WidePoint Corporation — Q2 2013 Form 10-Q
Reporting period: Three and six months ended June 30, 2013; balance-sheet comparisons are with December 31, 2012. WidePoint provides technology services including managed mobility, identity management, cybersecurity and consulting, with government and commercial customers. It reorganized around a single enterprise-wide portfolio and no longer reports separate operating segments.
Financial results
| Metric | Q2 2013 | Q2 2012 | First half 2013 | First half 2012 |
|---|---|---|---|---|
| Revenue | $11.34 million | $12.51 million | $23.31 million | $26.21 million |
| Gross profit (margin) | $3.53 million (31%) | $2.88 million (23%) | $6.80 million (29%) | $6.20 million (24%) |
| Operating income (loss) | $187,000 | $(477,000) | $62,000 | $(349,000) |
| Net income (loss) | $139,000 | $(302,000) | $104,000 | $(245,000) |
- Revenue fell about 9% in Q2 and 11% in the first half year over year. Management attributed the decline to its shift toward higher-margin recurring services, delayed government product resale transactions and customer implementations, commercial telecommunications customer attrition, and a protest involving a federal contract award.
- Gross margin improved as the sales mix shifted toward higher-margin services. First-half sales and marketing expense was $1.69 million, versus $1.52 million; general and administrative expense was $4.91 million, versus $4.90 million. First-half reported G&A included a $589,000 noncash gain from remeasuring a contingent obligation; excluding that gain, management reported G&A of about $5.5 million.
- First-half operating cash flow was $1.64 million, compared with cash used of $1.19 million in the prior-year period. Cash increased to $2.50 million from $1.86 million at year-end. Investing activities used $235,000 and financing activities used $756,000; net cash increased $646,000.
- At June 30, current assets were $10.11 million and current liabilities were $7.56 million; management reported working capital of approximately $2.5 million. Long-term debt, including its current portion, was $4.78 million, down from $6.02 million at year-end. Capital lease obligations totaled $124,000. No balance was outstanding on the $8 million bank credit facility at quarter-end, although the company drew and repaid approximately $481,000 during the first half.
Outlook, risks and notable items
- Management said current cash and the working-capital facility should meet minimum operating needs, but expansion, new contracts, acquisitions or growth initiatives could require additional working capital or financing. No specific revenue or earnings guidance was provided.
- Management cited potential demand from federal credentialing and dual-factor authentication requirements, bring-your-own-device use, and secure mobile connectivity. It also described sizeable government and commercial opportunities in its sales pipeline; awards and timing are uncertain.
- Risks highlighted include reduced government spending, regulatory changes, execution of growth and sales strategies, financing availability, and the company’s ability to increase profitable recurring services and manage costs. TSA and DHS represented 20% and 18% of Q2 revenue, respectively.
- A noncash $589,000 first-half gain reduced the recorded fair value of the contingent seller-financed obligation to $661,000 from $1.25 million. Management attributed the reduction primarily to lower-than-anticipated client implementations; potential 2013 contingent consideration was up to $1.5 million face value.
- Disclosure controls and internal control over financial reporting were deemed ineffective at June 30, 2013 because of material weaknesses involving segregation of duties, accounting policies and procedures, and expertise for complex accounting and tax matters. Management said its remediation plan would continue through year-end 2013.
- Subsequent to quarter-end, the company modified office leases effective July 1, including a Fairfax lease extending to 2019 with possible termination after three years subject to notice and a fee. On August 13, it extended the CEO’s and CFO’s employment agreements through December 31, 2013 at existing salary and benefit levels.
Important facts for investors to verify
- Whether revenue declines and the cited contract, implementation and customer delays persist, and whether pipeline opportunities convert to awards.
- How much margin improvement is sustainable as higher-margin recurring services grow and lower-margin resale transactions fluctuate.
- Cash conversion, collection timing, debt repayments and capacity under the receivables-based credit facility.
- Assumptions underlying the Level 3 contingent-obligation valuation and potential future payments.
- Progress in remediating the disclosed material weaknesses and any subsequent changes in control effectiveness.