WidePoint Corporation — Q1 2015 Form 10-Q
Business and period: The filing covers the three months ended March 31, 2015, compared with Q1 2014. WidePoint provides managed mobility and identity-management IT services to commercial and government customers. Its results are reported as one segment.
Financial performance
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Revenue | $17.70 million | $9.60 million |
| Gross profit / margin | $3.57 million / 20% | $2.47 million / 26% |
| Operating loss | $1.09 million | $1.50 million |
| Net loss | $1.16 million | $0.93 million |
| Basic and diluted loss per share | $0.014 | $0.014 |
| Operating cash flow | $(1.29) million | $(0.05) million |
- Revenue increased about 84%, reflecting growth in carrier services and managed services. Carrier services rose to $8.68 million from $3.93 million; managed services rose to $9.02 million from $5.67 million.
- Gross profit increased in dollars, but gross margin declined to 20% from 26%, primarily because lower-margin carrier services made up a larger share of revenue.
- Operating loss narrowed, while net loss increased. The comparison was affected by a $616,000 tax benefit in Q1 2014 versus a $32,000 tax provision in Q1 2015; the company recorded a full valuation allowance against its U.S. deferred tax assets.
- Cash and cash equivalents were $11.52 million at March 31, down from $13.15 million at December 31, 2014. Net working capital was approximately $11.5 million, versus $12.5 million at year-end.
- Current assets were $27.83 million and current liabilities $16.35 million. Total debt was $3.30 million; no balance was outstanding on the $8 million revolving credit facility at quarter-end. The company reported compliance with the facility’s financial covenants.
- Investing activities used $93,000. Financing activities used $99,000, including scheduled debt and lease repayments, partly offset by $126,000 from stock-option exercises. Cash declined by $1.63 million, including a $148,000 adverse foreign-exchange effect.
Changes, outlook, and risks
- Growth was driven in part by task orders under the Department of Homeland Security (DHS) blanket purchase agreement and by the Soft-ex Communications acquisition, which contributed approximately $1.4 million of managed-services revenue.
- DHS represented 49% of Q1 2015 revenue, up from 37% in Q1 2014. Management noted that three major DHS component agencies had not yet issued initial task orders. It expected carrier-services revenue could increase in Q2 as newly initiated work contributed a full quarter, but provided no formal financial guidance.
- Management attributed operating cash use to investment in sales and product development, including Certificate-on-Device identity offerings, and staffing to support contract work. It said current cash and the credit facility were sufficient for minimum current operating needs, while noting expansion or new contracts could require additional working capital and future financing was not assured.
- Debt maturities include a $1.0 million contingent seller note due May 31, 2015. A separate $333,000 seller note was paid on April 15, 2015. The revolving facility matures October 31, 2015.
- Management identified material weaknesses in revenue-recognition controls and entity-level controls, including policies, procedures, and segregation of duties. They remained unremediated at March 31, 2015; management was developing a remediation plan. Disclosure controls were deemed ineffective.
- Other disclosed risks include dependence on government spending and contract awards, customer and DHS concentration, execution and integration of SCL, margin mix, and the ability to convert growth and investment into profitability and cash generation. Management said risk factors had not materially changed from the 2014 Form 10-K. No material legal proceedings or off-balance-sheet arrangements were reported.
Important facts to verify
- Progress and timing of additional DHS task orders, and the resulting revenue concentration and carrier-services margins.
- Whether operating cash use, receivables and unbilled receivables, and working capital improve as revenue grows.
- Repayment or refinancing of the SCL seller note and the October 2015 credit-facility maturity.
- Remediation of the material weaknesses, especially controls over revenue recognition and segregation of duties.
- Realizability of tax-loss carryforwards: the filing cites approximately $21.5 million of federal NOLs, potential Section 382 limits, and a $5.0 million valuation allowance against deferred tax assets.