WidePoint Corporation — Q3 2012 Form 10-Q
Business and period. WidePoint provides telecommunications management, cybersecurity managed solutions, and IT consulting and products to government and commercial customers. This unaudited filing covers the three and nine months ended September 30, 2012, compared with the same 2011 periods; balance-sheet comparisons are with December 31, 2011. The company reported that results for the interim periods are not necessarily indicative of full-year results.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $15.21 million | $10.68 million | $41.42 million | $31.18 million |
| Gross profit / margin | $3.57 million / 23% | $2.57 million / 24% | $9.78 million / 24% | $7.11 million / 23% |
| Operating income | $459,000 | $270,000 | $110,000 | $149,000 |
| Net income (loss) | $244,000 | $218,000 | ($951) | $115,000 |
| Net cash from operations | Not separately provided for the quarter | $1.21 million | $1.20 million |
- Q3 revenue rose 42%; nine-month revenue rose 33%. Management attributed growth to all segments, including the Avalon Global Solutions (AGS) acquisition, commercial consulting and software sales, credentialing services, and government product resale.
- Q3 gross margin declined one percentage point year over year, which management attributed to sales mix. Nine-month gross margin improved one point. Sales and marketing expense increased to $705,000 in Q3 and $2.22 million for the nine-month period; management cited marketing and channel-partner commissions. Nine-month interest expense rose to $265,000 from $55,000, primarily due to AGS-related debt.
- Q3 net income included a $142,000 income tax provision. The nine-month net loss was approximately break-even despite higher revenue, with increased amortization, operating costs, and interest expense among the factors reflected in results.
Financial position and liquidity
- At September 30, 2012, cash was $2.49 million; current assets were $11.98 million and current liabilities $8.36 million. Management reported working capital of approximately $3.6 million, versus $2.4 million at December 31, 2011.
- Total debt was $8.13 million, including $7.77 million classified as long-term. Capital lease obligations totaled $155,000. The $8.0 million receivables-based credit facility had no balance outstanding at quarter-end, although the company drew and repaid approximately $3.04 million during the nine months.
- Nine-month operating cash flow was $1.21 million. Investing used $224,000 and financing used $631,000; cash increased $358,000 from year-end to $2.49 million. Operating cash flow included a $2.39 million source from receivables and unbilled receivables, partly offset by a $2.37 million use from accounts payable and accrued expenses.
- Total assets were $39.38 million, down from $42.29 million at year-end, including net intangibles of $4.25 million and goodwill of $18.15 million.
Material changes, outlook and risks
- AGS, acquired at the end of 2011, contributed to revenue growth and higher general and administrative expense and borrowing costs. The company expected to complete its final acquisition fair-value determination before year-end 2012.
- Management said current cash and the available credit facility were sufficient for minimum operating needs, but future liquidity depends on revenue growth, spending on products and infrastructure, acquisition funding, and market acceptance. It cautioned that additional financing, if needed, may not be available on acceptable terms.
- Management anticipated further infrastructure investment and related depreciation, and said margins may vary with revenue mix. It expected lower long-term cost of sales as higher-margin services become a greater share of revenue; this is not a numerical earnings or revenue forecast.
- Federal customer and contract exposure remains significant: TSA and DHS represented 18% and 17%, respectively, of nine-month revenue. Management noted that consulting and product resale growth tied to federal contracts may be erratic, and cited customer concentration and variability in federal contract revenue as risks.
- Disclosure controls were deemed ineffective as of September 30, 2012 because of continuing material weaknesses in segregation of duties, accounting policies and procedures, and expertise for complex transactions, including income taxes. A remediation plan was underway; management stated its effectiveness was not yet established.
- The filing reports an ongoing finalization of an Illinois income tax examination for 2007–2008; the company said it was not otherwise under IRS or state examination. No off-balance-sheet arrangements were reported.
Important facts for investors to verify
- Whether revenue growth, especially in commercial business and acquired AGS operations, is recurring and improves profitability and margins.
- Debt service and scheduled repayments, the subordinated AGS notes’ claw-back terms, and continued access to the receivables-based credit facility.
- Customer and federal-contract concentration, contract renewals and assignments, and the effect of any federal spending or award changes.
- Progress in remediating material control weaknesses and the completion of AGS purchase accounting and valuation.
- The sustainability of operating cash flow, given working-capital movements, and the potential effect of planned infrastructure spending and amortization.