WidePoint Corporation — Q3 2015 Form 10-Q
Business context and period. WidePoint provides IT products and services, principally Managed Mobility Solutions (MMS), including carrier, managed, identity-management and consulting services. This unaudited report covers the quarter and nine months ended September 30, 2015; comparisons are with the corresponding 2014 periods unless noted.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $17.0 million | $14.6 million | $52.1 million | $36.6 million |
| Gross profit / margin | $3.1 million / 18% | $4.0 million / 27% | $10.0 million / 19% | $10.1 million / 27% |
| Operating loss | $(1.6) million | $(0.9) million | $(4.1) million | $(3.6) million |
| Net loss | $(1.8) million | $(5.9) million | $(4.3) million | $(7.5) million |
| Basic and diluted loss per share | $(0.021) | $(0.081) | $(0.053) | $(0.106) |
Revenue increased approximately 17% in Q3 and 43% year to date. Carrier-services revenue rose substantially, while Q3 managed-services revenue declined; for the nine months, managed-services revenue increased modestly. Carrier services are generally lower margin, and their larger share of sales drove gross margin down. The lower reported net losses primarily reflect lower income-tax expense than in 2014, when the company recorded a discrete $5.0 million valuation-allowance charge; operating losses increased in both comparison periods.
- Costs and margins: Cost of revenue was 82% of Q3 sales and 81% of nine-month sales, versus 73% in each 2014 period. Management expects margins could improve as carrier-services growth levels off and higher-margin managed and identity-management services increase; this is not quantified guidance.
- Cash flow: Nine-month operating cash use was $2.8 million, compared with $2.6 million in 2014. Investing cash use was $0.5 million versus $4.5 million, which included the 2014 Soft-Ex acquisition. Financing provided $0.7 million versus $10.2 million in 2014, when a public stock offering generated proceeds.
- Cash and liquidity: Cash was $10.4 million at September 30, down from $13.2 million at December 31, 2014. Current assets were $27.0 million and current liabilities $18.0 million; reported working capital was approximately $9.0 million, down from $12.5 million at year-end. Management said current cash and the credit facility should meet minimum requirements for current operations, but expansion or new contracts could require additional working capital.
- Debt: The company had $2.0 million drawn on its $8.0 million receivables-based Cardinal Bank line and reported approximately $2.9 million available. The facility maturity was extended on October 23, 2015 to January 31, 2016. Long-term debt was $1.5 million, including current maturities; capital-lease obligations were approximately $0.1 million. The company reported covenant compliance at September 30.
Material changes, outlook and risks
- DHS represented 56% of Q3 revenue and 52% of nine-month revenue, up from 36% and 37%, respectively, in 2014. Growth was substantially tied to task orders under the DHS blanket purchase agreement. The Coast Guard and FEMA had not yet issued initial task orders at the time discussed; awards and mobile-device volumes could affect future revenue.
- Management cited lower Q3 software-reselling activity as a reason managed-services revenue fell year over year, while reporting growth in other managed-services activities over the nine-month period. New identity-management offerings and channel partners may provide opportunities, but adoption, awards and revenue timing are uncertain.
- Management recorded a $6.1 million valuation allowance against deferred tax assets. Federal net operating loss carryforwards were approximately $21.2 million, subject to potential Section 382 limitations and expirations from 2017 to 2034; management cited cumulative losses as negative evidence regarding realization.
- Disclosure controls and procedures were deemed ineffective at September 30, 2015. Unremediated material weaknesses involved revenue-recognition controls and entity-level controls, including policies, procedures and segregation of duties. Management was developing a remediation plan.
- Management cautioned that results can fluctuate with contract timing, government awards, billable days, cost pass-throughs and fixed personnel and facility costs. It also cited government-spending and regulatory risks, execution of growth plans, financing availability and the possibility that additional capital may be needed. The filing provides no quantified earnings or revenue guidance.
- No material legal proceedings or off-balance-sheet arrangements were reported. The filing states risk factors had not materially changed from the 2014 Form 10-K.
Key facts for investors to verify
- Whether DHS task orders, including potential Coast Guard and FEMA awards, materialize and how customer concentration evolves.
- Whether revenue growth shifts toward higher-margin managed and identity-management services, and whether gross margins recover.
- Cash burn, receivables collection and working-capital needs, along with renewal and borrowing availability under the credit facility approaching its January 2016 maturity.
- Progress remediating the disclosed internal-control material weaknesses and the implications of the deferred-tax-asset valuation allowance.