WIDEPOINT CORPORATION 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-
Organizational Overview
We were incorporated on
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.
We executed on our key initiative for 2021 by obtaining FedRAMP Ready status for
ITMS™ and completing an acquisition of substantially all of the assets of
· selling high margin managed services,
· integration of ITA business into the Company,
· executing cross-sell opportunities identified from ITA acquisition,
including Identity Management (IdM), Telecommunications Lifecycle Management
(TLM) and Digital Billing & Analytics (DB&A) solutions,
· growing our sales pipeline by continue 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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Our longer-term strategic goals are driven by our need to expand our critical mass so that we have more flexibility to fund investments in technology solutions and introduce new sales and marketing initiatives to expand our marketplace share and increase the breadth of our offerings in order to improve company sustainability and growth. Our 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 TMaaS offering,
· developing and testing innovative new offerings that enhance our TMaaS
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 TMaaS 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 TMaaS offerings.
Critical Accounting Policies and Estimates
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
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.
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.
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A substantial portion of our revenues are derived from firm fixed price
contracts with the
Our revenue recognition policies for our managed services is summarized and shown below:
· 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.
· 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 policies for our labor services is summarized and shown below:
· 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.
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Our revenue recognition policies for our reselling services is summarized and shown below:
· 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.
Our revenue recognition policies for our billable carrier services is summarized and shown below:
· 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 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.
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Finally, we compared our estimates of fair value to the Company's
We had approximately
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.
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Business Combinations
The application of the acquisition method of accounting for business combinations requires the use of significant estimates, assumptions and judgments in the determination of the estimated fair value of assets acquired and liabilities assumed in order to properly allocate the purchase price at the acquisition date. For the ITA acquisition, the Company used valuation methods including the "monte carlo simulation" method to estimate the fair value of the contingent consideration, the "multi-period excess earnings method" to estimate the fair value of customer relationships and the "relief from royalty" method to estimate the fair value of the acquired tradename. Although we believe the estimates, assumptions and judgments we have made are reasonable, they are based in part on historical experience, industry data, information obtained from the management of the acquired companies and assistance from independent third-party appraisal firms and are inherently uncertain.
Contingent Consideration
To value both the cash and warrant portions of the contingent consideration, we used a Monte Carlo Simulation Model, which incorporates significant inputs that are not observable in the market. Fluctuations in the fair value of contingent obligations are impacted by several unobservable inputs that are estimated by management, including forecasted revenue growth rates, forecasted costs and expenses, volatility, and discount rates. Significant changes in any of those inputs in isolation may result in a significantly higher or lower fair value measurement. The unobservable inputs utilized for measuring the fair value of the contingent consideration reflect management's own assumptions about the assumptions that market participants would use in valuing the contingent consideration.
2021 Results of Operations
Year Ended
Revenues
Revenues for the year ended December 31, 2021 were approximately $87.3 million ,
a decrease of approximately $93.0 million (or 52%), as compared to approximately
$180.3 million in 2020. Our mix of revenues for the periods presented is set
forth below:
YEARS ENDED
DECEMBER 31, Dollar
Customer Type 2021 2020 Variance
U.S. Federal Government $ 73,130,465 $ 165,799,500 $ (92,669,035 )
U.S. State and Local Governments 240,473 101,079 139,394
Foreign Governments 69,718 127,512 (57,794 )
Commercial Enterprises 13,897,441 14,314,924 (417,483 )
$ 87,338,097 $ 180,343,015 $ (93,004,918 )
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· Our carrier services revenues declined primarily as a result of the
completion of the U.S. Department of Commerce contract supporting the 2020
Census.
· Our managed service fees declined primarily due to reduced accessory sales
to federal government customers and to lesser extent, customer attrition due
to contract expiration, partially offset by additional revenue as a result
of the ITA acquisition during the fourth quarter of 2021.
· Billable service fees decreased due to the completion of professional
services supporting the 2020 Census project, partially offset by increased
onsite support services to other existing and new federal government
customers.
· Reselling and other services increased due to large product resales to
existing 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
DECEMBER 31, Dollar
2021 2020 Variance
Carrier Services $ 49,730,949 $ 137,640,019 $ (87,909,070 )
Managed Services:
Managed Service Fees 27,011,135 32,154,976 (5,143,841 )
Billable Service Fees 4,087,929 6,916,092 (2,828,163 )Reselling and Other Services 6,508,084 3,631,928 2,876,156
37,607,148 42,702,996 (5,095,848 )
$ 87,338,097 $ 180,343,015 $ (93,004,918 )
· Our sales to federal government customers decreased as a result of the
completion of the activities of the U.S. Department of Commerce contract
supporting the 2020 Census, partially offset by increased professional
onsite support to other federal government customers, as well as product
resales to federal government customers.
· Our sales to state and local government customers increased primarily due to
a new managed services provided to the Virginia state agency.
· Our sales to foreign government customers decreased as compared to last year
due to reduction in managed services.
· Our sales to commercial enterprise customers decreased due to reduction in
product resale compared to last year, partially offset by ITaaS provided by
ITA.
Cost of Revenues
Cost of revenues for the year ended
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Gross Profit
Gross profit for the year ended was approximately
Operating Expenses
Sales and marketing expense for the year ended
General and administrative expenses for the year ended
Depreciation and amortization expense for the year ended
Other (Expense) Income
Net other income for the year ended
Provision (Benefit) for Income Taxes
Income tax provision (benefit) for the year ended
Net Income
As a result of the factors above, net income for the year ended
Liquidity and Capital
Net Working Capital Our immediate sources of liquidity include cash and cash equivalents, accounts
receivable, unbilled receivables and access to a working capital credit facility
with
At
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ATM Sales Program
On
We sold 399,000 shares during the fiscal year ended
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
For the year ended
For the year ended
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
For the year ended
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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
For the year ended
Net Effect of Exchange Rate on Cash and Equivalents
For the year ended
Credit Facilities and Other Commitments
At
The credit facility requires that the Company meet the following financial
covenants on a quarterly basis: (i) maintain a minimum adjusted tangible net
worth of at least
We believe our working capital credit facility, provided it is renewed or
replaced upon its expiration on
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Off-Balance Sheet Arrangements
The Company has no existing off-balance sheet arrangements as defined under
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