WidePoint Corporation — FY 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012; comparisons are with FY 2011. WidePoint provides managed mobility, cybersecurity/identity credentialing, and IT consulting services to government and commercial customers. The AGS acquisition contributed to 2012 results. The financial statements received an unqualified audit opinion; management reported material weaknesses in internal control over financial reporting.
Financial performance and liquidity
| Metric | FY 2012 | FY 2011 | Change / context |
|---|---|---|---|
| Revenue | $55.8 million | $41.4 million | Up 35%; about $7.0 million of 2012 revenue came from AGS customers. |
| Gross profit / margin | $13.9 million / 24.9% | $9.2 million / 22.3% | Higher revenue and mix of higher-margin services improved margin. |
| Operating income / margin | $1.02 million / 1.8% | $105,000 / 0.3% | Includes a $900,000 non-cash gain from reducing the fair value of AGS contingent consideration. |
| Net income | $832,000 | $247,000 | Basic and diluted EPS were $0.013, versus $0.004. |
| Operating cash flow | $1.00 million | $1.43 million | Lower year over year, attributed mainly to billing and collection timing on large resale transactions. |
| Cash / working capital | $1.86 million / approximately $2.6 million | $2.04 million / approximately $2.3 million | No outstanding balance on the $8 million revolving credit facility at year-end. |
| Debt | $6.02 million long-term debt, including current maturities; $113,000 short-term note payable | $7.72 million long-term debt; $101,000 short-term note payable | Debt primarily reflects financing of the AGS acquisition. Separate capital-lease obligations totaled $145,000. |
Investing activities used $373,000, compared with $8.81 million in 2011, which included the AGS acquisition. Financing activities used $806,000 in 2012. At year-end, current assets were $13.14 million and current liabilities were $10.58 million. The company reported compliance with its debt covenants.
Material changes versus FY 2011
- Managed Mobility revenue rose 34% to $31.8 million; excluding AGS-related customer transitions, management cited growth of about $1.0 million. The company continued shifting away from lower-margin resale of minutes.
- Cybersecurity revenue increased 6% to $6.9 million, principally reflecting credentialing services related to the TWIC program.
- Consulting and Support revenue rose 55% to $17.1 million, driven by commercial consulting and product resale; management cautioned that demand may vary by period.
- Cost of revenue declined to 75% of revenue from 78%; selling and marketing expense increased to $2.7 million from $1.5 million.
- Interest expense increased to $294,000 from $69,000, mainly due to borrowing for the AGS acquisition. Intangible amortization also increased materially.
- TSA and DHS represented 19% and 15% of revenue, respectively, versus 23% and 27% in 2011. Management said it aims to diversify revenue, particularly by growing commercial business.
Outlook, risks and unusual items
- Management expects federal budget constraints to pressure government contracting growth and potentially industry margins, while identifying mobile cost-management and cybersecurity as areas of opportunity. No quantified revenue or earnings guidance was provided.
- Management planned to continue reorganizing operations and move to a single reported segment in 2013. It also anticipated investment in sales and marketing, infrastructure and growth initiatives, and continued to consider strategic acquisitions.
- Customer concentration is significant: the loss of a major customer or contract could materially harm results. Government contracts may be modified, curtailed or terminated for convenience or default.
- Results may fluctuate with contract awards and timing, customer technology requirements, resale activity, and fixed labor and facility costs. Other stated risks include federal spending reductions, competition, rapid technological change, and recruiting and retaining skilled personnel.
- The $900,000 non-cash gain arose from remeasurement of the AGS contingent seller note after performance targets were not met and forecasts changed. The liability was valued at $1.25 million at year-end using Level 3 inputs; it remained subject to reassessment.
- Management concluded disclosure controls and internal control over financial reporting were ineffective at year-end due to material weaknesses involving segregation of duties, accounting policies and procedures, and tax-accounting expertise. A remediation plan was underway; the filing does not establish that the weaknesses were subsequently remediated.
- Management reported no material pending legal proceedings and no material impairment of goodwill or intangible assets at year-end. Goodwill was $16.6 million; finite-lived intangible assets were $5.0 million.
Most important facts for investors to verify
- Whether recurring revenue growth and improved gross margin continued, and how much growth was organic versus attributable to AGS.
- Whether the company diversified away from TSA/DHS and other major-contract exposure.
- Whether operating profitability and cash generation hold up excluding the $900,000 non-cash contingent-liability gain, and whether receivables convert to cash as expected.
- Debt repayment capacity, covenant compliance, and the timing and amount of any AGS contingent-note payments.
- Whether management remediated the disclosed material weaknesses and improved financial reporting controls.
- Whether management’s 2013 reorganization and commercial-growth plans translated into sustained profitable results.