WidePoint Corporation — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015. The unaudited filing covers WidePoint and its subsidiaries, a provider of IT products and services, primarily Managed Mobility Solutions (MMS), including carrier services, managed services, and identity management. The company reports as one operating segment.
Key financial results
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $17.43 million | $12.39 million | $35.13 million | $22.00 million |
| Gross profit | $3.31 million | $3.61 million | $6.88 million | $6.08 million |
| Gross margin | 19% | 29% | 20% | 28% |
| Operating loss | $1.40 million | $1.23 million | $2.50 million | $2.74 million |
| Net loss | $1.41 million | $0.67 million | $2.57 million | $1.60 million |
| Basic and diluted loss per share | $0.017 | $0.009 | $0.031 | $0.023 |
- Revenue increased approximately 41% year over year in Q2 and 60% for the first half. Carrier services rose to $9.62 million in Q2 and $18.30 million in the first half, primarily reflecting task orders under the Department of Homeland Security (DHS) blanket purchase agreement (BPA).
- Margin compression reflected a greater mix of lower-margin carrier services. Q2 gross profit declined despite higher revenue; first-half gross profit increased in dollars but fell as a share of revenue.
- Q2 operating expenses were $4.71 million, versus $4.85 million a year earlier. For the first half, they increased to $9.37 million from $8.82 million, including higher general and administrative costs for SCL, technology development, and capacity.
- Income tax expense was $45,204 in Q2 and $77,345 for the first half, versus tax benefits in the comparable 2014 periods. The filing attributes this primarily to foreign and state taxes and no U.S. tax benefit for losses; the company recorded a full valuation allowance against approximately $5.0 million of deferred tax assets.
Cash, liquidity, and debt
- At June 30, 2015, cash was $9.69 million, current assets were $28.07 million, and current liabilities were $17.47 million. Management reported working capital of approximately $10.6 million, down from $12.5 million at December 31, 2014.
- For the six months, operating cash use was $1.96 million, investing cash use was $0.38 million, and financing cash use was $0.99 million. Cash decreased $3.47 million from year-end. Operating cash use reflected investment and a $3.46 million increase in accounts receivable and unbilled receivables, partly offset by increases in payables and deferred revenue.
- The company had an $8.0 million borrowing-base line of credit maturing October 31, 2015, with $122,527 outstanding at quarter-end. It reported compliance with the facility’s financial covenants. Long-term debt, including its current portion, was $1.76 million; the company also had $80,713 in capital lease obligations and a $37,423 short-term note payable.
- During the first half, the company repaid the remaining seller notes associated with prior acquisitions: the SCL contingent note, including interest, was paid in May, and the AGS note was paid in April. Total long-term debt declined from $3.51 million at December 31, 2014.
Material changes, outlook, and risks
- Management said carrier-services revenue could increase in the second half if the U.S. Coast Guard, FEMA, or U.S. Secret Service issues initial DHS BPA task orders. No quantified company-wide financial guidance was provided.
- Management cited potential growth from new identity-management offerings, including Certificate on Device, machine-to-machine credentials, and derived credentials, as well as commercial, federal, and state opportunities. These prospects depend on contract awards, customer approvals, and execution.
- Managed services revenue in Q2 was slightly lower year over year, which management attributed to delayed telecommunications optimization approvals, lower per-device billing after a volume threshold, and reduced credential activity. For the first half, managed services revenue increased.
- DHS concentration is substantial: DHS represented 54% of Q2 revenue and 52% of first-half revenue, and 50% of accounts receivable at June 30. Revenue and results may fluctuate with government awards, contract timing, device volumes, billing and collection timing, and fixed costs.
- Management stated that current cash and the credit facility were sufficient for minimum current operating requirements, but expansion, new contracts, acquisitions, or growth investment could require additional working capital. It cautioned that future financing may not be available on acceptable terms.
- Disclosure controls and procedures were deemed ineffective at June 30, 2015 due to unremediated material weaknesses in revenue-recognition controls and entity-level controls, including policies, procedures, and segregation of duties. Management was developing a remediation plan.
- No material legal proceedings or material changes to the previously disclosed risk factors were reported. Goodwill was $18.56 million; management reported no impairment indicators for the first half.
Important facts for investors to verify
- Whether the remaining DHS agencies issue task orders, and how DHS concentration and carrier-services mix affect revenue and gross margins.
- Collection timing and quality of the increased receivables, including unbilled receivables, and the resulting effect on operating cash flow and borrowing availability.
- Renewal or replacement of the line of credit before its October 31, 2015 maturity, and continued covenant compliance.
- Progress and evidence of remediation of the material weaknesses in financial reporting controls, particularly revenue recognition.
- Whether new identity-management offerings and sales channels generate awards and profitable revenue sufficient to support ongoing investment and liquidity needs.