WIDEPOINT CORP - Interim / Quarterly Report 2020

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

| ☑ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
| --- | --- |
| | For the quarterly period ended September 30, 2020 |
| or | |
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
| | For the transition period from ___ to
____ |

Commission File Number: 001-33035

WidePoint Corporation
(Exact name of Registrant as specified in its charter)

Delaware	52-2040275
(State or other jurisdiction of	(I.R.S. employer
incorporation or organization)	identification no.)

| 11250 Waples Mill Road, South Tower 210, Fairfax, Virginia
22030 |
| --- |
| (Address of principal executive offices) (Zip Code) |

(703) 349-2577
(Registrant’s telephone number, including area
code)

Securities Registered pursuant to Section 12(b) of the Act:

Title of Each Class	Trading Symbol	Name of Exchange on Which Registered
Common Stock, $0.001 par value per share	WYY	NYSE
American

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes ☑ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files): Yes ☑ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

| Large
accelerated filer ☐ | Accelerated
filer ☐ |
| --- | --- |
| Non-accelerated
filer ☐ | Smaller
reporting company ☑ Emerging
growth company ☐ |

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. Yes ☐ No ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☑

As of November 16, 2020, there were 8,458,734 shares of the registrant’s Common Stock issued and outstanding.

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WIDEPOINT CORPORATION

INDEX

| Part
I | FINANCIAL
INFORMATION | Page
No. |
| --- | --- | --- |
| | Condensed
Consolidated Financial Statements | 2 |
| | Condensed
Consolidated Statements of Operations for the three and nine month
periods ended September 30, 2020 and 2019
(unaudited) | 2 |
| | Condensed
Consolidated Statements of Comprehensive Income for the three and
nine month periods ended September 30, 2020 and 2019
(unaudited) | 3 |
| | Condensed
Consolidated Balance Sheets as of September 30, 2020 and December
31, 2019 (unaudited) | 4 |
| | Condensed
Consolidated Statements of Cash Flows for the nine month periods
ended September 30, 2020 and 2019 (unaudited) | 5 |
| | Condensed
Consolidated Statements of Changes in Stockholders’ Equity
for the three and nine month periods ended September 30, 2020 and
2019 (unaudited) | 7 |
| | Notes to Condensed
Consolidated Financial Statements (unaudited) | 8 |
| Item
2. | Management's
Discussion and Analysis of Financial Condition and Results
of Operations | 19 |
| Item
3. | Quantitative and
Qualitative Disclosures About Market Risk | 25 |
| Item
4. | Controls and
Procedures | 26 |
| Part II. | OTHER INFORMATION | |
| Item
1. | Legal
Proceedings | 26 |
| Item
1A. | Risk
Factors | 26 |
| Item
2. | Unregistered Sales
of Equity Securities and Use of Proceeds | 26 |
| Item
3. | Default Upon Senior
Securities | 27 |
| Item
4. | Mine Safety
Disclosures | 27 |
| Item
5. | Other
Information | 27 |
| Item
6. | Exhibits | 27 |
| SIGNATURES | | 28 |
| CERTIFICATIONS | | 29 |

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PART I. FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.

WIDEPOINT CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF O PERATIONS

| | THREE MONTHS
ENDED — SEPTEMBER
30, | | NINE MONTHS
ENDED — SEPTEMBER
30, | |
| --- | --- | --- | --- | --- |
| | 2020 | 2019 | 2020 | 2019 |
| | (Unaudited) | | | |
| REVENUES | $ 57,506,561 | $ 29,616,940 | $ 151,955,707 | $ 73,626,995 |
| COST OF REVENUES
(including amortization and depreciation of | | | | |
| $130,559, $233,033,
$432,327, and $698,192, respectively) | 51,888,205 | 25,302,919 | 136,314,439 | 61,002,387 |
| GROSS
PROFIT | 5,618,356 | 4,314,021 | 15,641,268 | 12,624,608 |
| OPERATING
EXPENSES | | | | |
| Sales and
marketing | 500,015 | 406,683 | 1,431,930 | 1,215,556 |
| General and
administrative expenses (including share-based | | | | |
| compensation of
$160,056, $163,451, $650,924 and $536,828,
respectively) | 3,684,344 | 3,372,269 | 10,887,952 | 10,070,383 |
| Depreciation and
amortization | 285,181 | 246,293 | 814,813 | 730,905 |
| Total operating
expenses | 4,469,540 | 4,025,245 | 13,134,695 | 12,016,844 |
| INCOME FROM
OPERATIONS | 1,148,816 | 288,776 | 2,506,573 | 607,764 |
| OTHER (EXPENSE)
INCOME | | | | |
| Interest
income | 94 | 40 | 3,119 | 4,761 |
| Interest
expense | (69,582 ) | (78,066 ) | (227,889 ) | (230,983 ) |
| Other
income | 118 | 5,324 | 458 | 5,324 |
| Total other
expense | (69,370 ) | (72,702 ) | (224,312 ) | (220,898 ) |
| INCOME BEFORE
INCOME TAX PROVISION | 1,079,446 | 216,074 | 2,282,261 | 386,866 |
| INCOME TAX
PROVISION | 12,483 | 32,364 | 242,783 | 126,816 |
| NET
INCOME | $ 1,066,963 | $ 183,710 | $ 2,039,478 | $ 260,050 |
| BASIC EARNINGS PER
SHARE | $ 0.13 | $ 0.02 | $ 0.24 | $ 0.03 |
| BASIC
WEIGHTED-AVERAGE SHARES OUTSTANDING | 8,450,843 | 8,423,435 | 8,409,114 | 8,401,405 |
| DILUTED EARNINGS
PER SHARE | $ 0.13 | $ 0.02 | $ 0.24 | $ 0.03 |
| DILUTED
WEIGHTED-AVERAGE SHARES OUTSTANDING | 8,527,309 | 8,427,183 | 8,463,561 | 8,405,152 |

The accompanying notes are an integral part of these condensed consolidated financial statements.

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WIDEPOINT CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE I NCOME

| | THREE MONTHS
ENDED — SEPTEMBER
30, | | NINE MONTHS
ENDED — SEPTEMBER
30, | |
| --- | --- | --- | --- | --- |
| | 2020 | 2019 | 2020 | 2019 |
| | (Unaudited) | | | |
| NET
INCOME | $ 1,066,963 | $ 183,710 | $ 2,039,478 | $ 260,050 |
| Other
comprehensive income (loss): | | | | |
| Foreign
currency translation adjustments, net of tax | 64,890 | (50,411 ) | 55,159 | (65,698 ) |
| Other
comprehensive income (loss) | 64,890 | (50,411 ) | 55,159 | (65,698 ) |
| COMPREHENSIVE
INCOME | $ 1,131,853 | $ 133,299 | $ 2,094,637 | $ 194,352 |

The accompanying notes are an integral part of these condensed consolidated financial statements.

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WIDEPOINT CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED B ALANCE SHEETS

| | SEPTEMBER 30, | DECEMBER
31, |
| --- | --- | --- |
| | 2020 | 2019 |
| | (Unaudited) | |
| ASSETS | | |
| CURRENT
ASSETS | | |
| Cash
and cash equivalents | $ 11,372,902 | $ 6,879,627 |
| Accounts
receivable, net of allowance for doubtful accounts | | |
| of
$119,248 and $126,235 in 2020 and 2019, respectively | 31,469,534 | 14,580,928 |
| Unbilled
accounts receivable | 15,041,634 | 13,976,958 |
| Other
current assets | 1,099,773 | 1,094,847 |
| Total
current assets | 58,983,843 | 36,532,360 |
| NONCURRENT
ASSETS | | |
| Property
and equipment, net | 619,773 | 681,575 |
| Operating
lease right of use asset, net | 6,299,131 | 5,932,769 |
| Intangibles,
net | 2,076,320 | 2,450,770 |
| Goodwill | 18,555,578 | 18,555,578 |
| Other
long-term assets | 874,906 | 140,403 |
| Total
assets | $ 87,409,551 | $ 64,293,455 |
| LIABILITIES AND STOCKHOLDERS' EQUITY | | |
| CURRENT
LIABILITIES | | |
| Accounts
payable | $ 30,954,163 | $ 13,581,822 |
| Accrued
expenses | 17,348,047 | 14,947,981 |
| Deferred
revenue | 2,270,783 | 2,265,067 |
| Current
portion of operating lease liabilities | 580,483 | 599,619 |
| Current
portion of other term obligations | - | 133,777 |
| Total
current liabilities | 51,153,476 | 31,528,266 |
| NONCURRENT
LIABILITIES | | |
| Operating
lease liabilities, net of current portion | 6,097,949 | 5,593,649 |
| Deferred
revenue, net of current portion | 382,814 | 363,560 |
| Deferred
tax liability | 2,100,446 | 1,868,562 |
| Total
liabilities | 59,734,685 | 39,354,037 |
| Commitments
and contingencies | - | - |
| STOCKHOLDERS'
EQUITY | | |
| Preferred
stock, $0.001 par value; 10,000,000 shares | | |
| authorized;
2,045,714 shares issued and none outstanding | - | - |
| Common
stock, $0.001 par value; 30,000,000 shares | | |
| authorized;
8,458,734 and 8,386,145 shares | | |
| issued
and outstanding, respectively | 84,587 | 83,861 |
| Additional
paid-in capital | 95,919,199 | 95,279,114 |
| Accumulated
other comprehensive loss | (187,435 ) | (242,594 ) |
| Accumulated
deficit | (68,141,485 ) | (70,180,963 ) |
| Total
stockholders’ equity | 27,674,866 | 24,939,418 |
| Total
liabilities and stockholders’ equity | $ 87,409,551 | $ 64,293,455 |

The accompanying notes are an integral part of these condensed consolidated financial statements.

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WIDEPOINT CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF C ASH FLOWS

| | NINE MONTHS
ENDED | |
| --- | --- | --- |
| | SEPTEMBER
30, | |
| | 2020 | 2019 |
| | (Unaudited) | |
| CASH FLOWS FROM
OPERATING ACTIVITIES | | |
| Net
income | $ 2,039,478 | $ 260,050 |
| Adjustments to
reconcile net income to net cash provided by | | |
| (used in) operating
activities: | | |
| Deferred income tax
expense | 236,115 | 82,237 |
| Depreciation
expense | 870,175 | 832,651 |
| Provision for
doubtful accounts | 571 | 23,460 |
| Amortization of
intangibles | 376,965 | 596,446 |
| Amortization of
deferred financing costs | 1,667 | 3,750 |
| Share-based
compensation expense | 650,924 | 536,828 |
| Changes in assets
and liabilities: | | |
| Accounts receivable
and unbilled receivables | (17,870,622 ) | 330,286 |
| Inventories | (2,151 ) | 65,161 |
| Prepaid expenses
and other current assets | 131,403 | 128,468 |
| Other
assets | 18,334 | 61,661 |
| Accounts payable
and accrued expenses | 19,588,012 | 2,487,865 |
| Income tax
payable | (40,747 ) | 6,133 |
| Deferred revenue
and other liabilities | (4,295 ) | 37,535 |
| Net cash provided
by operating activities | 5,995,829 | 5,452,531 |
| CASH FLOWS FROM
INVESTING ACTIVITIES | | |
| Purchases of
property and equipment | (225,883 ) | (214,072 ) |
| Capitalized
software development costs | (752,837 ) | (146,767 ) |
| Net cash used in
investing activities | (978,720 ) | (360,839 ) |
| CASH FLOWS FROM
FINANCING ACTIVITIES | | |
| Advances on bank
line of credit | 1,895,659 | 6,354,455 |
| Repayments of bank
line of credit advances | (1,895,659 ) | (6,354,455 ) |
| Principal
repayments under finance lease obligations | (452,841 ) | (356,924 ) |
| Debt
issuance costs | - | (5,000 ) |
| Common stock
repurchased | (10,113 ) | - |
| Offering costs for
the issuance of common stock/At-the-market offering | (131,436 ) | - |
| Net cash used in
financing activities | (594,390 ) | (361,924 ) |
| Net
effect of exchange rate on cash and equivalents | 70,556 | (62,043 ) |
| NET INCREASE IN
CASH AND CASH EQUIVALENTS | 4,493,275 | 4,667,725 |
| CASH AND CASH
EQUIVALENTS, beginning of period | 6,879,627 | 2,431,892 |
| CASH AND CASH
EQUIVALENTS, end of period | $ 11,372,902 | $ 7,099,617 |

The accompanying notes are an integral part of these condensed consolidated financial statements.

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WIDEPOINT CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

| | NINE MONTHS
ENDED | |
| --- | --- | --- |
| | SEPTEMBER
30, | |
| | 2020 | 2019 |
| | (Unaudited) | |
| SUPPLEMENTAL CASH
FLOW INFORMATION | | |
| Cash paid for
interest | $ 229,795 | $ 213,233 |
| Cash paid for
income taxes | $ - | $ 8,857 |
| NONCASH INVESTING
AND FINANCING ACTIVITIES | | |
| Insurance policies
financed by short term notes payable | $ - | $ 77,386 |
| Cashless exercise
of stock options | $ 169 | $ - |
| Leased assets
obtained in exchange for new lease liabilities | $ 943,290 | $ - |

The accompanying notes are an integral part of these condensed consolidated financial statements.

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WIDEPOINT CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN S TOCKHOLDERS’ EQUITY

| | Common
Stock | | Additional — Paid-In | Accumulated | Accumulated | |
| --- | --- | --- | --- | --- | --- | --- |
| | Issued | Amount | Capital | OCI | Deficit | Total |
| | (Unaudited) | | | | | |
| Balance, January 1,
2019 | 8,411,245 | $ 84,113 | $ 94,926,560 | $ (186,485 ) | $ (70,407,218 ) | $ 24,416,970 |
| Stock compensation expense
— | | | | | | |
| restricted | - | - | 16,737 | - | - | 16,737 |
| Stock compensation expense
— | | | | | | |
| non-qualified stock
options | - | - | 72,529 | - | - | 72,529 |
| Foreign currency translation
— | | | | | | |
| (loss) | - | - | - | (29,282 ) | - | (29,282 ) |
| Net income | - | - | - | - | 384,101 | 384,101 |
| Balance, March 31,
2019 | 8,411,245 | $ 84,113 | $ 95,015,826 | $ (215,767 ) | $ (70,023,117 ) | $ 24,861,055 |
| Issuance of common stock
— | | | | | | |
| restricted | 66,274 | 663 | (663 ) | - | - | - |
| Stock compensation expense
— | | | | | | |
| restricted | - | - | 180,863 | - | - | 180,863 |
| Stock compensation expense
— | | | | | | |
| non-qualified stock
options | - | - | 103,248 | - | - | 103,248 |
| Foreign currency translation
— | | | | | | |
| gain | - | - | - | 13,995 | - | 13,995 |
| Net loss | - | - | - | - | (307,761 ) | (307,761 ) |
| Balance, June 30,
2019 | 8,477,519 | $ 84,776 | $ 95,299,274 | $ (201,772 ) | $ (70,330,878 ) | $ 24,851,400 |
| Stock compensation expense
— | | | | | | |
| restricted | - | - | 91,826 | - | - | 91,826 |
| Stock compensation expense
— | | | | | | |
| non-qualified stock
options | - | - | 71,625 | - | - | 71,625 |
| Foreign currency translation
— | | | | | | |
| (loss) | - | - | - | (50,411 ) | - | (50,411 ) |
| Net Income | - | - | - | - | 183,710 | 183,710 |
| Balance, September 30,
2019 | 8,477,519 | $ 84,776 | $ 95,462,725 | $ (252,183 ) | $ (70,147,168 ) | $ 25,148,150 |

| | Common
Stock | | Additional — Paid-In | Accumulated | Accumulated | |
| --- | --- | --- | --- | --- | --- | --- |
| | Issued | Amount | Capital | OCI | Deficit | Total |
| | (Unaudited) | | | | | |
| Balance, January
1, 2020 | 8,386,145 | $ 83,861 | $ 95,279,114 | $ (242,594 ) | $ (70,180,963 ) | $ 24,939,418 |
| Common stock repurchased | (2,416 ) | (24 ) | (10,089 ) | | | (10,113 ) |
| Stock
compensation expense — | | | | | | |
| restricted | - | - | 254,499 | - | - | 254,499 |
| Stock
compensation expense — | | | | | | |
| non-qualified
stock options | - | - | 26,942 | - | - | 26,942 |
| Foreign currency
translation — | | | | | | |
| (loss) | - | - | - | (37,330 ) | - | (37,330 ) |
| Net
income | - | - | - | - | 483,888 | 483,888 |
| Balance, March
31, 2020 | 8,383,729 | $ 83,837 | $ 95,550,466 | $ (279,924 ) | $ (69,697,075 ) | $ 25,657,304 |
| Issuance of
common stock — | | | | | | |
| restricted | 58,123 | 581 | (581 ) | - | - | - |
| Stock
compensation expense — | | | | | | |
| restricted | - | | 182,928 | - | - | 182,928 |
| Stock
compensation expense — | | | | | | |
| non-qualified
stock options | - | - | 26,499 | - | - | 26,499 |
| Foreign currency
translation — | | | | | | |
| gain | - | - | - | 27,599 | - | 27,599 |
| Net
income | - | - | - | | 488,627 | 488,627 |
| Balance, June
30, 2020 | 8,441,852 | $ 84,418 | $ 95,759,312 | $ (252,325 ) | $ (69,208,448 ) | $ 26,382,957 |
| Issuance of
common stock — | | | | | | |
| options
exercises | 16,882 | 169 | (169 ) | - | - | - |
| Stock
compensation expense — | | | | | | |
| restricted | - | - | 133,266 | - | - | 133,266 |
| Stock
compensation expense — | | | | | | |
| non-qualified
stock options | - | - | 26,790 | - | - | 26,790 |
| Foreign currency
translation — | | | | | | |
| gain | - | - | - | 64,890 | - | 64,890 |
| Net
Income | - | - | - | | 1,066,963 | 1,066,963 |
| Balance,
September 30, 2020 | 8,458,734 | $ 84,587 | $ 95,919,199 | $ (187,435 ) | $ (68,141,485 ) | $ 27,674,866 |

The accompanying notes are an integral part of these condensed consolidated financial statements.

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WIDEPOINT CORPORATION AND SUBSIDIARIES

N OTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Organization and Nature of Operations

Organization

WidePoint Corporation (“WidePoint” or the “Company”) was incorporated in Delaware on May 30, 1997 and conducts operations through its wholly-owned operating subsidiaries throughout the continental United States, Ireland, the Netherlands and the United Kingdom. The Company’s principal executive and administrative headquarters is located in Fairfax, Virginia.

Nature of Operations

The Company is a leading provider of trusted mobility management (TM2). The Company’s TM2 platform and service solutions enable its customers to efficiently secure, manage and analyze the entire lifecycle of their mobile communications assets through its federally compliant platform Intelligent Telecommunications Management System (ITMS™). The Company’s ITMS™ platform is SSAE 18 compliant and was granted an Authority to Operate by the U.S. Department of Homeland Security and the U.S. Department of Commerce. Additionally, the Company was granted an Authority to Operate by the General Services Administration with regard to its identity credentialing component of its TM2 platform. The Company’s TM2 platform is internally hosted and accessible on-demand through a secure customer portal that is specially configured for each customer. The Company can deliver these solutions in a number of configurations ranging from utilizing the platform as a service to a full-service solution that includes full lifecycle support for all end users and the organization.

The Company derives a significant amount of its revenues from contracts funded by federal government agencies for which WidePoint’s subsidiaries act in the capacity as the prime contractor, or as a subcontractor. The Company believes that contracts with federal government agencies will be the primary source of revenues for the foreseeable future. External factors outside of the Company’s control such as delays and/or a change in government administrations, budgets and other political matters that may impact the timing and commencement of such work could result in variations in operating results and directly affect the Company’s financial performance. Successful contract performance and variation in the volume of activity as well as in the number of contracts commenced or completed during any quarter may cause significant variations in operating results from quarter to quarter.

A significant portion of the Company’s expenses, such as personnel and facilities costs, are fixed in the short term and may not be easily modified to manage through changes in the Company’s market place that may create pressure on pricing and/or costs to deliver its services.

The Company has periodic capital expense requirements to maintain and upgrade its internal technology infrastructure tied to its hosted solutions and other such costs may be significant when incurred in any given quarter.

COVID-19

The coronavirus (“COVID-19”) pandemic has created significant macroeconomic uncertainty, volatility and disruption. The assessment of how COVID-19 will impact our business is on-going and encompasses all aspects of our business, including how COVID-19 will impact our customers, employees, subcontractors, business partners and the capital markets. Although the Company did not experience significant disruptions during the nine months ended September 30, 2020, we are unable to fully predict the impact the COVID-19 pandemic will have on our future financial position, results of operations, or cash flows.

Additionally, changes in spending policies, budget priorities and funding levels are a key factor influencing the purchasing levels of government customers. With the current COVID-19 pandemic, future budget priorities and funding levels for these customers may be adversely affected.

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Basis of Presentation and Accounting Policies

Basis of Presentation

The unaudited condensed consolidated financial statements as of September 30, 2020 and for each of the three and nine month periods ended September 30, 2020 and 2019, respectively, included herein have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Pursuant to such regulations, certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) have been condensed or omitted. It is the opinion of management that all adjustments (which include normal recurring adjustments) necessary for a fair statement of financial results are reflected in the financial statements for the interim periods presented. The condensed consolidated balance sheet as of December 31, 2019 was derived from the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019. The results of operations for the three and nine month periods ended September 30, 2020 are not necessarily indicative of the operating results for the full year.

Principles of Consolidation

The accompanying condensed consolidated financial statements include the accounts of the Company, its wholly owned subsidiaries and acquired entities since their respective dates of acquisition. All significant inter-company amounts were eliminated in consolidation.

Common Stock Reverse Split

On October 23, 2020, the Company filed a Certificate of Amendment to its Amended and Restated Certificate of Incorporation with the Secretary of Delaware to effect a one-for-ten reverse stock split of the shares of the Company’s common stock, effective as of 5:00 pm Eastern Time on November 6, 2020. The Certificate of Amendment also decreased the number of authorized shares of the Company’s common stock from 110,000,000 to 30,000,000. All share, restricted stock awards (“RSA”) and per share information has been retroactively adjusted to reflect the reverse stock split.

Foreign Currency

Assets and liabilities denominated in foreign currencies are translated into U.S. dollars based upon exchange rates prevailing at the end of each reporting period. The resulting translation adjustments, along with any related tax effects, are included in accumulated other comprehensive income, a component of stockholders’ equity. Translation adjustments are reclassified to earnings upon the sale or substantial liquidation of investments in foreign operations. Revenues and expenses are translated at the average month-end exchange rates during the year. Gains and losses related to transactions in a currency other than the functional currency, including operations outside the U.S. where the functional currency is the U.S. dollar, are reported net in the Company’s condensed consolidated statements of operations, depending on the nature of the activity.

Use of Estimates

The preparation of condensed consolidated financial statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The more significant areas requiring use of estimates and judgment relate to revenue recognition, accounts receivable valuation reserves, ability to realize intangible assets and goodwill, ability to realize deferred income tax assets, fair value of certain financial instruments and the evaluation of contingencies and litigation. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results could differ from those estimates. There were no significant changes in accounting estimates used by management during the quarter.

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Segment Reporting

Our TM2 solution offerings comprise an overall single business from which the Company earns revenues and incurs costs. The Company’s TM2 solution offerings are centrally managed and reported on that basis to its Chief Operating Decision Maker who evaluates its business as a single segment. See Note 14 for detailed information regarding the composition of revenues.

Significant Accounting Policies

There were no significant changes in the Company’s significant accounting policies during the first nine months of 2020 from those disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 filed with the SEC on March 24, 2020.

Accounting Standards under Evaluation

In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments ” (“Topic 326”). Topic 326 amends guidance on reporting credit losses for assets held at amortized cost basis and available for sale debt securities. For assets held at amortized cost basis, Topic 326 eliminates the probable initial recognition threshold in current GAAP and, instead, requires an entity to reflect its current estimate of all expected credit losses. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial assets to present the net amount expected to be collected. For available for sale debt securities, credit losses should be measured in a manner similar to current GAAP, however Topic 326 will require that credit losses be presented as an allowance rather than as a write-down. This ASU update affects entities holding financial assets and net investment in leases that are not accounted for at fair value through net income. This update is effective for the company for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Company is currently evaluating the impact of the pending adoption of this new standard on its consolidated financial statements.

Accounts Receivable and Significant Concentrations

A significant portion of the Company’s receivables are billed under firm fixed price contracts with agencies of the U.S. federal government and similar pricing structures with several corporations. Accounts receivable consist of the following by customer type in the table below as of the periods presented:

| | SEPTEMBER 30, | DECEMBER
31, |
| --- | --- | --- |
| | 2020 | 2019 |
| | (Unaudited) | |
| Government
(1) | $ 29,569,252 | $ 12,604,582 |
| Commercial
(2) | 2,019,530 | 2,102,581 |
| Gross accounts
receivable | 31,588,782 | 14,707,163 |
| Less: allowances
for doubtful | | |
| accounts
(3) | 119,248 | 126,235 |
| Accounts
receivable, net | $ 31,469,534 | $ 14,580,928 |

(1) Government contracts are generally firm fixed price not to exceed arrangements with a term of five (5) years, which consists of a base year and four (4) annual option year renewals. Government receivables are billed under a single consolidated monthly invoice and are billed approximately thirty (30) to sixty (60) days in arrears from the date of service and payment is generally due within thirty (30) days of the invoice date. Government accounts receivable payments could be delayed due to administrative processing delays by the government agency, continuing budget resolutions that may delay availability of contract funding, and/or administrative only invoice correction requests by contracting officers that may delay payment processing by our government customers.

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(2) Commercial contracts are generally fixed price arrangements with contract terms ranging from two (2) to three (3) years. Commercial accounts receivables are billed based on the underlying contract terms and conditions which generally have repayment terms that range from thirty (30) to ninety (90) days. Commercial receivables are stated at amounts due from customers net of an allowance for doubtful accounts if deemed necessary.

(3) For the nine months ended September 30, 2020, the Company did not recognize any material provisions for bad debt, write-offs or recoveries of existing provisions for bad debt . The Company has not historically maintained a bad debt reserve for its government customers as it has not experienced material or recurring bad debt charges and the nature and size of the contracts has not necessitated the Company’s establishment of such a bad debt reserve.

Significant Concentrations

The following table presents customers that represent ten (10) percent or more of consolidated trade accounts receivable as of the dates presented below:

| | SEPTEMBER 30, | DECEMBER
31, |
| --- | --- | --- |
| | 2020 | 2019 |
| | As a %
of | As a %
of |
| Customer
Name | Receivables | Receivables |
| | (Unaudited) | |
| National
Aeronautics and Space Administration | -- | 21% |
| U.S. Census
Bureau | 68% | 18% |

The following table presents customers that represent ten (10) percent or more of consolidated revenues in the current and/or comparative periods:

| | THREE MONTHS
ENDED — SEPTEMBER
30, | | NINE MONTHS
ENDED — SEPTEMBER
30, | |
| --- | --- | --- | --- | --- |
| | 2020 | 2019 | 2020 | 2019 |
| | As a %
of | As a %
of | As a %
of | As a %
of |
| Customer Name | Revenues | Revenues | Revenues | Revenues |
| | (Unaudited) | | | |
| U.S. Immigration
and Customs Enforcement | -- | 12% | -- | 14% |
| U.S. Customs Border
Patrol | -- | 14% | -- | 12% |
| U.S. Transportation
Safety Administration | 10% | -- | -- | -- |
| U.S. Census
Bureau | 61% | 16% | 54% | -- |

Unbilled Accounts Receivable

Unbilled accounts receivable represent revenues earned but not invoiced to the customer at the balance sheet date due to either timing of invoice processing or delays due to fixed contractual billing schedules. A significant portion of our unbilled accounts receivable consist of carrier services and hardware and software products delivered but not invoiced at the end of the reporting period.

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The following table presents customers that represent ten (10) percent or more of consolidated unbilled accounts receivable as of the dates presented below:

| | SEPTEMBER 30, | DECEMBER
31, |
| --- | --- | --- |
| | 2020 | 2019 |
| | As a %
of | As a %
of |
| Customer
Name | Receivables | Receivables |
| | (Unaudited) | |
| U.S.
Immigration and Customs Enforcement | 18% | 24% |
| U.S. Census
Bureau | -- | 23% |

Other Current Assets and Accrued Expenses

Other current assets consisted of the following as of the dates presented below:

| | SEPTEMBER 30, | DECEMBER
31, |
| --- | --- | --- |
| | 2020 | 2019 |
| | (Unaudited) | |
| Inventories | $ 216,058 | $ 213,713 |
| Prepaid rent,
insurance and other assets | 883,715 | 881,134 |
| Total other current
assets | $ 1,099,773 | $ 1,094,847 |

Accrued expenses consisted of the following as of the dates presented below:

| | SEPTEMBER 30, | DECEMBER
31, |
| --- | --- | --- |
| | 2020 | 2019 |
| | (Unaudited) | |
| Carrier service
costs | $ 13,596,460 | $ 12,274,440 |
| Salaries and
payroll taxes | 2,728,088 | 1,781,628 |
| Inventory
purchases, consultants and other costs | 1,006,107 | 834,131 |
| Severance
costs | 7,612 | 7,612 |
| U.S. income tax
payable | 3,670 | 8,850 |
| Foreign income tax
payable | 6,110 | 41,320 |
| Total accrued
expenses | $ 17,348,047 | $ 14,947,981 |

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Property and Equipment

Major classes of property and equipment consisted of the following as of the dates presented below:

| | SEPTEMBER 30, | DECEMBER
31, |
| --- | --- | --- |
| | 2020 | 2019 |
| | (Unaudited) | |
| Computer hardware
and software | $ 2,216,824 | $ 2,041,978 |
| Furniture and
fixtures | 452,117 | 399,521 |
| Leasehold
improvements | 298,080 | 299,340 |
| Automobiles | 30,063 | 56,800 |
| Gross property and
equipment | 2,997,084 | 2,797,639 |
| Less: accumulated
depreciation and | | |
| amortization | 2,377,311 | 2,116,064 |
| Property and
equipment, net | $ 619,773 | $ 681,575 |

During the three and nine month periods ended September 30, 2020, property and equipment depreciation expense was approximately $117,000 and $328,300, respectively, as compared to $142,600 and $417,400, respectively, for the three and nine month periods ended September 30, 2019.

During the nine month periods ended September 30, 2020 and 2019, there were no material disposals of owned property and equipment.

There were no changes in the estimated useful lives used to depreciate property and equipment during the three and nine month periods ended September 30, 2020 and 2019.

Goodwill and Intangible Assets

The Company has recorded goodwill of $18,555,578 as of September 30, 2020. There were no changes in the carrying amount of goodwill during the nine month period ended September 30, 2020.

Intangible assets consists of the following:

| | SEPTEMBER 30,
2020 | | |
| --- | --- | --- | --- |
| | | (unaudited) | |
| | Gross
Carrying | Accumulated | Net
Book |
| | Amount | Amortization | Value |
| Customer
Relationships | $ 1,980,000 | $ (1,980,000 ) | $ - |
| Channel
Relationships | 2,628,080 | (1,124,234 ) | 1,503,846 |
| Internally
Developed Software | 1,629,772 | (1,223,512 ) | 406,260 |
| Trade
Name and Trademarks | 290,472 | (124,258 ) | 166,214 |
| | $ 6,528,324 | $ (4,452,004 ) | $ 2,076,320 |

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| | DECEMBER 31,
2019 — Gross
Carrying | Accumulated | Net
Book |
| --- | --- | --- | --- |
| | Amount | Amortization | Value |
| Customer
Relationships | $ 1,980,000 | $ (1,980,000 ) | $ - |
| Channel
Relationships | 2,628,080 | (992,830 ) | 1,635,250 |
| Internally
Developed Software | 1,623,122 | (988,340 ) | 634,782 |
| Trade
Name and Trademarks | 290,472 | (109,734 ) | 180,738 |
| | $ 6,521,674 | $ (4,070,904 ) | $ 2,450,770 |

For the three and nine month periods ended September 30, 2020, the Company capitalized $234,000 and $753,000, respectively, of internally developed software costs, primarily associated with upgrading our ITMS™ (Intelligent Telecommunications Management System), secure identity management technology and network operations center. For the three and nine month periods ended September 30, 2019, the Company capitalized internally developed software costs of approximately $21,000 and $146,800, respectively, related to costs associated with our next generation TDI Optimiser™ application. There were no disposals of intangible assets during the three month periods ended September 30, 2020 and 2019.

The aggregate amortization expense recorded for the three month periods ended September 30, 2020 and 2019 were approximately $125,700 and $198,800, respectively. The aggregate amortization expense recorded for the nine month periods ended September 30, 2020 and 2019 were approximately $377,00 and $596,500, respectively The total weighted remaining average life of all purchased intangible assets and internally developed software costs was approximately 4.3 years and 1.0 year, respectively, at September 30, 2020.

As of September 30, 2020, estimated annual amortization for our intangible assets for each of the next five years is approximately:

| Remainder
of 2020 | $ 77,270 |
| --- | --- |
| 2021 | 333,714 |
| 2022 | 202,021 |
| 2023 | 194,570 |
| 2024 | 194,570 |
| Thereafter | 1,074,175 |
| Total | $ 2,076,320 |

Lease Modification

The Company entered into a lease amendment, effective July 24, 2020, for additional office space and a one year extension of the original lease term. The Company accounted for the lease amendment under the lease modification guidance in ASC 842, Leases . As a result, the Company re-measured its lease liability and recognized an additional lease liability and corresponding right-of-use asset of $943,290. The lease liability was discounted using the Company’s incremental borrowing rate of 3.5%.

Line of Credit

On June 15, 2017, the Company entered into a Loan and Security Agreement with Atlantic Union Bank (formerly known as Access National Bank) (the “Loan Agreement”). The Loan Agreement provides for a $5.0 million working capital revolving line of credit.

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Effective, April 30, 2020, the Company entered into a fifth modification agreement (“Modification Agreement”) with Atlantic Union Bank to amend the existing Loan Agreement. The Modification Agreement extended the maturity date of the facility from April 30, 2020 through April 30, 2021 and changed the variable interest rate from the Wall Street Journal prime rate plus 0.50% to the Wall Street Journal prime rate plus 0.25%.

The Loan Agreement requires that the Company meet the following financial covenants on a quarterly basis: (i) maintain a minimum adjusted tangible net worth of at least $2.0 million, (ii) maintain minimum consolidated EBITDA of at least two times interest expense and (iii) maintain a current ratio of 1.10:1.

The available amount under the working capital line of credit is subject to a borrowing base, which is equal to the lesser of (i) $5.0 million or (ii) 70% of the net unpaid balance of the Company’s eligible accounts receivable. The facility is secured by a first lien security interest on all of the Company’s personal property, including its accounts receivable, general intangibles, inventory and equipment maintained in the United States. As of September 30, 2020, the Company was eligible to borrow up to $4.9 million under the borrowing base formula.

10.

Income Taxes

The Company files U.S. federal income tax returns with the Internal Revenue Service (“IRS”) as well as income tax returns in various states and certain foreign countries. The Company may be subject to examination by the IRS or various state taxing jurisdictions for tax years 2003 and forward. The Company may be subject to examination by various foreign countries for tax years 2014 forward. As of September 30, 2020, the Company was not under examination by the IRS, any state or foreign tax jurisdiction. The Company did not have any unrecognized tax benefits at either September 30, 2020 or December 31, 2019. In the future if applicable, any interest and penalties related to uncertain tax positions will be recognized in income tax expense.

As of September 30, 2020, the Company had approximately $37.5 million in net operating loss (NOL) carry forwards available to offset future taxable income for federal income tax purposes, net of the potential Section 382 limitations. These federal NOL carry forwards expire between 2020 and 2037. Included in the recorded deferred tax asset, the Company had a benefit of approximately $39.5 million available to offset future taxable income for state income tax purposes. These state NOL carry forwards expire between 2024 and 2036. Because of the change of ownership provisions of the Tax Reform Act of 1986, use of a portion of our domestic NOL may be limited in future periods. Further, a portion of the carryforwards may expire before being applied to reduce future income tax liabilities.

Management assesses the available positive and negative evidence to estimate if sufficient future taxable income will be generated to use the existing deferred tax assets. Under existing income tax accounting standards such objective evidence is more heavily weighted in comparison to other subjective evidence such as our projections for future growth, tax planning and other tax strategies. A significant piece of objective negative evidence considered in management’s evaluation of the realizability of its deferred tax assets was the existence of cumulative losses over the latest three-year period. Management forecast future taxable income, but concluded that there may not be enough of a recovery before the end of the fiscal year to overcome the negative objective evidence of three years of cumulative losses. On the basis of this evaluation, management has recorded a valuation allowance against all deferred tax assets. If management’s assumptions change and we determine we will be able to realize these deferred tax assets, the tax benefits relating to any reversal of the valuation allowance on deferred tax assets will be accounted for as a reduction of income tax expense.

11.

Stockholders’ Equity

Common Stock

The Company is authorized to issue 30,000,000 shares of common stock, $.001 par value per share. As of September 30, 2020, there were 8,458,734 shares issued and outstanding. During the nine month period ended September 30, 2020, the Company granted 231,868 restricted stock awards (RSAs), of which 173,745 remain unvested . During the three and nine month periods ended September 30, 2019, 18,333 shares and 40,524 shares, respectively, of common stock vested in accordance with the vesting terms of RSAs.

During the nine months ended September 30, 2020, 75,000 stock options were exercised on a cashless basis for an aggregate issuance of 16,882 shares of the Company’s common stock.

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At The Market Offering Agreement

On August 18, 2020, the Company entered into an At-The-Market Issuance Sales Agreement (the “Sales Agreement”) with B. Riley Securities, Inc. (“B. Riley FBR”), The Benchmark Company, LLC (“Benchmark”) and Spartan Capital Securities, LLC (“Spartan”, and together with B. Riley FBR and Benchmark, the “Sales Agents”) which establishes an at-the-market equity program pursuant to which the Company may offer and sell shares of our common stock, par value $0.001 per share, from time to time as set forth in the Sales Agreement. The Sales Agreement provides for the sale of shares of the Company’s common stock (“Shares”) having an aggregate offering price of up to $24,000,000.

The Sales Agreement will terminate upon the earlier of sale of all of the Shares under the Sales Agreement or termination of the Sales Agreement as permitted. During the nine months ended September 30, 2020, the Company has incurred $131,436 of offering costs.

The Company has no obligation to sell any of the Shares, and, at any time, we may suspend offers under the Sales Agreement or terminate the Sales Agreement. The Company sold no shares during the three months ended September 30, 2020 and has capacity of $24.0 million under the Sales Agreement as of September 30, 2020.

12.

Share-based Compensation

Share-based compensation (including restricted stock awards) represents both stock options based expense and stock grant expense. The following table sets forth the composition of stock compensation expense included in general and administrative expense for the periods then ended:

| | THREE MONTHS
ENDED — SEPTEMBER
30 | | NINE MONTHS
ENDED — SEPTEMBER
30 | |
| --- | --- | --- | --- | --- |
| | 2020 | 2019 | 2020 | 2019 |
| | (Unaudited) | | | |
| Restricted stock
compensation expense | $ 133,266 | $ 91,826 | $ 570,693 | $ 289,426 |
| Non-qualified
option stock compensation expense | 26,790 | 71,625 | 80,231 | 247,402 |
| Total share-based
compensation before taxes | $ 160,056 | $ 163,451 | $ 650,924 | $ 536,828 |

At September 30, 2020, the Company had approximately $584,082 of total unrecognized share-based compensation expense, net of estimated forfeitures, related to share-based compensation that will be recognized over the weighted average remaining period of 1.0 year.

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13.

Earnings Per Common Share (EPS)

The computations of basic and diluted earnings per share were as follows for the periods presented below:

| | THREE MONTHS
ENDED — SEPTEMBER
30, | | NINE MONTHS
ENDED — SEPTEMBER
30, | |
| --- | --- | --- | --- | --- |
| | 2020 | 2019 | 2020 | 2019 |
| | (Unaudited) | | | |
| Basic
Earnings Per Share Computation: | | | | |
| Net
income | $ 1,066,963 | $ 183,710 | $ 2,039,478 | $ 260,050 |
| Weighted average
number of common shares | 8,450,843 | 8,423,435 | 8,409,114 | 8,401,405 |
| Basic Earnings Per
Share | $ 0.13 | $ 0.02 | $ 0.24 | $ 0.03 |
| Diluted
Earnings Per Share Computation: | | | | |
| Net
income | $ 1,066,963 | $ 183,710 | $ 2,039,478 | $ 260,050 |
| Weighted average
number of common shares | 8,450,843 | 8,423,435 | 8,409,114 | 8,401,405 |
| Incremental shares
from assumed conversions | | | | |
| of dilutive
securities | 76,466 | 3,747 | 54,447 | 3,747 |
| Adjusted weighted
average number of | | | | |
| common
shares | 8,527,309 | 8,427,183 | 8,463,561 | 8,405,152 |
| Diluted Earnings
Per Share | $ 0.13 | $ 0.02 | $ 0.24 | $ 0.03 |

14.

Revenue from Contracts with Customers

The following table was prepared to provide additional information about the composition of revenues from contracts with customers for the periods presented:

| | THREE MONTHS
ENDED — SEPTEMBER
30, | | NINE MONTHS
ENDED — SEPTEMBER
30, | |
| --- | --- | --- | --- | --- |
| | 2020 | 2019 | 2020 | 2019 |
| | (Unaudited) | | | |
| Carrier
Services | $ 45,029,563 | $ 20,576,193 | $ 118,116,987 | $ 48,943,134 |
| Managed
Services | 12,476,998 | 9,040,747 | 33,838,720 | 24,683,861 |
| | $ 57,506,561 | $ 29,616,940 | $ 151,955,707 | $ 73,626,995 |

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The Company recognized revenues from contracts with customers for the following customer types as set forth below:

| | THREE MONTHS
ENDED — SEPTEMBER
30, | | NINE MONTHS
ENDED — SEPTEMBER
30, | |
| --- | --- | --- | --- | --- |
| | 2020 | 2019 | 2020 | 2019 |
| | (Unaudited) | | | |
| U.S.
Federal Government | $ 54,067,651 | $ 25,734,891 | $ 138,942,101 | $ 62,339,060 |
| U.S.
State and Local Governments | 24,969 | 112,108 | 76,255 | 354,289 |
| Foreign
Governments | 40,906 | 15,334 | 106,812 | 84,231 |
| Commercial
Enterprises | 3,373,035 | 3,754,607 | 12,830,539 | 10,849,415 |
| | $ 57,506,561 | $ 29,616,940 | $ 151,955,707 | $ 73,626,995 |

The Company recognized revenues from contracts with customers in the following geographic regions:

| | THREE MONTHS
ENDED — SEPTEMBER
30, | | NINE MONTHS
ENDED — SEPTEMBER
30, | |
| --- | --- | --- | --- | --- |
| | 2020 | 2019 | 2020 | 2019 |
| | (Unaudited) | | | |
| North
America | $ 56,407,094 | $ 28,563,085 | $ 148,655,842 | $ 70,294,212 |
| Europe | 1,099,467 | 1,053,855 | 3,299,865 | 3,332,783 |
| | $ 57,506,561 | $ 29,616,940 | $ 151,955,707 | $ 73,626,995 |

During the three months ended September 30, 2020 and 2019, we recognized approximately $350,400 and $312,50 0, respectively, of revenue related to amounts that were included in deferred revenue as of December 31, 2019 and 2018, respectively.

During the nine months ended September 30, 2020 and 2019, we recognized approximately $1.6 million and $1.6 million, respectively, of revenue related to amounts that were included in deferred revenue as of December 31, 2019 and 2018, respectively.

15.

Commitments and Contingencies

The Company has employment agreements with certain senior executives that set forth compensation levels and provide for severance payments in certain instances.

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ITEM 2. M ANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

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:

●

The impact of the COVID-19 pandemic on our business and operations;

●

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 expansion of services of existing contracts;

●

Our ability to re-win our Blanket Purchase Agreement with the Department of Homeland Security;

●

Our ability to compete with companies that have greater resources than us;

●

Our ability to penetrate the commercial sector to expand our business;

●

Our ability to borrow funds against our credit facility and renew or replace our credit facility on favorable terms or at all;

●

Our ability to raise additional capital on favorable terms or at all; and

●

Our ability to retain key personnel.

●

Our ability to properly manage the wind down the Census 2020 project as we head into 2021.

●

The risk factors set forth in our Annual Report on Form 10-K for the year ended December 31, 2019 filed with the SEC on March 24, 2020 and in our Quarterly Report on Form 10-Q for the three months ended March 31, 2020 filed with the SEC on May 14, 2020.

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 Trusted Mobility Management (TM2) that consists of federally certified communications management, identity management, and interactive bill presentment and analytics solutions. We help our clients achieve their organizational missions for mobility management and security objectives in this challenging and complex business environment.

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We offer our TM2 solutions through a flexible managed services model which includes both a scalable and comprehensive set of functional capabilities that can be used by any customer to meet the most common functional, technical and security requirements for mobility management. Our TM2 solutions were designed and implemented with flexibility in mind such that it can accommodate a large variety of customer requirements through simple configuration settings rather than through costly software development. The flexibility of our TM2 solutions enables our customers to be able to quickly expand or contract their mobility management requirements. Our TM2 solutions are hosted and accessible on-demand through a secure federal government certified proprietary portal that provides our customers with the ability to manage, analyze and protect their valuable communications assets, and deploy identity management solutions that provide secured virtual and physical access to restricted environments.

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 the Company's Annual Report on Form 10-K for the year ended December 31, 2019 filed with the SEC on March 24, 2020.

Strategic Focus and Notable Events

We believe that demand for our TM2 solutions will continue to grow as public and private sectors seek to address the additional requirements for supporting a mobile workforce. We also believe that the current COVID-19 pandemic and the post pandemic environment will increase the need for WidePoint’s services as our customers and potential customers seek to manage, secure and gain visibility into their mobility assets as a result of a larger number of employees working remotely. 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.

During fiscal 2020, we continue to be focused on the following key goals:

■

continued focus on selling high margin managed services,

■

growing our sales pipeline by investing in our business development and sales team assets,

■

pursuing additional opportunities with our key systems integrator partners,

■

improving our proprietary platform and products, which includes pursuing FedRAMP certification for ITMS™ and maintaining our ATOs with our federal government agencies, as well as upgrade our secure identity management technology,

■

working to successfully renew our existing U.S. Department of Homeland Security Blanket Purchase Agreement (DHS BPA), and

■

expanding our solution offerings into the commercial space.

Our longer-term goals include:

■

pursuing accretive and strategic acquisitions to expand our solutions and our customer base,

■

delivering new incremental offerings to add to our existing TM2 offering,

■

developing and testing innovative new offerings that enhance our TM2 offering, and

■

transitioning our data center and support infrastructure into a more cost-effective and federally approved cloud environment to comply with perceived future contract requirements.

We believe these actions could drive a strategic repositioning of 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.

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During the nine months ended September 30, 2020, we accomplished the following:

●

Generated high double-digit growth in revenue and grew GAAP net income almost 5 times in the three months ended September 30, 2020, compared to the same quarter a year ago.

●

Responded to DHS CWMS 2.0 Single Award Indefinite-delivery Indefinite-Quantity (IDIQ) RFP. Completed submissions for Phase 1 and Phase 2 – (phase 1) written submission (including certification that we meet the minimum technical requirements) and (phase 2) pricing and oral presentation

●

Supported the COVID-19 delayed Census2020 Non-Response Follow-up (NRFU) (enumeration) in which over 600,000 devices were deployed to the field.

●

Began implementing State of Virginia ABC contract

●

Presented as the 9 th Annual Gateway Conference

The COVID-19 pandemic continues to create significant macroeconomic uncertainty, volatility and disruption. The extent to which the COVID-19 pandemic continues to impact our business, results of operations, cash flows, financial condition and liquidity will depend on future developments, which are highly uncertain and cannot be predicted, including, but not limited to, the duration, severity and further spread of the outbreak, future resurgences and reimplementation of closures, actions taken to contain the virus or treat its impact, and how quickly and to what extent normal economic and operating conditions can resume. We have mobilized our resources to help ensure the well-being and safety of our coworkers, business continuity, a strong capital position and adequate liquidity. Our efforts have included:

We continue to be focused on the well-being and safety of our coworkers, following guidelines from public health authorities and state and local governments. During the first quarter of 2020, we implemented precautions to help keep our coworkers healthy and safe, moving to remote work for our non-essential office coworkers, and implementing safety protocols at our credentialing office, logistics and call centers, including social distancing measures, additional personal protective equipment, enhanced facility cleanings, and temperature screening for anyone entering our offices and facilities. All of our facilities continue to be operational.

Results of Operations

Three Months Ended September 30, 2020 as Compared to Three Months Ended September 30, 2019

Revenues. Revenues for the three month period ended September 30, 2020 were approximately $57.5 million, an increase of approximately $27.8 million (or 94%), as compared to approximately $29.6 million in 2019. Our mix of revenues for the periods presented is set forth below:

| | THREE MONTHS
ENDED — SEPTEMBER
30, | | Dollar |
| --- | --- | --- | --- |
| | 2020 | 2019 | Variance |
| | (Unaudited) | | |
| Carrier
Services | $ 45,029,570 | $ 20,576,190 | $ 24,453,380 |
| Managed
Services: | | | |
| Managed
Service Fees | 9,954,284 | 7,225,858 | 2,728,426 |
| Billable
Service Fees | 2,236,590 | 1,091,330 | 1,145,260 |
| Reselling
and Other Services | 286,117 | 723,562 | (437,445 ) |
| | 12,476,991 | 9,040,750 | 3,436,241 |
| | $ 57,506,561 | $ 29,616,940 | $ 27,889,621 |

Our carrier services increased primarily due to activities of the U.S. Department of Commerce contract supporting the 2020 Census, and the U.S. Citizenship and Immigration Services, partially offset by reduction in U.S. Customs Border Patrol and Department of Health and Human Services. The activities supporting the 2020 Census are scheduled to wind down in the fourth quarter of 2020, which will likely cause a reduction in carrier service revenue in future periods.

Our managed service fees increased due to expansion of managed services for existing government and commercial customers, as well as increases in sales of accessories to our government customers as compared to last year.

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Billable service fee revenue increased as compared to last year due to ramp up of services delivered through our partnerships with large systems integrators as we complete a government project.

Reselling and other services decreased as compared to last year due to timing of large product resales. Reselling and other services are transactional in nature and as a result the amount and timing of revenue will vary significantly from quarter to quarter.

Cost of Revenues. Cost of revenues for the three month period ended September 30, 2020 were approximately $51.8 million (or 90% of revenues), as compared to approximately $25.3 million (or 85% of revenues) in 2019. The increase was driven by higher carrier services related to the U.S. Department of Commerce contract, accessories cost of sale and billable services labor cost as compared to last year.

Gross Profit. Gross profit for the three month period ended September 30, 2020 was approximately $5.6 million (or 10% of revenues), as compared to approximately $4.3 million (or 15% of revenues) in 2019. The decrease in gross profit percentage was driven by the increase in lower margin carrier services revenue. Our gross profit percentage will vary from quarter to quarter and could be negatively impacted due to recognition of low margin reselling transactions and expansion of carrier services with our U.S. federal government customers.

Sales and Marketing. Sales and marketing expense for the three month period ended September 30, 2020 was approximately $0.5 million (or 1% of revenues), as compared to approximately $0.4 million (or 1% of revenues) in 2019.

General and Administrative. General and administrative expenses for the three month period ended September 30, 2020 were approximately $3.7 million (or 6% of revenues), as compared to approximately $3.4 million (or 11% of revenues) in 2019. The increase in general and administrative expense reflects overhead and administrative costs to support the increased business.

Depreciation and Amortization. Depreciation and amortization expense for the three month period ended September 30, 2020 was approximately $285,100 as compared to approximately $246,300 in 2019. The increase in depreciation and amortization expense reflects the increase in our depreciable asset base.

Other (Expense) Income. Net other expense for the three month period ended September 30, 2020 was approximately $69,400 as compared to approximately an expense of $72,700 in 2019. The decrease in net expense substantially reflects lower interest expense related to less borrowings on the line of credit compared to prior year.

Income Taxes. Income tax expense for the three month period ended September 30, 2020 was approximately $12,500, as compared to $32,400 in 2019. In come taxes were accrued at an estimated effective tax rate of 1.2% for the three months ended September 30, 2020 compared to 15% for the three month ended period ended September 30, 2019 , primarily due an increase in income before taxes compared to prior year.

Net Income. As a result of the cumulative factors annotated above, net income for the three month period ended September 30, 2020 was approximately $1.1 million, as compared to net income of approximately $183,700 in the same period last year.

Nine Months Ended September 30, 2020 as Compared to Nine Months Ended September 30, 2019

Revenues. Revenues for the nine month period ended September 30, 2020 were approximately $151.9 million, an increase of approximately $78.3 million (or 106%), as compared to approximately $73.6 million in 2019. Our mix of revenues for the periods presented is set forth below:

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| | NINE MONTHS
ENDED — SEPTEMBER
30, | | Dollar |
| --- | --- | --- | --- |
| | 2020 | 2019 | Variance |
| | (Unaudited) | | |
| Carrier
Services | $ 118,116,989 | $ 48,943,143 | $ 69,173,846 |
| Managed
Services: | | | |
| Managed
Service Fees | 25,295,949 | 19,880,073 | 5,415,876 |
| Billable
Service Fees | 5,246,307 | 3,415,046 | 1,831,261 |
| Reselling
and Other Services | 3,296,462 | 1,388,733 | 1,907,729 |
| | 33,838,718 | 24,683,852 | 9,154,866 |
| | $ 151,955,707 | $ 73,626,995 | $ 78,328,712 |

Our carrier services increased primarily due to activities of the U.S. Department of Commerce contract supporting the 2020 Census, and the U.S. Citizenship and Immigration Services, partially offset by reduction in U.S. Customs Border Patrol and Department of Health and Human Services. The activities supporting the 2020 Census is scheduled to wind down in the fourth quarter of 2020, which will likely cause a reduction in carrier service revenue in future periods.

Billable service fee revenue increased as compared to last year due to ramp up of services delivered through our partnerships with large systems integrators as we complete a government project.

Reselling and other services increased as compared to last year due to timing of large product resales. Reselling and other services are transactional in nature and as a result the amount and timing of revenue will vary significantly from quarter to quarter.

Cost of Revenues. Cost of revenues for the nine month period ended September 30, 2020 were approximately $136.3 million (or 90% of revenues), as compared to approximately $61.0 million (or 81% of revenues) in 2019. The increase was driven by higher carrier services related to the U.S. Department of Commerce contract, accessories cost of sale and cost of product resale as compared to last year.

Gross Profit. Gross profit for the nine month period ended September 30, 2020 was approximately $15.6 million (or 10% of revenues), as compared to approximately $12.6 million (or 19% of revenues) in 2019. The decrease in gross profit percentage was driven by the increase in lower margin carrier services and lower margin reselling during the nine months ended September 30, 2020. Our gross profit percentage will vary from quarter to quarter and could be negatively impacted due to recognition of low margin reselling transactions and expansion of carrier services with our U.S. federal government customers.

Sales and Marketing. Sales and marketing expense for the nine month period ended September 30, 2020 was approximately $1.4 million (or 1% of revenues), as compared to approximately $1.2 million (or 2% of revenues) in 2019, due to increased business development efforts.

General and Administrative. General and administrative expenses for the nine month period ended September 30, 2020 were approximately $10.8 million (or 7% of revenues), as compared to approximately $10.0 million (or 15% of revenues) in 2019. The increase in general and administrative expense reflects overhead and administrative costs to support the increased business as well as an increase in share-based compensation expense compared to last year.

Depreciation and Amortization. Depreciation and amortization expense for the nine month period ended September 30, 2020 was approximately $814,800 as compared to approximately $730,900 in 2019. The increase in depreciation and amortization expense reflects the increase in our depreciable asset base

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Other (Expense) Income. Net other expense for the nine month period ended September 30, 2020 was approximately $224,300 as compared to approximately $220,900 in 2019. The increase in net expense substantially reflects higher interest expense related to an increase in lease liabilities compared to prior year.

Income Taxes. Income tax expense for the nine month period ended September 30, 2020 was approximately $242,800, as compared to $126,800 in 2019. In come taxes were accrued at an estimated effective tax rate of 10.6% for the nine months ended September 30, 2020 compared to 32.8% in 2019.

Net Income. As a result of the cumulative factors annotated above, net income for the nine month period ended September 30, 2020 was approximately $2.0 million, as compared to net income of approximately $260,050 in the same period last year

Liquidity and Capital Resources

We have, since inception, financed operations and capital expenditures through our operations, credit facilities and the sale of securities. Our immediate sources of liquidity include cash and cash equivalents, accounts receivable, unbilled receivables and access to a working capital credit facility with Atlantic Union Bank for up to $5.0 million. In addition, we recently established an at-the-market (ATM) equity sales program (described below) that permits us to sell, from time to time, up to $24.0 million of our common stock through the sales agents under the program. There is no assurance that, if needed, we will be able to raise capital on favorable terms or at all.

At September 30, 2020, our net working capital was approximately $7.8 million as compared to $5.0 million at December 31, 2019. The increase in net working capital was primarily driven by increases in revenue and temporary payable timing differences . We may need to raise additional capital to fund major growth initiatives and/or acquisitions and there can be no assurance that additional capital will be available on acceptable terms or at all.

ATM Sales Program

On August 18, 2020, we entered into an At-The-Market Issuance Sales Agreement (the “Sales Agreement”) with B. Riley Securities, Inc., The Benchmark Company, LLC and Spartan Capital Securities, LLC which establishes an ATM equity program pursuant to which we may offer and sell up to $24.0 million of shares of our common stock, par value $0.001 per share, from time to time as set forth in the Sales Agreement. We have no obligation to sell any of the Shares, and, at any time, we may suspend offers under the Sales Agreement or terminate the Sales Agreement. We sold no Shares during the three months ended September 30, 2020 under the ATM program and had remaining capacity of $24.0 million as of September 30, 2020.

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 the cost of labor and 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 costs 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 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.

For the nine months ended September 30, 2020, net cash provided by operations was approximately $6.0 million driven by collections of accounts receivable and temporary payable timing differences , as compared to approximately $5.5 million for the nine months ended September 30, 2019 .

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 nine months ended September 30, 2020, cash used in investing activities was approximately $978,700 and consisted of computer hardware and software purchases and capitalized internally developed software costs, primarily associated with upgrading our ITMS™ platform, secure identity management technology and network operations center.

For the nine months ended September 30, 2019, cash used in investing activities was approximately $360,800 and consisted computer hardware and software purchases and capitalized internally developed software costs related to our TDI Optimiser™ solutions .

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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 nine months ended September 30, 2020, cash used in financing activities was approximately $594,300 and reflects line of credit advances and payments of approximately $1.9 million, common stock repurchases of approximately $10,100, offering costs related to the ATM program offering of $131,400, and finance lease principal repayments of approximately $452,800.

For the nine months ended September 30, 2019, cash used in financing activities was approximately $361,900 and reflects line of credit advances and payments of approximately $6.3 million, and finance lease principal repayments of approximately $356,900 .

Net Effect of Exchange Rate on Cash and Equivalents

For the nine months ended September 30, 2020 and 2019, the gradual appreciation of the Euro relative to the US dollar increased the translated value of our foreign cash balances by approximately $70,556 as compared to last year.

Off-Balance Sheet Arrangements

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

ITEM 3.

Q UANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not required.

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ITEM 4. C ONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures Under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Based on this evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this 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 September 30, 2020 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II – O THER INFORMATION

ITEM 1

L EGAL PROCEEDINGS

The Company is not currently involved in any material legal proceeding.

ITEM 1A

R ISK FACTORS

Other than the additional risk factor set forth below, our risk factors have not changed materially from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2019 and in our Quarterly Report on Form 10-Q for the three months ended March 31, 2020.

ITEM 2

U NREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Stock Repurchase Plan

On October 7, 2019, the Company announced that its Board of Directors approved a stock repurchase plan (the “2019 Repurchase Plan”) to purchase up to $2.5 million of the Company’s common stock. Any repurchases will be made in compliance with the SEC’s Rule 10b-18 if applicable, and may be made in the open market or in privately negotiated transactions, including the entry into derivatives transactions. During the three months ended March 31, 2020, we repurchased 2,416 shares for a total of $10,100 under the stock repurchase plan. This plan was suspended on March 9, 2020, as a precaution due to the COVID-19 pandemic.

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ITEM 3

D EFAULT UPON SENIOR SECURITIES

None

ITEM 4

M INE SAFETY DISCLOSURES

None

ITEM 5

O THER INFORMATION

None

ITEM 6.

E XHIBITS

| EXHIBIT
NO. | DESCRIPTION |
| --- | --- |
| 1.1 | At Market Issuance
Sales Agreement, dated August 18, 2020, by and among WidePoint
Corporation, B. Riley Securities, Inc., The Benchmark Company, LLC
and Spartan Capital Securities, LLC (incorporated by reference from
Exhibit 1.1 to Form 8-K filed August 18, 2020). |
| 3.1 | Certificate of
Amendment to the Amended and Restated Certificate of Incorporation
of the Company. (incorporated by reference from Exhibit 3.1 to Form
8-K filed October 29, 2020). |
| 31.1 | Certification of
Chief Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 (Filed herewith). |
| 31.2 | Certification of
Chief Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 (Filed herewith). |
| 32 | Certification of
Chief Executive Officer and Chief Financial Officer Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 (Filed
herewith). |
| 101. | Interactive Data
Files |
| 101.INS+ | XBRL Instance
Document |
| 101.SCH+ | XBRL Taxonomy
Extension Schema Document |
| 101.CAL+ | XBRL Taxonomy
Extension Calculation Linkbase Document |
| 101.DEF+ | XBRL Taxonomy
Definition Linkbase Document |
| 101.LAB+ | XBRL Taxonomy
Extension Label Linkbase Document |
| 101.PRE+ | XBRL Taxonomy
Extension Presentation Linkbase Document |

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S IGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

| Date : November 16,
2020 | WIDEPOINT
CORPORATION — By: | /s/ JIN H.
KANG |
| --- | --- | --- |
| | | Jin H. Kang |
| | | President and Chief
Executive Officer |
| Date : November 16,
2020 | By: | /s/ KELLIE H.
KIM |
| | | Kellie H. Kim |
| | | Chief Financial
Officer |

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WIDEPOINT CORP Interim / Quarterly Report 2020

34608_10-q_2020-11-16_7547fcb9-ebda-4c3b-af1f-a9a954f2a3c7.zip

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WIDEPOINT CORP — Interim / Quarterly Report 2020

34608_10-q_2020-11-16_7547fcb9-ebda-4c3b-af1f-a9a954f2a3c7.zip

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WIDEPOINT CORP Interim / Quarterly Report 2020