WidePoint Corporation (NYSE American: WYY) — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. This is an annual filing; the supplied filing text does not provide a clear standalone fourth-quarter financial result. WidePoint provides trusted mobility management, communications lifecycle management, identity-management and digital billing services, primarily to U.S. government customers.
Financial performance and liquidity
| Metric | 2019 | 2018 |
|---|---|---|
| Revenue | $101.7 million | $83.7 million |
| Gross profit / margin | $17.4 million / 17% | $15.3 million / 18% |
| Operating income (loss) | $0.9 million | ($0.2 million) |
| Net income (loss) | $0.23 million | ($1.46 million) |
| Basic and diluted EPS | $0.00 | ($0.02) |
| Cash from operations | $5.85 million | ($2.13 million) |
| Cash used in investing | $0.52 million | $0.49 million |
| Cash used in financing | $0.84 million | $0.16 million |
- Revenue rose 22%, led by carrier services, up $18.7 million to $68.7 million. Managed-service fees increased modestly to $25.8 million; billable-service fees rose to $4.3 million; resale and other services declined to $2.8 million.
- Cost of revenue increased to $84.3 million, or 83% of revenue, from 82% in 2018. Gross margin consequently declined one percentage point despite higher gross profit.
- Federal-government revenue was $86.5 million, approximately 85% of total revenue, versus $66.3 million in 2018. Commercial revenue fell to $14.6 million from $16.7 million.
- Operating cash flow improved by about $8.0 million year over year. Management attributed 2019 cash generation to improved collections and temporary timing differences in payables; accounts receivable and unbilled receivables together increased about $8.0 million.
- At year-end, cash was $6.9 million, net working capital was approximately $5.0 million, and current assets and current liabilities were $36.5 million and $31.5 million, respectively. The company reported no outstanding borrowings on its $5.0 million revolving credit facility.
- That facility matures April 30, 2020; availability depends on eligible receivables and quarterly financial covenants. Total operating-lease liabilities were approximately $6.2 million after adoption of lease accounting; undiscounted operating-lease commitments were $8.0 million, with a further approximately $1.9 million lease expected to commence in 2020.
Material changes and notable items
- WidePoint returned to modest profitability from a 2018 net loss, while revenue expanded. It nevertheless reported a long history of losses and cautioned that sustained profitability depends on profitable new business and contract expansions.
- Growth was concentrated in federal contracts, including Department of Commerce work supporting the 2020 Census, increased DHS units managed, and Coast Guard and Customs and Border Protection activity. Higher carrier-services revenue has nominal margins, so revenue growth did not translate proportionately into gross profit.
- One DHS Blanket Purchase Agreement generated approximately $65.7 million, or 65% of 2019 revenue. It had expired in December 2018 and was extended through June 2019; the planned recompete solicitation was canceled in February 2020 and expected to be replaced. The filing says interim arrangements were being used to maintain services during the recompete.
- Adoption of ASC 842 added lease assets and liabilities to the balance sheet. Management said it did not materially affect cash flows or operating results, but it increased reported depreciation/amortization and interest expense. The filing presents 2018 comparatively without restating it.
- The company repurchased 863,733 shares for approximately $366,000 in 2019 under a $2.5 million authorization. It reported approximately $2.1 million remaining under the plan at year-end.
Outlook, risks and controls
- Management’s 2020 priorities include increasing high-margin managed services, expanding sales and business-development capacity, growing system-integrator and strategic-partner opportunities, enhancing products, pursuing FedRAMP certification for ITMS, and broadening government and commercial customers. No numerical revenue or earnings guidance is provided.
- The DHS BPA recompete is a major risk given its scale. Failure to retain the work could materially reduce revenue, profitability and cash flow. The company also depends heavily on federal budgets, contract renewals and government payment timing; contracts can generally be modified or terminated for government convenience.
- The credit facility’s near-term maturity and covenant requirements create refinancing and liquidity risks. Management said cash and the facility, if renewed or replaced, should meet current operating needs; it also noted that additional capital may be needed for major growth initiatives or acquisitions.
- Other risks include customer concentration, long and uncertain sales cycles, pricing pressure and competition, cybersecurity or service failures, dependence on key personnel and partners, and fixed labor and facility costs. The filing also identifies coronavirus-related disruption and possible changes in government spending priorities as risks.
- Management concluded disclosure controls and procedures were not effective at December 31, 2019, while concluding internal control over financial reporting was effective. The auditor issued an unqualified opinion on the financial statements; it did not provide an internal-control audit opinion.
- Federal and state net operating loss carryforwards were approximately $37.5 million and $39.5 million, respectively; use may be limited or some amounts may expire. Goodwill of approximately $18.6 million was not impaired at year-end.
- The company reported no material pending legal proceedings and no material off-balance-sheet arrangements. It does not expect to pay dividends in the foreseeable future.
Important facts for investors to verify
- Current status, award timing, terms and expected revenue impact of the replacement DHS solicitation and interim DHS service arrangements.
- Whether the credit facility was renewed or replaced after its April 30, 2020 maturity, and whether covenants and borrowing availability were maintained.
- Whether operating cash flow remains positive after the effects of payable timing, and whether elevated unbilled receivables are converted to cash on schedule.
- Revenue and gross-profit mix: federal and DHS concentration, low-margin carrier-services contribution, and progress in higher-margin managed services and commercial business.
- Remediation of ineffective disclosure controls, and whether future filings report sustained improvement in profitability and cash generation.
- Impact of the new office lease, lease obligations, and any future capital or financing needs on liquidity.