional services to include audit, consulting, outside legal, and outsourcing services. Certain of these expenses, including those associated with the operation of our technical infrastructure as well as components of our operating expenses, are generally less variable in nature and may not correlate to the changes in revenue.
General and administrative expenses for the year ended December 31, 2023 were approximately $15.9 million (or 15% of revenues), as compared to approximately $14.7 million (or 16% of revenues) in 2022. The increase primarily relates to an increase in share-based compensation expense compared to the same period last year.
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Goodwill impairment charge for the year ended December 31, 2022 was $16.3 million following goodwill impairment testing performed as a result of sustained decreases in our publicly quoted share price and market capitalization. There was no goodwill impairment during 2023.
Definite-lived intangible asset impairment charge for the year ended December 31, 2023 was $0.2 million following impairment testing on definite-lived intangible assets performed during the year. There was no definite-lived intangible asset impairment during 2022.
Depreciation and amortization expense were consistent for the year ended December 31, 2023 and 2022.
Other (Expense) Income
Net other expense for the year ended December 31, 2023 was $(0.2) million as compared to net other income of $1.1 million in 2022. The net other income in 2022 included the fair value adjustments of contingent consideration. There were no adjustments to contingent consideration in 2023.
Provision for Income Taxes
Income tax provision for the year ended December 31, 2023 was $0.1 million as compared to an income tax provision of $5.1 million in 2022. During the year ended December 31, 2022, the Company recorded a partial valuation allowance on its deferred tax assets related to net operating losses because management determined that it is more likely than not that the Company will not produce taxable income sufficient to realize the deferred tax assets during the carry forward period.
Net Loss
As a result of the factors above, net loss for the year ended December 31, 2023 was $4.0 million or negative $0.46 per share as compared to a net loss of $23.6 million in 2022 or negative $2.70 per share.
Liquidity and Capital
Net Working Capital
At December 31, 2023, our net working capital was approximately $1.4 million as compared to $1.8 million at December 31, 2022. The decrease in net working capital was primarily driven by investments in computer hardware and software purchases and capitalized internally developed software costs, which was partially offset by temporary receivable/payable timing differences.
Our sources of liquidity include cash on hand, our anticipated cash flows from operations, and access to our new credit agreement with Old Dominion National Bank. While through most of 2023 we had a factoring arrangement available which is set to expire in April of 2024, the credit agreement with Old Dominion National Bank limits our ability to utilize the factoring agreement in the period prior to its expiration.
We believe that our existing cash on hand, our anticipated cash flows from operations, and interim funds available under the Old Dominion Credit Facility, through its maturity on February 28, 2025 will be sufficient to meet our working capital, expenditure, and contractual obligation requirements for the next 12 months.
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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 labor and company sponsored benefits. 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 our facilities under non-cancellable long-term contracts. 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, including intermittent U.S. federal government shutdowns related to budgetary funding issues.
For the year ended December 31, 2023, net cash provided by operations was approximately $0.6 million driven by collections of accounts receivable and temporary payable timing difference, as compared to approximately $6.1 million net cash provided by operations for the year ended December 31, 2022.
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 year ended December 31, 2023, cash used in investing activities was approximately $0.6 million and consisted of $0.5 million in proceeds from factoring arrangement offset by $1.1 million of computer hardware and software purchases and capitalized internally developed software costs primarily associated with upgrading our ITMS™ and Soft-ex platform, secure identity management technology and network operations center. The decrease in amounts capitalized for the year ended December 31, 2023 reflects the capital investments in our delivery platforms beginning to reach completion.
For the year ended December 31, 2022, cash used in investing activities was approximately $3.4 million and consisted of $3.4 million of computer hardware and software purchases and capitalized internally developed software costs of computer hardware and software purchases and capitalized internally developed software costs, primarily associated with upgrading our ITMS™ and Soft-ex platform, secure identity management technology and network operations center.
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 year ended December 31, 2023, cash used in financing activities was approximately $0.6 million and reflects line of credit advances and payments of approximately $6.5 million, finance lease principal repayments of approximately $586,500 and withholding taxes paid on behalf of employees on net settled restricted stock awards of approximately $3,600.
For the year ended December 31, 2022, cash used in financing activities was approximately $1.5 million and reflects line of credit advances and payments of approximately $15.3 million, payments of approximately $1.5 million finance lease principal repayments of approximately $600,400, repurchases of common stock of $818,200 and withholding taxes paid on behalf of employees on net settled restricted stock awards of approximately $49,200.
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Net Effect of Exchange Rate on Cash and Equivalents
For the year ended December 31, 2023, the gradual depreciation of the Euro relative to the US dollar decreased the translated value of our foreign cash balances by approximately $23,800 as compared to last year. For the year ended December 31, 2022, the depreciation of the Euro relative to the US dollar decreased the translated value of our foreign cash balances by approximately $140,800.
Credit Facilities and Other Commitments
From June 15, 2017 to June 2023, the Company had a Loan and Security Agreement with Atlantic Union Bank (the “Loan Agreement”). The Loan Agreement with Atlantic Union Bank matured in June 2023 and was not renewed.
On April 28, 2023, the Company entered into an Accounts Receivable Purchase Agreement (the “Purchase Agreement”) with Republic Capital Access, LLC (the “Buyer”) for the non-recourse sale of eligible accounts receivable relating to U.S. Government prime contracts or subcontracts of the Company (collectively, the “Purchased Receivables”) to replace the Company’s matured Loan Agreement with Atlantic Union Bank. Upon purchase, Buyer becomes the absolute owner of any such Purchased Receivables, which are payable directly to the Buyer. The total amount of Purchased Receivables is subject to a maximum limit of $4 million outstanding Purchased Receivables at any time, with an available increase to $14 million, subject to adequate receivables. The Purchase Agreement contains customary fees, covenants and representations.
Pursuant to the Purchase Agreement, the Company may from time to time offer and sell eligible accounts receivable to the Buyer. The Buyer pays the sales proceed of the purchase of the receivable invoices in two installments; first installment is Initial Purchase Price, which is 90% if the debtor is an agency of the U.S. Government, and 85% if the debtor is not an agency of the U.S. Government, of the invoice amount. The second and final installment is the residual purchase price that is the invoice amount less the initial purchase price less applicable discount factor and fees.
On February 29, 2024, we entered into a Loan and Security Agreement (the “Loan”) and Promissory Note (the “Note,” and, together with the Loan, the “Agreements”) with Old Dominion National Bank. The Agreements provide for a new $4,000,000 revolving line of credit facility (the “Credit Facility”).
Advances under the Credit Facility are subject to a borrowing base equal to the lesser of (i) $4,000,000 or (ii) 80% of eligible accounts receivable. Interest accrues on the outstanding principal balance of the Credit Facility at an annual rate equal to the Prime Rate published in The Wall Street Journal, subject to a floor rate of 7.25%. Outstanding interest on the amount borrowed is payable monthly and all outstanding interest and principal is due on the maturity date of February 28, 2025. The Credit Facility includes customary covenants and events of default, including the following items that are measured annually commencing December 31, 2024: (i) a minimum tangible net worth of $2.0 million; (ii) a minimum annual EBITDA of $1.0 million and (iii) a ratio of current assets to current liabilities of not less than 1.0 to 1.0. The terms of new Credit Facility prohibit the use of our Factoring Arrangement.
Off-Balance Sheet Arrangements
The Company has no existing off-balance sheet arrangements as defined under SEC regulations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not required for smaller reporting companies.
| 40 |
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
The consolidated financial statements and schedules required hereunder and contained herein are listed under Item 15 below.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A. 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 annual report on Form 10-K 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.
Management's Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework in Internal Control - Integrated Framework (2013), our management concluded that our internal control over financial reporting (ICOFR) was effective as of December 31, 2023.
This Annual Report on Form 10-K does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting because we are not an “accelerated filer” or a “large accelerated filer”. Our management’s report was not subject to attestation by our independent registered public accounting firm pursuant to rules of the SEC that permit us to provide only management’s report in this Annual Report on Form 10-K.
Our system of ICOFR was designed to provide reasonable assurance regarding the preparation and fair presentation of published financial statements in accordance with accounting principles generally accepted in the United States. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance and may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Changes in Internal Controls over Financial Reporting
There were no changes in the Company’s ICOFR during the fourth quarter of 2023 that have materially affected, or are reasonably likely to materially affect, the Company’s ICOFR.
| 41 |
ITEM 9B. OTHER INFORMATION
(b) During the fourth quarter of 2023, none of our directors or Section 16 officers adopted or terminated any “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement” (as each term is defined in Item 408(a) of Regulation S-K).
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
Not applicable.
| 42 |
PART III.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information concerning our directors, executive officers, and corporate governance is incorporated herein by reference to our definitive proxy statement to be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year covered by this Form 10-K with respect to the 2024 Annual Meeting of Stockholders.
WidePoint’s Code of Business Conduct
WidePoint’s Code of Business Conduct, Corporate Governance Principles and Charters of the Committees of the Board of Directors are also available free of charge on our website or by writing to WidePoint Corporation, 11250 Waples Mill Road, South Tower, Suite 210, Fairfax, Virginia 22030, c/o Corporate Secretary. WidePoint’s Code of Business Conduct applies to all directors, officers (including the Chief Executive Officer and Chief Financial Officer) and employees. Amendments to or waivers of the Code of Conduct granted to any of the Company’s directors or executive officers will be published on our website within four business days of such amendment or waiver.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated herein by reference to our definitive proxy statement to be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year covered by this Form 10-K with respect to the 2024 Annual Meeting of Stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Information about security ownership is incorporated herein by reference to our definitive proxy statement to be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year covered by this Form 10-K with respect to the 2024 Annual Meeting of Stockholders.
| 43 |
Equity Compensation Plan Information
The following table sets forth information as of December 31, 2023, with respect to the Company’s compensation plans under which its Common Stock is authorized for issuance:
|
|
| (a) |
|
| (b) |
|
| (c) |
| |||
|
|
|
|
|
|
|
|
| Number of Securities |
| |||
|
|
| Number of Securities |
|
|
|
|
| remaining available |
| |||
|
|
| to be issued upon |
|
| Weighted average |
|
| for future issuance |
| |||
|
|
| exercise of |
|
| exercise price of |
|
| (excluding securities |
| |||
| Directors, Nominees |
| outstanding options, |
|
| outstanding options, |
|
| reflected in |
| |||
| and Executive Officers |
| warrants and rights |
|
| warrants and rights |
|
| column (a)) |
| |||
|
|
|
|
|
|
|
|
|
|
| |||
| Equity Compensation Plans: |
|
|
|
|
|
|
|
|
| |||
|
|
|
|
|
|
|
|
|
|
| |||
| Approved by security holders |
|
| 288,570 |
|
| $ | 2.04 |
|
|
| 1,245,203 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Not approved by security holders |
|
| - |
|
| $ | 0.00 |
|
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total |
|
| 288,570 |
|
| $ | 2.04 |
|
|
| 1,245,203 |
|
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Incorporated herein by reference to our definitive proxy statement to be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year covered by this Form 10-K with respect to the 2024 Annual Meeting of Stockholders.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Incorporated herein by reference to our definitive proxy statement to be filed with the Securities and Exchange Commission within 120 days after the end of the fiscal year covered by this Form 10-K with respect to the 2024 Annual Meeting of Stockholders.
| 44 |
PART IV.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
| ■ | Financial Statements and Financial Statement Schedule |
Financial Statements:
Report of Independent Registered Public Accounting Firm (Moss Adams LLP, San Diego, California, PCAOB firm ID: 659)
Consolidated Balance Sheets as of December 31, 2023 and 2022
Consolidated Statements of Operations for the Years Ended December 31, 2023 and 2022
Consolidated Statements of Changes in Stockholders’ Equity for the Years Ended December 31, 2023 and 2022
Consolidated Statements of Cash Flow for the Years Ended December 31, 2023 and 2022
Notes to Consolidated Financial Statements
All other schedules are omitted either because they are not applicable or not required, or because the required information is included in the financial statements or notes thereto
| ■ | Exhibits: The following exhibits are filed herewith or incorporated herein by reference: |
| 3.1 | Amended and Restated Certificate of Incorporation of WidePoint Corporation. (Incorporated herein by reference to Exhibit A to the Registrant’s Definitive Proxy Statement, as filed on December 27, 2004.) |
|
|
|
| 3.1.1 | Certificate of Amendment to the Amended and Restated Certificate of Incorporation of the Company. (Incorporated herein by reference to Exhibit 3.1 to Form 8-K filed on October 29, 2020.) |
|
|
|
| 3.2 | Bylaws. (Incorporated herein by reference to Exhibit 3.6 to the Registrant’s Registration Statement on Form S-4 (File No. 333-29833)) |
|
|
|
| 4.1 | Description of Securities Registered Pursuant to Section 12 of the Securities Exchange Act of 1924 (Incorporated by reference to Exhibit 4.1 to the Registrant’s Form 10-K filed on March 23, 2021). |
|
|
|
| 4.2 | Form of Warrant (Incorporated herein by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K filed on October 4, 2021.). |
|
|
|
| 10.1 | Employment Agreement, between WidePoint Corporation and Jin Kang. * (Incorporated herein by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on May 4, 2020.) |
| 45 |
| 10.2 | Loan and Security Agreement with Old Dominion Bank. (Incorporated herein by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on March 3, 2024). |
|
|
|
| 10.2.1 | Promissory Note in favor of Old Dominion National Bank. (Incorporated herein by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed on March 3, 2024). |
|
|
|
| 10.3 | Amended and Restated 2008 Stock Incentive Plan.* (Incorporated herein by reference to Appendix I to the Company's Definitive Proxy Statement filed on November 24, 2009) |
|
|
|
| 10.4 | WidePoint Corporation 2017 Omnibus Incentive Plan* (incorporated by reference from Appendix A to the Company’s definitive proxy statement filed October 31, 2017) |
|
|
|
| 10.5 | Cellular Wireless Managed Services Contract with U.S. Department of Homeland Security (incorporated by reference from Exhibit 10.1 to Registrant’s Current Report on Form 8-K filed on December 2, 2020) |
|
|
|
| 10.6 | Employment Agreement, between WidePoint Corporation and Jason Holloway. * (Incorporated herein by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed on May 4, 2020.) |
|
|
|
| 10.6.1* | Employment Modification Agreement with Jason Holloway (filed herewith) |
|
|
|
| 10.7 | Employment Agreement, between WidePoint Corporation and Robert George. * (Incorporated herein by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on March 14, 2022.) |
|
|
|
| 10.8 | Asset Purchase Agreement (Incorporated herein by reference to Exhibit 2.1 to the Registrant’s Current Report on Form 8-K filed on October 4, 2021.) |
|
|
|
| 10.9 | Purchase order dated January 24, 2024 (Filed herewith). |
|
|
|
| 10.10 | Task Order dated October 11, 2023 (Incorporated by reference from Exhibit 10.1 to the Registrant’s Form 10-Q filed on November 11, 2023) |
|
|
|
| 10.11. | Amended and Restated 2017 Omnibus Incentive Plan* (incorporated by reference from Appendix A to the definitive proxy statement filed on May 2, 2023) |
|
|
|
| 10.12* | Employment Agreement with Todd Dzyak (filed herewith) |
|
|
|
| 10.12.1* | Employment Modification Agreement with Todd Dzyak (filed herewith) |
|
|
|
| 10.13* | Employment Agreement with Ian Sparling (filed herewith) |
|
|
|
| 10.13.1* | Employment Modification Agreement with Ian Sparling (filed herewith) |
|
|
|
| 19.1 | Insider Trading Policy (filed herewith) |
|
|
|
| 21 | Subsidiaries of WidePoint Corporation (Filed herewith). |
|
|
|
| 23.1 | Consent of Moss Adams LLP (Filed herewith). |
|
|
|
| 31.1 | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Filed herewith). |
|
|
|
| 31.2 | Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Filed herewith). |
|
|
|
| 32 | Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Filed herewith). |
|
|
|
| 97.1 | Compensation Recovery Policy (filed herewith). |
|
|
|
| 101. | Interactive Data Files |
|
|
|
| 101. | INS+ XBRL Instance Document |
|
|
|
| 101. | SCH+ XBRL Taxonomy Extension Schema Document |
|
|
|
| 101. | CAL+ XBRL Taxonomy Extension Calculation Linkbase Document |
|
|
|
| 101. | DEF+ XBRL Taxonomy Definition Linkbase Document |
|
|
|
| 101. | LAB+ XBRL Taxonomy Extension Label Linkbase Document |
|
|
|
| 101. | PRE+ XBRL Taxonomy Extension Presentation Linkbase Document |
|
|
|
____________________
* Management contract or compensatory plan.
| 46 |
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: March 26, 2024 |
| s/ JIN H. KANG |
|
|
|
| Jin H. Kang |
|
|
|
| Chief Executive Officer |
|
|
|
|
|
|
| Date: March 26, 2024 |
| /s/ Robert J. George |
|
|
|
| Robert J. George |
|
|
|
| Chief Financial Officer |
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons, on behalf of the registrant and in the capacities and on the dates indicated.
| Dated: March 26, 2024 |
| /s/ JIN H. KANG |
|
|
|
| Jin H. Kang |
|
|
|
| Director, Chief Executive Officer and President |
|
|
|
| (Principal Executive Officer) |
|
|
|
|
|
|
| Dated: March 26, 2024 |
| /s/ PHILIP GARFINKLE |
|
|
|
| Philip Garfinkle |
|
|
|
| Chairman of the Board |
|
| Dated: March 26, 2024 |
| /s/ JULIA A. BOWEN |
|
|
|
| Julia A. Bowen |
|
|
|
| Director |
|
|
|
|
|
|
| Dated: March 26, 2024 |
| /s/ JOHN J. FITZGERALD |
|
|
|
| John J. Fitzgerald |
|
|
|
| Director |
|
| 47 |
| 48 |
| Table of Contents |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders of
WidePoint Corporation
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of WidePoint Corporation and subsidiaries (the “Company”) as of December 31, 2023 and 2022, the related consolidated statements of operations, comprehensive loss, changes in stockholders’ equity, and cash flows for the years then ended, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2023 and 2022, and the consolidated results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
Critical audit matters are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. We determined that there are no critical audit matters.
/s/ Moss Adams LLP
San Diego, California
March 26, 2024
We have served as the Company’s auditor since 2007.
| F-1 |
| Table of Contents |
WIDEPOINT CORPORATION AND SUBSIDIARIES
|
|
| DECEMBER 31, |
|
| DECEMBER 31, |
| ||
|
|
| 2023 |
|
| 2022 |
| ||
|
|
|
|
| |||||
| ASSETS |
| |||||||
| CURRENT ASSETS |
|
|
|
|
|
| ||
| Cash |
| $ | 6,921,160 |
|
| $ | 7,530,864 |
|
| Accounts receivable, net of allowance for credit losses |
|
|
|
|
|
|
|
|
| of $81,359 and $51,666, respectively |
|
| 8,219,793 |
|
|
| 9,277,109 |
|
| Unbilled accounts receivable |
|
| 16,618,639 |
|
|
| 10,244,101 |
|
| Other current assets |
|
| 1,083,671 |
|
|
| 935,978 |
|
|
|
|
|
|
|
|
|
|
|
| Total current assets |
|
| 32,843,263 |
|
|
| 27,988,052 |
|
|
|
|
|
|
|
|
|
|
|
| NONCURRENT ASSETS |
|
|
|
|
|
|
|
|
| Property and equipment, net |
|
| 780,800 |
|
|
| 978,218 |
|
| Lease right of use asset |
|
| 4,045,222 |
|
|
| 4,723,899 |
|
| Intangible assets, net |
|
| 7,336,348 |
|
|
| 7,398,160 |
|
| Goodwill |
|
| 5,811,578 |
|
|
| 5,811,578 |
|
| Deferred tax assets, net |
|
| - |
|
|
| 86,909 |
|
| Other long-term assets |
|
| 483,288 |
|
|
| 2,025,845 |
|
|
|
|
|
|
|
|
|
|
|
| Total assets |
| $ | 51,300,499 |
|
| $ | 49,012,661 |
|
|
|
|
|
|
|
|
|
|
|
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
|
|
|
|
|
|
|
|
|
|
| CURRENT LIABILITIES |
|
|
|
|
|
|
|
|
| Accounts payable |
| $ | 12,633,658 |
|
| $ | 12,515,081 |
|
| Accrued expenses |
|
| 16,175,702 |
|
|
| 11,327,269 |
|
| Current portion of deferred revenue |
|
| 2,009,343 |
|
|
| 1,704,933 |
|
| Current portion of lease liabilities |
|
| 638,258 |
|
|
| 596,529 |
|
|
|
|
|
|
|
|
|
|
|
| Total current liabilities |
|
| 31,456,961 |
|
|
| 26,143,812 |
|
|
|
|
|
|
|
|
|
|
|
| NONCURRENT LIABILITIES |
|
|
|
|
|
|
|
|
| Lease liabilities, net of current portion |
|
| 4,114,516 |
|
|
| 4,745,909 |
|
| Contingent consideration |
|
| 6,900 |
|
|
| 6,900 |
|
| Deferred revenue, net of current portion |
|
| 1,027,770 |
|
|
| 364,837 |
|
| Deferred tax liabilities, net |
|
| 16,923 |
|
|
| - |
|
|
|
|
|
|
|
|
|
|
|
| Total liabilities |
|
| 36,623,070 |
|
|
| 31,261,458 |
|
|
|
|
|
|
|
|
|
|
|
| Commitments and contingencies (Note 18) |
|
| - |
|
|
| - |
|
|
|
|
|
|
|
|
|
|
|
| STOCKHOLDERS' EQUITY |
|
|
|
|
|
|
|
|
| Preferred stock, $0.001 par value; 10,000,000 shares |
|
|
|
|
|
|
|
|
| authorized; 2,045,714 shares issued and none outstanding |
|
| - |
|
|
| - |
|
| Common stock, $0.001 par value; 30,000,000 shares |
|
|
|
|
|
|
|
|
| authorized; 8,893,220 and 8,725,476 shares |
|
|
|
|
|
|
|
|
| issued and outstanding, respectively |
|
| 8,894 |
|
|
| 8,726 |
|
| Additional paid-in capital |
|
| 102,151,381 |
|
|
| 101,194,185 |
|
| Accumulated other comprehensive loss |
|
| (334,899 | ) |
|
| (350,234 | ) |
| Accumulated deficit |
|
| (87,147,947 | ) |
|
| (83,101,474 | ) |
|
|
|
|
|
|
|
|
|
|
| Total stockholders’ equity |
|
| 14,677,429 |
|
|
| 17,751,203 |
|
|
|
|
|
|
|
|
|
|
|
| Total liabilities and stockholders’ equity |
| $ | 51,300,499 |
|
| $ | 49,012,661 |
|
The accompanying notes are an integral part of these consolidated financial statements.
| F-2 |
| Table of Contents |
WIDEPOINT CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
|
|
| YEARS ENDED |
| |||||
|
|
| DECEMBER 31, |
| |||||
|
|
| 2023 |
|
| 2022 |
| ||
|
|
|
|
|
|
|
| ||
| REVENUES |
| $ | 106,026,360 |
|
| $ | 94,103,365 |
|
| COST OF REVENUES (including amortization and depreciation of $2,291,144 and $1,455,262, respectively) |
|
| 90,380,833 |
|
|
| 79,527,893 |
|
|
|
|
|
|
|
|
|
|
|
| GROSS PROFIT |
|
| 15,645,527 |
|
|
| 14,575,472 |
|
|
|
|
|
|
|
|
|
|
|
| OPERATING EXPENSES |
|
|
|
|
|
|
|
|
| Sales and marketing |
|
| 2,191,838 |
|
|
| 2,134,240 |
|
| General and administrative expenses (including share-based compensation of $960,991 and $528,582, respectively) |
|
| 15,882,415 |
|
|
| 14,720,497 |
|
| Impairment charge - goodwill |
|
| - |
|
|
| 16,277,000 |
|
| Impairment charge - definite-lived intangible assets |
|
| 193,336 |
|
|
| - |
|
| Depreciation and amortization |
|
| 1,079,724 |
|
|
| 1,077,440 |
|
|
|
|
|
|
|
|
|
|
|
| Total operating expenses |
|
| 19,347,313 |
|
|
| 34,209,177 |
|
|
|
|
|
|
|
|
|
|
|
| LOSS FROM OPERATIONS |
|
| (3,701,786 | ) |
|
| (19,633,705 | ) |
|
|
|
|
|
|
|
|
|
|
| OTHER INCOME (EXPENSE) INCOME |
|
|
|
|
|
|
|
|
| Interest income |
|
| 90,679 |
|
|
| 41,831 |
|
| Interest expense |
|
| (239,526 | ) |
|
| (259,644 | ) |
| Other (expense) income, net |
|
| (62,597 | ) |
|
| 1,344,102 |
|
|
|
|
|
|
|
|
|
|
|
| Total other (expense) income, net |
|
| (211,444 | ) |
|
| 1,126,289 |
|
|
|
|
|
|
|
|
|
|
|
| LOSS BEFORE INCOME TAX PROVISION |
|
| (3,913,230 | ) |
|
| (18,507,416 | ) |
| INCOME TAX PROVISION |
|
| 133,243 |
|
|
| 5,077,875 |
|
|
|
|
|
|
|
|
|
|
|
| NET LOSS |
| $ | (4,046,473 | ) |
| $ | (23,585,291 | ) |
|
|
|
|
|
|
|
|
|
|
| EARNINGS PER SHARE, BASIC AND DILUTED |
| $ | (0.46 | ) |
| $ | (2.70 | ) |
|
|
|
|
|
|
|
|
|
|
| WEIGHTED-AVERAGE SHARES OUTSTANDING, BASIC AND DILUTED |
|
| 8,830,709 |
|
|
| 8,732,203 |
|
The accompanying notes are an integral part of these consolidated financial statements.
| F-3 |
| Table of Contents |
WIDEPOINT CORPORATION AND SUBSIDIARIES
Consolidated Statements of Comprehensive Loss
|
|
| YEARS ENDED |
| |||||
|
|
| DECEMBER 31, |
| |||||
|
|
| 2023 |
|
| 2022 |
| ||
|
|
|
|
|
|
|
| ||
| NET LOSS |
| $ | (4,046,473 | ) |
| $ | (23,585,291 | ) |
|
|
|
|
|
|
|
|
|
|
| Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
| Foreign currency translation adjustments, net of tax |
|
| 15,335 |
|
|
| (108,648 | ) |
|
|
|
|
|
|
|
|
|
|
| Other comprehensive income (loss): |
|
| 15,335 |
|
|
| (108,648 | ) |
|
|
|
|
|
|
|
|
|
|
| COMPREHENSIVE LOSS |
| $ | (4,031,138 | ) |
| $ | (23,693,939 | ) |
The accompanying notes are an integral part of these consolidated financial statements.
| F-4 |
| Table of Contents |
WIDEPOINT CORPORATION AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders’ Equity
|
|
|
|
|
|
| Additional |
|
|
|
|
|
|
| |||||||||||
|
|
| Common Stock |
|
| Paid-In |
|
| Accumulated |
|
| Accumulated |
|
|
| ||||||||||
|
|
| Issued |
|
| Amount |
|
| Capital |
|
| OCI |
|
| Deficit |
|
| Total |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
| Balance, January 1, 2022 |
|
| 8,842,026 |
|
| $ | 8,842 |
|
| $ | 101,424,922 |
|
| $ | (241,586 | ) |
| $ | (59,516,183 | ) |
| $ | 41,675,995 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Common stock repurchased |
|
| (196,586 | ) |
|
| (197 | ) |
|
| (818,014 | ) |
|
| - |
|
|
| - |
|
|
| (818,211 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Issuance of common stock — restricted |
|
| 80,036 |
|
|
| 81 |
|
|
| (49,305 | ) |
|
| - |
|
|
| - |
|
|
| (49,224 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Issuance of common stock — warrants |
|
| - |
|
|
| - |
|
|
| 108,000 |
|
|
| - |
|
|
| - |
|
|
| 108,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Stock compensation expense — restricted |
|
| - |
|
|
| - |
|
|
| 528,582 |
|
|
| - |
|
|
| - |
|
|
| 528,582 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Foreign currency translation — (loss) |
|
| - |
|
|
| - |
|
|
| - |
|
|
| (108,648 | ) |
|
| - |
|
|
| (108,648 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net loss |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| (23,585,291 | ) |
|
| (23,585,291 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance, December 31, 2022 |
|
| 8,725,476 |
|
| $ | 8,726 |
|
| $ | 101,194,185 |
|
| $ | (350,234 | ) |
| $ | (83,101,474 | ) |
| $ | 17,751,203 |
|
|
|
|
|
|
|
|
|
| Additional |
|
|
|
|
|
|
|
|
|
| ||||||
|
|
| Common Stock |
|
| Paid-In |
|
| Accumulated |
|
| Accumulated |
|
|
|
| |||||||||
|
|
| Issued |
|
| Amount |
|
| Capital |
|
| OCI |
|
| Deficit |
|
| Total |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
| Balance, January 1, 2023 |
|
| 8,725,476 |
|
| $ | 8,726 |
|
|
| 101,194,185 |
|
|
| (350,234 | ) |
|
| (83,101,474 | ) |
|
| 17,751,203 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Issuance of common stock — restricted |
|
| 167,744 |
|
|
| 168 |
|
|
| (3,795 | ) |
|
| - |
|
|
| - |
|
|
| (3,627 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Stock compensation expense — restricted |
|
| - |
|
|
| - |
|
|
| 914,194 |
|
|
| - |
|
|
| - |
|
|
| 914,194 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Stock compensation expense — non-qualified stock options |
|
| - |
|
|
| - |
|
|
| 46,797 |
|
|
| - |
|
|
| - |
|
|
| 46,797 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Foreign currency translation — gain |
|
| - |
|
|
| - |
|
|
| - |
|
|
| 15,335 |
|
|
| - |
|
|
| 15,335 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (4,046,473 | ) |
|
| (4,046,473 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance, December 31, 2023 |
|
| 8,893,220 |
|
| $ | 8,894 |
|
| $ | 102,151,381 |
|
| $ | (334,899 | ) |
| $ | (87,147,947 | ) |
| $ | 14,677,429 |
|
The accompanying notes are an integral part of these consolidated financial statements.
| F-5 |
| Table of Contents |
WIDEPOINT CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
|
|
| YEARS ENDED |
| |||||
|
|
| DECEMBER 31, |
| |||||
|
|
| 2023 |
|
| 2022 |
| ||
|
|
|
|
|
| ||||
| CASH FLOWS FROM OPERATING ACTIVITIES |
|
|
|
|
|
| ||
| Net loss |
| $ | (4,046,473 | ) |
| $ | (23,585,291 | ) |
| Adjustments to reconcile net loss to net cash provided by |
|
|
|
|
|
|
|
|
| (used in) operating activities: |
|
|
|
|
|
|
|
|
| Deferred income tax expense |
|
| 107,157 |
|
|
| 5,034,385 |
|
| Depreciation expense |
|
| 1,088,546 |
|
|
| 1,084,001 |
|
| Impairment charge - goodwill |
|
| - |
|
|
| 16,277,000 |
|
| Impairment charge - definite-lived intangible assets |
|
| 193,336 |
|
|
| - |
|
| Provision for credit losses |
|
| 47,060 |
|
|
| 11,852 |
|
| Amortization of intangibles |
|
| 2,282,322 |
|
|
| 1,451,091 |
|
| Share-based compensation expense |
|
| 960,991 |
|
|
| 528,582 |
|
| Change in fair value of contingent consideration |
|
| - |
|
|
| (1,340,100 | ) |
| Loss on disposal of fixed assets |
|
| 1,927 |
|
|
| - |
|
| Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
| Accounts receivable and unbilled receivables |
|
| (4,686,874 | ) |
|
| 3,945,175 |
|
| Inventories |
|
| (143,668 | ) |
|
| 367,551 |
|
| Other current assets |
|
| (3,171 | ) |
|
| 1,887,717 |
|
| Other assets |
|
| 33,574 |
|
|
| 27,967 |
|
| Accounts payable and accrued expenses |
|
| 3,837,059 |
|
|
| 1,252,212 |
|
| Income tax payable |
|
| (2,234 | ) |
|
| 69,901 |
|
| Deferred revenue and other liabilities |
|
| 955,696 |
|
|
| (585,816 | ) |
| Other liabilities |
|
| - |
|
|
| (358,000 | ) |
|
|
|
|
|
|
|
|
|
|
| Net cash provided by operating activities |
|
| 625,248 |
|
|
| 6,068,227 |
|
|
|
|
|
|
|
|
|
|
|
| CASH FLOWS FROM INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
| Purchases of property and equipment |
|
| (208,202 | ) |
|
| (244,953 | ) |
| Capitalized hardware and software development costs |
|
| (881,887 | ) |
|
| (3,163,726 | ) |
| Proceeds from beneficial interest in sold receivables |
|
| 469,104 |
|
|
| - |
|
|
|
|
|
|
|
|
|
|
|
| Net cash used in investing activities |
|
| (620,985 | ) |
|
| (3,408,679 | ) |
|
|
|
|
|
|
|
|
|
|
| CASH FLOWS FROM FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
| Advances on bank line of credit |
|
| 6,493,284 |
|
|
| 15,298,792 |
|
| Repayments of bank line of credit advances |
|
| (6,493,284 | ) |
|
| (15,298,792 | ) |
| Principal repayments under finance lease obligations |
|
| (586,525 | ) |
|
| (600,438 | ) |
| Withholding taxes paid on behalf of employees on net settled restricted stock awards |
|
| (3,627 | ) |
|
| (49,224 | ) |
| Common stock repurchased |
|
| - |
|
|
| (818,211 | ) |
|
|
|
|
|
|
|
|
|
|
| Net cash used in financing activities |
|
| (590,152 | ) |
|
| (1,467,873 | ) |
|
|
|
|
|
|
|
|
|
|
| Net effect of exchange rate on cash |
|
| (23,815 | ) |
|
| (140,791 | ) |
|
|
|
|
|
|
|
|
|
|
| NET (DECREASE) INCREASE IN CASH |
|
| (609,704 | ) |
|
| 1,050,884 |
|
|
|
|
|
|
|
|
|
|
|
| CASH, beginning of period |
|
| 7,530,864 |
|
|
| 6,479,980 |
|
|
|
|
|
|
|
|
|
|
|
| CASH, end of period |
| $ | 6,921,160 |
|
| $ | 7,530,864 |
|
The accompanying notes are an integral part of these consolidated financial statements.
| F-6 |
| Table of Contents |
WIDEPOINT CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Continued)
|
|
| YEARS ENDED |
| |||||
|
|
| DECEMBER 31, |
| |||||
|
|
| 2023 |
|
| 2022 |
| ||
|
|
|
|
|
| ||||
| SUPPLEMENTAL CASH FLOW INFORMATION |
|
|
|
|
|
| ||
| Cash paid for interest |
| $ | 223,307 |
|
| $ | 194,754 |
|
| Cash paid for income taxes |
| $ | - |
|
| $ | 27,559 |
|
|
|
|
|
|
|
|
|
|
|
| NONCASH INVESTING AND FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
| Capitalized hardware and software development costs in accounts payable |
| $ | - |
|
| $ | 34,923 |
|
| Leased assets and lease liabilities terminated |
| $ | - |
|
| $ | 876,281 |
|
The accompanying notes are an integral part of these consolidated financial statements.
| F-7 |
| Table of Contents |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 in the 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 Technology Management as a Service (TMaaS). The Company’s TMaaS 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. Additionally, the Company was granted an Authority to Operate by the General Services Administration with regard to its identity credentialing component of its TMaaS platform. The Company’s TMaaS 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.
A significant portion of the Company’s expenses, such as personnel and facilities costs, are fixed in the short term and may be 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 period.
2. Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and the financial statement rules and regulations of the Securities and Exchange Commission.
Principles of Consolidation
The accompanying 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.
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. The Company records government subsidies as offsets to the related operating expenses. During the year ended 12/31/22, the Company collected $1.6M payroll tax credits that were earned and recognized prior to fiscal year 2022.
| F-8 |
| Table of Contents |
Accounting Standards Update
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 Instrument (“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. The Company adopted Topic 326 on January 1, 2023. The adoption of ASU 2016-03 did not have a material impact on the Company's consolidated financial statements.
In November 2023, the FASB issued Accounting Standards Update (“ASU”) 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, which requires disclosure of incremental segment information on an annual and interim basis. This standard is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024, and requires retrospective application to all prior periods presented in the financial statements. The Company is currently evaluating the impacts of the new standard.
In December 2023, the FASB issued ASU 2023-09, Income Taxes – Improvements to Income Tax Disclosures, requiring enhancements and further transparency to certain income tax disclosures, most notably the tax rate reconciliation and income taxes paid. This ASU is effective for fiscal years beginning after December 15, 2024 on a prospective basis and retrospective application is permitted. The Company is currently evaluating the impacts of the new standard.
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 loss, 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 Consolidated Statements of Operations, depending on the nature of the activity. See Note 17 for additional information.
Segment Reporting
Segments are defined by authoritative guidance as components of a company in which separate financial information is available and is evaluated by the chief operating decision maker (CODM), or a decision-making group, in deciding how to allocate resources and in evaluating financial performance. The Company’s CODM is its chief executive officer.
| F-9 |
| Table of Contents |
The Company’s customers view our market as a singular business and demand an integrated and scalable suite of enterprise-wide solutions. The Company’s TMaaS offerings are substantially managed service driven solutions that use our proprietary technology platform to deliver our services. The amount of labor required to perform our contract obligations may vary significantly contract to contract depending on the customer’s specific requirements; however, the way in which we perform these services is consistent across the company and requires a connected group of internal subject matter experts and support personnel.
In order to evaluate a managed service business model the Company’s CODM measures financial performance and allocates resources based on the overall consolidated results of managed and carrier services and related margins. These consolidated financial metrics provide a stronger indication of how the Company is managing its key customer relationships and assesses overall profitability.
As a result, the Company comprises of one operating segment and presents single reporting segment for purposes of financial reporting and prepared its consolidated financial statements upon that basis.
Use of Estimates and Critical Accounting Estimates
The preparation of 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. Critical accounting estimates include the Company’s valuation of goodwill impairment. To estimate the fair value of its reporting unit, the Company projects future cash flows using management’s assumptions for revenue growth rate, operating margins, and a discount rate. These estimates can significantly affect the outcome of the Company’s impairment assessment.
Other areas requiring use of estimates and judgment relate to revenue recognition, accounts receivable valuation reserves, ability to realize intangible assets, ability to realize deferred income tax assets, contingent consideration, 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.
Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, based on the Company’s principal or, in the absence of a principal, most advantageous market for the specific asset or liability. GAAP provides for a three-level hierarchy of inputs to valuation techniques used to measure fair value, defined as follows:
Level 1 - Inputs that are quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity can access.
Level 2 - Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability, including:
|
| ■ | Quoted prices for similar assets or liabilities in active markets |
|
| ■ | Quoted prices for identical or similar assets or liabilities in markets that are not active |
|
| ■ | Inputs other than quoted prices that are observable for the asset or liability |
|
| ■ | Inputs that are derived principally from or corroborated by observable market data by correlation or other means |
| F-10 |
| Table of Contents |
Level 3 - Inputs that are unobservable and reflect the Company’s own assumptions about the assumptions market participants would use in pricing the asset or liability based on the best information available in the circumstances (e.g., internally derived assumptions surrounding the timing and amount of expected cash flows). The Company measured the fair value of contingent consideration using unobservable inputs (level 3).
The Company monitors the market conditions and evaluates the fair value hierarchy levels at least quarterly. For any transfers in and out of the levels of the fair value hierarchy, the Company elects to disclose the fair value measurement at the beginning of the reporting period during which the transfer occurred.
Note 3 for changes in fair value of liabilities recorded in connection with certain liabilities that are measured at fair value on a recurring basis.
Financial Instruments
Financial instruments that potentially subject the Company to credit risk consist of cash and cash equivalents and accounts receivable.
Cash and Cash Equivalents
The Company maintains interest-bearing cash deposits and short-term overnight investments with large financial institutions. The Company considers all highly liquid investments with original maturities of three months or less to be cash equivalents for purposes of these consolidated financial statements. Interest-bearing cash deposits maintained by financial institutions in the United States of America are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to a maximum of $250,000. At December 31, 2023 and 2022, the Company had deposits in excess of FDIC limits of approximately $5.5 million and $5.1 million, respectively. The Company also maintains deposits with a financial institution in Ireland that are insured by the Central Bank of Ireland up to a maximum of €100,000 per financial institution. The Company also maintains deposits with a financial institution in the United Kingdom that are insured by Financial Services Compensation Scheme up to a maximum of £75,000 per financial institution. At December 31, 2023 and 2022, the Company had foreign bank deposits in excess of insured limits of approximately $0.6 million and $1.3 million, respectively.
Allowances for Credit Losses
The Company determines its allowance for credit allowances by considering a number of factors, including the type of customer, credit worthiness, payment history, length of time accounts receivable are past due, the Company’s previous loss history, the customer’s current ability to pay its obligation to the Company, and the condition of the general economy and the industry as a whole. The Company writes off accounts receivable when they are deemed to be uncollectible, having exhausted all collection efforts.
Inventories
Inventories consist of mobile devices and accessories and identity credential hardware components. Inventories are valued at the lower of cost, using first-in, first-out method, or net realizable value. The Company may record a write-down for inventories which have become obsolete or are in excess of anticipated demand or net realizable value. If future demand or market conditions for our products are less favorable than forecasted or if unforeseen technological changes negatively impact the utility of inventory, we may be required to record additional write-downs, which would adversely affect our gross profit. For the years ended December 31, 2023 and 2022, there were no inventory write-downs.
| F-11 |
| Table of Contents |
Property and Equipment
Property and equipment are stated at historical cost, net of accumulated depreciation and amortization. Depreciation and amortization expense is computed using the straight-line method over the estimated useful lives based upon the classification of the property and/or equipment or lease period for assets acquired under lease arrangements. The estimated useful lives of the assets are as follows:
| Estimated | |||
| Useful Life | |||
| Computer hardware and software | 3-5 years | ||
| Furniture and fixtures | 5 years | ||
| Mobile equipment | 3 years |
The Company assesses the recoverability of property and equipment by determining whether the depreciation of property and equipment over its remaining life can be recovered through projected undiscounted future cash flows. The amount of property and equipment impairment if any, is measured based on fair value and is charged to operations in the period in which property and equipment impairment is determined by management. As of December 31, 2023 and 2022, the Company’s management has not identified any material impairment of its property and equipment.
Leases
The Company has leases for corporate offices that are accounted for under ASC 842, Leases (Topic 842). The leases have remaining lease terms ranging from one year to eighteen years.
The Company determines if an arrangement is a lease at inception. The Company considers any contract where there is an identified asset and that it has the right to control the use of such asset in determining whether the contract contains a lease. A right-of-use (“ROU”) asset represents the Company’s right to use an underlying asset for the lease term and the lease liabilities represent its obligation to make lease payments arising from the lease. Lease ROU assets and lease liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As the Company’s leases do not provide an implicit rate, the Company uses an incremental borrowing rate based on the information available on the lease commencement date in determining the present value of lease payments. The lease ROU assets include any lease payments made prior to the rent commencement date. Lease expense for lease payments are recognized on a straight-line basis over the lease term.
Goodwill and Other Intangible Assets
The Company accounts for goodwill and other indefinite-lived intangible assets in accordance with ASC 350, Intangibles (Topic 350). Under ASC Topic 350, goodwill and certain indefinite-lived intangible assets are not amortized but are subject to an annual impairment test as of December 31, and between annual tests if events occur or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying value.
The Company has a single reporting unit and all goodwill relates to that reporting unit.
The Company recorded a non-cash goodwill impairment charge of $16.3 million during 2022 following goodwill impairment testing performed as a result of sustained decreases in our publicly quoted share price and market capitalization. There was no goodwill impairment during 2023.
| F-12 |
| Table of Contents |
Impairment of long-lived assets
The Company reviews long-lived assets such as property and equipment, right of use assets, and intangible assets with finite useful lives for impairment whenever events or changes in circumstances indicate that the carrying value of the asset or asset group may not be recoverable by comparing the net book value of the asset group to their estimated undiscounted future cash flows expected from their use and eventual disposition. Impaired assets are recorded at estimated fair value, determined principally by using the present value of estimated future cash flows expected from their use and eventual disposition.
Revenue from Contracts with Customers
Revenue is recognized upon transfer of control of promised products or services to customers in an amount that reflects the consideration the Company expects to receive in exchange for those products or services. The Company enters into contracts that can include various combinations of products and services, which are generally capable of being distinct and accounted for as separate performance obligations. Revenue is recognized net of any taxes collected from customers, which are subsequently remitted to governmental authorities.
The Company reports products and services under the categories managed services and carrier services as described below:
Carrier Services. The Company bills for costs incurred to deliver phone, data and satellite and related mobile services for a connected device or end point. These services require us to procure, process and pay communications carrier invoices. We recognize revenues and related costs on a gross basis for such arrangements whenever we control the products and services before they are transferred to the customer. We are the principal in these transactions when we are seen as the primary creditor, we directly issue purchase orders directly to communications carriers for wireline and wireless services, and/or we have discretion in choosing optimal providers and rate plans. For arrangements in which we do not control the product or service, do not have economic risk, and do not have pricing or vendor discretion we recognize revenues and related costs on a net basis. A significant portion of our overall reported revenue is tied to this service component; however, it represents an insignificant portion of our overall reported gross profit. This is a commodity type service and margins are nominal, but this is a necessary service to deliver to federal government customers that engage us to provide a full-service solution. The Company does not assume the credit risk when providing these services for commercial customers due to the increased credit risk involved.
Managed Services. The Company delivers managed services under a full-service, quasi full-service or self-service solution to suit our customers’ needs. A significant portion of our reported gross profit is tied to this service component. Revenue is accrued based on what the Company expects will be ultimately invoiced. Differences between accrued revenues and actual billed revenues are adjusted in the period that billings are prepared and such differences have not historically been material. Managed services are not interdependent and there are no undelivered performance obligations in these arrangements. The Company aggregates its billable revenue under the following groupings:
|
| · | Managed Service Fees: The Company delivers managed services under firm fixed price contracts that may include multiple performance obligations. |
|
| o | Revenue for fixed price services are generally completed and billed in the same accounting period and we charge a fixed fee for each performance obligation which may be tied to the number of units managed, percentage of supplier spend and/or savings, units delivered, certificates issued by the Company, certificate validation services installed in a customer’s environment, accessories sold and billable hours. Revenue from this service requires accounting estimates due to delays between completion of the service and the normal billing cycle. |
| F-13 |
| Table of Contents |
|
| o | Revenue for fixed price software sold as a term license is recognized ratably over the license term from the date the software is accepted by the customer. Maintenance services, if contracted, are recognized ratably over the term of the maintenance agreement, generally twelve months. Revenue for fixed price software licenses that are sold as a perpetual license with no significant customization are recognized when the software is delivered. Implementation fees are recognized when the work is completed. Revenue from this service does not require significant accounting estimates. |
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|
|
| o | Revenue is recognized from the sales of identity credentials to an individual or organization upon issuance less a portion deferred for monthly credential validation support services. In the case of bulk sales or credential management system revenue is recognized upon issue or availability to the customer for issuance. There is generally no significant performance obligation to provide post contract services in relation to identity consoles delivered. Identity certificates issued have a fixed life and cannot be modified once issued. |
|
| · | Billable Service Fees. The Company delivers subject matter expertise either offsite or onsite for certain customers at a fixed hourly rate or fixed monthly fee. Billable services are generally completed and billed in the same accounting period and charge a fixed fee based on actual hours worked and actual costs incurred. Revenue is accrued based on what the Company expects will be ultimately invoiced. Differences between accrued revenues and actual billed revenues are adjusted in the period that billings are prepared and such differences have not historically been material |
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|
| · | Reselling and Other Service Fees. The Company delivers third party products and services to satisfy customer contractual obligations. The Company recognizes revenues and related costs on a gross basis for such arrangements whenever we control the products and services before they are transferred to the customer. The Company is the principal in these transactions as we are seen as the primary creditor, carries inventory risk for undelivered products and services, and directly issues purchase orders third party suppliers, and has discretion in sourcing among many different suppliers. For those transactions in which we procure and deliver products and services for our customers on their own account, the Company does not control the product or service, does not have economic risk, and does not have pricing or vendor discretion and therefore does not recognize revenues and related costs on a gross basis for these arrangements. The Company only recognizes revenues earned for arranging the transaction and any related costs. |
Software Development Costs
The Company applies the principles of FASB ASC 350-40, Accounting for the Cost of Computer Software Developed or Obtained for Internal Use (“ASC 350-40”). ASC 350-40 requires that internal use software development costs incurred before the preliminary project stage be expensed as incurred. We capitalize development costs related to these software applications once the preliminary project stage is complete and it is probable that the project will be completed, and the software will be used to perform the function intended.
The Company also applies the principles of FASB ASC 985-20, Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed (“ASC 985-20”). ASC 985-20 requires that software development costs incurred in conjunction with development of computer software to be sold to be charged to research and development expense until technological feasibility is established. Thereafter, until the product is released for sale, development costs of computer software to be sold are capitalized and reported at the lower of unamortized cost or net realizable value of the related product.
| F-14 |
| Table of Contents |
Product Development
Product development expenses include payroll, employee benefits, and other employee related expenses associated with product development. Product development expenses also include third-party development and programming costs, subject matter experts, localization costs incurred to translate software for international markets, and the amortization of purchased software code and services content. Costs related to product development are expensed until the point that preliminary project stage is complete or technological feasibility is reached. Costs incurred during the implementation of product development and enhancements are capitalized and amortized to cost of revenue over the estimated lives of the solution.
For the years ended December 31, 2023 and 2022, the Company incurred product development costs associated with TMaaS platform application, Secure Identity Management Solutions, Unified Communications Analytics (UCAS) solution, and data center of approximately $0.9 million and $3.2 million, respectively, which were capitalized. See Note 9 to the consolidated financial statements for additional information about capitalization of product development costs.
Judgments and Estimates
The Company’s contracts with customers often include promises to transfer multiple products and services to a customer under a fixed rate or fixed fee arrangement. Determining whether products and services are considered distinct performance obligations that should be accounted for separately versus together may require judgment. Components of our managed service solution are generally distinct performance obligations that are not interdependent and can be completed within a month. The Company’s products are generally sold with a right of return. Historically the returns have been immaterial and recognized in the period which the products are returned. While historically immaterial as well, the Company may provide other event driven credits or disincentives for not meeting performance obligations which are accounted for as variable consideration and recognized in the period which the event occurs.
Contract Balances
A significant portion of contract balances represent revenues earned on federal government contracts. Timing of revenue recognition may differ materially from the timing of invoicing to customers due a long-standing practice of issuing a consolidated managed service invoice. A consolidated invoice usually requires data such as billable hours, units managed, credentials issued, accessories sold and usage data from telecommunications providers and other suppliers. As a result it could take between thirty (30) to sixty (60) days after all performance obligations have been met to deliver a complete customer invoice. As a result, the Company may have both accounts receivables (invoiced revenue) and unbilled receivables (revenue recognize but not yet invoiced) that could represent one or more months of revenue. Additionally, the Company may be required under contractual terms to bill for services in advance and deferred recognition of revenue until all performance obligations have been met.
Payment terms and conditions vary by contract type, although terms generally include a requirement of payment within thirty (30) to ninety (90) days. Payment terms and conditions for government and commercial customers are described below:
|
| · | Government contract billings are 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 customer. |
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|
| · | Commercial contracts are billed based on the underlying contract terms and conditions which generally have repayment terms that range from thirty (30) to ninety (90) days. In instances where the timing of revenue recognition differs from the timing of invoicing, we have determined our contracts generally do not include a significant financing component. |
| F-15 |
| Table of Contents |
The primary purpose of our invoicing terms is to provide customers with simplified and predictable ways of purchasing our products and services, not to receive financing from our customers.
The Company assesses its ability to collect outstanding receivables and contract assets and provides customer-specific allowances for credit losses and general allowances for the portion of receivables and contract assets that are estimated to be uncollectible. Allowances for credit losses are based on historical collection experience and expected credit losses, customer specific financial condition, current economic trends in the customer's industry and geographic region, changes in customer demand and the overall economic climate in the market the Company serves. Customer accounts receivable balances that remain uncollected for more than 45 days are further reviewed for collectability and are considered past due after 90 days unless different contractual repayment terms were extended under a contract with a customer. The Company will reserve such amounts estimated to be uncollectable.
Costs to Obtain a Contract with a Customer
The Company does not recognize assets from the costs to obtain a contract with a customer and generally expenses these costs as incurred. The Company primarily uses internal labor to manage and oversee the customer acquisition process and to finalize contract terms and conditions and commence customer start-up activities, if any. Internal labor costs would be incurred regardless of the outcome of a contract with a customer and as such those costs are not considered incremental to the cost to obtain a contract with a customer. The Company does not typically incur significant incremental costs to obtain a contract with a customer which may include payment of commissions to certain internal and/or external sales agents upon collection of invoiced sales from the customer. The Company does not typically prepay sales commissions in advance of being paid for services delivered.
Income Taxes
The Company accounts for income taxes in accordance with authoritative guidance which requires that deferred tax assets and liabilities be computed based on the difference between the financial statement and income tax bases of assets and liabilities using the enacted marginal tax rate. The guidance requires that the net deferred tax asset be reduced by a valuation allowance if, based on the weight of available evidence, it is more likely than not that some portion or all of the net deferred tax asset will not be realized.
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.
The Company recognizes the impact of an uncertain tax position taken or expected to be taken on an income tax return in the financial statements at the amount that is more likely than not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized in the financial statements unless it is more likely than not of being sustained upon audit by the relevant taxing authority.
Basic and Diluted Earnings Per Share (EPS)
Basic EPS includes no dilution and is computed by dividing net income by the weighted-average number of common shares outstanding for the period. Diluted EPS includes the potential dilution that could occur if securities or other contracts to issue common and restricted stock were exercised or converted into common and restricted stock. The number of incremental shares from assumed conversions of stock options and unvested restricted stock awards included in the calculation of diluted EPS was calculated using the treasury stock method. See Note 16 to the consolidated financial statements for computation of EPS.
| F-16 |
| Table of Contents |
Employee Stock-Based Compensation
The Company accounts for stock-based employee compensation arrangements under provisions of ASC 718-10. The Company recognizes the cost of employee stock awards granted in exchange for employee services based on the grant-date fair value of the award using a Black-Scholes option-pricing model, net of expected forfeitures. Those costs are recognized ratably over the vesting period. Each stock option has an exercise price equal to the market price of the Company’s common stock on the date of grant and a contractual term ranging from 3 to 10 years. See Note 15 to the consolidated financial statements for additional information about stock-based compensation programs.
3. Fair Value Measurements
The consolidated financial statements include financial instruments for which the fair value may differ from amounts reflected on a historical basis.
Financial Assets and Financial Liabilities Carried at Other Than Fair Value
The Company’s financial instruments include cash equivalents, accounts receivable, short and long-term debt (except for contingent promissory notes) and other financial instruments associated with the issuance of the common stock. The carrying values of cash equivalents and accounts receivable approximate their fair value because of the short maturity of these instruments and past evidence indicates that these instruments settle for their carrying value. The carrying amounts of the Company’s bank borrowings under its credit facility approximate fair value because the interest rates reflect current market rates.
The following table present information about the Company's liabilities measured at fair value on a recurring basis in the consolidated balance sheets:
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| Quoted Prices in |
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| Significant Other |
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| ||||
|
|
| DECEMBER 31, |
|
| Active Markets |
|
| Observable Inputs |
|
| Unobservable Inputs |
| ||||
| Description |
| 2023 |
|
| (Level 1) |
|
| (Level 2) |
|
| (Level 3) |
| ||||
| Liabilities: |
|
|
|
|
|
| ||||||||||
| Contingent consideration - cash settled |
| $ | 6,500 |
|
|
| - |
|
|
| - |
|
| $ | 6,500 |
|
| Contingent consideration - warrants |
|
| 400 |
|
|
| - |
|
|
| - |
|
|
| 400 |
|
| Total liabilities measured and recorded at fair value |
| $ | 6,900 |
|
| $ | - |
|
| $ | - |
|
| $ | 6,900 |
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| Quoted Prices in |
|
| Significant Other |
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| ||
|
|
| DECEMBER 31, |
|
| Active Markets |
|
| Observable Inputs |
|
| Unobservable Inputs |
| ||||
| Description |
| 2022 |
|
| (Level 1) |
|
| (Level 2) |
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| (Level 3) |
| ||||
| Liabilities: |
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|
|
|
|
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|
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|
|
|
|
|
| Contingent consideration - cash settled |
| $ | 6,500 |
|
|
| - |
|
|
| - |
|
| $ | 6,500 |
|
| Contingent consideration - warrants |
|
| 400 |
|
|
| - |
|
|
| - |
|
|
| 400 |
|
| Total liabilities measured and recorded at fair value |
| $ | 6,900 |
|
| $ | - |
|
| $ | - |
|
| $ | 6,900 |
|
| F-17 |
| Table of Contents |
The Company’s contingent consideration is categorized as Level 3 within the fair value hierarchy. The contingent consideration has been recorded at their fair value using a Monte Carlo simulation model. This model incorporates probability of achievement of certain milestones, risk-free rates and volatility. The development and determination of the unobservable inputs for Level 3 fair value measurements and fair value calculations are the responsibility of the Company’s management with the assistance of a third-party valuation specialist.
Management estimates the fair value of the contingent consideration liability based on financial projections of ITA’s business and forecasted results, including revenue growth rates, costs and expenses, volatility, and discount rates. The Company evaluates, on a routine, periodic basis, the estimated fair value of the contingent consideration and quarterly changes in estimated fair value are reflected in other income in the consolidated statements of operations. Changes in the fair value of contingent consideration obligations may result from changes in changes of any of the key assumptions that are used. Changes in the estimated fair value of contingent consideration liability may have a material impact on the Company’s operating results.
There was no change in fair value of contingent consideration for the year ended December 31, 2023. During the year ended December 31, 2022, the Company recorded a gain of $1.3 million related to a change in fair value of contingent consideration.
4. Accounts Receivable and Significant Concentrations
A significant portion of the Company’s revenue arrangements consist of firm fixed price contracts with agencies of the U.S. federal government and several large multinational publicly traded and private corporations. Accounts receivable consist of the following by customer type in the table below as of the periods presented:
|
|
| DECEMBER 31, |
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| DECEMBER 31, |
| ||
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| 2023 |
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| 2022 |
| ||
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| U.S. Federal, State, and Local Government (1) |
| $ | 6,402,922 |
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| $ | 7,272,993 |
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| Commercial (2) |
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| 1,898,230 |
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| 2,055,782 |
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| Gross accounts receivable |
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| 8,301,152 |
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| 9,328,775 |
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| Less: allowances for credit |
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| losses (3) |
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| 81,359 |
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| 51,666 |
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| Accounts receivable, net |
| $ | 8,219,793 |
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| $ | 9,277,109 |
|
As of December 31, 2021, the Company had accounts receivable, net of $12.5 million.
(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 customer.
(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 credit losses if deemed necessary.
(3) During the year ended December 31, 2023 and 2022, the Company did not recognize any material provisions of recoveries of existing provision for credit losses. The Company has not historically maintained an allowance for credit losses for its government customers as it has not experienced material or recurring bad debt charges and the nature and size of the contracts has not necessitated the Company’s establishment of such an allowance for credit losses.
| F-18 |
| Table of Contents |
Significant Concentrations
The following table presents revenue by customer for each of the periods presented:
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| YEARS ENDED |
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| DECEMBER 31, |
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| Customer Type |
| 2023 |
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| 2022 |
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| U.S. Federal Government (1) |
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| 79.7 | % |
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| 79.1 | % |
| U.S. State & Local and Foreign Governments |
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| 0.6 | % |
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| 0.6 | % |
(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.
5. Unbilled Accounts Receivable and Significant Concentrations
Unbilled accounts receivable represent revenues earned in connection with products and/or services delivered for which we are unable to issue a formal billing to the customer at the balance sheet 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 not invoiced at the end of the reporting period. An allowance for credit losses were insignificant for unbilled accounts receivable as of December 31, 2023 and 2022.
The following table presents customers that represent ten (10) percent or more of consolidated unbilled accounts receivable as of the periods presented below:
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| DECEMBER 31, |
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| DECEMBER 31, |
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| 2023 |
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| 2022 |
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| As a % of |
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| As a % of |
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| Customer Type |
| Receivables |
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| Receivables |
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| U.S. Federal Government |
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| 97 | % |
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| 97 | % |
As of December 31, 2021, the Company had unbilled accounts receivable of $10.9 million.
6. Other Current Assets and Other Long Term Assets
Other current assets consisted of the following as of the periods presented below:
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| DECEMBER 31, |
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| DECEMBER 31, |
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| 2023 |
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| 2022 |
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| Inventories |
| $ | 366,126 |
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| $ | 222,279 |
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| Prepaid insurance and other assets |
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| 717,545 |
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| 713,699 |
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| Total other current assets |
| $ | 1,083,671 |
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| $ | 935,978 |
|
Other long term assets consisted of the following as of the periods presented below:
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| DECEMBER 31, |
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| DECEMBER 31, |
| ||
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| 2023 |
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| 2022 |
| ||
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| Security deposits |
| $ | 40,587 |
|
| $ | 67,748 |
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| Capital work in progress |
|
| 442,701 |
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| 1,958,097 |
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| Other long term assets |
| $ | 483,288 |
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| $ | 2,025,845 |
|
Capitalized work in progress consists of internally developed software costs, primarily associated with upgrading our ITMS™ (Intelligent Technology Management System), secure identity management technology and secure network operations center of which $2.4 million was transferred from capital work in progress to internally developed software during the year ended December 31, 2023.
7. Property and Equipment
Major classes of property and equipment consisted of the following as of the periods presented below:
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| DECEMBER 31, |
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| DECEMBER 31, |
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| 2023 |
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| 2022 |
| ||
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| Computer hardware and software |
| $ | 3,355,488 |
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| $ | 3,158,428 |
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| Furniture and fixtures |
|
| 503,913 |
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|
| 502,391 |
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| Leasehold improvements |
|
| 330,040 |
|
|
| 284,321 |
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| Automobiles |
|
| 128,994 |
|
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| 122,524 |
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| Gross property and equipment |
|
| 4,318,435 |
|
|
| 4,067,664 |
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| Less: accumulated depreciation and |
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|
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| amortization |
|
| 3,537,635 |
|
|
| 3,089,446 |
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| Property and equipment, net |
| $ | 780,800 |
|
| $ | 978,218 |
|
| F-19 |
| Table of Contents |
During the years ended December 31, 2023 and 2022, the Company purchased for cash property and equipment totaling approximately $208,200 and $245,000, respectively.
During the years ended December 31, 2023 and 2022, property and equipment depreciation expense was approximately $402,000 and $397,700, respectively.
During the years ended December 31, 2023 and 2022, 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 years ended December 31, 2023 and 2022.
8. Leases
The Company has leases for corporate and operational facilities (“real estate leases”).
Real estate leases. Substantially all real estate leases have remaining terms of six (6) to nine (9) years, with additional five (5) year extensions available. All of these leases require a fixed lease payment that contains an annual lease payment escalation provision ranging from 3% to 4% per year. Certain leases contain early termination provisions that would require payment of unamortized tenant improvements, real estate broker commissions paid, and up to six (6) months of rent to compensate the landlord for early termination. The cost to exit a lease would be significant and potentially range $0.2 million to $0.8 million. The earliest any lease termination provisions could be exercised would be in 2023, which the Company did not exercise.
The components of lease expense were as follows:
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| YEARS ENDED |
| |||||
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| DECEMBER 31, |
| |||||
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| 2023 |
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| 2022 |
| ||
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| Operating lease expense |
| $ | 12,463 |
|
| $ | 16,351 |
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| Finance lease expense: |
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| Amortization of right of use assets |
| $ | 684,600 |
|
| $ | 682,102 |
|
| Interest on finance lease liabilities |
|
| 214,954 |
|
|
| 241,444 |
|
|
|
|
|
|
|
|
|
|
|
| Total finance lease expense |
| $ | 899,554 |
|
| $ | 923,546 |
|
Lease expense is included in general and administrative expenses in the consolidated statement of operations. Amortization of right of use assets is include in depreciation and amortization in the consolidated statement of operations.
| F-20 |
| Table of Contents |
Supplemental cash flow information related to leases was as follows:
|
|
| YEARS ENDED |
| |||||
|
|
| DECEMBER 31, |
| |||||
|
|
| 2023 |
|
| 2022 |
| ||
|
|
|
|
|
|
|
| ||
| Cash paid for amounts included in the measurement of lease liabilities: |
|
|
|
|
|
| ||
| Operating cash flows from leases |
| $ | 227,417 |
|
| $ | 257,795 |
|
| Financing cash flows from leases |
|
| 586,833 |
|
|
| 600,438 |
|
Supplemental balance sheet information related to leases was as follows:
|
|
| DECEMBER 31, |
| |||||
|
|
| 2023 |
|
| 2022 |
| ||
|
|
|
|
|
|
|
| ||
| Lease right of use assets, net |
| $ | 4,045,222 |
|
| $ | 4,723,899 |
|
| Current portion of lease liabilities |
|
| 638,258 |
|
|
| 596,529 |
|
| Lease liabilities, net of current portion |
|
| 4,114,516 |
|
|
| 4,745,909 |
|
|
|
|
|
|
|
|
|
|
|
| Weighted average remaining lease term |
|
|
|
|
|
|
|
|
| Finance leases |
|
| 10.2 |
|
|
| 11 |
|
| Weighted average discount rate |
|
|
|
|
|
|
|
|
| Finance leases |
|
| 3.5 | % |
|
| 3.5 | % |
Maturities of lease liabilities as of December 31, 2023, were as follows:
| 2024 |
| $ | 822,740 |
|
| 2025 |
|
| 730,500 |
|
| 2026 |
|
| 631,541 |
|
| 2027 |
|
| 633,663 |
|
| 2028 |
|
| 695,939 |
|
| Thereafter |
|
| 2,228,121 |
|
| Total undiscounted finance lease payments |
|
| 5,742,504 |
|
| Less: Imputed interest |
|
| 989,730 |
|
| Total lease liability |
| $ | 4,752,774 |
|
On January 1, 2022, the Company entered into an amendment to its lease agreement for its Tampa office to amend the term and the extension option to June 30, 2022. As a result of the amendment, the Company removed the lease right of use asset and lease liability from its consolidated balance sheet and accounted for the lease as month to month and recorded the monthly rent expense in its consolidated statement of operations until termination on June 30, 2022.
| F-21 |
| Table of Contents |
9. Intangible Assets
The Company’s intangible assets are comprised of purchased intangibles consisting of customer relationships, channel relationships, telecommunications software, trade names and trademarks and non-compete agreements. Intangible assets acquired in connection with a business combination are valued at fair value and amortized on a straight-line basis over the expected useful life which may range from three (3) to fifteen (15) years or more depending on the intangible asset characteristics.
The Company’s intangible assets also include internally developed software used in the sales and delivery of its information technology service offerings. The Company capitalizes certain internal costs related to software development to deliver its information technology services including but not limited to its Intelligent Telecommunications Management System (ITMS™), Public Key Infrastructure (PKI) and Optimiser Telecom Data Intelligence (TDI™) applications. Significant development costs are capitalized from the point of demonstrated technological feasibility until the point in time that the product is available for general release to customers. Once the product is available for general release, capitalized costs are amortized based on units sold, or on a straight-line basis generally over the expected functional life which may range from two (2) to five (5) years.
The following tables summarize purchased and internally developed intangible assets subject to amortization as of the periods presented below:
|
|
| DECEMBER 31, 2023 |
| |||||||||
|
|
| Gross Carrying |
|
| Accumulated |
|
| Net Book |
| |||
|
|
| Amount |
|
| Amortization |
|
| Value |
| |||
|
|
|
|
|
|
| |||||||
| Customer Relationships |
| $ | 2,392,000 |
|
| $ | (538,200 | ) |
| $ | 1,853,800 |
|
| Channel Relationships |
|
| 2,628,080 |
|
|
| (1,693,652 | ) |
|
| 934,428 |
|
| Internally Developed Software |
|
| 7,892,045 |
|
|
| (4,331,203 | ) |
|
| 3,560,842 |
|
| Trade Name and Trademarks |
|
| 1,330,472 |
|
|
| (343,194 | ) |
|
| 987,278 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ | 14,242,597 |
|
| $ | (6,906,249 | ) |
| $ | 7,336,348 |
|
|
|
| DECEMBER 31, 2022 |
| |||||||||
|
|
| Gross Carrying |
|
| Accumulated |
|
| Net Book |
| |||
|
|
| Amount |
|
| Amortization |
|
| Value |
| |||
|
|
|
|
|
|
| |||||||
| Customer Relationships |
| $ | 2,392,000 |
|
| $ | (299,000 | ) |
| $ | 2,093,000 |
|
| Channel Relationships |
|
| 2,628,080 |
|
|
| (1,518,446 | ) |
|
| 1,109,634 |
|
| Internally Developed Software |
|
| 5,665,957 |
|
|
| (2,546,407 | ) |
|
| 3,119,550 |
|
| Trade Name and Trademarks |
|
| 1,330,472 |
|
|
| (254,496 | ) |
|
| 1,075,976 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ | 12,016,509 |
|
| $ | (4,618,349 | ) |
| $ | 7,398,160 |
|
| F-22 |
| Table of Contents |
Purchased Intangibles
For the year ended December 31, 2023, there were no disposals or sales of purchased intangible assets.
Internally Developed
For the year ended December 31, 2023, the Company capitalized $0.9 million of internally developed software costs, primarily associated with upgrading our ITMS™ (Intelligent Technology Management System), next generation TDI™ application, secure identity management technology and secure network operations center of which $2.4 million was transferred from capital work in progress to internally developed software. Capital work in progress is included in other long-term assets in the consolidated balance sheet.
For the year ended December 31, 2022, the Company capitalized $3.2 million of internally developed software costs, primarily associated with upgrading our ITMS™ (Intelligent Technology Management System), next generation TDI™ application, secure identity management technology and secure network operations center of which $2.6 million was transferred from capital work in progress to internally developed software and $316,900 was transferred from capital work in progress to property and equipment during the year. Capital work in progress is included in other long-term assets in the consolidated balance sheet.
The aggregate amortization expense recorded was approximately $2,282,300 and $1,451,100 for the years ended December 31, 2023 and 2022, respectively.
The Company recorded an impairment charge of $0.2 million to for the year ended December 31, 2023 as part of its impairment assessment of long-lived assets and reduced the impaired internally developed software assets to the estimated fair value and adjusted the remaining useful lives as applicable on those assets as of December 31, 2023.
As of December 31, 2023, estimated annual amortization for our intangible assets for each of the next five years and beyond is approximately:
| 2024 |
| $ | 2,445,034 |
|
| 2025 |
|
| 1,718,736 |
|
| 2026 |
|
| 930,582 |
|
| 2027 |
|
| 511,170 |
|
| 2028 |
|
| 511,170 |
|
| Thereafter |
|
| 1,219,656 |
|
| Total |
| $ | 7,336,348 |
|
| F-23 |
| Table of Contents |
10. Goodwill
The following table summarizes the changes in the carry amount of goodwill for the years ended December 31, 2023 and 2022:
|
|
| DECEMBER 31, |
|
| DECEMBER 31, |
| ||
|
|
| 2023 |
|
| 2022 |
| ||
|
|
|
|
|
|
|
| ||
| Balances, January 1 |
| $ | 5,811,578 |
|
| $ | 22,088,578 |
|
| Impairment |
|
| - |
|
|
| (16,277,000 | ) |
|
|
|
|
|
|
|
|
|
|
| Balances, December 31 |
| $ | 5,811,578 |
|
| $ | 5,811,578 |
|
As a result of the significant decrease in the Company’s publicly quoted share price and market capitalization, during the second quarter of 2022, the Company conducted additional testing of its goodwill, definite-lived intangibles, and other long-lived assets during the quarter ended June 30, 2022 As a result of this review and additional testing, the Company did not identify an impairment to its definite-lived intangible assets or other long lived assets, but the Company did identify an impairment to goodwill resulting in recording a $16.3 million non-cash goodwill impairment charge for the three month period ended June 30, 2022, and accordingly that amount was also reflected in the full year 2022 results.
The Company performed its additional goodwill impairment test with support from an external consultant and estimated the fair value of its single reporting unit based on a combination of the income (estimates of future discounted cash flows) and the market approach (market multiples for similar companies). The income approach uses a discounted cash flow (DCF) method that utilizes the present value of cash flows to estimate fair value of our reporting unit. The future cash flows for the reporting unit were projected based upon our estimates of future revenue, operating income and other factors such as working capital and capital expenditures. As part of our DCF analysis, the Company projected revenue and operating profits, and assumed a long-term revenue growth rates in the terminal year. The market approach utilizes multiples of earnings before interest expense, taxes, depreciation and amortization (EBITDA) to estimate the fair value of our reporting unit. The market multiples used for our single reporting unit were based on a group of comparable companies’ market multiples applied to the Company’s revenue and EBITDA.
The Company performed its annual impairment assessment as of December 31, 2023 and 2022, using the same external consultant as used in the previous impairment analyses. In connection with its annual budgeting and forecast process, the Company projected future cashflows based on existing business and margins, projected new business as well considering modifications to the Company’s cost structure. The market approach utilizes multiples of earnings before interest expense, taxes, depreciation and amortization (EBITDA) to estimate the fair value of our reporting unit. The market multiples used for our single reporting unit were based on a group of comparable companies’ market multiples applied to the Company’s revenue and EBITDA. The assessment did not result in any impairment of goodwill as of December 31, 2023 and 2022.
| F-24 |
| Table of Contents |
11. Other Current Liabilities
Accrued expenses consisted of the following as of the periods presented below:
|
|
| DECEMBER 31, |
|
| DECEMBER 31, |
| ||
|
|
| 2023 |
|
| 2022 |
| ||
|
|
|
|
|
| ||||
| Carrier service costs |
| $ | 12,959,350 |
|
| $ | 8,402,770 |
|
| Salaries and payroll taxes |
|
| 1,681,160 |
|
|
| 1,637,628 |
|
| Inventory purchases, consultants and other costs |
|
| 1,463,102 |
|
|
| 1,205,209 |
|
| Other |
|
| 72,090 |
|
|
| 81,662 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ | 16,175,702 |
|
| $ | 11,327,269 |
|
12. Line of Credit and Factoring Agreement
From June 15, 2017 to June 2023, the Company had a Loan and Security Agreement with Atlantic Union Bank (the “Loan Agreement”) that matured in June 2023 and was not renewed.
On April 28, 2023, the Company entered into an Accounts Receivable Purchase Agreement (the “Purchase Agreement”) with Republic Capital Access, LLC (the “Buyer”) for the non-recourse sale of eligible accounts receivable relating to U.S. Government prime contracts or subcontracts of the Company (collectively, the “Purchased Receivables”) to replace the Company’s matured Loan and Security Agreement with Atlantic Union Bank. Upon purchase, Buyer becomes the absolute owner of any such Purchased Receivables, which are payable directly to the Buyer. The total amount of Purchased Receivables is subject to a maximum limit of $4 million outstanding Purchased Receivables at any time, with an available increase to $14 million, subject to adequate receivables. The Purchase Agreement contained customary fees, covenants and representations.
Pursuant to the Purchase Agreement, the Company may from time to time offer and sell eligible accounts receivable to the Buyer. The Buyer pays the sales proceed of the purchase of the receivable invoices in two installments; first installment is Initial Purchase Price, which is 90% if the debtor is an agency of the U.S. Government, and 85% if the debtor is not an agency of the U.S. Government, of the invoice amount. The second and final installment is the residual purchase price that is the invoice amount less the initial purchase price less applicable discount factor and fees.
During the year ended December 31, 2023, the Company sold a total of $5.2 million of receivables for $5.1 million in proceeds net of fees. As of December 31, 2023, there is no outstanding residual payment balance and availability under the Purchase Agreement of $4 million.
Subsequent to year end the Company entered into a new revolving line of credit agreement (see Note 20)
| F-25 |
| Table of Contents |
13. Income Taxes
Income tax provision is as follows for the years ended:
|
|
| DECEMBER 31, |
| |||||
|
|
| 2023 |
|
| 2022 |
| ||
|
|
|
|
|
|
|
| ||
| Current provision |
|
|
|
|
|
| ||
| State |
| $ | 30,000 |
|
| $ | 20,000 |
|
| Foreign |
|
| (3,914 | ) |
|
| 26,982 |
|
| Total |
|
| 26,086 |
|
|
| 46,982 |
|
|
|
|
|
|
|
|
|
|
|
| Deferred provision (benefit) |
|
|
|
|
|
|
|
|
| Federal |
|
| 57,849 |
|
|
| 4,717,527 |
|
| State |
|
| 77,519 |
|
|
| 298,832 |
|
| Foreign |
|
| (28,211 | ) |
|
| 14,534 |
|
| Total |
|
| 107,157 |
|
|
| 5,030,893 |
|
|
|
|
|
|
|
|
|
|
|
| Income tax provision |
| $ | 133,243 |
|
| $ | 5,077,875 |
|
Income tax provision effective rates, which differs from the federal and state statutory rate as follows for the years ended:
|
|
| DECEMBER 31, |
| |||||
|
|
| 2023 |
|
| 2022 |
| ||
|
|
|
|
|
|
|
| ||
| Statutory federal income tax rate |
|
| 21.0 | % |
|
| 21.0 | % |
| State, net of federal benefit |
|
| 4.4 | % |
|
| 4.0 | % |
| Non-deductible expenses |
|
| -1.3 | % |
|
| -5.7 | % |
| Valuation allowance |
|
| -23.4 | % |
|
| -45.9 | % |
| Foreign rate differential |
|
| -0.6 | % |
|
| 0.0 | % |
| Return to accrual difference true-ups |
|
| -1.7 | % |
|
| 0.3 | % |
| Other |
|
| -0.8 | % |
|
| -0.2 | % |
| Deferred tax adjustment and true-up |
|
| 0.2 | % |
|
| -1.0 | % |
| Combined effective tax rate |
|
| -2.2 | % |
|
| -27.4 | % |
| F-26 |
| Table of Contents |
The tax effects of temporary differences that give rise to significant portions of the Company’s deferred tax assets (liabilities) consisted of the following:
|
|
| DECEMBER 31, |
| |||||
|
|
| 2023 |
|
| 2022 |
| ||
| Deferred tax assets: |
|
|
|
|
|
| ||
| Net operating loss carryforwards |
| $ | 11,836,460 |
|
| $ | 10,584,372 |
|
| Alternative minimum tax credit |
|
| 45,650 |
|
|
| 45,650 |
|
| Share-based compensation |
|
| 531,179 |
|
|
| 475,297 |
|
| Intangible amortization |
|
| (334,043 | ) |
|
| (48,740 | ) |
| Lease liability |
|
| 1,581,946 |
|
|
| 1,555,503 |
|
| Other assets |
|
| 770,488 |
|
|
| 167,825 |
|
|
|
|
|
|
|
|
|
|
|
| Total deferred tax assets |
|
| 14,431,680 |
|
|
| 12,779,907 |
|
| Less: valuation allowance |
|
| (11,930,917 | ) |
|
| (10,503,243 | ) |
| Total deferred tax assets, net |
|
| 2,500,763 |
|
|
| 2,276,664 |
|
|
|
|
|
|
|
|
|
|
|
| Deferred tax liabilities: |
|
|
|
|
|
|
|
|
| Goodwill amortization |
|
| 366,764 |
|
|
| 116,530 |
|
| Depreciation |
|
| 456,913 |
|
|
| 324,959 |
|
| Foreign intangible amortization |
|
| 276,321 |
|
|
| 334,973 |
|
| Other liabilities |
|
| 15,052 |
|
|
| 11,354 |
|
| Lease asset |
|
| 1,402,636 |
|
|
| 1,401,939 |
|
|
|
|
|
|
|
|
|
|
|
| Total deferred tax liabilities |
|
| 2,517,686 |
|
|
| 2,189,755 |
|
|
|
|
|
|
|
|
|
|
|
| Net deferred tax (liability) asset |
| $ | (16,923 | ) |
| $ | 86,909 |
|
As of December 31, 2023, the Company had approximately $42.6 million in net operating loss (NOL) carry forwards available to offset future taxable income for federal income tax purposes that consist of $29.7 million that will expire between 2023 and 2036 and $12.9 million related to years after December 31, 2017 that does not have an expiration under current tax law. NOLs arising in tax years beginning in 2018 and after may only reduce 80 percent of taxable income every year but can be carried forward indefinitely. Included in the recorded deferred tax asset, the Company had a benefit of approximately $51.4 million available to offset future taxable income for state income tax purposes. These state NOL carry forwards expire between 2024 and 2043.
Under the provisions of the Internal Revenue Code, the net operating losses (“NOL”) and tax credit carryforwards are subject to review and possible adjustment by the Internal Revenue Service and state tax authorities. NOL and tax credit carryforwards may become subject to an annual limitation in the event of certain cumulative changes in the ownership interest of significant shareholders over a three-year period in excess of 50%, as defined under Sections 382 and 383 of the Internal Revenue Code of 1986, respectively, as well as similar state tax provisions. This could limit the amount of tax attributes that the Company can utilize annually to offset future taxable income or tax liabilities. The amount of the annual limitation, if any, will be determined based on the value of the Company immediately prior to the ownership change. Subsequent ownership changes may further affect the limitation in future years. Utilization of the net operating loss and tax credits carryforwards may be limited by “ownership change” rules, as defined in Section 382 of the Internal Revenue Code of 1986, as amended, and similar state provisions. This annual limitation may result in the expiration of the net operating losses and credits before utilization.
| F-27 |
| Table of Contents |
Changes in the valuation allowance for the years ended were as follows:
|
|
| DECEMBER 31, |
| |||||
|
|
| 2023 |
|
| 2022 |
| ||
|
|
|
|
|
|
|
| ||
| Beginning balance |
| $ | (10,503,243 | ) |
| $ | (1,999,630 | ) |
| Increases |
|
| (1,427,674 | ) |
|
| (8,503,613 | ) |
|
|
|
|
|
|
|
|
|
|
| Ending balance |
| $ | (11,930,917 | ) |
| $ | (10,503,243 | ) |
As of each reporting date, management considers new evidence, both positive and negative, that could affect its view of the future realization of deferred tax assets. On the basis of this evaluation, management recorded a valuation allowance against a portion of domestic deferred tax assets because management has determined that it is more likely than not that the Company will not earn income sufficient to realize the deferred tax assets during the carry forward period. During the year ended December 31, 2023, the Company increased the valuation allowance by $1.4 million. If management’s assumptions change and we determine we will be able to realize these deferred tax assets, the tax benefits relating to any reversal of the valuation allowance on deferred tax assets will be accounted for as a reduction of income tax expense.
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 for tax years 2003 and forward. The Company may be subject to examinations by various state taxing jurisdictions for tax years 2003 and forward. The Company may be subject to examination by various foreign countries for tax years 2019 forward. As of December 31, 2023, the Company is currently not under examination by the IRS, any state or foreign tax jurisdiction. The Company did not have any unrecognized tax benefits at either December 31, 2023 or 2022. In the future, any interest and penalties related to uncertain tax positions will be recognized in income tax expense.
14. Stockholders’ Equity
Preferred Stock
The Company’s Certificate of Incorporation authorizes the Company to issue up to 10,000,000 shares of preferred stock, $0.001 par value per share. Under the terms of the Company’s Certificate of Incorporation, the board of directors is authorized, subject to any limitations prescribed by law, without stockholder approval, to issue such shares of preferred stock in one or more series. Each such series of preferred stock shall have such rights, preferences, privileges and restrictions, including voting rights, dividend rights, conversion rights, redemption privileges and liquidation preferences, as shall be determined by the board of directors. As of December 31, 2023, there were 7,954,286 undesignated shares of preferred stock remaining available for issuance. There were no issuances of or outstanding preferred stock during the years ended December 31, 2023 and 2022.
Common Stock
The Company is authorized to issue 30,000,000 shares of common stock, $.001 par value per share. As of December 31, 2023, there were 8,893,220 shares issued and outstanding.
Common Stock Issuances - Employee Stock Option Exercises
There were no stock option exercises during the years ended December 31, 2023 and 2022.
| F-28 |
| Table of Contents |
Common Stock Issuances – Restricted Stock Awards
During the year ended December 31, 2023, there were 169,737 shares of common stock vested in accordance with the vesting terms of the RSAs. Two employees received less than the shares vested because they elected to have a total of 1,993 shares withheld in satisfaction of the employees corresponding tax liability of approximately $3,600. The Company’s payment of this tax liability was recorded as a cash flow from financing activity on the consolidated statement of cash flows.
During the year ended December 31, 2022, there were 91,316 shares of common stock vested in accordance with the vesting terms of the RSAs. Three employees received less than the shares vested because they elected to have a total of 11,280 shares withheld in satisfaction of the employees corresponding tax liability of approximately $49,300. The Company’s payment of this tax liability was recorded as a cash flow from financing activity on the consolidated statement of cash flows.
See Note 15 for additional information regarding stock option plans.
Warrants Issued
On March 31, 2022, the Company issued a warrant to purchase 75,000 shares of common stock as part of the contingent consideration earned by ITA for 2021 EBITDA achievement. The warrant contains a strike price of $5.33 and has a four-year contractual term. The warrant is classified within stockholders’ equity at its fair value. The fair value of the warrant was determined to be $108,000 utilizing the Black-Scholes-Merton option-pricing model at the time of issuance. Following such issuance, the Company has outstanding warrants to acquire 150,000 shares of common stock at a strike price of $5.33 that expire at terms through October 1, 2025.
Stock Repurchase Program
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 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. During the three month period ended March 31, 2022, we repurchased 196,586 shares of our common stock for a total of $818,200 and subsequently in March of 2022, the Board suspended the repurchase plan in order to use the company’s excess funds to invest into the business. The Company retired all common stock it repurchased.
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 $0.001 per share, from time to time as set forth in the Sales Agreement. The Sales Agreement provides for the sale of shares of the Company’s common stock (“Shares”) having an aggregate offering price of up to $24,000,000.
Effective March 27, 2023, the Company provided notice to the sales agents under its At the Market Sales Agreement that it was terminating the agreement. No shares were offered during the years ended December 31, 2023 and 2022. Accordingly, no additional sales of shares of common stock will be offered pursuant to such an agreement.
| F-29 |
| Table of Contents |
15. Stock Options and Award Programs
The Company’s stock incentive plan is administered by the Compensation Committee and authorizes the grant or award of incentive stock options, non-qualified 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. Any shares associated with options forfeited are added back to the number of shares that underlie stock options to be granted under the stock incentive plan. The Company has issued restricted stock awards and non-qualified stock option awards as described below.
Valuation of Stock Awards
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 granted and included in the total number of common shares issued and outstanding. During the years ended December 31, 2023 and 2022, the Company granted 628,572 RSAs and 163,903 RSAs, respectively.
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 288,570 stock option awards granted during the year ended December 31, 2023. There were no stock option awards granted during the year ended December 31, 2022.
Option pricing model assumptions for NQSO awards granted were valued using the following assumptions for the years then ended as set forth below:
|
|
| YEARS ENDED |
| |||||
|
|
| DECEMBER 31, |
| |||||
|
|
| 2023 |
|
| 2022 |
| ||
|
|
|
|
|
|
|
| ||
| Stock options granted |
|
| 288,570 |
|
|
| -- |
|
| Expected dividend yield |
|
| -- |
|
|
| -- |
|
| Expected volatility |
| 61.6% - 62.2% |
|
|
| -- |
| |
| Risk-free interest rate |
|
| 4.1% |
|
| -- |
| |
| Term |
| 4 years |
|
|
| -- |
| |
| F-30 |
| Table of Contents |
Non-Qualified Stock Option Awards
A summary of NQSO activity as of December 31, 2023 and 2022, and changes during the years then ended are set forth below:
|
|
| 2023 |
|
| 2022 |
| ||||||||||
|
|
|
|
| Weighted |
|
|
|
|
| Weighted |
| |||||
|
|
|
|
| Average |
|
|
|
| Average |
| ||||||
|
|
|
|
| Grant Date |
|
|
|
| Grant Date |
| ||||||
| NON-VESTED OPTIONS |
| Shares |
|
| Fair Value |
|
| Shares |
|
| Fair Value |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
| Non-vested balances, January 1, |
|
| - |
|
|
| - |
|
|
| 25,000 |
|
| $ | 3.98 |
|
| Granted (+) |
|
| 288,570 |
|
| $ | 0.91 |
|
|
| - |
|
|
| - |
|
| Expired (-) |
|
| - |
|
|
| - |
|
|
| 25,000 |
|
| $ | 3.98 |
|
| Vested/Excercised (-) |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
| Non-vested balances, December 31, |
|
| 288,570 |
|
| $ | 0.91 |
|
|
| - |
|
|
| - |
|
|
|
| 2023 |
|
| 2022 |
| ||||||||||
|
|
|
|
| Weighted |
|
|
|
|
| Weighted |
| |||||
|
|
|
|
| Average |
|
|
|
| Average |
| ||||||
| OUTSTANDING AND EXERCISABLE OPTIONS |
| Shares |
|
| Exercise Price |
|
| Shares |
|
| Exercise Price |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
| Awards outstanding, January 1, |
|
| 7,500 |
|
| $ | 4.90 |
|
|
| 140,000 |
|
| $ | 5.79 |
|
| Granted (+) |
|
| 288,570 |
|
| $ | 2.04 |
|
|
| - |
|
|
| - |
|
| Cancelled (-) |
|
| - |
|
|
| - |
|
|
| 5,000 |
|
| $ | 4.40 |
|
| Expired (-) |
|
| 7,500 |
|
| $ | 4.90 |
|
|
| 127,500 |
|
| $ | 5.89 |
|
| Awards outstanding, December 31, |
|
| 288,570 |
|
| $ | 2.04 |
|
|
| 7,500 |
|
| $ | 4.90 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Awards vested and expected to vest, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| December 31, |
|
| 285,923 |
|
| $ | 2.04 |
|
|
| 7,500 |
|
| $ | 4.90 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Awards outstanding and exercisable, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| December 31, |
|
| - |
|
|
| - |
|
|
| 7,500 |
|
| $ | 4.90 |
|
| F-31 |
| Table of Contents |
The weighted-average remaining contractual life and the aggregate intrinsic value (the amount by which the fair value of the Company’s stock exceeds the exercise price of the option) of the stock options outstanding, exercisable, and vested and expected to vest as of December 31, 2023 are as follows:
|
|
|
|
|
|
| Outstanding |
| |||||
|
|
|
|
| Expected to |
|
| and |
| ||||
|
|
| Outstanding |
|
| Vest |
|
| Exercisable |
| |||
|
|
|
|
|
|
|
|
|
|
| |||
| Weighted-average remaining contractual life (in years) |
|
| 4.73 |
|
|
| 4.73 |
|
|
| 0.00 |
|
| Aggregate intrinsic value |
| $ | 79,485 |
|
| $ | 78,756 |
|
| $ | - |
|
Restricted Stock Awards
A summary of RSA activity as of December 31, 2023 and 2022, and changes for the years then ended are set forth below:
|
|
| 2023 |
|
| 2022 |
| ||
| VESTED AND NON-VESTED AWARDS |
|
|
|
|
|
| ||
|
|
|
|
|
|
|
| ||
| Non-vested awards outstanding, January 1, |
|
| 188,903 |
|
|
| 121,316 |
|
| Granted (+) |
|
| 628,572 |
|
|
| 163,903 |
|
| Cancelled (-) |
|
| 31,746 |
|
|
| 5,000 |
|
| Vested (-) |
|
| 169,737 |
|
|
| 91,316 |
|
| Non-vested awards outstanding, December 31, |
|
| 615,992 |
|
|
| 188,903 |
|
|
|
|
|
|
|
|
|
|
|
| Weighted-average remaining contractual life (in years) |
|
| 0.3 |
|
|
| 0.7 |
|
|
|
|
|
|
|
|
|
|
|
| Unamortized RSA compensation expense |
| $ | 483,416 |
|
| $ | 28,440 |
|
|
|
|
|
|
|
|
|
|
|
| Aggregate intrinsic value of RSAs non-vested, December 31 |
| $ | 1,429,101 |
|
| $ | 343,822 |
|
|
|
|
|
|
|
|
|
|
|
| Aggregate intrinsic value of RSAs vested, December 31 |
| $ | 326,628 |
|
| $ | 346,694 |
|
Long-Term Incentive Plan
The Company maintains a long-term incentive plan (LTIP) that covers the period of January 1, 2023 through January 1, 2026. The plan was approved by the Board of Directors in August 2023. The LTIP has two components of equity-based compensation. The first is 250,000 Restricted Stock Awards (RSAs) that will be awarded to management and which will be issued to management in upcoming months, based on Board and management agreement. Of the 250,000 RSAs awarded, 83,333 are expected to vest on April 1, 2024. With the remaining awards vesting 83,333 on both January 1, 2025 and January 1, 2026. The second is 250,000 Performance- based Restricted Stock Units (PSRUs) that would vest upon meeting, by January 1, 2026, certain revenue, and adjusted EBITDA performance targets. As of December 31, 2023, the Company has not awarded the RSAs or PRSUs under this plan.
| F-32 |
| Table of Contents |
Stock Compensation Expense
Share-based compensation recognized under ASC 718-10 (including restricted stock awards) represents both stock options-based expense and stock grant expense. The Company recognized share-based compensation expense for the years then ended December 31 as set forth below:
|
|
| YEAR ENDED DECEMBER 31, 2023 |
|
| YEAR ENDED DECEMBER 31, 2022 |
| ||||||||||||||||||
|
|
| Shared-Based Compensation Expense |
|
| Shared-Based Compensation Expense |
| ||||||||||||||||||
|
|
| Employees |
|
| Directors |
|
| Total |
|
| Employees |
|
| Directors |
|
| Total |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
| Restricted share-based compensation expense |
| $ | 641,730 |
|
| $ | 272,464 |
|
| $ | 914,194 |
|
| $ | 265,704 |
|
| $ | 262,878 |
|
| $ | 528,582 |
|
| Non-qualified option share-based compensation expense |
|
| 46,797 |
|
|
| - |
|
|
| 46,797 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total share-based compensation before taxes |
| $ | 688,527 |
|
| $ | 272,464 |
|
| $ | 960,991 |
|
| $ | 265,704 |
|
| $ | 262,878 |
|
| $ | 528,582 |
|
At December 31, 2023, the Company had approximately $0.7 million of total unrecognized share-based compensation expense, net of estimated forfeitures, related to share-based compensation that will be recognized over the weighted average remaining period of 1.0 years.
16. Earnings Per Common Share (EPS)
The computations of basic and diluted EPS for the years ended were as follows:
|
|
| YEARS ENDED |
| |||||
|
|
| DECEMBER 31, |
| |||||
|
|
| 2023 |
|
| 2022 |
| ||
|
|
|
|
|
|
|
| ||
| Basic and Diluted Earnings Per Share Computation: |
|
|
|
|
|
| ||
| Net loss |
| $ | (4,046,473 | ) |
| $ | (23,585,291 | ) |
| Weighted average number of common shares |
|
| 8,830,709 |
|
|
| 8,732,203 |
|
| Basic and Diluted Loss Per Share |
| $ | (0.46 | ) |
| $ | (2.70 | ) |
For the year ended December 31, 2023 the Company had unexercised stock options of 288,570, RSAs of 615,992 and warrants to purchase 150,000 shares of common stock, outstanding, that were anti-dilutive. For the year ended December 31, 2022 the Company had unexercised stock options of 106,685, RSAs of 49,777 and warrants to purchase 150,000 shares of common stock, outstanding, that were anti-dilutive.
| F-33 |
| Table of Contents |
17. Accumulated Other Comprehensive Loss
Changes in the Company’s cumulative foreign currency translation adjustments due to translation of its foreign subsidiaries’ Euro currency financial statements into the Company’s reporting currency were as and for the periods presented below:
|
|
| YEAR ENDED |
| |||||
|
|
| DECEMBER 31, |
| |||||
|
|
| 2023 |
|
| 2022 |
| ||
|
|
|
|
|
|
|
| ||
| Balances, January 1 |
| $ | (350,234 | ) |
| $ | (241,586 | ) |
|
|
|
|
|
|
|
|
|
|
| Net foreign currency translation gain (loss) |
|
| 15,335 |
|
|
| (108,648 | ) |
|
|
|
|
|
|
|
|
|
|
| Balances, December 31 |
| $ | (334,899 | ) |
| $ | (350,234 | ) |
18. 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.
Legal Matters
The Company is not involved in any material legal proceedings.
19. Revenue by Service Type, Customer Type and by Geographic Region
The Company recognized revenues by the following broad service types:
|
|
| YEARS ENDED |
| |||||
|
|
| DECEMBER 31, |
| |||||
|
|
| 2023 |
|
| 2022 |
| ||
|
|
|
|
|
|
|
| ||
| Carrier Services |
| $ | 58,229,511 |
|
| $ | 53,339,950 |
|
| Managed Services |
|
| 47,796,849 |
|
|
| 40,763,415 |
|
|
|
| $ | 106,026,360 |
|
| $ | 94,103,365 |
|
| F-34 |
| Table of Contents |
The Company recognized revenues for the following customer types as set forth below:
|
|
| YEARS ENDED |
| |||||
|
|
| DECEMBER 31, |
| |||||
|
|
| 2023 |
|
| 2022 |
| ||
|
|
|
|
|
|
|
| ||
| U.S. Federal Government |
| $ | 84,475,325 |
|
| $ | 74,416,288 |
|
| U.S. State and Local Governments |
|
| 561,378 |
|
|
| 411,511 |
|
| Foreign Governments |
|
| 79,556 |
|
|
| 146,538 |
|
| Commercial Enterprises |
|
| 20,910,101 |
|
|
| 19,129,028 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ | 106,026,360 |
|
| $ | 94,103,365 |
|
The Company recognized revenues from customers in the following geographic regions:
|
|
| YEARS ENDED |
| |||||
|
|
| DECEMBER 31, |
| |||||
|
|
| 2023 |
|
| 2022 |
| ||
|
|
|
|
|
|
|
| ||
| United States |
| $ | 102,017,851 |
|
| $ | 90,786,554 |
|
| Europe |
|
| 4,008,509 |
|
|
| 3,316,811 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ | 106,026,360 |
|
| $ | 94,103,365 |
|
20. Subsequent Events
On February 29, 2024, the Company entered into a Loan and Security Agreement (the “Loan”) and Promissory Note (the “Note,” and, together with the Loan, the “Agreements”) with Old Dominion National Bank. The Agreements provide for a new $4,000,000 revolving line of credit facility (the “Credit Facility”).
Advances under the Credit Facility are subject to a borrowing base equal to the lesser of (i) $4,000,000 or (ii) 80% of billed accounts receivable less than 90 days outstanding. Interest accrues on the outstanding principal balance of the Credit Facility at an annual rate equal to the Prime Rate published in The Wall Street Journal, subject to a floor rate of 7.25%. Outstanding interest on the amount borrowed is payable monthly and all outstanding interest and principal is due on the maturity date of February 28, 2025. The Credit Facility includes customary covenants and events of default, including the following items that are measured annually commencing December 31, 2024: (i) a minimum tangible net worth of $2.0 million; (ii) a minimum annual EBITDA of $1.0 million and (iii) a ratio of current assets to current liabilities of not less than 1.0 to 1.0. The terms of new Credit Facility prohibit the use of our Factoring Arrangement. The Company has not had material borrowings on its Credit Facility through March 26, 2024.
| F-35 |
|
|
|
|
EXHIBIT 10.9
|
|
|
|
EXHIBIT 10.13.1
|
|
MODIFICATION #1
TO
Employment Agreement Dated April 30, 2020
BETWEEN
WidePoint Corporation
AND
Ian Sparling (“Executive”)
MODIFICATION DESCRIPTION:
|
| 1. | Change the Executive’s Title |
|
| From: | Executive Vice President and CEO Soft-ex |
|
| To: | Chief Operating Officer, International (COO – I) and CEO Soft-ex |
|
| 2. | Change the Executive’s Salary |
|
| From: | €200,000 |
|
| To: | €250,000 |
The effective date of the modifications is August 1, 2022. All other terms and conditions remain unchanged.
Acceptance:
| WIDEPOINT CORPORATION |
| EXECUTIVE |
| ||
|
|
|
|
|
|
|
| BY: |
|
| BY: |
|
|
| NAME: | Jin Kang |
| NAME: | Ian Sparling |
|
| TITLE: | President and CEO |
| TITLE: | Chief Operating Officer, International |
|
|
|
|
|
| and CEO Soft-ex |
|
|
|
|
|
|
|
|
| DATE |
|
| DATE: |
|
|
EXHIBIT 19.1
WIDEPOINT CORPORATION STATEMENT OF
CORPORATION POLICY ON INSIDER TRADING
The Need for a Policy Statement
As a publicly owned company, WidePoint Corporation (the “Company”) is in competition with other public companies for investment dollars. A critical aspect of that competition is the Company’s ability to maintain its reputation for integrity in its dealings with the investment public. Accordingly, the Company has adopted this Policy on Insider Trading (the “Policy”) to avoid even the appearance of impropriety on the part of any the Company’s directors, officers, employees, temporary employees, consultants, independent contractors or other agents (not just so-called "insiders"). Not only will our relationship with the public be damaged by a perception that "insiders" are taking improper advantage of inside information, but individuals and the Company may be civilly and criminally liable for unlawful trading under federal and state laws.
As an essential part of your work, you may have access to material nonpublic ("insider") information about the Company or about the Company’s business (including information about other companies with which the Company does or may do business). This Policy is meant to prevent the purchase or sale of the Company’s securities by those who possess such material nonpublic information. In addition, this Policy seeks to prevent the selective disclosure of such material nonpublic information to others who may trade. Specifically, this Policy addresses Rule 10b-5 of the Rules and Regulations under the Securities Exchange Act of 1934, as amended, (the "Exchange Act").
You should also understand that the directors and certain shareholders and officers are subject to Section 16 of the Exchange Act. The Company requires that all involved persons comply with the provisions of Section 16.
Policy Applicable to All Persons
No director, officer, employee, temporary employee, consultant, independent contractor, agent, or representative of the Company who has material nonpublic information relating to the Company, may buy or sell the Company’s securities, directly or indirectly, or engage in any other action to take improper personal advantage of that information, or improperly pass that information on to others. This Policy also applies to information relating to any other company, including customers or suppliers, obtained in the course of your relationship with the Company when that information may have material consequences with respect to the Company or the other company. Under Section 16, any profit realized by a director, officer or 10% stockholder of the Company from selling and then buying or from buying and then selling the Company securities within any six-month period is subject to recapture by the Company. This "short- swing" profit rule applies regardless of whether the person trading possessed material nonpublic information. In addition, no director, officer, or 10% stockholder may sell the Company’s securities he or she does not own (often referred to as "short sales") nor may such a person sell the Company’s securities he or she owns without delivering them to the buyer within 20 days or mailing them to the buyer within 5 days. Transactions that may be necessary or justifiable for independent reasons (such as the need to raise money for an emergency expenditure) are no exception.
|
| Page 1 of 4 | Revised March 22, 2024 |
Definition of Material Nonpublic Information
"Material" information is any information that a reasonable investor would likely consider important in formulating a decision to buy, hold or sell securities of the Company. In short, any information, which could reasonably affect the price of the Company’s stock. A good rule of thumb is if the nonpublic information makes you want to buy or sell, it would probably affect others in the same way and is, therefore, likely to be material.
Common examples of material information include: projections of future earnings or losses; financial liquidity problems; major marketing changes; news of a pending or proposed joint venture, merger, acquisition or tender offer; news of a significant sale of assets or the disposition of a subsidiary; changes in dividend policies; the declaration of a stock split or the offering of additional securities; changes in senior management or major personnel changes; significant new products or discoveries; significant litigation or government investigations; and the gain or loss of a substantial customer or supplier.
"Nonpublic" information is any information, which has not been disclosed generally to the marketplace. Information about the Company that is not yet in general circulation should be considered nonpublic. Similarly, information received about another company in circumstances indicating that it is not yet in general circulation should be considered nonpublic. All information that you learn about the Company, its business plans or any other company with whom the Company may be doing business in connection with your employment is potentially "insider" information until publicly disclosed or made available by the Company. Even after the Company has released previously nonpublic information, it is important to be sure that, before you trade, sufficient time has elapsed to enable the information to be disseminated to, and considered by, public investors. Again, a good rule of thumb is to wait at least 48 hours following a public announcement before trading, assuming that you are not otherwise in the possession of material nonpublic information about the Company.
You should treat all nonpublic information as confidential and proprietary to the Company. You may not disclose nonpublic information to others, such as relatives, friends or business acquaintances, who do not need to know it for legitimate business reasons. If this nonpublic information is also "material," you are required by law and the Company’s policy to refrain from trading and refrain from passing the information on to others who may trade, as you may be held personally liable if you "tip" material nonpublic inside information. Further, you are prohibited from urging others to trade or not trade if your advice is prompted by nonpublic information.
Passing on Information ("Tipping") to Others
"Tipping" occurs when a company insider communicates any material nonpublic information concerning the Company to any other person or when a company insider expresses an opinion to another based on material nonpublic information regarding whether or not to trade in the Company’s securities. If the information is proprietary information about the Company or is information that could have an impact on the price of the Company’s securities, you are prohibited from passing on such information to others, including relatives, friends and business acquaintances. The Company’s officers, directors and employees are responsible for the compliance of their immediate family and others living in their households. Penalties apply whether or not you derive any benefit from another's actions when those actions are based on information you provided.
|
| Page 2 of 4 | Revised March 22, 2024 |
Liability
Insider trading is illegal. Insider traders and tippers may be subject to criminal penalties including jail sentences and fines, as well as held liable for any losses to the Company and any other person who contemporaneously bought or sold securities. The Securities and Exchange Commission and the securities exchanges have developed very effective methods of detecting insider trading through, among other things, constantly reviewing trading activity amounting to only a few hundred dollars. It is the infraction, not the amount of money, that drives the government enforcement effort, and the SEC in recent years has adopted a deliberate policy of pursuing small violations. Do not assume that a particular violation is too small or insignificant to be detected or prosecuted.
In addition, the Company and the Company’s directors, officers and other managers may be subject to liability under the federal securities laws if the Company or such persons knew or recklessly disregarded the fact that a person, directly or indirectly, under the Company’s or such person's control was likely to engage in insider trading and failed to take appropriate steps to prevent such an act before it occurred. The penalties for such inaction can be significant. The adoption of this Policy by the Board of Directors states the intent and practice of the Company to establish an environment where insider trading is simply not allowed.
Trading or tipping while in possession of information that is both material and nonpublic could lead to liability for the Company as well as the individual traders. Remember, if your securities transactions become the subject of scrutiny, they will be viewed after-the-fact with the benefit of hindsight. As a result, before engaging in any transaction, you should carefully consider how regulators and others might view your transaction in hindsight.
If material nonpublic information is inadvertently disclosed, no matter what the circumstances, by any Company director, officer or employee, the person making or discovering that disclosure should immediately report the facts to the Chief Executive Officer or his or her designee.
Trading During Window Periods - When Trading is Appropriate - Preclearance
The Company encourages investment in its securities by our directors, officers and employees. The most appropriate periods to buy or sell the Company’s securities are the periods beginning on the third trading day following the issuance of an earnings release for a completed fiscal quarter and ending at the close of trading on the tenth calendar day following the last day of the Company’s fiscal quarter (i.e. the window periods would close at the close of trading on April 10, July 10, August 10 and January 10) (so-called "window periods"). The Securities and Exchange Commission has identified these periods as the times when there should be the least amount of inside information about companies that is unavailable to the investing public. Please note, however, that you may not buy or sell the Company’s securities even during window periods if you are in possession of material nonpublic information. This restriction applies even if you planned to make the transaction before learning material nonpublic information, and even if you believe you will suffer an economic loss or miss an anticipated gain by waiting.
Directors and officers that desire to transact in Company securities during a window period need to seek and obtain preclearance from the Company’s Chief Executive Officer or his or her designee for each particular transaction. No trades should occur without preclearance unless they are under an authorized 10b5-1 trading plan.
Example of Trading Window: if the Company’s quarterly financial results are made public on Friday morning prior to the opening of the stock markets, then the appropriate trading window commences on the succeeding Tuesday and ends on April 10, July 10, August 10 or January 10, as applicable.
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| Page 3 of 4 | Revised March 22, 2024 |
Trading Outside the Window Periods - Preclearance
Directors and officers of the Company may buy or sell the Company’s securities outside the window period IF AND ONLY IF they seek and obtain preclearance from the Company’s Chief Executive Officer or his or her designee for each particular transaction. No trades outside the window periods should occur without preclearance.
Transactions Under Company Plans
This Policy does not apply in the case of the following transactions, except as specifically noted:
Stock Option Exercises. This Policy does not apply to the exercise of a stock option acquired pursuant to the Company’s equity incentive plans or to the exercise of a share withholding right pursuant to which you elect to have the Company withhold shares of stock to satisfy tax withholding requirements or the exercise price for the option. This Policy does apply, however, to any sale of stock as part of a broker-assisted cashless exercise of an option or any other market sale for the purpose of generating the cash needed to pay tax withholding amounts or the exercise price of an option or otherwise.
Restricted Stock and Restricted Stock Unit Awards. This Policy does not apply to the vesting of restricted stock or restricted stock units, or the exercise of a tax withholding right pursuant to which you elect to have the Company withhold shares of stock to satisfy tax withholding requirements upon the vesting of any restricted stock or restricted stock units. This Policy does apply, however, to any market sale of restricted stock that has vested or shares received in settlement of restricted stock units.
10b5-1 Trading Plans. This Policy does not apply to trades made pursuant to a pre-authorized 10b5-1 trading plan that is entered into a window period at such time as the individual is not in possession of material non public information. Such plans shall be pre-approved by the Chief Executive Officer.
Corporation Assistance
Any person who has any questions about specific transactions may obtain additional guidance from the Company’s Chief Executive Officer or his or her designee. Remember, however, the ultimate responsibility for adhering to this Policy and avoiding improper transactions rests with you. It is imperative that you use your best judgment.
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| Page 4 of 4 | Revised March 22, 2024 |
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EXHIBIT 21
SUBSIDIARIES OF WIDEPOINT CORPORATION
| Full Legal Name | State or Country of Incorporation |
| WidePoint Integrated Solutions Corp. (1) | Virginia |
| WidePoint Cybersecurity Solutions Corporation (2) | Virginia |
| WidePoint IL, Inc. (3) | Illinois |
| WidePoint Global Solutions, Inc. | Delaware |
| Soft-ex Communications Ltd. (subsidiary of WidePoint Global Solutions, Inc.) | Ireland |
| Soft-ex BV (subsidiary of Soft-ex Communications Ltd.) | Netherlands |
| Soft-ex UK Limited (subsidiary of Soft-ex Communications Ltd.) | England |
| WYY Florida Sub, Inc. (changed to IT Authorities, Inc.) | Florida |
| (1) | In January 2019, WidePoint Solutions Corp. was merged into WidePoint Integrated Solutions Corp. |
| (2) | In April 2017, Advanced Response Concepts Corporation and Protexx Technology Corporation, both Delaware corporations, were merged into WidePoint Cybersecurity Solutions Corporation. |
| (3) | In January 2021, WidePoint IL, Inc. was merged into WidePoint Integrated Solutions Corp. |
EXHIBIT 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in the Registration Statements on Form S-8 (No. 333-124867, No. 333-158772, No. 333-223352, and No. 333-272976) of WidePoint Corporation (the “Company”), of our report dated March 26, 2024, relating to the consolidated financial statements of the Company, appearing in this Annual Report on Form 10-K of the Company for the year ended December 31, 2023, filed with the Securities and Exchange Commission.
| /s/ Moss Adams LLP |
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San Diego, California
March 26, 2024
EXHIBIT 31.1
Certification of Chief Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act and Rule 13a-14(a)
or 15d-14(a) under the Securities Exchange Act of 1934
I, Jin H. Kang, certify that:
| 1. | I have reviewed this Annual Report on Form 10-K of WidePoint Corporation; | |
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| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; | |
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| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; | |
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| 4. | The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: | |
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| a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
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| b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
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| c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation, and |
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| d) | Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
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| 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): | |
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| a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
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| b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| Date: March 26, 2024 | By: | /s/ JIN H. KANG | |
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| Jin H. Kang Chief Executive Officer | ||
EXHIBIT 31.2
Certification of Chief Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act and Rule 13a-14(a)
or 15d-14(a) under the Securities Exchange Act of 1934
I, Robert J. George certify that:
| 1. | I have reviewed this Annual Report on Form 10-K of WidePoint Corporation; | |
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| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; | |
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| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; | |
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| 4. | The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: | |
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| a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
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| b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
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| c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation, and |
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| d) | Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
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| 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): | |
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| a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
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| b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| Date: March 26, 2024 | By: | /s/ Robert J. George | |
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| Robert J. George | ||
| Chief Financial Officer | |||
EXHIBIT 32
Written Statement of the Chief Executive Officer and Chief Financial Officer
Pursuant to 18 U.S.C. § 1350
Solely for the purposes of complying with 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, we, the undersigned Chief Executive Officer and Chief Financial Officer of WidePoint Corporation (the “Company”), hereby certify, based on our knowledge, that the Annual Report on Form 10-K of the Company for the year ended December 31, 2023 (the “Report”), fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 and that information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
| /s/ JIN H. KANG |
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| Jin H. Kang |
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| Chief Executive Officer |
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| /s/ Robert J. George |
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| Robert J. George |
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| Chief Financial Officer |
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| Date: March 26, 2024 |
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EXHIBIT 97.1
WidePoint Corporation
Compensation Recovery Policy
Effective December 1, 2023
| 1. | Purpose. The purpose of this Compensation Recovery Policy (this “Policy”) is to describe the circumstances under which WidePoint Corporation (the “Company”) is required to recover certain compensation paid to certain employees. Any references in compensation plans, agreements, equity awards or other policies to the Company’s “recoupment,” “clawback” or similarly named policy shall mean this Policy. |
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| 2. | Requirement to Recover Compensation. In the event that the Company is required to prepare an Accounting Restatement, the Company shall recover reasonably promptly the amount of Erroneously Awarded Compensation. |
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| 3. | Definitions. For purposes of this Policy, the following terms, when capitalized, shall have the meanings set forth below: |
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| (a) | “Accounting Restatement” shall mean any accounting restatement required due to the Company’s material noncompliance with any financial reporting requirement under the securities law, including any required accounting restatement to correct an error in previously issued financial statements that is material to the previously issued financial statements, or that would result in a material misstatement if the error were corrected in the current period or left uncorrected in the current period. |
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| (b) | “Covered Officer” shall mean the Company’s president; principal financial officer; principal accounting officer (or if there is no such accounting officer, the controller); any vice-president of the Company in charge of a principal business unit, division, or function (such as sales, administration, or finance); any other officer who performs a significant policy-making function; or any other person who performs similar significant policy-making functions for the Company. Executive officers of the Company’s parent(s) or subsidiaries, if any, shall be deemed “Covered Officers” if they perform such policy-making functions for the Company. Identification of an executive officer for purposes of this Policy shall include at a minimum executive officers identified pursuant to Item 401(b) of Regulation S-K. |
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| (c) | “Effective Date” shall mean the date of adoption of Section 303A.14 of the NYSE Listed Company Manual. |
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| (d) | “Erroneously Awarded Compensation” shall mean the excess of (i) the amount of Incentive-Based Compensation Received by a person (A) after beginning service as a Covered Officer, (B) who served as a Covered Officer at any time during the performance period for that Incentive-Based Compensation, (C) while the Company has a class of securities listed on a national securities exchange or a national securities association and (D) during the Recovery Period; over (ii) the Recalculated Compensation. |
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| (e) | “Incentive-Based Compensation” shall mean any compensation that is granted, earned, or vested based wholly or in part upon the attainment of a financial reporting measure. A financial reporting measure is a measure that is determined and presented in accordance with the accounting principles used in preparing the Company’s financial statements, and any measures that are derived wholly or in part from such measures, regardless of whether such measure is presented within the financial statements or included in a filing with the Securities and Exchange Commission. Each of stock price and total shareholder return is always considered a financial reporting measure. For the avoidance of doubt, incentive-based compensation subject to this Policy does not include stock options, restricted stock, restricted stock units or similar equity-based awards for which the grant is not contingent upon achieving any financial reporting measure performance goal and vesting is contingent solely upon completion of a specified employment period or attaining one or more non-financial reporting measures. |
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| (f) | “Recalculated Compensation” shall mean the amount of Incentive-Based Compensation that otherwise would have been Received had it been determined based on the restated amounts in the Accounting Restatement, computed without regard to any taxes paid. For Incentive-Based Compensation based on stock price or total shareholder return, where the amount of the Erroneously Awarded Compensation is not subject to mathematical recalculation directly from the information in an Accounting Restatement, the amount of the Recalculated Compensation must be based on a reasonable estimate of the effect of the Accounting Restatement on the stock price or total shareholder return, as the case may be, upon which the compensation was Received. The Company must maintain documentation of the determination of that reasonable estimate and provide such documentation to the national securities exchange or association on which its securities are listed. |
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| (g) | Incentive-Based Compensation is deemed “Received” in the Company’s fiscal period during which the financial reporting measure specified in the award of such Incentive-Based Compensation is attained, even if the payment or grant of the Incentive-Based Compensation occurs after the end of that period. |
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| (h) | “Recovery Period” shall mean the three completed fiscal years of the Company immediately preceding the date the Company is required to prepare an Accounting Restatement; provided that the Recovery Period shall not begin before the Effective Date. For purposes of determining the Recovery Period, the Company is considered to be “required to prepare an Accounting Restatement” on the earlier to occur of: (i) the date the Company’s Board of Directors, a committee thereof, or the Company’s officer or officers authorized to take such action if Board action is not required, concludes, or reasonably should have concluded, that the Company is required to prepare an Accounting Restatement, or (ii) the date a court, regulator, or other legally authorized body directs the Company to prepare an Accounting Restatement. If the Company changes its fiscal year, then the transition period within or immediately following such three completed fiscal years also shall be included in the Recovery Period, provided that if the transition period between the last day of the Company’s prior fiscal year end and the first day of its new fiscal year comprises a period of nine to 12 months, then such transition period shall instead be deemed one of the three completed fiscal years and shall not extend the length of the Recovery Period. |
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| 4. | Exceptions. Notwithstanding anything to the contrary in this Policy, recovery of Erroneously Awarded Compensation will not be required to the extent the Company’s committee of independent directors responsible for executive compensation decisions (or a majority of the independent directors serving on the Company’s board of directors in the absence of such a committee) has made a determination that such recovery would be impracticable and one of the following conditions have been satisfied: |
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| (a) | The direct expense paid to a third party to assist in enforcing this Policy would exceed the amount to be recovered; provided that, before concluding that it would be impracticable to recover any amount of Erroneously Awarded Compensation that was Incentive-Based Compensation based on the expense of enforcement, the Company must make a reasonable attempt to recover such Erroneously Awarded Compensation, document such reasonable attempt(s) to recover, and provide that documentation to the national securities exchange or association on which its securities are listed. |
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| (b) | Recovery would violate home country law where, with respect to Incentive-Based Compensation, that law was adopted prior to November 28, 2022; provided that, before concluding that it would be impracticable to recover any amount of Erroneously Awarded Compensation that was Incentive-Based Compensation based on violation of home country law, the Company must obtain an opinion of home country counsel, acceptable to the national securities exchange or association on which its securities are listed, that recovery would result in such a violation, and must provide such opinion to the exchange or association. |
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| (c) | Recovery would likely cause an otherwise tax-qualified retirement plan, under which benefits are broadly available to employees of the Company, to fail to meet the requirements of 26 U.S.C. 401(a)(13) or 26 U.S.C. 411(a) and regulations thereunder. |
| 5. | Manner of Recovery. In addition to any other actions permitted by law or contract, the Company may take any or all of the following actions to recover any Erroneously Awarded Compensation: (a) require the Covered Officer to repay such amount; (b) offset such amount from any other compensation owed by the Company or any of its affiliates to the Covered Officer, regardless of whether the contract or other documentation governing such other compensation specifically permits or specifically prohibits such offsets; and (c) subject to Section 5(c), to the extent the Erroneously Awarded Compensation was deferred into a plan of deferred compensation, whether or not qualified, forfeit such amount (as well as the earnings on such amounts) from the Covered Officer’s balance in such plan, regardless of whether the plan specifically permits or specifically prohibits such forfeiture. If the Erroneously Awarded Compensation consists of shares of the Company’s common stock, and the Covered Officer still owns such shares, then the Company may satisfy its recovery obligations by requiring the Covered Officer to transfer such shares back to the Company. |
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| 6. | Other. |
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| (a) | This Policy shall be administered and interpreted, and may be amended from time to time, by the Company’s board of directors or any committee to which the board may delegate its authority in its sole discretion in compliance with the applicable listing standards of the national securities exchange or association on which the Company’s securities are listed, and the determinations of the board or such committee shall be binding on all Covered Officers. |
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| (b) | The Company shall not indemnify any Covered Officer against the loss of Erroneously Awarded Compensation. |
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| (c) | The Company shall file all disclosures with respect to this Policy in accordance with the requirements of the Federal securities laws, including the disclosure required by the applicable Securities and Exchange Commission filings. |
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| (d) | Any right to recovery under this Policy shall be in addition to, and not in lieu of, any other rights of recovery that may be available to the Company. |
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