WidePoint Corporation — FY2017 Form 10-K
Reporting period: Year ended December 31, 2017; comparisons are with FY2016. This is an annual report, not a standalone fourth-quarter report. WidePoint provides trusted mobility management, telecom lifecycle and billing analytics, and identity-management services. Its business is reported as one segment and is heavily weighted toward U.S. federal government contracts.
Financial performance
| Metric | FY2017 | FY2016 |
|---|---|---|
| Revenue | $75.9 million | $78.4 million |
| Gross profit / margin | $13.7 million / 18% | $14.0 million / 18% |
| Operating loss | $3.46 million | $4.16 million |
| Net loss | $3.53 million | $4.13 million |
| Basic and diluted loss per share | $0.04 | $0.05 |
| Cash from (used in) operations | $(3.0) million | $2.7 million |
| Cash used in investing activities | $0.77 million | $0.61 million |
| Cash used in financing activities | $0.30 million | $0.88 million |
Revenue declined 3%. Federal-government revenue was $58.6 million, about 77% of total revenue, versus $58.8 million in 2016. Commercial revenue fell to $16.7 million from $19.1 million. Carrier-services revenue rose to $45.0 million, while billable-service fees fell to $3.3 million from $5.1 million and reselling/other revenue fell to $4.8 million from $6.4 million. Cost of revenue declined, leaving gross margin unchanged at 18%; lower sales and marketing, general and administrative, and product-development expenses helped reduce the operating and net losses.
Liquidity, debt and balance sheet
- Cash and cash equivalents were $5.27 million at year-end, down from $9.12 million. Net working capital was approximately $2.5 million, versus $5.0 million in 2016.
- Current assets were $22.3 million and current liabilities were $19.7 million. Accounts receivable was $8.13 million and unbilled receivables were $8.13 million.
- No borrowings were outstanding on the $5.0 million revolving credit facility at December 31, 2017; borrowing availability was subject to a receivables-based limit. The facility was scheduled to expire April 30, 2018. A February 2018 amendment reduced the minimum tangible-net-worth covenant to $2.0 million and set a 1.10:1 minimum current ratio.
- Reported long-term debt was $333,700, principally capital leases; other term obligations were $281,607. The filing reports no outstanding line-of-credit borrowings at year-end.
- Contractual obligations included $9.95 million of operating leases and $372,769 of capital-lease payments. Total liabilities were $20.7 million; stockholders’ equity was $25.2 million.
Changes, outlook and risks
- Management cited discontinued or completed projects, early customer contract terminations, commercial customer cost-cutting, and a delayed U.S. Air Force contract award as factors behind revenue declines. It also intentionally discontinued unprofitable engagements and shifted toward higher-margin managed services.
- Management reported restructuring actions in 2017, including staffing and office reductions. General and administrative expenses included approximately $927,800 of severance and office-closure costs; the Lewis Center facility sale produced a $66,700 gain and the related relocation included a $176,700 loss on disposal of leasehold improvements. Management estimated cost reductions would lower annual operating expenses by approximately $3.0 million, while noting savings might be redeployed for new contract wins.
- Management’s priorities were restoring profitability and positive cash flow, reducing costs, improving sales and emphasizing higher-margin services. It stated that 2018 liquidity depended on renewal or replacement of the credit facility and successful execution of operating plans; additional capital might be needed. No formal revenue or earnings guidance is provided.
- The DHS cellular-services BPA was due to expire December 16, 2018 and was up for renewal. Management believed renewal was likely but gave no assurance. The company warned that losing significant customers or contracts could materially affect results.
- Key risks include persistent losses and negative operating cash flow, federal-budget and contract-renewal dependence, pricing competition, long sales cycles, contract termination rights, covenant compliance and financing access, cybersecurity and service interruptions, and the ability to deliver profitable growth. The company recorded no goodwill impairment; goodwill was approximately $18.6 million.
- The company recorded a $38,000 income-tax provision in 2017, versus a $73,000 benefit in 2016. The Tax Act led to provisional tax accounting, including an estimated $0.8 million tax on accumulated foreign earnings, offset by available NOL deductions; the filing says this accounting was not finalized. Federal and state NOL carryforwards were approximately $36.7 million and $43.9 million, respectively, with a full valuation allowance against deferred tax assets.
- The Probaris software-asset purchase cost approximately $304,300, with a further $100,000 contingent payment estimated as probable if the seller’s government customer renews its license in 2018. Management reported no material pending legal proceedings and concluded no additional going-concern disclosure was required.
Important facts for investors to verify
- Whether the $5.0 million credit facility was renewed or replaced after its April 30, 2018 expiration, and whether the company continued to meet its covenants.
- Whether the DHS BPA and other significant federal contracts were renewed, and how contract awards and customer retention affected revenue and cash collection.
- Whether the stated cost savings were realized and whether operating cash flow, working capital, and cash balances improved.
- Whether commercial revenue and higher-margin managed-services sales recovered, and whether revenue concentration declined.
- Final tax accounting under the Tax Act and the continued recoverability of deferred tax assets and goodwill assumptions.
Audit and controls: Moss Adams LLP issued an unqualified opinion on the consolidated financial statements. Management concluded disclosure controls and internal control over financial reporting were effective as of year-end; the auditor did not provide an internal-control attestation because the company was a smaller reporting company.