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WYY > SEC Filings for WYY > Form 10-Q on 14-Aug-2014All Recent SEC Filings

Show all filings for WIDEPOINT CORP

Form 10-Q for WIDEPOINT CORP


14-Aug-2014

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, 2013.

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 our 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 ability to successfully integrate the operations Soft-ex Communications Ltd. (SCL); (v) decreased government spending, (vi) changes in government regulations, (vii) our focus on selling higher margin services, and (viii) the risk factors disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2013 filed with the SEC on March 31, 2014. Readers are cautioned not to put undue reliance on forward-looking statements.

Business Overview

We are a provider of information technology (IT) based products, services, and solutions. We offer secure, cloud-based, enterprise-wide information technology-based solutions that enable commercial markets, and federal and state government organizations, to deploy fully compliant IT services in accordance with government-mandated regulations and advanced system requirements. Our Managed Mobility Solutions (MMS) offer a portfolio of information technology based services and products with a set of streamlined mobile communications management, identity management, and consulting solutions that provide our customers with the ability to manage and protect their valuable communications assets and deploy compliant identity management solutions that provide secured virtual and physical access to restricted environments. Many of our solutions are accessible on-demand through cloud computing and provide customers with the ability to remotely manage their workforce mobility and identity management requirements in accordance with internal policies, the marketplace and the demands of our customers.

During the first quarter of 2014, we rolled out our Certificate-on-Device service. Our Certificate-on-Device service is a robust cloud-based internally developed service that provides secure digital certificates to all types of mobile devices in order to enhance the information security assurance level of mobile transactions and access to corporation networks, databases and other IT assets. Certificate-on-Device enables an enterprise to attain a greater level of network security than user authentication alone by ensuring that only authorized devices connect to an organization's IT infrastructure. During the second quarter of 2014 we successfully loaded secure digital certificates onto a number of individual mobile devices, tablets and operating system platforms. We are also delivering machine to machine digital certificates that support data in motion. We are working with leading suppliers and manufacturers of mobile devices to develop mobile devices with this capability built-in as a ready feature and to accommodate other device operating systems.

For additional information related to our business operations see the description of our business set forth in the Company's Annual Report on Form 10-K for the year ended December 31, 2013 filed with the SEC on March 31, 2014.

Acquisition of Soft-Ex Communications Limited

On May 1, 2014, we purchased all of the outstanding equity of Soft-ex Communications Limited ("SCL"). SCL, with headquarters in Dublin, Ireland. SCL is a provider of telecom data intelligence services offered as a software as a service solution throughout the European and Middle Eastern markets. SCL has two operating subsidiaries, Soft-Ex BV and Soft-Ex UK Limited, which maintain offices and operations in the Netherlands and the United Kingdom, respectively. We believe the combination of WidePoint's secure managed mobility services coupled with Soft-Ex's European and Middle East presence, channel partners, and additional portfolio of services provides our combined operations with a stronger base of operations, services and global growth opportunities. The transaction complements Soft-Ex's focus and expertise in delivering business intelligence and subscriber data intelligence to the global telecommunications service provider market. Through the combination of our partnerships and customers we believe that we can leverage Soft-Ex's innovative Software-as-a-Service solutions combined with the scale and breadth of WidePoint's managed mobility offerings, optimizing the core strengths of both organizations.

Sources of Significant Operational and Administrative Expense

A significant source of operational costs consist of salaries and benefits paid to our technical, marketing and administrative personnel. These costs are largely fixed and may not be adjusted as quickly in the event there is a rapid expansion or reduction of the scope of work associated with a customer contract. Another significant source of operational costs are payments to technical subcontractor labor and vendor-related costs in connection with the delivery of our information technology based services. These costs are tied to contracts and may be adjusted more quickly in the event there is a rapid expansion or reduction of the scope of work associated with a customer contract. 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 technologies and 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 June 30, 2014 as Compared to Three Months Ended June 30, 2013

Revenues.Revenues for the three month period ended June 30, 2014 were approximately $12.4 million, an increase of approximately $1.1 million as compared to approximately $11.3 million in the same period last year. Our mix of MMS revenues for the periods presented is set forth below:

                                 THREE MONTHS ENDED
                                      JUNE 30,                  Dollar
MMS Service Mix                 2014             2013          Variance
                                     (Unaudited)

Carrier Services            $  4,301,378     $  4,232,388     $    68,990
Management Services            4,604,498        4,829,980        (225,482 )
Resale and Other Services      3,488,145        2,281,594       1,206,551

                            $ 12,394,021     $ 11,343,962     $ 1,050,059

We believe the following factors contributed to higher revenues:

Our carrier services were slightly higher compared to the same quarter last year as a result of the recognition of initial task orders issued related to our recent U.S Department Homeland Security ("DHS") blanket purchase agreement ("BPA") contract award. We anticipate carrier services will further expand during the second half of 2014 as we commence work under additional task orders presently being issued and/or being prepared by DHS in the near term.

Our managed services were lower as a result of the transition of our DHS award and related new task orders being issued and some commercial customer attrition, partially offset by additional revenues from our recent acquisition of SCL of approximately $0.9 million. We anticipate managed services will grow as additional task orders are issued during the second half of 2014 and recent commercial contracts awards are implemented.

Our resale and other services expanded as a result of increased software resale transactions and to a lesser extent an increase in consulting services. We anticipate that resale and other services could be erratic quarter to quarter due to timing of federal procurement activity.

Cost of Revenues. Cost of revenues for the three month period ended June 30, 2014 was approximately $8.8 million (or 71% of revenues), as compared to approximately $7.8 million (or 69% of revenues) in the same period last year. The increase in cost of revenues is largely due to an increased amount of low margin software resale activity during the quarter. The addition of SCL cost of sales did not have a material effect on our cost of revenues for the three month period ended June 30, 2014.

Gross Profit. Gross profit for the three month period ended June 30, 2014 was approximately $3.6 million (or 29% of revenues), as compared to approximately $3.5 million (or 31% of revenues) in the same period last year. The dollar basis increase in gross profit was due to the addition of SCL's higher margin revenue, partially offset by sales of low margin government product resale revenues.

Sales and Marketing. Sales and marketing expense for the three month period ended June 30, 2014 was approximately $1.0 million (or 8% of revenues), as compared to approximately $0.9 million (or 8% of revenues) in the same period last year. The dollar basis increase in sales and marketing expense reflects the addition of SCL of approximately $0.3 million. There were no significant changes in our sales and marketing programs and initiatives as compared to the same period last year.

General and Administrative. General and administrative expenses for the three month period ended June 30, 2014 were approximately $3.7 million (or 30% of revenues), as compared to approximately $2.4 million (or 21% of revenues) in the same period last year. General and administrative expenses for the three month period ended June 30, 2013 included a non-cash gain of approximately $0.4 million that reflected a reduction in the fair value of a contingent obligation (related to the acquisition of Avalon Global Solutions, Inc. ("AGS")) as re-measured at the reporting date. Excluding this non-cash gain, general and administrative expenses for the three month period ended June 30, 2013 would have been approximately $2.8 million (or 24% of revenues). Excluding the non-cash gain, we believe a combination of events contributed to an increase in general and administrative expense as set forth below:

General and administrative costs attributable to SCL (approximately $528,000);

Non-recurring technology infrastructure and research and development costs (approximately $200,000); and

Non-recurring audit, legal and tax acquisition-related transaction costs incurred to acquire SCL (approximately $180,000).

Depreciation and Amortization. Overhead and administrative related depreciation and amortization expense for the three month period ended June 30, 2014 was approximately $143,200 as compared to approximately $73,200 in the same period last year. The increase in depreciation expense is primary due to the inclusion of SCL's pool of depreciable assets during the quarter.

Interest Income. Interest income for the three month period ended June 30, 2014 was approximately $4,600, as compared to approximately $2,600 in the same period last year. This increase was due to higher amounts of invested cash and cash equivalents being held in interest bearing accounts and the length of time those deposits were earning interest throughout the quarter compared the same period last year.

Interest Expense. Interest expense for the three months ended June 30, 2014 was approximately $46,300 as compared to approximately $55,900 in the same period last year. The decrease in interest expense was predominantly due to reversal of accrued interest related to a contingent promissory note obligation that had a fair value of zero at end of fiscal 2013, partially offset by an increase in interest expense related to an unsecured loan note payable issued in connection with the SCL acquisition. There were no significant changes in the terms of other interest bearing debt during the three months ended June 30, 2014.

Income Taxes. Income tax benefit for the three month period ended June 30, 2014 was approximately $0.6 million, as compared to approximately $1,800 in the same period last year. The income tax expense recognized in the three month period ended June 30, 2014 reflects state and foreign income taxes, offset by estimated federal net operating losses generated during the second quarter.

Net (Loss) Income. As a result of the factors above, the net loss for the three month period ended June 30, 2014 was approximately $(669,200), as compared to net income of approximately $139,300 in the same period last year.

Six Months Ended June 30, 2014 as Compared to Six Months Ended June 30, 2013

Revenues.Revenues for the six month period ended June 30, 2014 were approximately $22.0 million, a decrease of approximately $1.3 million as compared to approximately $23.3 million in the same period last year. Our mix of MMS revenues for the periods presented is set forth below:

                                  SIX MONTHS ENDED
                                      JUNE 30,                   Dollar
MMS Service Mix                 2014             2013           Variance
                                     (Unaudited)

Carrier Services            $  8,253,070     $  8,330,729     $    (77,659 )
Management Services            8,400,497       10,000,200       (1,599,703 )
Resale and Other Services      5,343,233        4,981,139          362,094

                            $ 21,996,800     $ 23,312,068     $ (1,315,268 )

We believe a combination of events, including delays affecting our customers operations caused by severe winter snow storms during the first quarter of 2014 and government contracts in transition, partially offset by the acquisition of SCL, contributed to our lower revenues as set forth below:

Our carrier services were slightly lower compared to the same period last year as a result of the transition of our DHS award and delays in DHS BPA task order issuances until the second quarter of 2014. We anticipate carrier services will expand during the second half of 2014 as we commence work under task orders presently being issued and/or being prepared by DHS under the BPA.

Our managed services were lower compared to the same period last year due to changes in timing of purchases of credentials by a prime contractor for a major federal government credentialing program. The prior prime contractor procured our services on a bulk basis, while the current prime contractor is procuring our services on a month to month basis. This decrease was partially offset by the addition of SCL revenues of approximately $0.9 million, the implementation of new commercial contract awards and additional task orders issued under our DHS BPA. We anticipate our managed services should expand as a full quarter of revenue from our recent acquisition of SCL is realized, additional task orders are issued under our DHS BPA, recent commercial contract awards are implemented, and the continued roll-out of our Certificate-on-Device service capability.

Our resale and other services expanded as a result of increased software resale transactions, partially offset by a decrease in hardware resale transactions as compared to the same period last year. We anticipate that resale and other services could be erratic quarter to quarter due to timing of federal procurement activity and commercial customer mobile equipment upgrades and deployments. The timing of these revenues tend to be erratic.

We continue to believe the second half of 2014 may be stronger than the first half of 2014 as a result of delays in receipt of contract awards and task orders delivered for fulfillment during the second quarter of 2014.

Cost of Revenues. Cost of revenues for the six month period ended June 30, 2014 was approximately $15.9 million (or 72% of revenues), as compared to approximately $16.5 million (or 71% of revenues) in the same period last year. The decrease in cost of revenues reflects lower commercial mobile equipment upgrades and deployments and the planned redeployment of billable technology staff labor on MMS product development and infrastructure projects reflected in general and administrative expense.

Gross Profit. Gross profit for the six month period ended June 30, 2014 was approximately $6.1 million (or 28% of revenues), as compared to approximately $6.8 million (or 29% of revenues) in the same period last year. The dollar basis decrease in gross profit was due to lower mix of managed service sales compared to an increase in resale and other services, partially offset by increased cost of sales of approximately $39,000 from our recent acquisition of SCL.

Sales and Marketing. Sales and marketing expense for the six month period ended June 30, 2014 was approximately $1.9 million (or 9% of revenues), as compared to approximately $1.7 million (or 7% of revenues) in the same period last year. The dollar basis increase in sales and marketing expense reflects the addition of SCL of approximately $0.3 million. There were no significant changes in our sales and marketing programs and initiatives as compared to the same period last year.

General and Administrative. General and administrative expenses for the six month period ended June 30, 2014 were approximately $6.7 million (or 31% of revenues), as compared to approximately $4.9 million (or 21% of revenues) in the same period last year. General and administrative expenses for the six month period ended June 30, 2013 include a non-cash gain of approximately $0.6 million that reflects a reduction in the fair value of a contingent obligation (related to the acquisition of Avalon Global Solutions, Inc. ("AGS")) as re-measured at the reporting date. Excluding this non-cash gain, general and administrative expenses for the six month period ended June 30, 2013 would have been approximately $5.5 million (or 24% of revenues). Excluding the non-cash gain, we believe a combination of events contributed to an increase in general and administrative expense as set forth below:

General and administrative costs attributable to SCL (approximately $528,000);

Non-recurring infrastructure and technology research and development costs (approximately $390,000); and

Non-recurring audit, legal and tax acquisition-related transaction costs incurred to acquire SCL (approximately $250,300).

Depreciation and Amortization. Overhead and administrative related depreciation and amortization expense for the six month period ended June 30, 2014 was approximately $212,700 as compared to approximately $139,500 in the same period last year. The increase in depreciation expense is primary due to the inclusion of SCL's pool of depreciable assets during the period.

Interest Income. Interest income for the six month period ended June 30, 2014 was approximately $5,300, as compared to approximately $3,500 in the same period last year. This increase was due to higher amounts of invested cash and cash equivalents being held in interest bearing accounts and the length of time those deposits were earning interest throughout the quarter compared the same period last year.

Interest Expense. Interest expense for the six months ended June 30, 2014 was approximately $92,600 as compared to approximately $115,500 in the same period last year. The decrease in interest expense predominantly due to reversal of accrued interest related to a contingent promissory note obligation that had a fair value of zero at end of fiscal 2013, partially offset by an increase in interest expense related to an unsecured loan note payable issued in connection with the SCL acquisition. There were no significant changes in the terms of other interest bearing debt during the six months ended June 30, 2014.

Income Taxes. Income tax benefit for the six month period ended June 30, 2014 was approximately $1.2 million, as compared to approximately $145,400 in the same period last year. The income tax expense recognized in the three month period ended June 30, 2014 reflects state and foreign income taxes, offset by estimated federal net operating losses generated.

Net (Loss) Income. As a result of the factors above, the net loss for the six month period ended June 30, 2014 was approximately $(1.6) million, as compared to net income of approximately $104,100 in the same period last year.

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 June 30, 2014, the Company's net working capital was approximately $2.1 million. At December 31, 2013, the Company had net negative net working capital and financed operational requirements using its credit facility. On March 3, 2014, the Company completed a successful public offering of 9,057,972 shares of the Company's common stock and realized net proceeds from this offering of approximately $11.4 million, after deducting seller offering expenses. The Company's net working capital became positive after this public offering. During the six months ended June 30, 2014, the Company used approximately $5.0 million of the public offering proceeds to acquire Soft-ex Communications Ltd on May 1, 2014. The remainder of the proceeds were retained to fund operations and strategic investments. At June 30, 2014, there were no material commitments for additional capital expenditures, but that could change with the addition of material contract awards or task orders. At June 30, 2014, 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 six months ended June 30, 2014, net cash used in operations was approximately $1.3 million as compared to net cash provided by operations of approximately $1.6 million in the same period last year. The decrease in cash flow from operating activities reflects longer timing differences between billing and collection and lower billable revenues as compared to the same period last year.

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. For the six months ended June 30, 2014, cash used in investing activities was approximately $4.4 million as compared to approximately $235,400 in the same period last year. On May 1, 2014, we purchased all of the equity interests of SCL for approximately $6.0 million, consisting of $5.0 million in cash at closing, subject to post-closing net working capital adjustments, and a note payable in the amount of $1.0 million. The continuing property and equipment expenditures in the six months ended June 30, 2014 reflects decisions to move forward with further investments aimed at enhancing our internal infrastructure to support growth. For the six months ended June 30, 2014, we also made investments of approximately $138,800 in software development related to our Public Key Infrastructure software certificate credentialing tools and applications.

Cash provided by (used in) financing activities provides an indication of our debt financing and proceeds from capital raise transactions and stock option exercises. For the six months ended June 30, 2014, cash provided by financing activities was approximately $9.8 million as compared to cash used in financing of approximately $676,100 in the same period last year. The increase in cash provided by financing year is driven by the same factors described in our discussion above about our change in net working capital. Also, we repaid our line of credit advances in full with available cash balances and made our scheduled payments for current maturities of term debt.

We believe our current cash position and our working capital credit facility are sufficient to meet our minimum requirements for our current business operations (including sales and marketing initiatives), although any expansion of our operational needs, including as a result of any new contracts, could require additional working capital. 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 . . .

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