WIDEPOINT CORPORATION This discussion should be read in conjunction with the other sections of this
Form 10-K, including "Risk Factors," and the Financial Statements and notes
thereto. The various sections of this discussion contain a number of
forward-looking statements, all of which are based on our current expectations
and could be affected by the uncertainties and risk factors described throughout
this Annual Report on Form 10-
Organizational Overview
We were incorporated on
We offer our TMaaS solutions through a flexible managed services model which includes both a scalable and comprehensive set of functional capabilities that can be used by any customer to meet the most common functional, technical and security requirements for mobility management. Our TMaaS solutions were designed and implemented with flexibility in mind such that it can accommodate a large variety of customer requirements through simple configuration settings rather than through costly software development. The flexibility of our TMaaS solutions enables our customers to be able to quickly expand or contract their mobility management requirements. Our TMaaS solutions are hosted and accessible on-demand through a secure federal government certified proprietary portal that provides our customers with the ability to manage, analyze and protect their valuable communications assets, and deploy identity management solutions that provide secured virtual and physical access to restricted environments.
Strategy
We executed on our key initiative for 2022 by obtaining FedRAMP "In Process"
status for ITMS™ and completing the integration of our newly acquired assets of
· selling high margin managed services,
· executing cross-sell opportunities identified from ITA acquisition,
including Identity Management (IdM), Telecommunications Lifecycle
Management (TLM) and Digital Billing & Unified Communication Analytics
(DB&UCA) solutions,
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· growing our sales pipeline by continue to invest in our business
development and sales team assets,
· pursuing additional opportunities with our key systems integrator and
strategic partners, and
· expanding our solution offerings into the commercial space.
Our longer-term strategic focus and goals are driven by our need to expand our critical mass so that we have more flexibility to fund investments in technology solutions and introduce new sales and marketing initiatives in order to expand our marketplace share and increase the breadth of our offerings in order to improve company sustainability and growth.
In fiscal 2022, we continue to focus on the following key goals:
? Continue to find additional avenues for capturing new sales opportunities
in the post pandemic environment,
? Continue to provide unmatched level of services to our current customer
base,
? Attain full FedRAMP certification in 2022 and continued technology refresh
of our delivery infrastructure,
? Grow our recurring high margin managed services revenues,
? Add incremental capabilities to our Technology Management solution set and
develop and acquire new high margin business lines,
? Enhance our software platforms to grow our SaaS revenues and take
advantage of the opportunities emerging from the growth in remote working,
? Expand our customer base organically and inorganically,
? Continue to leverage the R2v3 Certification to further our ESG commitment
? Executing cross-sell opportunities identified from ITA acquisition,
including Identity Management (IdM), Telecommunications Lifecycle
Management (TLM) and Digital Billing & Analytics (DB&A) solution,
? Growing our sales pipeline by continuing to invest in our business
development and sales team assets,
? Pursuing additional opportunities with our key systems integrator and
strategic partners, and
? Expanding our solution offerings into the commercial space.
Our strategy for achieving our longer-term goals include:
? Establishing a market leadership position in the trusted mobility
management (TM2) sector,
? 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.
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
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Segments
Segments are defined by authoritative guidance as components of a company in which separate financial information is available and is evaluated by the chief operating decision maker (CODM), or a decision-making group, in deciding how to allocate resources and in assessing performance. Our CODM is our chief executive officer.
We operate in one segment based on the consolidated information used by our CODM in evaluating the financial performance of our business and allocation resources. This single segment represents our Company's business, which is providing managed services for government and commercial clients that include Identity Management (IdM), secure Mobility Managed Services (MMS), Telecom Lifecycle Management, Digital Billing & Analytics and IT as a service (ITaaS).
We present a single segment for purposes of financial reporting and prepared consolidated financial statements upon that basis.
Revenue Recognition
Our managed services solutions may require a combination of labor, third party products and services. Our managed services are generally not interdependent and our contract performance obligations are delivered consistently on a monthly basis. We do not typically have undelivered performance obligations in these arrangements that would require us to spread our revenue over a longer period of time. In the event there are undelivered performance obligations our practice is to recognize the revenue when the performance obligation has been satisfied.
A substantial portion of our revenues are derived from firm fixed price
contracts with the
Our revenue recognition policies for our managed services is summarized and shown below:
? Managed services are delivered on a monthly basis based on a standard
fixed pricing scale and sensitive to significant changes in per user or
device counts which form the basis for monthly charges. Revenue is
recognized upon the completion of the delivery of monthly managed services
based on user or device counts or other metrics. Managed services are not
interdependent and there are no undelivered elements in these
arrangements.
? Identity services are delivered as an on-demand managed service through
the cloud to an individual or organization or sold in bulk to an
organization capable of self-issuing credentials. There are two aspects to
issuing an identity credential to an individual that consists of identity
proofing which is a significant part of the service and monthly credential
validation services which enable the credential holder to access third
party systems. Identity proofing services are not bundled and do not
generally include other performance obligations to deliver. Revenue is
recognized from the sales of identity credentials to an individual or
organization upon issuance less a portion deferred for monthly credential
validation support services. In the case of bulk sales or credential
management system revenue is recognized upon issue or availability to the
customer for issuance. There is generally no significant performance
obligation to provide post contract services in relation to identity
consoles delivered. Identity certificates issued have a fixed life and
cannot be modified once issued.
? Proprietary software revenue for software sold as a term license is
recognized ratably over the license term from the date the software is
accepted by the customer. Maintenance services, if contracted, are
recognized ratably over the term of the maintenance agreement, generally
twelve months. Revenue for fixed price software licenses that are sold as
a perpetual license with no significant customization are recognized when
the software is delivered. Implementation fees are recognized when the
work is completed. Revenue from this service does not require significant
accounting estimates.
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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.
Goodwill A reporting unit is defined as either an operating segment or a business one level below an operating segment for which discrete financial information is available that management regularly reviews. The Company has a single reporting unit for the purpose of impairment testing.
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The Company performed its additional goodwill impairment test with support from an external consultant and estimated the fair value of its single reporting unit based on a combination of the income (estimates of future discounted cash flows) and the market approach (market multiples for similar companies). The income approach uses a discounted cash flow (DCF) method that utilizes the present value of cash flows to estimate fair value of our reporting unit. The future cash flows for the reporting unit were projected based upon our estimates of future revenue, operating income and other factors such as working capital and capital expenditures. As part of our DCF analysis, the Company projected revenue and operating profits, and assumed a long-term revenue growth rates in the terminal year. The market approach utilizes multiples of earnings before interest expense, taxes, depreciation and amortization (EBITDA) to estimate the fair value of our reporting unit. The market multiples used for our single reporting unit were based on a group of comparable companies' market multiples applied to the Company's revenue and EBITDA.
As compared to the Company's impairment testing on
The Company performed its annual impairment assessment as of
Accounting for Income Taxes
Deferred tax assets and liabilities are determined based on the differences between the financial statement and tax bases of assets and liabilities using the enacted tax rates expected to be in effect for the years in which the differences are expected to reverse. A valuation allowance is established when management determines that it is more likely than not that all or some portion of the benefit of the deferred tax asset will not be realized.
Since deferred taxes measure the future tax effects of items recognized in the financial statements, certain estimates and assumptions are required to determine whether it is more likely than not that all or some portion of the benefit of a deferred tax asset will not be realized. In making this assessment, management analyzes and estimates the impact of future taxable income, reversing temporary differences and available tax planning strategies. These assessments are performed quarterly, taking into account any new information.
The Company's significant deferred tax assets consist of net operating loss carryforwards, share-based compensation and intangible asset amortization related to prior business acquisitions. Should a change in facts or circumstances lead to a change in judgment about the ultimate ability to realize a deferred tax asset (including our utilization of historical net operating losses and share-based compensation expense), the Company records or adjusts the related valuation allowance in the period that the change in facts or circumstances occurs, along with a corresponding increase or decrease to the income tax provision.
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During the year ended
Business Combinations
The application of the acquisition method of accounting for business combinations requires the use of significant estimates, assumptions and judgments in the determination of the estimated fair value of assets acquired and liabilities assumed in order to properly allocate the purchase price at the acquisition date. For the ITA acquisition, the Company used valuation methods including the "monte carlo simulation" method to estimate the fair value of the contingent consideration, the "multi-period excess earnings method" to estimate the fair value of customer relationships and the "relief from royalty" method to estimate the fair value of the acquired tradename. Although we believe the estimates, assumptions and judgments we have made are reasonable, they are based in part on historical experience, industry data, information obtained from the management of the acquired companies and assistance from independent third-party appraisal firms and are inherently uncertain.
Contingent Consideration
To value both the cash and warrant portions of the contingent consideration, we used a Monte Carlo Simulation Model, which incorporates significant inputs that are not observable in the market. Fluctuations in the fair value of contingent obligations are impacted by several unobservable inputs that are estimated by management, including forecasted revenue growth rates, forecasted costs and expenses, volatility, and discount rates. Significant changes in any of those inputs in isolation may result in a significantly higher or lower fair value measurement. The unobservable inputs utilized for measuring the fair value of the contingent consideration reflect management's own assumptions about the assumptions that market participants would use in valuing the contingent consideration.
2022 Results of Operations
Year Ended
Revenues
Revenues for the year ended December 31, 2022 were approximately $94.1 million ,
an increase of approximately $6.8 million (or 8%), as compared to approximately
$87.3 million in 2021. Our mix of revenues for the periods presented is set
forth below:
YEARS ENDED
DECEMBER 31,
2022 2021
Carrier Services $ 53,339,949 $ 49,730,949
Managed Services:
Managed Service Fees and Billable Fees 28,102,695 25,215,996
Reselling and Other Services 12,660,721 12,391,152
Total Managed Services: 40,763,416 37,607,148
$ 94,103,365 $ 87,338,097
? Our carrier services revenues increased by $3.6 million to $53.3 million from
$49.7 million last year, primarily due to a large federal government customer
increasing the number of phone lines we manage by approximately 75% during
2022. Additionally, carrier credits of approximately $1.7 million were
experienced in 2021 that did not occur in 2022.
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? Our managed and billable service fees increased by
million to
("ITA") which added
compared to only one quarter of results in 2021 as a result of the acquisition
timing in 2021. The increase was partially offset by lower sales in our legacy
lines of business.
? Reselling and other services increased by
acquisition of ITA which added
to only one quarter of results in 2021 as a result of the acquisition timing in
2021. The increase was partially offset by lower sales in our legacy lines of
business. Reselling and other services are transactional in nature and as a
result the amount and timing of revenue will vary significantly from quarter to
quarter.
Revenues by customer type for the periods presented is set forth below:
YEARS ENDED
DECEMBER 31, Dollar
Customer Type 2022 2021 Variance
U.S. Federal Government $ 74,416,288 $ 73,130,465 $ 1,285,823
U.S. State and Local Governments 411,511 240,473 171,038
Foreign Governments 146,538 69,718 76,820
Commercial Enterprises 19,129,028 13,897,441 5,231,587
$ 94,103,365 $ 87,338,097 $ 6,765,268 ? Our sales to federal government customers increased primarily as a result of
the increase phone-lines managed and a decrease in carrier credits occurring in
2022.
? Our sales to state and local government customers increased primarily due to
increased activity in Identity Management solutions.
? Our sales to foreign government customers increased as compared to last year
due to increased activity in our Unified Communications Analytics offering.
? Our sales to commercial enterprise customers increased primarily as a result of
the addition of ITA which contributed approximately
increase.
Cost of Revenues
Cost of revenues for the year ended
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Gross Profit
Gross profit for the year ended was approximately
Operating Expenses
Sales and marketing expense for the year ended
General and administrative expenses for the year ended
Depreciation and amortization expense for the year ended
Other (Expense) Income
Net other income for the year ended
Provision for Income Taxes
Income tax provision for the year ended
Net (Loss) Income
As a result of the one-time goodwill impairment charge, an increase lower margin
and increase in expenses in 2022, net loss for the year ended
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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
ATM Sales Program
On
Cash Flows from Operating Activities
Cash provided by operating activities provides an indication of our ability to
generate sufficient cash flow from our recurring business activities. Our single
largest cash operating expense is labor and company sponsored benefits. Our
second largest cash operating expense is our facility costs and related
technology communication costs to support delivery of our services to our
customers. We lease our facilities under non-cancellable long-term contracts.
Any changes to our fixed labor and/or infrastructure costs may require a
significant amount of time to take effect depending on the nature of the change
made and cash payments to terminate any agreements that have not yet expired. We
experience temporary collection timing differences from time to time due to
customer invoice processing delays that are often beyond our control, including
intermittent
For the year ended
Cash Flows from Investing Activities
Cash used in investing activities provides an indication of our long-term infrastructure investments. We maintain our own technology infrastructure and may need to make additional purchases of computer hardware, software and other fixed infrastructure assets to ensure our environment is properly maintained and can support our customer obligations. We typically fund purchases of long-term infrastructure assets with available cash or capital lease financing agreements.
For the year ended
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For the year ended
Cash Flows from Financing Activities
Cash used in financing activities provides an indication of our debt financing and proceeds from capital raise transactions and stock option exercises.
For the year ended
For the year ended
Net Effect of Exchange Rate on Cash and Equivalents
For the year ended
Credit Facilities and Other Commitments
At
The credit facility requires that the Company meet the following financial
covenants of (i) maintaining a minimum consolidated adjusted EBITDA of no be
less than
We believe our working capital credit facility, provided it is renewed or
replaced upon its expiration on
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Off-Balance Sheet Arrangements
The Company has no existing off-balance sheet arrangements as defined under
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