WidePoint Corporation — Q1 2016 Form 10-Q
Business and period: WidePoint provides cloud-based identity management, communications management and related IT services to government and commercial customers. This unaudited report covers the three months ended March 31, 2016, compared with Q1 2015; balance-sheet comparisons are with December 31, 2015.
Key financial results
| Metric | Q1 2016 | Q1 2015 / prior balance date |
|---|---|---|
| Revenue | $20.51 million | $17.70 million |
| Gross profit / margin | $4.20 million / 21% | $3.57 million / 20% |
| Operating loss | $643,878 | $1.09 million |
| Net loss / diluted loss per share | $659,510 / $0.008 | $1.16 million / $0.014 |
| Cash used in operations | $2.04 million | $1.29 million |
| Cash and cash equivalents | $6.25 million | $7.93 million at Dec. 31, 2015 |
| Working capital | Approximately $7.8 million | Approximately $8.0 million at Dec. 31, 2015 |
| Total assets | $47.91 million | $50.86 million at Dec. 31, 2015 |
Revenue increased approximately 16% year over year. Carrier services rose $3.34 million, while managed services declined $528,000. Cost of revenues remained approximately 80% of revenue. Sales and marketing expense was $739,000; general and administrative expense was $3.76 million; product development expense increased to $257,000 from $69,000. Interest expense fell to $20,000 from $44,000.
Operating cash outflow reflected investment in sales and product development, accelerated payments of certain payables, and working-capital timing. Investing cash outflow was $39,000; financing provided $321,000. Cash declined by $1.68 million, including a favorable $82,000 exchange-rate effect.
Debt, liquidity and balance-sheet matters
- At March 31, the company had $586,000 drawn on its prior revolving credit facility, $1.11 million of long-term debt (including $679,000 current), and $77,000 of short-term notes. Capital lease obligations totaled approximately $24,000.
- On April 28, 2016, WidePoint entered a replacement Cardinal Bank revolving facility of up to $6 million, maturing April 30, 2017. Borrowing availability is subject to a receivables-based borrowing base and outstanding term-loan amounts. The agreement includes tangible-net-worth, quarterly current-ratio and after-tax-income requirements.
- Management said the company was in compliance with financial covenants at March 31 under the then-existing facility. It cautioned that additional capital or alternative financing may be needed if the business plan does not generate improved profitability and cash flow; availability on acceptable terms is not assured.
- Accounts receivable decreased to $7.12 million, while unbilled receivables rose to $9.06 million. Goodwill was $18.56 million; management reported no goodwill balance change and considered impairment indicators.
Changes, outlook and risks
- Management attributed revenue growth to more DHS task orders and higher carrier/device sales. Managed-services revenue excluding software resale grew, but software-reselling activity was volatile and declined substantially year over year.
- The company is refocusing on higher-margin services and streamlining sales to improve cash flow. It identified potential growth from DHS task orders, commercial and government sales pipelines, channel partners, and new identity-management offerings. No quantitative revenue or earnings guidance was provided.
- Results may vary with contract awards, billable days, contract timing and service mix; fixed-price contracts, volume discounts and customer-mandated rate reductions may pressure margins. DHS accounted for 65% of Q1 revenue and 41% of receivables at March 31, creating significant customer concentration.
- Management recorded a valuation allowance against all deferred tax assets, citing cumulative losses over the latest three-year period and uncertainty about realizing the tax benefits. Federal NOL carryforwards expire from 2017 through 2032; some use may be limited.
- Disclosure controls were deemed ineffective at March 31 due to unremediated material weaknesses in contract-management and billing controls and entity-level controls, including inadequate documentation. Management was developing remediation measures.
- No material legal proceedings or material change in reported risk factors were disclosed. The filing identifies no off-balance-sheet arrangements.
Most important facts for investors to verify
- Whether the new credit facility’s borrowing base and financial covenants can be met, especially the required positive after-tax income in Q3 and Q4 2016.
- Whether operating cash flow improves and cash needs remain manageable given ongoing losses and working-capital outflows.
- Whether DHS contract activity continues and customer concentration can be reduced.
- Whether higher-margin services and new identity-management products generate sustainable growth and profitability.
- Progress and effectiveness of remediation for the disclosed material weaknesses in financial reporting controls.