Widepoint Corp: Form 10-Q for the period ended Jun 30, 2024

Cautionary Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q 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 Form 10-Q 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:

• Our ability to successfully execute our strategy;
• Our ability to sustain profitability and positive cash flows;
• Our ability to gain market acceptance for our products;
• Our ability to win new contracts, execute contract extensions and expand scope of services on existing contracts;
• Our ability to compete with companies that have greater resources than us;
• Our ability to penetrate the commercial sector to expand our business;
• The impact of supply chain issues;
• Our ability to identify potential acquisition targets and close such acquisitions;
• Our ability to successfully integrate acquired businesses with our existing operations;
• Our ability to maintain a sufficient level of inventory necessary to meet our customers demand due to supply shortage and pricing;
• Our ability to retain and recruit key personnel;
• The impact of increasingly volatile public equity markets on our market capitalization;
• Our ability to mitigate the impacts of inflation; and
• The risk factors set forth in our Annual Report on Form 10-K for the year ended December 31, 2023 filed with the SEC on March 26, 2024.

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The forward-looking statements included in this Form 10-Q 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. Readers are cautioned not to put undue reliance on forward-looking statements. In this Quarterly Report on Form 10-Q, 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.

Business Overview

We are a leading provider of Technology Management as a Service (TMaaS) that consists of federally certified communications management, identity management, interactive bill presentment and analytics, and Information Technology as a Service solutions. We help our clients achieve their organizational missions for mobility management, information technology management, and cybersecurity objectives in this challenging and complex business environment.

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 both a secure federal government certified proprietary portal and/or through a secure enterprise 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.

Revenue Mix

Our revenue mix fluctuates due to customer driven factors including: i) timing of technology and accessory refresh requirements from our customers; ii) onboarding of new customers that require carrier services; iii) subsequent decreases in carrier services as we optimize their data and voice usage; iv) delays in delivering products or services; and v) changes in control or leadership of our customers that lengthens our sales cycle, changes in laws or funding, among other circumstances that may unexpectedly change the revenue earned and/or duration of our services. As a result, our revenue will vary by quarter.

For additional information related to our business operations, see the description of our business set forth in our Annual Report on Form 10-K for the year ended December 31, 2023 filed with the SEC on March 26, 2024.

Strategic Focus and Notable Events

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 2024, we continue to focus on the following key goals:

• Capturing new sales opportunities,
• Providing unmatched levels of service to our current customer base,
• Attaining FedRAMP Authorized certification,
• Growing our recurring high margin managed services revenues,
• Adding incremental capabilities to our Technology Management solution set or develop and/or acquire new high margin business lines,
• Leveraging our software platforms to grow our SaaS revenues and take advantage of the opportunities emerging from the growth in remote working,
• Expanding our customer base organically,
• Continuing 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,
• Expanding our solution offerings into the commercial space, and
• Exploring integration of artificial intelligence into our solution to provide better information security, and improve service delivery while reducing response time and cost.

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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.

Results of Operations

Three Months Ended June 30, 2024 Compared to Three Months Ended June 30, 2023

Revenues. Revenues for the three month period ended June 30, 2024 were approximately $36.0 million, an increase of approximately $9.3 million (or 35%), compared to approximately $26.8 million in the same period in 2023. Our mix of revenues for the periods presented is set forth below:

Our carrier services revenue was $20.4 million, an increase of approximately $6.2 million, as compared with the same period in 2023. The increase in carrier services revenues over the same period last year is a result of new US government contracts, that were signed in the second half of 2023, which provide for WidePoint to pay for carrier services on the US government’s behalf, which are reflected in the three-months ended June 30 2024 results.

Our managed service fees were $9.2 million, an increase of approximately $2.3 million, compared with the same period in 2023.

The increase in managed service fees was primarily due to new federal and commercial customers signed in the third and fourth quarter of 2023.

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Billable service fees were $1.2 million, a decrease of approximately $618,000 compared with the same period in 2023. The decrease is due to less project work at one of our U.S. Government customers and lower fees in Europe.

Reselling and other services increased by approximately $1.5 million from the same period last year primarily due to increased demand and activity for items we resell to our customers. Reselling and other services are transactional in nature, and the amount and timing of revenue will vary significantly from quarter to quarter.

Cost of Revenues. Our cost of revenues include employee labor, excluding fringe benefit costs, and subcontractors directly associated with satisfying customer performance obligations, and the associated cost of products and third-party software that we resell to our end customers. Cost of revenues also includes depreciation and amortization of capitalized software related to delivering our solutions. Cost of revenues for the three month period ended June 30, 2024 were $31.1 million (or 86% of revenues), which is consistent as a percentage of revenues with $22.8 million (or 85% of revenues) in 2023. Included in cost of revenues is carrier costs paid on behalf of our DHS customer of approximately $20.4 million and $14.2 million for the three month periods ended June 30, 2024 and 2023, respectively.

Gross Profit. Gross profit for the three month period ended June 30, 2024 was $4.9 million (or 14% of revenues), as compared to approximately $3.9 million (or 15% of revenues) in 2023. The slight decline in gross margin as a percentage of revenues in the second quarter of 2024 compared to the same period last year was related to increased amortization expenses as our delivery platforms are placed into service.

Gross profit excluding carrier services for the three month period ended June 30, 2024 was 31% compared to 31% in the same period last year.

Sales and Marketing. Sales and marketing expenses include employee labor, excluding fringe benefit costs, and sales commissions associated with our sales force, commission fees paid non-employee sales agents and partners, and costs associated with travel and trade shows. Sales and marketing expense for the three month period ended June 30, 2024 was approximately $0.6 million and remained relatively constant at 2% of revenues, as compared to approximately $0.5 million to 2023.

General and Administrative. General and administrative expenses include employees in finance, human resources, information technology, and other administrative support functions; employee labor not associated with any single revenue producing activity, all company fringe benefits, including paid time off, employee health and medical insurance, 401k matching contributions, and payroll taxes. General and administrative expenses also include professional services to include audit, consulting, outside legal, and outsourcing services. Certain of these expenses, including those associated with the operation of our technical infrastructure as well as components of our operating expenses, are generally less variable in nature and may not correlate to the changes in revenue. General and administrative expenses for the three month period ended June 30, 2024 were approximately $4.5 million (or 12% of revenues), as compared to approximately $3.8 million (or 16% of revenues) in 2023. The dollar increase during 2024 primarily relates to an increase in share based compensation expense compared to the same period last year.

Depreciation and Amortization. Depreciation and amortization expense for the three month period ended June 30, 2024 was $252,100 as compared to $263,700 in 2023.

Other Expense. Other expense for the three month period ended June 30, 2024 was $22,100 compared to $66,500 in 2023.

Income Taxes. Income tax provision for the three month period ended June 30, 2024 was $15,800 as compared to $48,800 in 2023. Income taxes were accrued at an estimated effective tax rate of (3.3)% for the three month period ended June 30, 2024 compared to (6.2)% for the three month period ended June 30, 2023.

Net Loss. As a result of the cumulative factors described above, net loss for the three month period ended June 30, 2024 decreased by $342,500 to $499,600 compared to net loss of $842,100 for the three month period ended June 30, 2023.

Six Months Ended June 30, 2024 Compared to Six Months Ended June 30, 2023

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Revenues. Revenues for the six month period ended June 30, 2024 were approximately $70.4 million, an increase of approximately $18.4 million (or 35%), as compared to approximately $52.1 million in 2023. Our mix of revenues for the periods presented is set forth below:

Our carrier services revenue was $39.7 million, an increase of approximately $11.9 million, compared with the same period in 2023. The increase in carrier services revenues over the same period last year is a result of new US government contracts, that were signed in the second half of 2023, which provide for WidePoint to pay for carrier services on the US government’s behalf, which are reflected in the six month period ended June 30 2024 results.

Our managed service fees were $17.8 million for the six-month period ended June 30, 2024 an increase of $4.1 million as a result of increased new awards activity in the second half of 2023. The increase in both carrier services revenues and managed service fees was primarily due to new federal customers signed in the third and fourth quarter of 2023.

Billable service fees were $2.4 million, a decrease of approximately $678,000 from the same period last year. The decrease is due to less project work a one of our U.S. Government customers, and lower fees in Europe.

Reselling and other services increased by $2.8 million from the same period last year primarily due to increased demand and activity for items we resell to our customers. Reselling and other services are transactional in nature, and the amount and timing of revenue will vary significantly from period to period.

Cost of Revenues. Our cost of revenues include employee labor, excluding fringe benefit costs, and subcontractors directly associated with satisfying customer performance obligations, and the associated cost of products and third-party software that we resell to our end customers. Cost of revenues also includes amortization of capitalized software related to delivering our solutions. Cost of revenues for the six month period ended June 30, 2024 were approximately $60.6 million (or 86% of revenues), as compared to approximately $44.3 million (or 85% of revenues) in 2023. The dollar increase in cost of revenues was a result of the corresponding costs related to the resale of the new capabilities provided by a third-party partner for two large federal contracts.

Gross Profit. Gross profit for the six month period ended June 30, 2024 was approximately $9.5 million (or 14% of revenues), as compared to approximately $7.7 million (or 15% of revenues) in 2023.

The Gross Profit percentage excluding carrier services was 31% for the six-month period ended June 30, 2024 compared to 32% in the same period last year. The lower gross margin percentage excluding carrier services is related to the corresponding costs related to the resale of the new capabilities provided by a third-party partner and increased depreciation and amortization related to capital investments in our delivery platforms reaching completion and beginning to be amortized. Our gross profit percentage will vary from period to period due to our revenue mix.

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Sales and Marketing. Sales and marketing expenses include employee labor, excluding fringe benefit costs, and sales commissions associated with our sales force, commission fees paid non-employee sales agents and partners, and costs associated with travel and trade shows. Sales and marketing expense for the six month period ended June 30, 2024 remained constant at approximately $1.2 million (or 2% of revenues), as compared to approximately $1.1 million (or 2% of revenues) in 2023.

General and Administrative. General and administrative expenses include employees in finance, human resources, information technology, and other administrative support functions; employee labor not associated with any single revenue producing activity, all company fringe benefits, including paid time off, employee health and medical insurance, 401k matching contributions, and payroll taxes. General and administrative expenses also include professional services to include audit, consulting, outside legal, and outsourcing services. Certain of these expenses, including those associated with the operation of our technical infrastructure as well as components of our operating expenses, are generally less variable in nature and may not correlate to the changes in revenue. General and administrative expenses for the six month period ended June 30, 2024 were approximately $8.9 million (or 13% of revenues), as compared to approximately $7.8 million (or 15% of revenues) in 2023. The dollar increase during 2024 primarily relates to an increase in share based compensation expense compared to the same period last year.

Depreciation and Amortization. Depreciation and amortization expense for the six month period ended June 30, 2024 was $508,600 compared to $529,500 in 2023.

Other Income (Expense). Other income (expense) for the six month period ended June 30, 2024 was an expense of $(66,300) compared to expense of $(123,300) in 2023.

Income Taxes. Income tax benefit for the six month period ended June 30, 2024 was $26,300 compared to income tax provision of $55,100 in 2023. Income taxes were accrued at an estimated effective tax rate of 2.2% for the six month period ended June 30, 2024 compared to (3.2)% for the six month period ended June 30, 2023.

Net Loss. As a result of the cumulative factors described above, net loss for the six month period ended June 30, 2024 improved to $1.1 million compared to net loss of $1.8 million in the same period last year.

Liquidity and Capital Resources

Our immediate sources of liquidity include cash, accounts receivable, unbilled receivables and access to our credit agreement with Old Dominion National Bank.

At June 30, 2024, our net working capital was approximately $2.4 million compared to $1.4 million at December 31, 2023. The increase in net working capital was primarily driven by a decrease in investments in computer hardware and software purchases and capitalized internally developed software costs during the six month period of 2024 compared to the prior period. We believe that our existing cash on hand, our anticipated cash flows from operations, funds available under the Old Dominion Credit Facility, through its maturity on February 28, 2025, and our access to alternative financing sources will be sufficient to meet our working capital, expenditure, and contractual obligation requirements for the next 12 months. The Company is currently in compliance with its covenants that do not become effective until December 31, 2024.

Cash Flows from Operating Activities

For the six months ended June 30, 2024, net cash used in operations was approximately $2.4 million driven by delayed billing and collections of accounts receivables with predominately four (4) U.S. government customers and is partially offset by temporary payable timing differences. The delays on billing and collections relate to administrative contract actions that the Company expects to resolve in the next three to six months. In the same period in 2023, $1 million net cash was provided by operations.

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Our single largest cash operating expense is the cost of labor and the Company sponsored healthcare benefit programs. 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 most of our facilities under non-cancellable long term contracts that may limit our ability to reduce fixed infrastructure expenditures in the short term. 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. We also may experience temporary collection timing differences from time to time due to customer invoice processing delays that are often beyond our control. New customers often take more time to implement our billing processes. Further, changes within existing customers deployment of our services can cause temporary delays in billings. While we have historically been able to resolve these administrative matters timely, given the scale of several new customer implementations, failure to resolve these matters on a timely basis could negatively impact our cashflows from operations.

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 six months ended June 30, 2024, cash provided by investing activities was approximately $0.2 million and consisted of receipt of deferred portion of proceeds from factoring arrangement offset by purchases of property and equipment.

For the six months ended June 30, 2023, cash used in investing activities was approximately $0.6 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.

Cash Flows from Financing Activities

Cash provided by (used in) financing activities provides an indication of our debt financing and stock option exercises.

For the six months ended June 30, 2024, cash used in financing activities was approximately $0.5 million and reflects line of credit advances and payments of $4.6 million, finance lease principal repayments of approximately $278,600, and withholding taxes paid on behalf of employees on net settled restricted stock awards of approximately $258,400.

For the six months ended June 30, 2023, cash used in financing activities was approximately $0.3 million and reflects line of credit advances and payments of approximately $6.4 million, finance lease principal repayments of approximately $255,400, and withholding taxes paid on behalf of employees on net settled restricted stock awards of approximately $3,600.

Net Effect of Exchange Rate on Cash and Equivalents

For the six months ended June 30, 2024 and 2023, minor fluctuations in the Euro and U.S. dollar exchange rate increased the translated value of our foreign cash balances by approximately $13,000 as compared to last year.

Off-Balance Sheet Arrangements

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

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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 quarterly report on Form 10-Q 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.

Changes in Internal Control over Financial Reporting

There were no changes in the Company’s internal control over financial reporting during the three month period ended June 30, 2024 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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Our risk factors have not changed materially from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2023.