WidePoint Corporation — Q2 2016 Form 10-Q
Business and period: WidePoint provides cloud-based IT services, including mobile communications management and identity management, to government and commercial customers. This unaudited filing covers the quarter and six months ended June 30, 2016; comparisons are with the same 2015 periods unless noted.
Financial performance and position
| Metric | Q2 2016 | Six months 2016 | Comparison with 2015 |
|---|---|---|---|
| Revenue | $17.54 million | $38.05 million | Up 0.6% for Q2 and 8.3% year to date |
| Gross profit / margin | $3.36 million / 19% | $7.57 million / 20% | Gross profit increased from $3.31 million / 19% and $6.88 million / 20% |
| Operating loss | $0.87 million | $1.52 million | Improved from $1.40 million and $2.50 million losses |
| Net loss | $0.90 million; $0.011 per share | $1.56 million; $0.019 per share | Improved from $1.41 million and $2.57 million losses |
| Cash from operations | Not presented by quarter | $0.98 million provided | Compared with $1.96 million used |
| Investing cash flow | Not presented by quarter | $0.30 million used | Compared with $0.38 million used |
| Financing cash flow | Not presented by quarter | $0.36 million used | Compared with $0.99 million used |
Operating costs were $14.18 million in Q2 and $30.48 million for the half year, approximately 81% and 80% of revenue, respectively. At June 30, cash was $8.33 million; current assets were $22.62 million and current liabilities $15.62 million, with reported working capital of approximately $7.0 million. Total assets were $47.38 million and stockholders’ equity $30.75 million.
Debt included $884,000 of mortgage and term debt, $138,000 outstanding on the line of credit, and approximately $16,600 of capital lease obligations. The company reported $4.8 million of borrowing availability under the borrowing-base formula at June 30. The new $6.0 million revolving facility replaced the prior $8.0 million facility; maturity is April 30, 2017.
Changes and operating trends
- Six-month carrier-services revenue rose $3.89 million to $22.19 million, primarily from DHS task orders. Managed-services revenue fell $0.97 million to $15.86 million, including a $2.7 million year-over-year decline in software reselling, partly offset by accessory sales and existing managed services.
- Q2 revenue was nearly flat: carrier services increased $552,000 while managed services declined $445,000. The company cited 11 DHS BPA task orders awarded in Q2 2016 versus four a year earlier.
- Lower sales and marketing and general and administrative expenses helped reduce operating losses. Gross margin remained about 19% in Q2 and 20% for the half year.
- Cash increased $397,000 during the half year. Management attributed operating cash generation to collections, advance customer payments, and expense reductions; the cash-flow statement also shows a $3.67 million inflow from accounts receivable and unbilled receivables changes.
Outlook, risks, and unusual items
- Management is prioritizing higher-margin services and de-emphasizing lower-margin offerings, developing identity-management products, and seeking additional DHS task orders. It said positive future cash flow and net income depend on executing this strategy; it provided no revenue or earnings guidance.
- The April 2016 bank agreement requires minimum tangible net worth of $6.25 million at June 30, rising to $6.5 million at December 31, 2016; minimum after-tax net income of at least $1 for Q3 and $200,000 for Q4; and a quarterly current ratio of 1.1:1. The company reported compliance with covenants at June 30. These income requirements are notable given reported losses.
- Customer and receivables concentration is high: DHS represented 61% of Q2 revenue and 63% of first-half revenue, and 53% of June 30 trade receivables. Management also cited Brexit-related currency instability and delayed European contracts.
- Management concluded disclosure controls were ineffective at June 30 because material weaknesses in contract-management and billing controls and entity-level controls had not been remediated. A remediation plan was being implemented.
- The company reported cumulative three-year losses and recorded a valuation allowance against all deferred tax assets. Federal NOLs of approximately $26.7 million are subject to possible Section 382 limitations and may expire between 2017 and 2032; some carryforwards may expire unused.
- Management warned that profitability and liquidity are not assured and that additional capital or alternative debt financing may be needed, with no assurance of availability on acceptable terms. Results may vary with contract awards, timing, service mix, and fixed costs.
- Approximately $233,500 of internally developed software costs was capitalized in the first half, substantially related to Certificate-on-Device tools. Goodwill remained $18.56 million; the company said it considered impairment indicators and reported no change in goodwill.
Important facts for investors to verify
- Progress toward covenant-required positive net income in Q3 and Q4, and continued compliance with the bank facility’s borrowing-base and current-ratio tests.
- Whether DHS task orders and the two remaining major DHS BPA agencies generate sustained, profitable growth, given the customer concentration.
- Cash conversion and receivables collection, including the durability of first-half operating cash flow and the level of unbilled receivables.
- Remediation and independent assessment of the disclosed material weaknesses in financial reporting controls.
- Effects of the deferred-tax valuation allowance, NOL limitations and expirations, and the company’s ability to realize tax assets.