I
TEM 2. MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
Cautionary Note Regarding Forward-Looking Statements
This
Quarterly Report on Form 10-Q contains forward-looking statements
concerning our business, operations and financial performance and
condition as well as our plans, objectives and expectations for our
business operations and financial performance and condition that
are subject to risks and uncertainties. All statements other than
statements of historical fact included in this Form 10-Q are
forward-looking statements. You can identify these statements by
words such as “aim,” “anticipate,”
“assume,” “believe,” “could,”
“due,” “estimate,” “expect,”
“goal,” “intend,” “may,”
“objective,” “plan,”
“potential,” “positioned,”
“predict,” “should,” “target,”
“will,” “would” and other similar
expressions that are predictions of or indicate future events and
future trends. These forward-looking statements are based on
current expectations, estimates, forecasts and projections about
our business and the industry in which we operate and our
management's beliefs and assumptions. These statements are not
guarantees of future performance or development and involve known
and unknown risks, uncertainties and other factors that are in some
cases beyond our control. All forward-looking statements are
subject to risks and uncertainties that may cause actual results to
differ materially from those that we expected,
including:
●
Our ability to
successfully recompete and renew our existing U.S. Department of
Homeland Security Blanket Purchase Agreement (DHS
BPA);
●
Our ability to
achieve sustainable profitability and positive cash
flows;
●
Our ability to gain
market acceptance for our products;
●
Our ability to
compete with companies that have greater resources than
us;
●
Our ability to
penetrate the commercial sector to expand our
business;
●
Our ability to
successfully implement our strategic plan;
●
Our ability to
continue to deliver contracted services and products to our
existing customers;
●
Our ability to sell
higher margin services;
●
Our ability to
borrow funds against our credit facility;
●
Our ability to
raise additional capital on favorable terms or at all;
●
Our ability to
retain key personnel; and
●
The risk factors
set forth in our Annual Report on Form 10-K for the year ended
December 31, 2018 filed with the SEC on March 22,
2019.
The
forward-looking statements included in this Form 10-Q are made only
as of the date hereof. We undertake no obligation to publicly
update or revise any forward-looking statement as a result of new
information, future events or otherwise, except as otherwise
required by law. Readers are cautioned not to put undue reliance on
forward-looking statements. In this Quarterly Report on
Form 10-Q, unless the context indicates otherwise, the terms
“Company” and “WidePoint,” as well as the
words “we,” “our,” “ours” and
“us,” refer collectively to WidePoint Corporation and
its consolidated subsidiaries.
Business Overview
We are
a leading provider of trusted mobility solutions (TM2) to the
government and commercial sectors.
Our
TM2 platform and service solutions enable its customers to
efficiently secure, manage and analyze the entire lifecycle of
their mobile communications assets through our federally compliant
platform platform Intelligent Telecommunications Management System
(ITMS™).
We offer our TM2 solutions through a flexible
managed services model which includes both a scalable and
comprehensive set of functional capabilities that can be used by
any customer to meet most of the common functional, technical and
security requirements for mobility management. Our TM2 solutions
were designed and implemented with flexibility in mind such that it
can accommodate a large variety of customer requirements through
simple configuration settings rather than through costly software
development. The flexibility of our TM2 solutions enables our
customers to be able to quickly expand their mobility capabilities
and contract for their mobility management requirements. Our TM2
solutions are hosted and accessible on-demand through a secure
proprietary portal that provides our customers with the ability to
manage, analyze and protect their valuable communications assets,
and deploy federal government compliant identity management
solutions that provide secured virtual and physical access to
restricted environments.
Revenue Mix
Our
revenue mix fluctuates due to customer driven factors including: i)
timing of technology and accessory refresh requirements from our
customers; ii) onboarding of new customers that require carrier
services; iii) subsequent decreases in carrier services as we
optimize their data and voice usage; iv) delays in delivering
products or services; and v) changes in control or leadership of
our customers that lengthens our sales cycle, changes in laws or
funding, among other circumstances that may unexpectedly change the
revenue earned and/or duration of our services. As a result, our
revenue will vary by quarter.
For
additional information related to our business operations, see the
description of our business set forth in the Company's Annual
Report on Form 10-K for the year ended December 31, 2018 filed with
the SEC on March 22, 2019.
Strategic Focus and Goals
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.
For
fiscal 2019, we will be focusing more of our attention on the
following key goals:
■
continued focus on
selling high margin managed services,
■
growing our sales
pipeline by investing in our business development and sales team
assets,
■
pursuing additional
opportunities with our key systems integrator
partners,
■
improving our
proprietary platform and products, which includes placing
ITMS™ onto GovCloud and receive a FedRAMP
certification,
■
working to
successfully renew our existing U.S. Department of Homeland
Security Blanket Purchase Agreement (DHS BPA), and
■
expanding our
solution offerings into the commercial space.
Our
next steps towards achieving our longer-term goals
include:
■
pursuing accretive
and strategic acquisitions to expand our solutions and our customer
base,
■
delivering new
incremental offerings to add to our existing TM2
offering,
■
developing and
testing innovative new offerings that enhance our TM2 offering,
and
■
transitioning our
data center and support infrastructure into a more cost-effective
and federally approved cloud environment to comply with perceived
future contract requirements.
We
believe these actions could drive a strategic repositioning our TM2
offering and may include the sale of non-aligned offerings coupled
with acquisitions of complementary and supplementary offerings that
could result in a more focused core set of TM2
offerings.
Results of Operations
Three Months Ended June 30, 2019 as Compared to Three Months Ended
June 30, 2018
Revenues.
Revenues for the three month
period ended June 30, 2019 were approximately $22.1 million, an
increase of approximately $4.5 million (or 26%), as compared to
approximately $17.5 million in 2018. Our mix of revenues for the
periods presented is set forth below:
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Revenue Mix
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Carrier
Services
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$
14,023,930
|
$
11,282,881
|
$
2,741,049
|
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Managed
Services
|
8,069,223
|
6,261,457
|
1,807,766
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$
22,093,153
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$
17,544,338
|
$
4,548,815
|
Our
carrier services increased due to the implementation of the U.S.
Coast Guard contract and to a lesser extent the expansion of our
Customs & Border Protection task order (CBP).
Our
managed service fees increased due to expansion of managed services
for existing government and commercial customers, as well as
increases in sales of accessories to our government customers as
compared to last year.
Billable service
fee revenue increased as compared to last year due to ramp up of
services delivered through our partnerships with large systems
integrators as we complete a government project. We are focusing
our subject matter experts on this higher margin billable service
arrangements.
Reselling and other
services increased as compared to last year due to the timing of
large product resales to agencies of the U.S. federal government.
Reselling and other services are transactional in nature and as a
result the amount and timing of revenue will vary significantly
from quarter to quarter.
Cost of Revenues.
Cost of revenues for
the three month period ended June 30, 2019 was approximately $18.0
million (or 82% of revenues), as compared to approximately $14.0
million (or 80% of revenues) in 2018. The increase was driven by
higher labor costs to support billable service fee contracts and
inventory costs related to accessory sales as compared to last
year. Our cost of revenues may fluctuate due to accessories sales
activities which depends heavily on customer mobility equipment
accessory requirements.
Gross Profit.
Gross profit for the three
month period ended June 30, 2019 was approximately $4.1 million (or
18% of revenues), as compared to approximately $3.5 million (or 20%
of revenues) in 2018. The decrease in gross profit percentage was
driven by the increase in lower margin reselling and other services
during the quarter. Our gross profit percentage will vary from
quarter to quarter and could be negatively impacted due to
recognition of low margin reselling transactions and expansion of
carrier services with our U.S. federal government
customers.
Sales and Marketing.
Sales and marketing
expense for the three month period ended June 30, 2019 was
approximately $0.4 million (or 2% of revenues), as compared to
approximately $0.4 million (or 3% of revenues) in 2018. We
continued to maintain our conservative deployment of sales and
marketing assets during the current quarter which enabled us to
keep our cost profile unchanged. We expect to invest in strategic
hires of sales and marketing resources in the second half of 2019
in an effort to build our commercial sales pipeline
opportunities
General and Administrative.
General and
administrative expenses for the three month period ended June 30,
2019 were approximately $3.6 million (or 16% of revenues), as
compared to approximately $3.4 million (or 20% of revenues) in
2018. The decrease (as a percentage of revenue) in general and
administrative expense reflects the impact of our adoption of new
lease accounting guidance which requires us to treat lease payments
similar to term debt with recognition of interest expense and
amortization expense. Excluding the impact of our adoption of this
new lease accounting standing our general and administrative
expense would have been $3.7 million (of 17% of revenues) for the
current quarter.
Product Development.
We incurred product
development activities related to its next generation TDI
Optimiser™ application during the three months ended June 30,
2019 and 2018. The Company capitalized product development costs of
approximately $68,000 and $80,800 during the three month periods
ended June 30, 2019 and 2018, respectively. The Company has a
mature set of products and services that do not include significant
ongoing development activities and as such there could be periods
of time where our level of internal and external spending on
product development may not be significant.
Depreciation and Amortization.
Depreciation and amortization expense for the three month period
ended June 30, 2019 was approximately $244,100 as compared to
approximately $110,500 in 2018. The increase in
depreciation and amortization expense reflects the impact of our
adoption of new lease accounting guidance which requires us to
treat lease payments similar to term debt with recognition of
interest expense and amortization expense. Excluding the impact of
our adoption of this new lease accounting standing our depreciation
and amortization expense would have been $143,500 for the current
quarter, which represents an increase as compared to last year due
to an increase in our depreciable asset base.
Other Income (Expense).
Net other
expense for the three month period ended June 30, 2019 was
approximately $75,100, as compared to approximately $21,900 in
2018. The increase in net expense substantially reflects
higher interest expense as a result of the adoption of the new
lease accounting standard during the current quarter and to a
lesser extent interest expense associated with advances against our
line of credit.
Income Taxes.
Income tax expense for the
three month period ended June 30, 2019 was approximately $66,500,
as compared to $14,800 in 2018. The increase in income tax
expense reflects higher taxable foreign earnings in the Republic of
Ireland and deferred tax expense related to the amortization of
goodwill.
Net Loss.
As a result of the cumulative
factors annotated above, net loss for the three month period ended
June 30, 2019 was approximately $307,761, as compared to a net loss
of approximately $472,171 in the same period last
year.
Six Months Ended June 30, 2019 as Compared to Six Months Ended June
30, 2018
Revenues.
Revenues
for the six month period ended
June 30, 2019
were approximately $44.0 million, an increase of
approximately $6.4 million, as compared to approximately $37.6
million in 2018. Our mix of revenues for the periods presented is
set forth below:
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Revenue Mix
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Carrier
Services
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$
28,366,941
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$
23,095,025
|
$
5,271,916
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Managed
Services
|
15,643,114
|
14,528,932
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1,114,182
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$
44,010,055
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$
37,623,957
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$
6,386,098
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Our
carrier services increased primarily due to the implementation of
the U.S. Coast Guard contract and to a lesser extent the expansion
of our Customs & Border Protection task order
(CBP).
Our
managed service fees increased due to expansion of managed services
for existing government and commercial customers, as well as
increases in sales of accessories to our government customers as
compared to last year.
Billable service
fee revenue increased as compared to last year due to ramp up of
services delivered through our partnerships with large systems
integrators as we complete a government project. We are focusing
our subject matter experts on this higher margin billable service
arrangements.
Reselling and other
services decreased as compared to last year due
to fewer large product resales to agencies of the
U.S. federal government. Reselling and other services are
transactional in nature and as a result the amount and timing of
revenue will vary significantly from quarter to
quarter.
Cost of
Revenues.
Cost of revenues
for the six month period ended
June 30, 2019
was approximately $35.7 million (or 81% of
revenues), as compared to approximately $30.5 million (or 81% of
revenues) in 2018.
The dollar increase was driven by higher
labor costs to support billable service fee contracts and inventory
costs related to accessory sales as compared to last year. Our cost
of revenues may fluctuate due to accessories sales activities which
depends heavily on customer mobility equipment accessory
requirements.
Gross
Profit.
Gross profit for
the six month period ended
June 30, 2019
was approximately $8.3 million (or 19% of
revenues), as compared to approximately $7.1 million (or 19% of
revenues) in 2018.
The dollar increase in gross profit
dollars reflects higher margins related to billable services and
accessories sales as compared to last year
.
Sales and
Marketing.
Sales and
marketing expense for the six month period ended
June 30,
2019
was approximately $0.8 million
(or 2% of revenues), as compared to approximately $1.0 million (or
3% of revenues) in 2018.
We maintained our conservative
deployment of sales and marketing assets during the current quarter
which enabled us to keep our cost profile unchanged. We expect to
make strategic hires of sales and marketing resources in the second
half of 2019 in an effort to build our commercial sales pipeline
opportunities.
General and
Administrative.
General
and administrative expenses for the six month period ended
June 30, 2019
were approximately $6.7
million (or 15% of revenues), as compared to approximately $6.8
million (or 18% of revenues) in 2018.
The decrease (as a
percentage of revenue) in general and administrative expense
reflects the impact of our adoption of new lease accounting
guidance which requires us to treat lease payments similar to term
debt with recognition of interest expense and amortization expense.
Excluding the impact of our adoption of this new lease accounting
standing our general and administrative expense would have been
$6.9 million (of 16% of revenues) for the current
quarter.
Product
Development.
Product
development costs for the six month periods ended
June 30,
2019 and 2018
were approximately
$125,725 and $151,600, respectively, which were
capitalized.
Depreciation and
Amortization.
Depreciation
and amortization expense for the six month period ended
June
30, 2019
was approximately $484,600 as
compared to approximately $207,800 in 2018.
The
increase in depreciation and amortization expense reflects the
impact of our adoption of new lease accounting guidance which
requires us to treat lease payments similar to term debt with
recognition of interest expense and amortization expense. Excluding
the impact of our adoption of this new lease accounting standing
our depreciation and amortization expense would have been $214,620
for the current period.
Other Income (Expense).
Net other
expense for the six month period ended June 30, 2019 was
approximately $148,200, as compared to approximately $44,500 in
2018. The increase in net expense substantially reflects
higher interest expense as a result of the adoption of the new
lease accounting standard during the current quarter and to a
lesser extent interest expense associated with advances against our
line of credit.
Income
Taxes.
Income tax expense
for the six month period ended
June 30, 2019
was approximately $94,500 as compared to
approximately $20,900 in 2018. The increase in income tax
expense reflects higher taxable foreign earnings in the Republic of
Ireland as compared to the same period last
year.
Net Income
(Loss).
As a result of the
cumulative factors annotated above, the net income for the six
month period ended
June 30, 2019
was approximately $76,300 as compared to a net
loss of approximately $934,344 in the same period last
year.
Liquidity
and Capital Resources
We
have, since inception, financed operations and capital expenditures
through our operations and the sale of securities. Our immediate
sources of liquidity include cash and cash equivalents, accounts
receivable, unbilled receivables and access to a working capital
credit facility with Atlantic Union Bank for up to $5.0
million.
At June
30, 2019, our net working capital was approximately $4.3 million as
compared to $3.7 million at December 31, 2018. The increase in net
working capital was primarily driven by increases in revenue
and temporary payable timing
differences
. We utilized our credit facility to manage short
term cash flow requirements during the quarter. We must
successfully execute our strategic goals and tactically execute our
cost savings and new revenue initiatives as described above in
order to generate positive cash flows, improve our liquidity
position and meet our minimum operating requirements. We will
continue to identify additional opportunities for cost savings that
can further reduce our fixed operating costs and/or provide us
better flexibility to match our cost structure with our revenue
streams. We may need to raise additional capital to fund major
growth initiatives and/or acquisitions and there can be no
assurance that additional capital will be available on acceptable
terms or at all.
Cash Flows from Operating Activities
Cash
provided by operating activities provides an indication of our
ability to generate sufficient cash flow from our recurring
business activities. We are actively renegotiating our contracts
with customers to improve our cash flow by billing more than once a
month, including tiered price increases and charging more for labor
intensive services that were previously billed under firm fixed
price contracts. Our single largest cash operating expenses is the
cost of labor and company sponsored healthcare benefit programs.
Our second largest cash operating expense is our facility costs and
related technology communication costs to support delivery of our
services to our customers. We lease most of our facilities under
non-cancellable long term contracts that may limit our ability to
reduce fixed infrastructure costs in the short term. Any changes to
our fixed labor and/or infrastructure costs may require a
significant amount of time to take effect depending on the nature
of the change made and cash payments to terminate any agreements
that have not yet expired. We experience temporary collection
timing differences from time to time due to customer invoice
processing delays that are often beyond our control.
For the
six months ended June 30, 2019, net cash provided by operations was
approximately $3.5 million driven by
improved collections of accounts receivable and
temporary payable timing differences
.
For the
six months ended June 30, 2018,
net
cash provided by operations was approximately $350,000 driven by
improved collections of accounts receivable. We may periodically
experience delays in collecting our government contract billings
due to complicated government invoice submission requirements
and/or contract funding modifications.
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
six months ended June 30, 2019, cash used in investing activities
was approximately $266,000 and consisted computer hardware and
software purchases and capitalized internally developed software
costs related to our TDI Optimiser™ solutions.
For the
six months ended June 30, 2018,
cash
used in investing activities was approximately $245,500 and
consisted computer hardware and software purchases and capitalized
internally developed software costs related to our TDI
Optimiser™ solutions.
Cash Flows from Financing Activities
Cash
used in financing activities provides an indication of our debt
financing and proceeds from capital raise transactions and stock
option exercises.
For the
six months ended June 30, 2019, cash used in financing activities
was approximately $233,700 and reflects line of credit advances and
payments of approximately $6.3 million, and finance lease principal
repayments of approximately $238,700.
For the
six months ended June 30, 2018,
cash
provided by financing activities was approximately $26,150 and
primarily reflects net line of credit advances and payment of
contingent consideration of $100,000 related to our intellectual
property acquisition of Probaris ID™.
Net Effect of Exchange Rate on Cash and Equivalents
For the
six months ended June 30, 2019 and 2018, the gradual depreciation
of the Euro relative to the US dollar decreased the translated
value of our foreign cash balances by approximately $10,600 as
compared to last year.
Off-Balance Sheet Arrangements
The
Company has no existing off-balance sheet arrangements as defined
under SEC regulations.