Attached files
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
Form
10-K
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☑
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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, 2020
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or
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☐
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE
ACT OF 1934
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For
the transition period from __________________ to
___________________
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Commission
File Number: 001-33035
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WidePoint
Corporation
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(Exact name of Registrant as specified in its charter)
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Delaware
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52-2040275
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(State or other jurisdiction of
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(I.R.S. Employer
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incorporation or organization)
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Identification No.)
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11250
Waples Mill Road, South Tower, Suite 210, Fairfax, Virginia
22030
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(Address of principal executive offices) (Zip Code)
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(703)
349-2577
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(Registrant’s telephone number, including area
code)
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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)
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Name of each exchange
on which registered
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Common
Stock, $0.001 par value per share
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WYY
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NYSE
AMERICAN
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Securities
registered pursuant to Section 12(g) of the act:
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None
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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.
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Large
accelerated filer ☐
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Accelerated filer
☐
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Non-accelerated
filer ☑
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Smaller
reporting company ☑
Emerging growth
company ☐
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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.
☐
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 $59.1
million.
As of
March 12, 2021, there were 8,994,701 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
2021 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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The COVID-19
pandemic or another pandemic could have a material adverse impact
on our business and operations.
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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, which could harm our sales and
profitability.
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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 have had a
history of losses and we may be unable to sustain
profitability.
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The loss of
significant customer contracts could also have an adverse impact on
our financial results.
●
Federal agencies
and certain large customers can unexpectedly terminate their
contracts with us at any time without penalty.
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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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We may be unable to
successfully acquire complementary businesses, services or
technologies to support our growth strategy.
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Changes in the
spending policies or budget priorities of the federal government
could cause us to lose revenues.
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We may incur
substantial costs in connection with contracts awarded through a
competitive procurement process, which could negatively impact our
operating results.
3
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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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Security breaches
or cybersecurity events could result in the loss of customers and
negative publicity and materially harm our business.
●
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.
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. All share and per share
information included in this Annual Report on Form 10-K has been
retroactively adjusted to reflect a one-for-ten reverse stock split
completed in 2020.
PART
I
ITEM
1. BUSINESS
Company
Overview
We are a leading
provider of Trusted Mobility Management (TM2) that consists of
federally certified communications management, identity management,
and interactive bill presentment and analytics solutions. We help
our clients achieve their organizational missions for mobility
management and security objectives in this challenging and complex
business environment.
We offer our TM2
solutions through a flexible managed services model which includes
both a scalable and comprehensive set of functional capabilities
that can be used by any customer to meet the most common
functional, technical and security requirements for mobility
management. Our TM2 solutions were designed and implemented with
flexibility in mind such that it can accommodate a large variety of
customer requirements through simple configuration settings rather
than through costly software development. The flexibility of our
TM2 solutions enables our customers to be able to quickly expand or
contract their mobility management requirements. Our TM2 solutions
are hosted and accessible on-demand through a secure federal
government certified proprietary portal that provides our customers
with the ability to manage, analyze and protect their valuable
communications assets, and deploy identity management solutions
that provide secured virtual and physical access to restricted
environments.
Our
Solutions
Our TM2 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 assets as described below:
4
Telecom Lifecycle Management
We offer
comprehensive telecom lifecycle management solutions to
corporations, governments, and not-for-profit organizations. 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 users 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 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.
Digital Billing and Analytics Solutions
We offer innovative
and interactive billing communications and analytics solutions to
large communications service provides (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.
We sell service
solutions to government and business enterprises. Our ability to
successfully sell our services depends upon the relationships we
build and maintain 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 TM2 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, we have also more recently 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 exist when we partner with large systems
integrators and other strategic partners.
5
Our sales
approaches are summarized below:
Systems
Integrators. We partner with large systems integrators to
collectively pursue large market opportunities that include our TM2
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 TM2 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
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 TM2
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 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 promise and then upsell and cross sell our
TM2 solution offerings. We may enter into preferred supplier
network programs agreements with our customers and offer our TM2
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.
6
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.
We expect all of
our customers to be motivated to meet their organizational needs
for mobile management and security objectives in this challenging
mobile environment. As a result of delivering our TM2 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
believe we have an attractive set of solutions and we also 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:
●
Department of
Homeland Security for Cellular Wireless Managed Services (CWMS)
Indefinite Delivery/Indefinite Quantity (DHS CWMS 2.0
IDIQ).
●
Department of
Health and Human Services Telecommunications Inventory and Expense
Management Solutions contract.
7
●
Subsidiaries of
WidePoint are approved subcontractors for the following ID/IQ
contracts:
o
NASA End-User
Services and Technologies (NEST)
o
Defense Logistics
Agency J6 Enterprise Technology Services (JETS)
o
GSA Alliant
2
o
GSA Enterprise
Infrastructure Solutions (EIS)
o
GSA Connections
II
o
National Institutes
of Health Chief Information Officer Solutions and Partners
(CIO-SP3)
o
NASA Solutions for
Enterprise-Wide Procurement (SEWP)
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.
8
We funded and
expensed 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, 2020
and 2019, we incurred product development costs associated with our
next generation TM2 platform application of approximately $903,000
and $146,000, respectively, which were capitalized. In 2021, we
will continue to work with our strategic partners to continue and
focus our product development efforts as well as with customer
integrations.
Security
Certification and Accreditation
Our TM2 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, 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
at five (5) data centers located in Ireland, Ohio, and Virginia,
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 checks 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,
including our pending patents, if granted, may be contested,
circumvented or invalidated. Moreover, the rights that may be
granted in those issued and pending 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 issued patents and, if issued,
our pending patents and the other steps that we have taken to
protect our intellectual property cannot be predicted with
certainty.
9
Market Competition
Our TM2 market is
centered on mobile management, identity management 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 TM2. We believe that
we are presently the only provider of all three of these critical
services offerings. We believe that our TM2 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 authorization to operate (ATO) 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 of 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 pricing 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 TM2 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 TM2 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 will
save them time and money. We believe our TM2 solution pricing is
competitive and reflects the value of the solutions provide to our
customers. Our goal is providing the best solution for our
customers that meets their needs.
Competition. Our TM2 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., MobiChord, 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.
10
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 Lockheed Martin Corporation, Northrop Grumman
Corporation, 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.
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.
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:
●
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 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;
●
the Procurement
Integrity Act;
●
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 (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;
●
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
11
The
federal government audits and reviews 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.
Human
Capital
WidePoint currently
employees 234 full time professional staff members (201 in United
States and 33 in Europe), 6 consultants, 4 part-time staff, and 23
subcontractors.
WidePoint considers
that our human capital as one of the most important strategic
assets or our company. As such, we 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 TM2 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 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. The average tenure
of our employees is approximately seven (7) years and more than one
fourth of our employees have been employed by us for more than ten
(10) years.
12
Corporate
Information
We were
incorporated on May 30, 1997 under the laws of the State of
Delaware under the name WidePoint Corporation. 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.
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 PANDEMICS
The COVID-19 pandemic or another pandemic could have a material
adverse impact on our business and operations.
We
continue to monitor the impact of the COVID-19 pandemic and taking
steps to mitigate the risks to us posed by its spread, including by
working with our customers, employees, suppliers and other
stakeholders. The pandemic has in the past and continues to
adversely affect 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. Furthermore, the
pandemic has impacted and may further impact the broader economies
of affected countries, including negatively impacting economic
growth, the proper functioning of financial and capital markets,
foreign currency exchange rates and interest rates. Our offices
remain operational, and we are maintaining social distancing and
enhanced cleaning protocols and usage of personal protective
equipment, where appropriate. However, the COVID-19 pandemic or
another pandemic 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.
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.
13
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 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.
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 with annual managed service revenues of more than $1
million, 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 additional cost reduction actions that would largely
include reductions in force for personnel and assets affected by
the contract loss.
Also,
the loss of a significant customer contract could also cause the
Company to defer potentially advantageous strategic options. In the
case of the loss of a material customer contract, the Company may
be required to rapidly consider other strategic alternatives
including selling a portion or all of our assets if our financial
performance deteriorates as a result of key customer contract
losses. Accordingly, the loss of a significant customer,
particularly the DHS CWMS 2.0 IDIQ, would have a material adverse
effect on our operations.
14
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.
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 expenses, 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:
●
the contractual
terms and timing of completion of projects, including achievement
of certain business results;
●
acceptance of our
products to commercial or government customers;
●
budgets for
government customers;
●
the implementation
of new projects;
●
the adequacy of
provisions for losses and bad debts;
●
the accuracy of our
estimates of resources required to complete ongoing
projects;
●
personnel,
including the loss of key highly skilled personnel necessary to
complete projects;
●
global pandemics,
such as the coronavirus; and
●
general economic
conditions.
15
We currently have access to a credit facility agreement, which
requires us to maintain financial covenants and failure to maintain
such covenants could limit our access to debt capital and
simultaneously require immediate repayment of borrowings by our
lender.
We have
access to a credit facility, which consists of a variable line of
credit primarily to meet short-term working capital requirements
and to partially fund acquisition growth. Our credit facility
agreement requires us to maintain certain financial covenants on a
quarterly and annual basis. If we are unable to meet future
covenants, our lender could take adverse actions that might include
raising our variable interest rate, 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, 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.
Similarly, our credit facility expires in April 2021 and if we are
unable to renew the credit facility with our current lender or any
other lender in the future, our business and operating results will
suffer and we may need to obtain additional funding or raise
capital, which may not be available on favorable terms or at
all.
We have had a history of
losses and we may be unable to sustain
profitability.
Although we
achieved profitability in 2020 and 2019, we have a long history of
losses prior to 2019. 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 sustain 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. 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 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. Approximately 36% of our overall revenue and 33%
of Managed Services revenue in 2020 was generated under our DHS
contracts. If for some reason our new DHS CWMS 2.0 IDIQ were
terminated, it would have a material adverse impact on our future
revenue, profitability and cash flows.
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.
16
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, 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. 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.
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 TM2 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 TM2 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.
17
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.
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 are
currently seeking 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:
●
geographic
localization of our software products, including translation into
foreign languages and adaptation for local practices and regulatory
requirements;
●
lack of familiarity
with and unexpected changes in foreign regulatory
requirements;
●
longer accounts
receivable payment cycles and difficulties in collecting accounts
receivable;
●
difficulties in
managing, staffing and overseeing international implementations and
operations, including increased reliance on foreign
subcontractors;
●
challenges in
integrating our software with multiple country-specific billing or
communications support systems for international
customers;
●
challenges in
providing procurement, help desk and fulfillment capabilities for
our international customers;
●
fluctuations in
currency exchange rates;
●
potentially adverse
tax consequences, including the complexities of foreign value added
or other tax systems and restrictions on the repatriation of
earnings;
●
the burdens of
complying with a wide variety of foreign laws and legal
standards;
●
increased financial
accounting and reporting burdens and complexities;
●
potentially slower
adoption rates of communications management solutions services
internationally;
●
political, social
and economic instability abroad, terrorist attacks and security
concerns in general; and
●
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.
Expansion into
international markets could require us to comply with additional
billing, invoicing, communications, data privacy and similar
regulations, which could make it costly or difficult to operate in
these markets.
Many
international regulatory agencies have adopted regulations related
to where and how communications bills may be sent and how the data
on such bills must be handled and protected. For instance, certain
countries restrict communications bills from being sent outside of
the country, either physically or electronically, while other
countries require that certain information be encrypted or redacted
before bills may be transmitted electronically. These regulations
vary from jurisdiction to jurisdiction and international expansion
of our business could subject us to additional similar regulations.
Failure to comply with these regulations could result in
significant monetary penalties and compliance with these
regulations could require expenditure of significant financial and
administrative resources.
18
In
addition, personally identifiable information is increasingly
subject to legislation and regulations in numerous jurisdictions
around the world, the intent of which is to protect the privacy of
personal information that is collected, processed and transmitted
in or from the governing jurisdiction. Our failure to comply with
applicable safe harbor, privacy laws and international security
regulations or any security breakdown that results in the
unauthorized release of personally identifiable information or
other customer data could result in fines or proceedings by
governmental agencies or private individuals, which could harm our
results of operations.
We may be unable to
successfully acquire complementary businesses, services or
technologies to support our growth strategy.
We may
in the future acquire or invest in complementary and supplementary
businesses, services or technologies. 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:
●
issue additional
equity securities that would dilute our stockholders;
●
use cash that we
may need in the future to operate our business;
●
incur debt on terms
unfavorable to us or that we are unable to repay;
●
incur large charges
or substantial liabilities; or
●
become subject to
adverse tax consequences, substantial depreciation or deferred
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 TM2 solution and our ability to compete with the
manufacturers of such devices or the carriers using such systems in
providing similar services.
Our TM2
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.
19
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 TM2 offering
to potential customers.
Our
ability to provide our TM2 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 TM2 offering.
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.
Our net operating loss
carry-forwards are subject to a valuation adjustment if we do not
maintain and increase our profitability.
As of
December 31, 2020, we had aggregate federal net operating loss
carry-forwards of approximately $36.1 million and state net
operating loss carry- forwards of approximately $36.0 million. Our
ability to utilize our net operating loss carry-forwards and
related deferred tax assets is based upon our ability to generate
future taxable income. Our ability to generate future taxable
income can be impacted by many circumstances. If we fail to
generate taxable income our existing net operating loss
carry-forwards and related deferred tax assets may expire unused.
In addition, net operating loss carry-forwards may become subject
to an annual limitation if there is a cumulative change in the
ownership interest of significant stockholders (or certain
stockholder groups) over a three-year period in excess of 50%, in
accordance with rules established under Section 382 of the Internal
Revenue Code of 1986, as amended, or the Code, and similar state
rules (we refer to each as an ownership change). Such an ownership
change could limit the amount of historic net operating loss
carry-forwards that can be utilized annually to offset future
taxable income.
20
RISKS RELATED TO BUSINESS WITH GOVERNMENT AGENCIES
Changes in the spending
policies or budget priorities of the federal government could cause
us to lose revenues.
We
derive a significant amount of our annual revenues from contracts
funded by federal government agencies. We believe that contracts
with federal government agencies will be a significant source of
our revenues for the foreseeable future. Accordingly, 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:
●
curtailment of the
federal government’s use of technology services
firms;
●
a significant
decline in spending by the federal government, in general, or by
specific agencies such as the Department of Homeland
Security;
●
reductions in
federal government programs or requirements, including government
agency shutdowns and/or reductions in connection with
sequestration;
●
any failure to
raise the debt ceiling;
●
government
inability to approve a budget and operate under a “Continuing
Resolution”;
●
a shift in spending
to federal programs and agencies that we do not support or where we
currently do not have contracts;
●
delays in the
payment of our invoices by government payment offices;
●
federal
governmental shutdowns, and other potential delays in the
government appropriations process;
●
issues associated
with global health pandemics, such as the coronavirus;
and
●
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:
●
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;
●
requirements to
register to conduct business in another state or country could
increase our compliance costs;
●
requirements to
post a bid guarantee or similar performance guarantee as part of a
bid submission; and
●
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.
21
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. 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;
●
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.
22
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.
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.
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.
23
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.
24
Currently, internet
access is provided by telecommunications companies and internet
access service providers that have significant and increasing
market power in the broadband and internet access marketplace. On
December 14, 2017, the Federal Communications Commission classified
broadband internet access service as an unregulated information
service and repealed the specific rules against blocking,
throttling or “paid prioritization” of content or
services. In the absence of government regulation, these providers
could take measures that affect their customers’ ability to
use our products and services, such attempting to charge their
customers more for using our products and services. To the extent
that internet service providers implement usage-based pricing,
including meaningful bandwidth caps, or otherwise try to monetize
access to their networks, we could incur greater operating expenses
and customer acquisition and retention could be negatively
impacted. Furthermore, to the extent network operators were to
create tiers of internet access service and either charge us for or
prohibit our services from being available to our customers through
these tiers, our business could be negatively impacted. Some of
these providers may also offer products and services that directly
compete with our own offerings, which could potentially give them a
competitive advantage.
Defects or errors in our TM2 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.
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.
25
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.
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.
26
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.
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;
and
●
general economic
conditions and events, including adverse changes in the financial
markets, terrorist attacks, health pandemics such as COVID-19,
government shutdowns, war, adverse weather events and other
disasters.
27
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. In addition, in
order to raise capital for acquisitions or other general corporate
purposes, we would likely need to issue securities that are
convertible into or exercisable for a significant number of shares
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.”
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.
28
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
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,
2020 for our U.S. locations:
|
|
|
|
|
Base
|
Base
|
|
|
|
Lease
|
Approx.
|
Cost
per
|
Annual
|
|
Physical
Street Address
|
City,
State Zip Code
|
Expiration
|
Sqft
|
Sqft
|
Cost
|
|
|
|
|
|
|
|
|
11250
Waples Mill Rd S. Tower, Suite 210
|
Fairfax,
VA 22030
|
March
2029
|
11,852
|
$29
|
$349,000
|
|
8351
N High Street, Suite 200
|
Columbus,
OH 43235
|
September
2037
|
18,833
|
$8
|
$151,000
|
|
2101
Executive Drive, Suite 400
|
Hampton,
VA 23669
|
December
2024
|
6,440
|
$16
|
$105,000
|
The following table
presents our property locations at December 31, 2020 for our
international locations:
|
|
|
|
|
Base
|
Base
|
|
|
|
Lease
|
Approx.
|
Cost per
|
Annual
|
|
Physical Street Address
|
Country Postal Code
|
Expiration
|
Sqft
|
Sqft
|
Cost
|
|
|
|
|
|
|
|
|
South
County Business Park
|
Dublin
18, Ireland
|
March
2026
|
6,000
|
$30
|
$182,000
|
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.
29
PART
II
ITEM
5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Our common stock
trades on the NYSE American under the symbol
“WYY”.
Holders
As of the close of
business on March 12, 2021, there were 95 registered holders of
record of our common stock.
Transfer Agent and Registrar
The transfer agent
and registrar for our common stock is American Stock Transfer &
Trust Company.
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.
Recent Sales of Unregistered Securities
None.
At The Market Offering Agreement
On
August 18, 2020, we 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 we 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 our common stock
having an aggregate offering price of up to
$24,000,000.
Subject
to the terms and conditions set forth
in the Sales Agreement, the Sales Agents will use
commercially reasonable efforts consistent with normal trading and
sales practices to sell shares from time to time, based upon
our instructions. We have provided the Sales Agents with customary
indemnification rights, and the Sales Agents will be entitled to a
commission at a rate up to four percent (4.0%)
of the gross proceeds per share sold. The
Sales Agreement will terminate upon the earlier of
sale of all of the shares under the Sales
Agreement or termination of the Sales Agreement as permitted.
During the twelve months ended December 31, 2020, the Company has
incurred $333,500 of offering costs.
Sales
of the shares, if any, under the Sales
Agreement shall be made in transactions that are deemed to be
“at the market offerings” as defined in
Rule 415 under the Securities Act of 1933, as amended
(the “Securities Act”), including sales made by
means of ordinary brokers’ transactions,
at market prices or as otherwise agreed with the Sales
Agents. During the three months ended December 31, 2020, we sold
399,313 shares of our common stock through the Sales Agents for a
total of approximately $4,678,381, resulting in net proceeds to us
of approximately $4,345,475. We sold no shares of our common stock
through the Sales Agents between August 18, 2020 and September 30,
2020.
30
Common Stock Reverse Split
On
October 23, 2020, the Company filed a Certificate of Amendment to
the Amended and Restated Certificate of Incorporation with the
Secretary of Delaware to effect a one-for-ten reverse stock split
of the shares of the Company’s common stock, effective as of
5:00 p.m. Eastern Time on November 6, 2020. The Certificate of
Amendment also decreased the number of authorized shares of Common
Stock from 110,000,000 to 30,000,000. All share, restricted stock
awards (“RSA”) and per share information included in
this Annual Report on Form 10-K has been retroactively adjusted to
reflect the stock split.
Repurchases of Equity Securities
As
approved by the Board of Directors on October 7, 2019, the Board
authorized a stock repurchase plan (the “2019 Repurchase
Plan”) to purchase up to $2.5 million of our common stock.
Under this program, we are authorized to repurchase our issued and
outstanding common shares from time to time in open- market and
privately negotiated transactions and block trades in accordance
with federal securities laws, including Rule 10b-18 promulgated
under the Securities Exchange Act of 1934 as amended. During the
year ended December 31, 2019, we repurchased 863,733 shares of our
common stock for a total of approximately $366,000. During the
three months ended March 31, 2020, we repurchased 24,174 shares of
our common stock for a total of approximately $10,100. This plan
was suspended on March 9, 2020, as a precaution due to the COVID-19
pandemic. No shares were repurchased under the 2019 Repurchase Plan
between March 9, 2020 and December 31, 2020. As of December 31,
2020, $2.1 million remained available for future purchases under
the 2019 Repurchase Plan, which does not have an expiration
date.
|
|
Total Number of Shares Purchased
|
Average Price Paid Per Share
|
Total Number of Shares Purchased as Part of Publicly
Announced Plans or Programs
|
Approximate Dollar Value of Shares that May Yet Be Purchased
Under the Plan or Programs
|
|
|
-
|
$-
|
-
|
$2,154,037
|
|
January
|
2,277
|
$3.99
|
2,277
|
$2,144,513
|
|
March
|
140
|
$4.00
|
140
|
$2,143,925
|
|
Total
|
2,417
|
$4.00
|
2,417
|
|
ITEM
6. SELECTED FINANCIAL DATA
Not required for
smaller reporting companies.
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.
31
Organizational
Overview
We were
incorporated on May 30, 1997 under the laws of the state of
Delaware. We are a leading provider of Trusted Mobility Management
(TM2) that consists of federally certified communications
management, identity management, and interactive bill presentment
and analytics solutions. We help our clients achieve their
organizational missions for mobility management and security
objectives in this challenging and complex business
environment.
We offer our TM2
solutions through a flexible managed services model which includes
both a scalable and comprehensive set of functional capabilities
that can be used by any customer to meet the most common
functional, technical and security requirements for mobility
management. Our TM2 solutions were designed and implemented with
flexibility in mind such that it can accommodate a large variety of
customer requirements through simple configuration settings rather
than through costly software development. The flexibility of our
TM2 solutions enables our customers to be able to quickly expand or
contract their mobility management requirements. Our TM2 solutions
are hosted and accessible on-demand through a secure federal
government certified proprietary portal that provides our customers
with the ability to manage, analyze and protect their valuable
communications assets, and deploy identity management solutions
that provide secured virtual and physical access to restricted
environments.
Strategic
Focus
We executed on our
key initiative for 2020 by winning the re-competed U.S. Department
of Homeland Security Indefinite Delivery/Indefinite Quantity (DHS
CWMS 2.0 IDIQ) and successfully supported the 2020 Census. 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 2021, we will continue to focus on the following
key goals:
●
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 and strategic
partners,
●
improving our
proprietary platform and products, which includes pursuing FedRAMP
certification for ITMS™ and maintaining our ATOs with our
federal government agencies, as well as upgrading our secure
identity management technology,
●
working to
successfully deliver and expand the scope of work under the newly
awarded DHS CWMS 2.0 IDIQ, and
●
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 to expand our marketplace share and increase the
breadth of our offerings in order to improve company sustainability
and growth. Our strategy for achieving our longer-term goals
include:
●
pursuing accretive
and strategic acquisitions to expand our solutions and our customer
base,
●
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.
32
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 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.
Our customers view
our market as a singular business and demand an integrated and
scalable suite of enterprise-wide solutions. Our TM2 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 our CODM and the
executive management team measure financial performance based on
our overall mixture of managed and carrier services and related
margins. These financial metrics provide a stronger indication of
how we are managing our key customer relationships; and it also
determines our overall profitability.
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.
.
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.
33
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.
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.
34
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.
The goodwill
impairment test utilizes a two-step approach. The first step
identifies whether there is potential impairment by comparing the
fair value of a reporting unit to its carrying amount, including
goodwill. If the fair value of a reporting unit is less than its
carrying amount, the second step of the impairment test is required
to measure the amount of any impairment loss. We have the option to
bypass the qualitative assessment for any reporting period and
proceed to performing the first step of the two-step goodwill
impairment test and then subsequently resume performing a
qualitative assessment in any subsequent period. We bypassed using
a qualitative assessment for 2020.
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 using widely accepted valuation techniques, such
as the market approach (earnings multiples or transaction multiples
for the industry in which the reporting unit operates) or the
income approach discounted cash flow methods). The fair values of
the reporting units were determined using a combination of
valuation techniques consistent with the market approach and the
income approach.
When preparing
discounted cash flow models under the income approach, we estimate
future cash flows using the reporting unit’s internal
five-year forecast and a terminal value calculated using a growth
rate that management believes is appropriate in light of current
and expected future economic conditions. We then apply a discount
rate to discount these future cash flows to arrive at a net present
value amount, which represents the estimated fair value of the
reporting unit. The discount rate applied approximates the expected
cost of equity financing, determined using a capital asset pricing
model. The model generates an appropriate discount rate using
internal and external inputs to value future cash flows based on
the time value of money and the price for bearing the uncertainty
inherent in an investment.
We had
approximately $18.5 million of goodwill as of December 31, 2020.
The fair value of our single reporting unit was above carrying
value; accordingly, we have concluded that goodwill is not impaired
at December 31, 2020. The Company could be exposed to increased
risk of goodwill impairment if future operating results or
macroeconomic conditions differ significantly from our current
assumptions.
Allowance
for Doubtful Accounts
We have not
historically maintained an allowance for doubtful accounts for our
federal government customers as we have not experienced material or
recurring losses. Allowances for doubtful accounts relate to
commercial accounts receivable and such an allowance represents
management’s best estimate of the losses inherent in the
Company’s outstanding trade accounts receivable. We determine
the allowance for doubtful accounts by considering a number of
factors, including the length of time accounts receivable are past
due, the customers’ previous payment history and current
ability to pay its obligation, and the condition of the general
economy and the industry as a whole. Customer account balances
outstanding longer than 120 days that have not been settled in
accordance with contract terms or for which no firm payment
commitments exist are placed with a third party collection agency
and a reserve is established. We write off the reserved accounts
receivable against the existing allowance after it is determined
that such accounts are ultimately uncollectible. Payments
subsequently received on such receivables are credited to the
allowance for doubtful accounts. If the accounts receivable has
been written off and no allowance for doubtful accounts exist
subsequent payments received are credited to bad debt
expense.
35
To the extent
historical credit experience, updated for emerging market trends in
credit is not indicative of future performance, actual losses could
differ significantly from management’s judgments and
expectations, resulting in either higher or lower future provisions
for losses, as applicable. The process of determining the allowance
for doubtful accounts requires a high degree of judgment. It is
possible that others, given the same information, may at any point
in time reach different reasonable conclusions.
During the year
ended December 31, 2020, the Company recorded net provisions for
bad debt expense totaling approximately $1,000 related to
commercial contracts.
Share-Based
Compensation
We issue
share-based compensation awards to employees, directors, an on
occasion to non-employees upon which the fair value of awards is
subject to significant estimates made by management. The fair value
of each option award is estimated on the date of grant using a
Black-Scholes option pricing model (“Black-Scholes
model”), which uses the assumptions of no dividend yield,
risk free interest rates and expected life (in years) of
approximately two (2) to ten (10) years.
Expected
volatilities are based on the historical volatility of our common
stock. The expected term of options granted is based on analyses of
historical employee termination rates and option exercises. 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. To the extent historical volatility
estimates, risk free interest rates, option terms and forfeiture
rates updated for emerging market trends are not indicative of
future performance it could differ significantly from
management’s judgments and expectations on the fair value of
similar share-based awards, resulting in either higher or lower
future compensation expense, as applicable. The process of
determining fair value of share-based compensation requires a high
degree of judgment. It is possible that others, given the same
information, may at any point in time reach different reasonable
conclusions.
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.
The
Company's valuation allowance predominantly consisted of domestic
net operating loss carryforwards and certain state net operating
loss carryforwards. 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. As of
December 31, 2020, in part because in the current year the Company
achieved three years of cumulative pretax income in the U.S.
federal tax jurisdiction, management determined that there is
sufficient positive evidence to conclude that it is more likely
than not that additional deferred taxes of are realizable. It
therefore reduced the valuation allowance accordingly. During 2020,
the Company released $8.2 million of the deferred tax asset
valuation allowance to offset the regular tax expense generated by
current earnings.
36
2020
Results of Operations
Year Ended December 31, 2020 Compared to the Year ended December
31, 2019
Revenues
Revenues for the
year ended December 31, 2020 were approximately $180.3 million, an
increase of approximately $78.6 million (or 77%), as compared to
approximately $101.7 million in 2019. Our mix of revenues for the
periods presented is set forth below:
|
|
YEARS
ENDED
|
|
|
|
|
DECEMBER
31,
|
Dollar
|
|
|
|
2020
|
2019
|
Variance
|
|
|
|
|
|
|
Carrier
Services
|
$137,640,019
|
$68,739,088
|
$68,900,931
|
|
Managed
Services:
|
|
|
|
|
Managed
Service Fees
|
32,154,976
|
26,958,876(1)
|
5,196,100
|
|
Billable
Service Fees
|
6,916,092
|
4,304,616
|
2,611,476
|
|
Reselling
and Other Services
|
3,631,928
|
1,717,667(1)
|
1,914,261
|
|
|
42,702,996
|
32,981,159
|
9,721,837
|
|
|
|
|
|
|
|
$180,343,015
|
$101,720,247
|
$78,622,768
|
(1)
Previously included
certain software license revenues that are classified to managed
service fees.
■
Our carrier
services increased primarily due to activities of the U.S.
Department of Commerce contract supporting the 2020 Census, U.S.
Citizenship and Immigration Services, partially offset by reduction
in U.S. Customs Border Patrol and Department of Health and Human
Services. The carrier service revenue recognized from the 2020
Census project was approximately 61% of our total carrier services
revenue in 2020. The largest phase of our work on the 2020 Census
project was completed in late 2020. We will continue to support the
Bureau of Census through October 2022 in other minor
operations.
■
Our managed service
fees increased due to expansion of managed services for existing
government customers, as well as increases in sales of accessories
to our government customers as compared to last year.
■
Billable service
fees increased due to the ramp up of services delivered through our
partnerships with large systems integrators and professional
services supporting the 2020 Census project. As stated above, the
largest phase of our work was completed.
■
Reselling and other
services increased due to timing of large product resales.
Reselling and other services are transactional in nature and as a
result the amount and timing of revenue will vary significantly
from quarter to quarter.
37
Revenues by
customer type for the periods presented is set forth
below:
|
|
YEARS
ENDED
|
|
|
|
|
DECEMBER
31,
|
Dollar
|
|
|
|
2020
|
2019
|
Variance
|
|
|
|
|
|
|
U.S.
Federal Government
|
$165,799,500
|
$86,497,328
|
$79,302,172
|
|
U.S.
State and Local Governments
|
101,079
|
479,379
|
(378,300)
|
|
Foreign
Governments
|
127,512
|
109,948
|
17,564
|
|
Commercial
Enterprises
|
14,314,924
|
14,633,592
|
(318,668)
|
|
|
|
|
|
|
|
$180,343,015
|
$101,720,247
|
$78,622,768
|
■
Our sales to
federal government customers increased primarily due to the
activities of the U.S. Department of Commerce contract supporting
the 2020 Census, partially offset by a reduction of services to
Department of Health and Human Services and the Bureau of Alcohol,
Tobacco and Firearms.
■
Our sales to state
and local government customers declined as compared to last year
due to reduction in carrier services.
■
Our sales to
foreign government customers increased slightly as compared to last
year due to managed services.
■
Our sales to
commercial enterprise customers decreased slightly in 2020 as
compared to 2019 due to customer attrition.
Cost
of Revenues
Cost of revenues
for the year ended December 31, 2020 were approximately $159.9
million (or 89% of revenues) as compared to approximately $84.3
million (or 83% of revenues) in 2019. 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 year ended was approximately $20.4 million (or 11% of
revenues), as compared to approximately $17.4 million (or 17% of
revenues) in 2019. The dollar increase in gross profit
reflects higher managed services revenue as compared to last
year.
Operating
Expenses
Sales and marketing
expense for the year ended December 31, 2020 was approximately $1.9
million (or 1.0% of revenues), as compared to approximately$1.7
million (or 1.6% of revenues) in 2019. Increase reflects investment
in business development, partially offset by reduction in travel
costs.
General and
administrative expenses for the year ended December 31, 2020 were
approximately $14.3 million (or 8% of revenues), as compared to
approximately $13.8 million (or 14% of revenues) in 2019. The
increase in general and administrative expense reflects overhead
and administrative costs to support the increased business and
costs related to supporting our infrastructure in a cloud
environment, as well as an increase in share-based compensation
expense compared to last year, partially offset by reduced travel
costs .
38
Product
development costs associated with our with our proprietary platform
for the years ended December 31, 2020 and 2019 were approximately
$903,000 and $146,000, respectively, which were
capitalized.
Depreciation and
amortization expense for the year ended December 31, 2020 was
approximately $1,091,000, as compared to approximately $988,100 in
2019. The increase in depreciation and amortization
expense reflects the increase in our depreciable asset
base.
Other
(Expense) Income
Net other expense
for the year ended December 31, 2020 was approximately $299,000 as
compared to approximately $266,400 in 2019. The increase
in net other expense is primarily driven by the decrease in other
income.
(Benefit)
Provision for Income Taxes
Income tax
(benefit) provision for the year ended December 31, 2020 was
approximately $(7.4) million, as compared to approximately $0.4
million in 2019. The current income tax provision included reversal
of valuation allowance of $8.2 million discussed above, partially
offset by $0.8 million of current year tax expense that resulted in
a tax benefit of $7.4 million.
Net
Income
Primarily as a
result of the increased revenue from the 2020 Census project that
was completed in 2020, net income for the year ended December 31,
2020 increased to approximately $10.3 million as compared to a net
income of approximately $0.2 million in 2019.
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 Atlantic Union Bank for up to $5.0 million. In
addition, we recently established an at-the-market (ATM) equity
sales program (described below) that permits us to sell, from time
to time, up to $24.0 million of our common stock through the sales
agents under the program. There is no assurance that, if needed, we
will be able to raise capital on favorable terms or at
all.
At
December 31, 2020, our net working capital was approximately $13.0
million as compared to $5.0 million at December 31, 2019. The
increase in net working capital was primarily driven by increases
in revenue, and proceeds from issuance of common stock through the
ATM sales program, and temporary payable timing differences. We may
need to raise additional capital to fund major growth initiatives
and/or acquisitions and there can be no assurance that additional
capital will be available on acceptable terms or at
all.
ATM Sales Program
On
August 18, 2020, we entered into an At-The-Market Issuance Sales
Agreement (the “Sales Agreement”) with B. Riley
Securities, Inc., The Benchmark Company, LLC and Spartan Capital
Securities, LLC which establishes an ATM equity program pursuant to
which we may offer and sell up to $24.0 million of shares of our
common stock, par value $0.001 per share, from time to time as set
forth in the Sales Agreement. We have no obligation to sell any of
the Shares, and, at any time, we may suspend offers under the Sales
Agreement or terminate the Sales Agreement. We sold 399,000 shares
during the three months ended December 31, 2020 under the ATM
program and had remaining capacity of $20.0 million as of December
31, 2020.
Subsequent
to December 31, 2020, the Company sold 100,687 shares for gross
proceeds of $1.1 million.
39
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, 2020, net cash provided by operations was
approximately $6.4 million driven by increased accounts receivable
and temporary payable timing differences.
For the year ended
December 31, 2019, net cash provided by operations was
approximately $5.9 million driven by improved collections of
accounts receivable and temporary payable timing
differences.
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 lease financing
agreements.
For the
year ended December 31, 2020, cash
used in investing activities was approximately $1.2 million and
consisted of computer hardware and software purchases and
capitalized internally developed software costs, primarily
associated with upgrading our ITMS™
platform, secure identity management technology and network
operations center.
For the year ended
December 31, 2019, cash used in investing activities was
approximately $0.5 million and
predominantly consisted of 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 year ended
December 31, 2020, cash used in financing activities was
approximately $3.7 million and consisted of lease principal
repayments of approximately $608,000, proceeds from issuance
of common stock through the ATM sales program of $4.3 million, net
of issuance costs, and repurchases of our common stock of $10,100.
The Company was advanced and repaid approximately $1.9 million in
cumulative line of credit advances during the year.
40
For the
year ended December 31, 2019, cash used in financing activities was
approximately $0.8 million and consisted of lease principal
repayments of approximately $473,300, payment of debt issuance
costs of $5,000, and repurchases of our common stock of $366,000.
The Company was advanced and repaid approximately $6.8 million in
cumulative line of credit advances during the year.
Net Effect of Exchange Rate on Cash and Equivalents
For the
year ended December 31, 2020, the appreciation of the Euro relative
to the US dollar increased the translated value of our foreign cash
balances by approximately $155,500 as compared to last year. For
the year ended December 31, 2019, the gradual depreciation of the
Euro relative to the US dollar decreased the translated value of
our foreign cash balances by approximately $47,000.
Credit Facilities and Other Commitments
At
December 31, 2020, there were no outstanding borrowings against the
Company’s $5.0 million working capital credit facility with
Atlantic Union Bank. At December 31, 2020, there were no material
commitments for additional capital expenditures, but that could
change with the addition of material contract awards or task orders
awarded in the future. The available amount under the working
capital credit facility is subject to a borrowing base, which is
equal to the lesser of (i) $5.0 million or (ii) 50% of the net
unpaid balance of our eligible accounts receivable. The facility is
secured by a first lien security interest on all of our personal
property, including its accounts receivable, general intangibles,
inventory and equipment. The maturity date of the credit facility
is April 30, 2021 and the facility has a variable interest rate
equal to the Wall Street Journal prime rate plus
0.25%.
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 $2.0 million, (ii) maintain
minimum consolidated adjusted EBITDA of at least two times interest
expense and (iii) maintain a current ratio of 1.1 to 1.0 (excluding
lease liabilities reported under recently adopted lease accounting
standards).
We
believe our working capital credit facility, provided it is renewed
or replaced upon its expiration on April 30, 2021, along with cash
on hand and proceeds from sales under our ATM sales program, should
be sufficient to meet our minimum requirements for our current
business operations or potential acquisitions. We may need to raise
additional capital to fund our operations and there can be no
assurance that additional capital will be available on acceptable
terms, or at all.
Contractual
Obligations
The
table below identifies transactions that represent our
contractually committed future obligations. Purchase obligations
include our agreements to purchase goods and services that are
enforceable and legally binding and that specify significant terms,
including: fixed or minimum quantities to be purchased; fixed,
minimum or variable price provisions; and the approximate timing of
the transaction. The following reflects a summary of our
contractual obligations for fiscal years ending December
31:
|
Obligation Type
|
2021
|
2022
|
2023
|
2024
|
2025
|
Thereafter
|
Total
|
|
|
|
|
|
|
|
|
|
|
Operating
lease obligations (1)
|
$832,365
|
$854,679
|
$811,538
|
$832,494
|
$740,253
|
$4,179,979
|
$8,251,308
|
|
Finance
lease obligations (1)
|
6,215
|
-
|
-
|
-
|
-
|
-
|
6,215
|
|
|
|
|
|
|
|
|
|
|
|
$838,580
|
$854,679
|
$811,538
|
$832,494
|
$740,253
|
$4,179,979
|
$8,257,523
|
(1)
See Note 8 for further information on leases and the
adoption of ASC 842.
41
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.
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
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,
2020.
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
2020 that have materially affected, or are reasonably likely to
materially affect, the Company’s ICOFR.
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 2021 Annual Meeting of
Stockholders.
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 2021 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 2021 Annual Meeting of Stockholders.
Equity Compensation Plan Information
The
following table sets forth information as of December 31, 2020,
with respect to the Company’s compensation plans under which
its Common Stock is authorized for issuance:
|
|
(a)
|
(b)
|
(c)
|
|
Directors, Nominees and Executive
Officers
|
Number of Securities to be issued upon exercise
of outstanding options, warrants and
rights
|
Weighted average exercise price of outstanding
options, warrants and rights
|
Number of Securities remaining available for future
issuance (excluding securities reflected in
column (a))
|
|
|
|
|
|
|
Equity
Compensation Plans:
|
|
|
|
|
|
|
|
|
|
Approved
by security holders
|
187,334
|
$5.66
|
241,273
|
|
|
|
|
|
|
Not
approved by security holders
|
-
|
$0.00
|
-
|
|
|
|
|
|
|
Total
|
187,334
|
$5.66
|
241,273
|
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 2021
Annual Meeting of Stockholders.
43
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 2021
Annual Meeting of Stockholders.
PART
IV.
ITEM
15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
■ Financial
Statements and Financial Statement Schedule
Financial Statements:
Report
of Independent Registered Public Accounting Firm
Consolidated
Balance Sheets as of December 31, 2020 and 2019
Consolidated
Statements of Operations for the Years Ended December 31, 2020 and
2019
Consolidated
Statements of Changes in Stockholders’ Equity for the Years Ended
December 31, 2020 and 2019
Consolidated
Statements of Cash Flow for the Years Ended December 31, 2020 and
2019
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:
44
45
|
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
23, 2021
|
|
s/ JIN
H. KANG
|
|
|
|
|
Jin H. Kang
|
|
|
|
|
Chief
Executive Officer
|
|
|
|
|
|
|
Date:
|
March
23, 2021
|
|
/s/
KELLIE H. KIM
|
|
|
|
|
Kellie H. Kim
|
|
|
|
|
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
23, 2021
|
|
/s/ JIN
H. KANG
|
|
|
|
|
Jin H. Kang
|
|
|
|
|
Director,
Chief Executive Officer and President
|
|
|
|
|
(Principal
Executive Officer)
|
|
|
|
|
|
|
Dated:
|
March
23, 2021
|
|
/s/
OTTO GUENTHER
|
|
|
|
|
Otto Guenther
|
|
|
|
|
Chairman
of the Board
|
|
|
|
|
|
|
Dated:
|
March
23, 2021
|
|
/s/
JULIA A. BOWEN
|
|
|
|
|
Julia A. Bowen
|
|
|
|
|
Director
|
|
|
|
|
|
|
Dated:
|
March
23, 2021
|
|
/s/
RICHARD L. TODARO
|
|
|
|
|
Richard L. Todaro
|
|
|
|
|
Director
|
|
|
|
|
|
|
Dated:
|
March
23, 2021
|
|
/s/
PHILIP GARFINKLE
|
|
|
|
|
Philip Garfinkle
|
|
|
|
|
Director
|
47
INDEX
TO FINANCIAL STATEMENTS
|
|
Page
|
|
Report
of Independent Registered Public Accounting Firm
|
F-1
|
|
|
|
|
Consolidated
Balance Sheets as of December 31, 2020 and 2019
|
F-2
|
|
|
|
|
Consolidated
Statements of Operations for the Years ended December 31, 2020 and
2019
|
F-3
|
|
|
|
|
Consolidated
Statements of Comprehensive Income for the Years ended December 31,
2020 and 2019
|
F-4
|
|
|
|
|
Consolidated
Statements of Stockholders’ Equity for the Years ended
December 31, 2020 and 2019
|
F-5
|
|
|
|
|
Consolidated
Statements of Cash Flows for the Years ended December 31, 2020 and
2019
|
F-6
|
|
|
|
|
Notes
to Consolidated Financial
Statements
|
F-8
|
48
Report of Independent Registered Public Accounting
Firm
To the
Shareholders and the Board of Directors 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, 2020 and 2019, the related consolidated
statements of operations, comprehensive income, 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, 2020 and
2019, 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 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
23, 2021
We have
served as the Company’s auditor since 2007.
F-1
WIDEPOINT
CORPORATION AND SUBSIDIARIES
Consolidated
Balance Sheets
|
|
DECEMBER 31,
|
|
|
|
2020
|
2019
|
|
|
|
|
|
ASSETS
|
||
|
CURRENT
ASSETS
|
|
|
|
Cash
and cash equivalents
|
$15,996,749
|
$6,879,627
|
|
Accounts
receivable, net of allowance for doubtful accounts
|
|
|
|
of
$114,169 and $126,235 in 2020 and 2019, respectively
|
35,882,661
|
14,580,928
|
|
Unbilled
accounts receivable
|
13,848,726
|
13,976,958
|
|
Other
current assets
|
1,763,633
|
1,094,847
|
|
|
|
|
|
Total
current assets
|
67,491,769
|
36,532,360
|
|
|
|
|
|
NONCURRENT
ASSETS
|
|
|
|
Property
and equipment, net
|
573,039
|
681,575
|
|
Operating
lease right of use asset, net
|
6,095,376
|
5,932,769
|
|
Intangible
assets, net
|
2,187,503
|
2,450,770
|
|
Goodwill
|
18,555,578
|
18,555,578
|
|
Deferred
tax assets, net
|
5,606,079
|
-
|
|
Other
long-term assets
|
815,007
|
140,403
|
|
|
|
|
|
Total
assets
|
$101,324,351
|
$64,293,455
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
||
|
|
|
|
|
CURRENT
LIABILITIES
|
|
|
|
Accounts
payable
|
$36,221,981
|
$13,581,822
|
|
Accrued
expenses
|
15,626,313
|
14,947,981
|
|
Deferred
revenue
|
2,016,282
|
2,265,067
|
|
Current
portion of operating lease liabilities
|
577,855
|
599,619
|
|
Current
portion of other term obligations
|
-
|
133,777
|
|
|
|
|
|
Total
current liabilities
|
54,442,431
|
31,528,266
|
|
|
|
|
|
NONCURRENT
LIABILITIES
|
|
|
|
Operating
lease liabilities, net of current portion
|
5,931,788
|
5,593,649
|
|
Deferred
revenue, net of current portion
|
398,409
|
363,560
|
|
Deferred
tax liabilities, net
|
-
|
1,868,562
|
|
|
|
|
|
Total
liabilities
|
60,772,628
|
39,354,037
|
|
|
|
|
|
Commitments
and contingencies (Note 19)
|
-
|
-
|
|
|
|
|
|
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;
9,050,262 and 8,386,146 shares
|
|
|
|
issued
and outstanding, respectively
|
8,876
|
83,861
|
|
Additional
paid-in capital
|
100,504,741
|
95,279,114
|
|
Accumulated
other comprehensive loss
|
(104,615)
|
(242,594)
|
|
Accumulated
deficit
|
(59,857,279)
|
(70,180,963)
|
|
|
|
|
|
Total
stockholders’ equity
|
40,551,723
|
24,939,418
|
|
|
|
|
|
Total
liabilities and stockholders’ equity
|
$101,324,351
|
$64,293,455
|
The
accompanying notes are an integral part of these consolidated
financial statements.
F-2
WIDEPOINT
CORPORATION AND SUBSIDIARIES
Consolidated
Statements of Operations
|
|
YEARS
ENDED
|
|
|
|
DECEMBER
31,
|
|
|
|
2020
|
2019
|
|
|
|
|
|
REVENUES
|
$180,343,015
|
$101,720,247
|
|
COST OF REVENUES
(including amortization and depreciation of
|
|
|
|
$541,842 and
$922,455, respectively)
|
159,887,807
|
84,342,282
|
|
|
|
|
|
GROSS
PROFIT
|
20,455,208
|
17,377,965
|
|
|
|
|
|
OPERATING
EXPENSES
|
|
|
|
Sales and
marketing
|
1,871,146
|
1,659,875
|
|
General and
administrative expenses (including share-based
|
|
|
|
compensation of
$810,281 and $717,987, respectively)
|
14,270,342
|
13,844,689
|
|
Depreciation and
amortization
|
1,091,463
|
988,146
|
|
|
|
|
|
Total operating
expenses
|
17,232,951
|
16,492,710
|
|
|
|
|
|
INCOME FROM
OPERATIONS
|
3,222,257
|
885,255
|
|
|
|
|
|
OTHER (EXPENSE)
INCOME
|
|
|
|
Interest
income
|
3,944
|
5,355
|
|
Interest
expense
|
(302,924)
|
(310,582)
|
|
Other
income
|
456
|
38,877
|
|
|
|
|
|
Total other
expense
|
(298,524)
|
(266,350)
|
|
|
|
|
|
INCOME BEFORE
INCOME TAX (BENEFIT) PROVISION
|
2,923,733
|
618,905
|
|
INCOME TAX
(BENEFIT) PROVISION
|
(7,399,951)
|
392,650
|
|
|
|
|
|
NET
INCOME
|
$10,323,684
|
$226,255
|
|
|
|
|
|
BASIC EARNINGS PER
SHARE
|
$1.22
|
$0.03
|
|
|
|
|
|
BASIC
WEIGHTED-AVERAGE SHARES OUTSTANDING
|
8,460,558
|
8,397,454
|
|
|
|
|
|
DILUTED EARNINGS
PER SHARE
|
$1.20
|
$0.03
|
|
|
|
|
|
DILUTED
WEIGHTED-AVERAGE SHARES OUTSTANDING
|
8,603,170
|
8,401,029
|
The
accompanying notes are an integral part of these consolidated
financial statements.
F-3
WIDEPOINT CORPORATION AND SUBSIDIARIES
Consolidated
Statements of Comprehensive Income
|
|
YEARS
ENDED
|
|
|
|
DECEMBER 31,
|
|
|
|
2020
|
2019
|
|
|
|
|
|
NET
INCOME
|
$10,323,684
|
$226,255
|
|
|
|
|
|
Other
comprehensive income (loss):
|
|
|
|
Foreign
currency translation adjustments, net of tax
|
137,979
|
(56,109)
|
|
|
|
|
|
Other
comprehensive income (loss)
|
137,979
|
(56,109)
|
|
|
|
|
|
COMPREHENSIVE
INCOME
|
$10,461,663
|
$170,146
|
The
accompanying notes are an integral part of these consolidated
financial statements.
F-4
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,
2019
|
8,411,245
|
$84,113
|
$94,926,560
|
$(186,485)
|
$(70,407,218)
|
$24,416,970
|
|
|
|
|
|
|
|
|
|
Common stock
repurchased
|
(86,373)
|
$(865)
|
(364,820)
|
-
|
-
|
(365,685)
|
|
|
|
|
|
|
|
|
|
Issuance of common stock
—
|
|
|
|
|
|
|
|
restricted
|
66,274
|
663
|
(663)
|
-
|
-
|
-
|
|
|
|
|
|
|
|
|
|
Cancellation of common stock
—
|
|
|
|
|
|
|
|
restricted
|
(5,000)
|
(50)
|
50
|
-
|
-
|
-
|
|
|
|
|
|
|
|
|
|
Stock compensation expense
—
|
|
|
|
|
|
|
|
restricted
|
-
|
-
|
381,251
|
-
|
-
|
381,251
|
|
|
|
|
|
|
|
|
|
Stock compensation expense
—
|
|
|
|
|
|
|
|
non-qualified stock
options
|
-
|
-
|
336,736
|
-
|
-
|
336,736
|
|
|
|
|
|
|
|
|
|
Foreign currency translation
—
|
|
|
|
|
|
|
|
(loss)
|
-
|
-
|
-
|
(56,109)
|
-
|
(56,109)
|
|
|
|
|
|
|
|
|
|
Net ncome
|
-
|
-
|
-
|
|
226,255
|
226,255
|
|
|
|
|
|
|
|
|
|
Balance, December 31,
2019
|
8,386,146
|
$83,861
|
$95,279,114
|
$(242,594)
|
$(70,180,963)
|
$24,939,418
|
|
|
|
|
|
|
|
|
|
Reverse split adjustment
|
-
|
(75,475)
|
75,475
|
-
|
-
|
-
|
|
|
|
|
|
|
|
|
|
Issuance of shares for rounding on the reverse
split
|
2,546
|
2
|
(2)
|
-
|
-
|
-
|
|
|
|
|
|
|
|
|
|
Common stock
repurchased
|
(2,416)
|
(2)
|
(10,111)
|
-
|
-
|
(10,113)
|
|
|
|
|
|
|
|
|
|
Issuance of
common stock —
|
|
|
|
|
|
|
|
options
exercises
|
32,803
|
33
|
4,966
|
-
|
-
|
4,999
|
|
|
|
|
|
|
|
|
|
Issuance of
common stock —
|
|
|
|
|
|
|
|
restricted
|
58,123
|
58
|
(58)
|
-
|
-
|
-
|
|
|
|
|
|
|
|
|
|
Issuance of
common stock through at-the-market offering
|
|
|
|
|
|
|
|
program, net of
issuance costs of $333,305
|
399,313
|
399
|
4,345,076
|
-
|
-
|
4,345,475
|
|
|
|
|
|
|
|
|
|
Stock
compensation expense —
|
|
|
|
|
|
|
|
restricted
|
-
|
-
|
704,973
|
-
|
-
|
704,973
|
|
|
|
|
|
|
|
|
|
Stock
compensation expense —
|
|
|
|
|
|
|
|
non-qualified
stock options
|
-
|
-
|
105,308
|
-
|
-
|
105,308
|
|
|
|
|
|
|
|
|
|
Foreign currency
translation —
|
|
|
|
|
|
|
|
income
|
-
|
-
|
-
|
137,979
|
-
|
137,979
|
|
|
|
|
|
|
|
|
|
Net
income
|
-
|
-
|
-
|
|
10,323,684
|
10,323,684
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2020
|
8,876,515
|
$8,876
|
$100,504,741
|
$(104,615)
|
$(59,857,279)
|
$40,551,723
|
The
accompanying notes are an integral part of these consolidated
financial statements.
F-5
WIDEPOINT
CORPORATION AND SUBSIDIARIES
Consolidated
Statements of Cash Flows
|
|
YEARS
ENDED
|
|
|
|
DECEMBER
31,
|
|
|
|
2020
|
2019
|
|
|
|
|
|
CASH FLOWS FROM
OPERATING ACTIVITIES
|
|
|