WidePoint Corporation — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; compared with the three months ended March 31, 2012. WidePoint provides technology-based services, including managed mobility, identity management, cybersecurity, and consulting, to government and commercial customers.
Financial performance and liquidity
| Metric | Q1 2013 | Q1 2012 / comparator |
|---|---|---|
| Revenue | $12.0 million | $13.7 million |
| Gross profit / margin | $3.27 million / 27% | $3.33 million / 24% |
| Operating income (loss) | $(124,458) | $127,531 |
| Net income (loss) | $(35,269) | $57,403 |
| Operating cash flow | $966,058 | $(332,714) |
- Revenue declined approximately 13% year over year. Higher-margin service mix lifted gross margin, but gross profit was slightly lower in dollars.
- Cash and cash equivalents were $2.52 million at March 31, up from $1.86 million at December 31, 2012. Net working capital was approximately $2.5 million; the current ratio was about 1.30.
- Cash flow from operations improved, primarily reflecting working-capital timing, including a $2.84 million cash benefit from accounts receivable and unbilled receivables, partly offset by lower payables and accrued expenses.
- Long-term debt, including the contingent seller obligation, totaled $5.61 million; $910,902 was current. Capital lease obligations totaled $134,702. There was no outstanding balance on the $8 million Cardinal Bank credit facility at quarter-end; the company borrowed and repaid about $304,000 during the quarter.
- Investing cash outflow was $104,002, mainly for property and equipment; financing cash outflow was $202,259, principally scheduled debt and lease repayments.
Material changes and management commentary
- Revenue fell because government consulting projects and value-added resale work ended in the second half of 2012 and had not yet been fully replaced. Management cited government and commercial opportunities in its sales pipeline, but did not provide quantified revenue or earnings guidance.
- Sales and marketing expense increased to $806,000 from $641,000, reflecting added sales staff, channel commissions, and marketing and branding investment. General and administrative costs included a $220,000 noncash gain from reducing the estimated fair value of a contingent seller obligation; excluding that gain, the company said G&A would have been about $2.7 million.
- Management described efforts to consolidate offerings under the WidePoint brand and develop a managed-mobility product suite, including mobile device management and a planned mobile security solution. It identified federal credentialing and authentication requirements and demand for secure mobile connectivity as potential growth drivers.
- Management said current cash and credit-facility access were sufficient for minimum operating needs, while noting that new contracts, growth, acquisitions, product development, and debt service could increase working-capital needs. It cautioned that additional financing, if required, might not be available on acceptable terms.
Risks, contingencies, and unusual items
- Customer concentration is material: TSA represented 18% of revenue and DHS 15% in Q1 2013, together 33%. At March 31, TSA and DHS represented 19% and 16% of trade receivables, respectively.
- The $1.03 million contingent seller obligation is a Level 3 fair-value estimate based on internal forecasts and assumptions. Its carrying value fell by $220,000 during the quarter, primarily due to delays in client implementations; potential 2013 consideration was stated as up to $1.5 million face value.
- Management concluded disclosure controls and internal control over financial reporting were ineffective as of March 31, 2013. Reported material weaknesses involved segregation of duties, accounting policies and procedures, and expertise for complex accounting and tax matters. A remediation plan was underway, with work expected to continue through 2013.
- Management reported no material commitments for acquisitions or capital expenditures at quarter-end and no off-balance-sheet arrangements. It stated that interim results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Whether pipeline opportunities and new product offerings replace the concluded government projects and support revenue recovery.
- Whether stronger operating cash flow is sustained, given its dependence on receivables and payment timing.
- Customer and government-contract concentration, contract awards, and implementation delays affecting revenue and the contingent obligation.
- Debt repayment requirements, borrowing-base availability under the credit facility, and financing needs if growth accelerates.
- Progress in remediating the disclosed material weaknesses and whether controls are subsequently assessed as effective.