WidePoint Corporation — FY 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013; comparisons are with FY 2012. This is an annual filing, not a standalone fourth-quarter report. WidePoint provides managed mobility, telecommunications expense and device management, identity and cybersecurity services, and IT consulting to government and commercial customers.
Financial performance and liquidity
| Metric | FY 2013 | FY 2012 |
|---|---|---|
| Revenue | $46.83 million | $55.78 million |
| Gross profit / margin | $12.11 million / 25.9% | $13.86 million / 24.9% |
| Operating income (loss) | $(1.18) million | $1.02 million |
| Net income (loss) | $(1.69) million | $0.83 million |
| Diluted EPS | $(0.027) | $0.013 |
| Cash from operations | $(1.15) million | $1.00 million |
| Cash used in investing | $0.51 million | $0.37 million |
Revenue fell approximately 16%. Management attributed the decline to delayed government product resale transactions and customer implementations, commercial telecommunications customer attrition, and a protested federal contract award. Managed services generated $41.05 million of revenue, versus $49.50 million in 2012; professional services generated $5.78 million, versus $6.29 million.
Gross margin improved by about one percentage point as lower-margin resale activity declined, but lower revenue and higher operating expenses contributed to an operating loss. Sales and marketing expense rose to $3.13 million from $2.74 million, reflecting sales and marketing hires and expanded marketing. General and administrative expense was $9.87 million, broadly level with 2012, and included a $1.25 million noncash gain from reducing an acquisition-related contingent obligation to zero. The company also recorded a $0.36 million income tax expense despite its pretax loss, principally related to an adjustment involving deferred tax assets associated with share-based compensation.
Cash and cash equivalents were zero at year-end, compared with $1.86 million in 2012. Current assets of $9.77 million were below current liabilities of $10.91 million, implying negative working capital of approximately $1.14 million and a current ratio of about 0.90. The company reported $0.92 million drawn on its $8 million revolving facility. Long-term debt was $3.66 million, including current maturities; capital lease obligations totaled approximately $0.10 million. Operating cash flow weakened amid working-capital movements, including payments and collections timing.
The company did not meet all credit-facility financial covenants at December 31, 2013, but obtained a lender waiver. A March 3, 2014 common-stock offering raised approximately $12.5 million gross and $11.6 million net before company-paid offering expenses; management said it brought tangible-net-worth and current-ratio covenants into compliance. The offering increased outstanding shares to 72,965,329.
Material changes, outlook, and risks
- DHS award: WidePoint received a Cellular Wireless Managed Services BPA with a stated ceiling of $600 million. The award was protested, and a stop-work order was lifted in December 2013 after the protest was denied. The base period began December 17, 2013; management did not expect material revenue from the BPA before at least Q2 2014. The ceiling is not a commitment or a forecast of revenue.
- Growth strategy: Management is shifting toward recurring technology and services, emphasizing higher-margin offerings, customer retention and cross-selling, commercial-market growth, channel partners, and selective acquisitions. It launched a Certificate-on-Device service in January 2014. No quantified revenue or earnings guidance is provided.
- Concentration and government exposure: TSA and DHS represented 20% and 13% of 2013 revenue, respectively. Government spending constraints, procurement delays, protests, contract termination rights, audits, and customer concentration could materially affect results.
- Controls: Management concluded that disclosure controls and internal control over financial reporting were not effective at year-end due to material weaknesses in accounting policies and procedures and segregation of duties. Management described remediation work, but the weaknesses were not remediated by year-end. The auditor expressed an opinion on the financial statements, not on internal-control effectiveness.
- Other risks and items: Results are sensitive to contract timing, fixed personnel costs, competition and pricing pressure, technology and cybersecurity risks, and the ability to recruit and retain skilled staff. Inventory write-downs increased to approximately $0.20 million from $0.05 million. The company reported no material pending legal proceedings and no off-balance-sheet arrangements.
Important facts for investors to verify
- Whether the DHS BPA produces material task orders and revenue, and at what margins; distinguish the $600 million ceiling from actual funded work.
- Post-offering cash, debt repayment, liquidity and covenant status, including the facility’s June 30, 2014 maturity and any refinancing or renewal.
- Progress in remediating the material weaknesses and whether subsequent filings report effective controls.
- Revenue and margin trends, customer concentration, contract renewals, and the mix of recurring managed services versus lower-margin resale activity.
- Assumptions supporting deferred tax assets and net operating loss carryforwards, which are subject to Section 382 limitations; and the noncash contingent-obligation gain’s effect on reported results.