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WYY > SEC Filings for WYY > Form 10-Q on 14-Nov-2012All Recent SEC Filings

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Form 10-Q for WIDEPOINT CORP


14-Nov-2012

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

"Forward-Looking" Information

The following discussion and analysis of the financial condition and results of operations of the Company should be read in conjunction with the financial statements and the notes thereto which appear elsewhere in this Quarterly Report on Form 10-Q as well as the financial statements and the notes contained in the Company's Annual Report on Form 10-K for the year ended December 31, 2011.

The information set forth below contains statements that the Company believes to be "forward-looking statements" within the meaning of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include, without limitation, any statement that is not a statement of historical fact, including, without limitation, statements regarding the Company's business strategy and plans and objectives of management for future operations or that may predict, forecast, indicate or imply future results, performance or achievements. The words "estimate," "project," "intend," "forecast," "anticipate," "plan," "planning," "expect," "believe," "will," "will likely," "should," "could," "would," "may" or the negative of such words or words or expressions of similar meaning are intended to identify forward-looking statements. These forward-looking statements are not guarantees of future performance, and all such forward-looking statements involve risks and uncertainties, many of which are beyond the Company's ability to control. Actual results may differ materially from those expressed or implied by such forward-looking statements as a result of various factors. All forward-looking statements and other information in this Quarterly Report on Form 10-Q speak only as of the date of this report. We do not undertake, and we disclaim, any obligation to update any forward-looking statements or to announce revisions to any of the forward-looking statements. Certain factors that could cause results to differ materially from those projected in the forward-looking statements, including, among other things: (i) the Company's financing plans; (ii) trends affecting the Company's financial condition or results of operations; (iii) the Company's growth strategy and operating strategy; (iv) the declaration and payment of dividends; and (v) the risk factors disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2011 filed with the SEC on March 30, 2012. Readers are cautioned not to put undue reliance on forward-looking statements.

Business Overview

We have grown through the acquisition of highly specialized regional IT consulting companies. We provide our customized advanced technology-based products and solutions through three business segments operated principally through eight wholly-owned operational entities. Our customized advanced technology-based solutions enable organizations to deploy fully compliant solutions in accordance with government requirements and the demands of the commercial marketplace.

Our expertise lies in the following three business segments: Telecommunications Management, Cybersecurity Managed Solutions, and Consulting Services and Products. These segments offer unique solutions and proprietary IP-based wireline and wireless full life cycle management service solutions and; cybersecurity solutions with an expertise in identity management assurance and data protection services utilizing certificate-based security solutions delivered via WidePoint's trusted cloud mobility managed services environment; and are supported by other associated IT consulting services and products in which the Company provides specific subject matter expertise in including but not limited to IT Architecture and Planning, Software Implementation Services, IT Outsourcing, and Identity Assurance and Forensic Informatics. WidePoint has eight operational entities, which specialize in providing the following products and services:

Telecommunications Management - iSYS LLC ("iSYS") and WidePoint Solutions Corp.
("WSC") specialize in telecommunications life cycle management solutions, characterized by comprehensive wireless environment managed services contracts to a number of large US federal agencies and to commercial market enterprise which include a number of multi-national corporations. iSYS also specializes in forensic informatics, and Identity Assurance development services to both the public and private sectors.

Cybersecurity Managed Solutions - Operational Research Consultants, Inc. ("ORC") specializes in cyber security solutions with a focus on IT integration and secure authentication processes and software, and providing services to the federal government. ORC has been at the forefront of implementing PKI technologies. PKI technology uses a class of algorithms in which a user can receive two electronic keys, consisting of a public key and a private key, to encrypt any information and/or communication being transmitted to or from the user within a computer network and between different computer networks. We believe PKI technology has emerged as the technology of choice to enable security services within and between different computer systems utilized by various agencies and departments of the federal government. Advanced Response Concepts Corporation ("ARCC"). specializes in providing identity assurance and priority resource management solutions, crime scene management and information protection, and other activities related thereto; and the development, maintenance, enhancement and provision of software, services, products and operations for identity management and information protection, which are offered primarily to state and local government agency markets. Protexx Technology Corporation ("Protexx"), which is a development stage company, specializes in identity assurance, and encrypted mobile and wireless data-in motion protection products and services.

Consulting Services and Products - Our various subsidiaries provide IT consulting services and products to both commercial and federal government customers. Our commercial consulting services are predominantly offered by our Widepoint IL subsidiary in the Midwestern regional area and can cross-sell various services of our other operating subsidiaries. Our federal government consulting and product services are offered by all of our operating subsidiaries. These services include a variety of IT related services and products.

For additional information related to our business operations and segments see Note 11 to our condensed consolidated financial statements in this Quarterly Report on Form 10-Q and the description of our business set forth in the Company's Annual Report on Form 10-K for the year ended December 31, 2011 filed with the SEC on March 30, 2012.

Revenue Concentrations and Considerations

We remain focused on continued retention and expansion of services to our existing customer base and attracting new customers in the government and commercial sectors. The majority of our revenues for 2011 were derived from contracts and projects with U.S. federal government agencies and U.S. federal government contractors. Historically, we have derived, and may continue to derive in the future, a significant percentage of our total revenues from a relatively small number of clients. At the end of fiscal 2011, we increased our reach in the commercial sector with the acquisition of the assets of Avalon Global Solutions ("AGS").

Due to the acquisition of the assets of AGS, our 2012 consolidated revenue and receivable base is better diversified between government and commercial clients. We intend to continue to cross-sell additional services to AGS's existing customer base and leverage our existing customer relationships to reach new customers worldwide. We are continuing to actively search out new synergistic acquisitions that we believe may further enhance our present base of business and service offerings.

Sources of Significant Operational and Administrative Expense

A significant source of operational costs consists of salaries and benefits paid to our technical, marketing and administrative personnel as well as payments to technical subcontractor labor and vendor-related costs in connection with our Communications Management segment. Expansion of our internal growth initiatives and merger and acquisition opportunities will increase our operational costs and may require additional investments in technology infrastructure and personnel. Our profitability also depends upon both the volume of services performed and the Company's ability to manage costs. To date, the Company has attempted to maximize its operating margins through efficiencies achieved by the use of its proprietary methodologies, and by offsetting increases in consultant salaries with increases in consultant fees received from its clients. The uncertainties relating to the ability to achieve and maintain profitability, obtain additional funding to partially fund the Company's growth strategy, and provide the necessary investment to continue to upgrade its management reporting systems to meet the continuing demands of the present regulatory changes affect the comparability of the information reflected in the financial information presented above.

Results of Operations

Three Months Ended September 30, 2012 as Compared to Three Months Ended September 30, 2011

Revenues. Revenues for the three month period ended September 30, 2012 increased approximately 42% to approximately $15.2 million, an increase of $4.5 million as compared to approximately $10.7 million for the three month period ended September 30, 2011. This increase was a result of revenue growth in all of our segments.

Our segment revenue quarterly comparison is set forth below:

Our Telecommunications Management segment realized revenues of approximately $7.1 million, an increase of approximately $0.9 million (or 15%) for the three month period ended September 30, 2012 as compared to approximately $6.2 million for the quarter ended September 30, 2011. The increase reflects new commercial sector sales of software solutions and the addition of revenues from the AGS transaction, partially offset by lower amounts of revenue generated from billable reselling of minutes to our federal customers as we shift away from lower margin services.

Our Cyber Security Managed Solutions segment realized revenues of approximately $2.3 million, an increase of $0.7 million (or 48%) for the three month period ended September 30, 2012 as compared to approximately $1.6 million for the three month period ended September 30, 2011. This increase reflects credentialing managed service sales to commercial customers that are being driven by mandates requiring credentials to be utilized for access to certain federal government sites and continued expansion in support of the Transportation Workers Identification Credentialing (TWIC) program.

Our IT Consulting Services and Products segment realized revenues of $5.8 million, an increase of $2.9 million for the three month period ended September 30, 2012 as compared to $2.9 million for the three month period ended September 30, 2011. The increase was materially due to growth in commercial consulting and government product resale of hardware, software, mobile device and accessory products and IT consulting services.

Cost of Sales.Cost of sales for the three month period ended September 30, 2012, was approximately $11.6 million (or 77% of revenues), as compared to approximately $8.1 million (or 76% of revenues) for the three month period ended September 30, 2011. This nominal increase was caused by a slightly lower mix of sales of higher margin services in our CyberSecurity Managed Solutions segment as compared to our other segments.

Gross Profit.Gross profit for the three month period ended September 30, 2012 was approximately $3.6 million (or 23% of revenues), as compared to approximately $2.6 million (or 24% of revenues) for the three month period ended September 30, 2011. We believe as revenues expand in the future there will be periods of variability in margin growth associated with changes in our growth strategies which may affect our segment revenue mix.

Sales and Marketing. Sales and marketing expense for the three month period ended September 30, 2012 was approximately $705,000 (or 5% of revenues), as compared to approximately $363,000 (or 3% of revenues) for the three month period ended September 30, 2011. Sales and marketing program expense includes direct marketing costs and commission payments to commercial business channel partners, which accounted for a significant portion of the increase in our sales and marketing costs.

General and Administrative.General and administrative expenses for the three month period ended September 30, 2012 were approximately $2.3 million (or 15% of revenues), as compared to approximately $1.9 million (or 18% of revenues) for the three month period ended September 30, 2011. The acquisition of the assets of AGS accounted for a significant portion of the increase in our general and administrative costs . The remaining portion of the increase is attributable to project-based internal efforts to optimize future quarters' operational capacity.

Depreciation. Depreciation expense for the three month period ended September 30, 2012 was approximately $75,000, as compared to approximately $49,000 for the three month period ended September 30, 2011. The increase in depreciation expense was due to increased pool of depreciable assets to support our technology solutions infrastructure. We anticipate additional infrastructure investments in our Telecommunications Management and Cybersecurity Managed Solutions segments to purchase of equipment in support of new product solutions that will impact future depreciation expenses.

Interest Income.Interest income for the three month period ended September 30, 2012 was approximately $1,000, as compared to approximately $3,000, for the three month period ended September 30, 2011. This decrease was due to lower amounts of invested cash and cash equivalents in interest bearing accounts throughout the quarter. We do not anticipate any material changes in trends in our interest income for the near-term as a result of continuing low short-term interest rates presently payable by financial institutions.

Interest Expense.Interest expense for the three months ended September 30, 2012 was approximately $85,000 (or 1% of revenues), an increase of approximately $70,000 as compared to approximately $15,000 (or less than 1% of revenues) of interest expense for the three months ended September 30, 2011. The increase in interest expense was primarily attributable to higher expenses associated with the indebtedness incurred in connection with the acquisition of AGS.

Income Taxes. Income tax provision for the three month period ended September 30, 2012 was approximately $142,000, as compared to approximately $39,000 for the three month period ended September 30, 2011. The income tax benefit recognized in the three month period ended September 30, 2012 reflects changes in the timing and amount of the use of net operating loss carryforwards to reduce future taxable income.

Net Income.As a result of the factors above, the net income for the three month period ended September 30, 2012 was approximately $244,000 as compared to net income of approximately $218,000 for the three month period ended September 30, 2011.

Nine months Ended September 30, 2012 as Compared to Nine months Ended September 30, 2011

Revenues.Revenues for the nine month period ended September 30, 2012 increased to approximately $41.4 million, an increase of approximately $10.2 million (or 33%) as compared to approximately $31.2 million for the nine month period ended September 30, 2011. This increase reflects revenue growth in all of our segments and the addition of revenues from the AGS transaction.

Our segment revenue quarterly comparison is set forth below:

Our Telecommunications Management segment realized revenues of approximately $21.9 million, an increase of approximately $3.9 million (or 22%) for the nine month period ended September 30, 2012 as compared to approximately $18.0 million for the nine month period ended September 30, 2011. The increase reflects new commercial sector sales of software solutions and the addition of revenues from the AGS transaction, partially offset by our continued shift away from lower margin revenue generated from billable reselling of minutes to our federal customers. We continue to believe that growth strategies to expand our reach in the commercial and state government sectors should provide us with the revenue mix and customer diversification sought to meet our overall growth strategies and manage variability in revenue from federal government contracts.

Our Cyber Security Managed Solutions segment realized revenues of approximately $5.6 million, an increase of $0.5 million (or 9%) for the nine month period ended September 30, 2012 as compared to approximately $5.1 million for the nine month period ended September 30, 2011. This increase materially reflects continuing credentialing managed service sales in connection with the Transportation Workers Identification Credentialing (TWIC) program. We believe our credentialing program will expand from continued support and rollout of additional work with various states in support of our first responders initiatives, and other credentialing initiatives progress.

Our IT Consulting Services and Products segment realized revenues of approximately $13.8 million, an increase of $5.7 million (or 71%) for the nine month period ended September 30, 2012 as compared to $8.1 million for the nine month period ended September 30, 2011. The increase was materially due to growth in commercial consulting and government product resale of hardware, software, mobile device and accessory products and IT consulting services. Future performance and the continuity of growth may prove erratic from period to period as sales are materially driven by federal government contracts.

Cost of Sales.Cost of sales for the nine month period ended September 30, 2012 was approximately $31.6 million (or 76% of revenues), as compared to approximately $24.1 million (or 77% of revenues) for the nine month period ended September 30, 2011. This nominal increase was caused by a slightly lower mix of sales of higher margin services. We anticipate that our cost of sales in the long term will trend lower as we recognize a greater portion of revenue in the future from higher margin services.

Gross Profit.Gross profit for the nine month period ended September 30, 2012 was approximately $9.7 million (or 24% of revenues), as compared to approximately $7.1 million (or 23% of revenues) for the nine month period ended September 30, 2011. We believe as revenues expand in the future there will be periods of variability in margin growth associated with changes in our growth strategies which may affect our segment revenue mix.

Sales and Marketing. Sales and marketing expense for the nine month period ended September 30, 2012 was approximately $2.2 million (or 5% of revenues), as compared to approximately $1.2 million (or 4% of revenues) for the nine month period ended September 30, 2011. Sales and marketing program expense includes direct marketing costs and commission payments to commercial business channel partners, which accounted for a significant portion of the increase.

General and Administrative.General and administrative expenses for the nine month period ended September 30, 2012 were approximately $7.2 million (or 17% of revenues), as compared to approximately $5.6 million (or 18% of revenues) for the nine month period ended September 30, 2011. The acquisition of the assets of AGS accounted for a significant portion of the increase in our general and administrative costs. The remaining portion of the increase is attributable to project-based internal efforts to optimize future quarters' operational capacity .

Depreciation. Depreciation expense for the nine month period ended September 30, 2012 was approximately $214,000, as compared to approximately $155,000 for the nine month period ended September 30, 2011. The increase in depreciation expense was due to increased pool of depreciable assets to support our technology solutions infrastructure. We anticipate additional infrastructure investments in our Telecommunications Management and Cybersecurity Managed Solutions segments to purchase of equipment in support of new revenue streams that will impact future depreciation expenses.

Interest Income.Interest income for the nine month period ended September 30, 2012 was approximately $4,200, as compared to approximately $9,000, for the nine month period ended September 30, 2011. This decrease was due to lower amounts of invested cash and cash equivalents in interest bearing accounts. We do not anticipate any material changes in trends in our interest income for the near-term as a result of continuing low short-term interest rates presently payable by financial institutions.

Interest Expense.Interest expense for the nine months ended September 30, 2012 was approximately $265,000 (or 1% of revenues), an increase of approximately $210,000 as compared to approximately $55,000 (or less than 1% of revenues) of interest expense for the nine months ended September 30, 2011. The increase was primarily attributable to indebtedness incurred in connection with the acquisition of AGS.

Income Taxes. Income tax benefit for the nine month period ended September 30, 2012 was approximately $130,000, as compared to $12,000 for the nine month period ended September 30, 2011. The income tax benefit recognized in the nine month period ended September 30, 2012 reflects changes in the timing and amount of the use of net operating loss carryforwards in fiscal 2012 to reduce future taxable income.

Net (Loss) Income.As a result of the factors above, the net loss for the nine month period ended September 30, 2012 was approximately $1,000 as compared to a net income of approximately $115,000 for the nine month period ended September 30, 2011.

Liquidity and Capital Resources

The Company has, since inception, financed its operations and capital expenditures through the sale of preferred and common stock, seller notes in connection with acquisitions, convertible notes, convertible exchangeable debentures, senior secured loans and the proceeds from the exercise of the warrants related to a convertible exchangeable debenture. The Company's immediate sources of liquidity include cash and cash equivalents, accounts receivable, unbilled receivables and access to a working capital credit facility with Cardinal Bank for up to $8.0 million. The Company's operating liabilities consist of vendor and payroll obligations.

The Company's operations require working capital to fund planned growth strategies. At September 30, 2012, the Company's net working capital was approximately $3.6 million as compared to approximately $2.4 at December 31, 2011. At September 30, 2012, there were no material commitments for additional acquisitions or capital expenditures, but that could change with the addition of material contract awards in any of our segments. At September 30, 2012, there were no outstanding borrowings against the Company's working capital credit facility.

Cash provided by operating activities provides an indication of our ability to generate sufficient cash flow from our recurring business activities. For the nine months ended September 30, 2012 and 2011, net cash provided by operations was approximately $1.2 million.

Cash used in investing activities provides an indication of our long term infrastructure investments. We make recurring purchases of property and equipment to replace or enhance our hardware and software applications that support customer operations. We also make investments in software development related to our proprietary telecommunications expense management tools and applications and PKI software certificate credentialing managed services. For the nine months ended September 30, 2012, cash used in investing activities was approximately $224,000 as compared to approximately $667,000 in the same period last year. The decrease in investing activity in the nine months ended September 30, 2012 reflects the timing of periodic PKI credentialing software development costs and purchasing decisions to enter into a capital lease arrangements as opposed to financing the current year technology requirements from available cash balances.

Cash used in financing activities provides an indication of our equity and debt capital raises and repayment of those obligations. For the nine months ended September 30, 2012, cash used in financing activities was approximately $630,000 as compared to approximately $353,000 in the same period last year. We utilized our working capital credit facility during the nine months ended September 30, 2012 to facilitate short term funding post acquisition at WidePoint Solutions Corp. (which acquired the assets of AGS) while AGS customer contracts were being assigned and to fund infrastructure investments. We repaid our line of credit advances in full with available cash balances and made our scheduled payments for current maturities of term debt during the nine month period ended September 30, 2012.

We believe our current cash position and our working capital credit facility are sufficient to meet our minimum requirements for our current business operations. Our business environment is characterized by rapid technological change with periods of high growth and contraction, and is influenced by material events such as mergers and acquisitions that can substantially change our performance and outlook. Constant growth and technological change in our market makes it difficult to predict future liquidity requirements with certainty.

We believe future capital requirements will depend on many factors, including the rate of revenue growth, if any, the timing and extent of spending for new product and service development, strategic acquisition funding and availability of suitable acquisition targets, technological changes in our proprietary software solutions and market acceptance of the Company's branded products and service solutions.

Over the long term, the Company must successfully execute its growth plans to increase profitable revenue and income streams that should generate positive cash flows to sustain adequate liquidity without impairing growth initiatives or requiring the infusion of additional funds from external sources to meet minimum operating requirements, including debt service. There can be no assurance that additional financing, if required, will be available on acceptable terms, if at all, for future acquisitions and/or growth initiatives.

Off-Balance Sheet Arrangements

The Company has no existing off-balance sheet arrangements as defined under SEC regulations.

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