WidePoint Corporation — Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2011; filed August 15, 2011. WidePoint provides technology products and services through Wireless Mobility Management, Cyber Security Solutions, and IT Consulting Services and Products, with substantial federal-government exposure.
Financial performance and position
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Revenue | $9.97 million | $12.45 million | $20.50 million | $23.62 million |
| Gross profit | $2.70 million | $2.93 million | $4.54 million | $5.45 million |
| Gross margin | 27% | 24% | 22% | 23% |
| Operating income/(loss) | $384,000 | $511,000 | $(121,000) | $811,000 |
| Net income/(loss), per statements of operations | $214,000 | $413,000 | $(103,000) | $652,000 |
| Operating cash flow | Not presented quarterly | Not presented quarterly | $247,000 | $(2.84) million |
- Quarterly revenue declined about 20%; first-half revenue declined about 13%. In Q2, consulting revenue fell 51%, wireless revenue 11%, and cyber security revenue 8% year over year.
- First-half gross margin eased despite Q2 improvement. Management attributed the first-half pressure primarily to a less favorable consulting-services and resale mix in Q1.
- Cash and cash equivalents were $5.39 million at June 30, down from $5.82 million at year-end. Working capital was approximately $6.0 million. Current assets were $12.40 million and current liabilities $6.38 million.
- Total liabilities were $7.13 million. The balance sheet reported approximately $857,000 of short- and long-term debt, plus approximately $44,000 of capital-lease obligations. No borrowings were outstanding on the $5 million revolving facility; the company reported compliance with its covenants.
- First-half investing cash use was $505,000, including $231,000 for property and equipment and $275,000 for software development. Financing cash use was $164,000.
Changes, outlook, and risks
- Management linked lower revenue to reduced billable activity and federal contract-award delays associated with continuing resolutions, budget timing, and debt-ceiling debates. Receivables declined substantially, supporting operating cash flow; management also noted the slowdown in billings and awards.
- Management anticipated further Wireless Mobility Management growth in Q3 as new clients were added, and expected longer-term growth opportunities in cyber security from federal identity-assurance requirements and partnerships. It described consulting growth as modest but potentially erratic. No numerical earnings or revenue guidance was provided.
- The company said current cash was sufficient for near-term working-capital and capital needs, but longer-term liquidity depends on growing revenue and cash flow; additional financing may be needed for major expansion or acquisitions. Its unused $5 million credit facility was due to expire September 30, 2011, and management expected renewal before expiration.
- Federal agencies and customers create concentration and timing risks. TSA and DHS together represented 55% of Q2 revenue; DHS and TSA represented 31% and 20% of receivables, respectively. Federal budget reductions, delayed awards, contract variability, and dependence on labor and vendor costs could affect results.
- Management reported disclosure controls were not effective at period-end because of material weaknesses involving segregation of duties, accounting policies and procedures, and expertise with complex accounting and tax matters. Remediation efforts were underway during 2011.
- The company reported an ongoing Illinois state tax examination. It reported no goodwill impairment as of June 30, 2011 and no off-balance-sheet arrangements.
Investor verification priorities
- Reconcile net income: The statements of operations report Q2 net income of $214,431 and first-half net loss of $102,929, but the EPS note uses $184,808 and $(132,552), respectively. The filing text does not explain these discrepancies.
- Check credit-facility renewal: Verify renewal terms, continued covenant compliance, and availability after the September 30, 2011 expiration date.
- Track federal contract exposure: Monitor award timing, customer concentration, and whether anticipated new work offsets declines in billable activity and consulting revenue.
- Assess control remediation: Confirm whether the disclosed material weaknesses were addressed and whether disclosure controls became effective.
- Monitor cash conversion: Evaluate receivable collections and operating cash flow, noting that first-half cash generation benefited materially from lower receivables.