WidePoint Corporation — Q3 2011 Form 10-Q
Business context and reporting period. WidePoint provides technology products and services to government and commercial customers through Wireless Mobility Management, Cyber Security Solutions, and IT Consulting Services and Products. This unaudited filing covers the quarter and nine months ended September 30, 2011; comparisons are with the corresponding 2010 periods.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $10.68 million | $13.76 million | $31.18 million | $37.37 million |
| Gross profit; gross margin | $2.57 million; 24% | $3.93 million; 29% | $7.11 million; 23% | $9.39 million; 25% |
| Operating income | $270,000 | $1.18 million | $149,000 | $1.99 million |
| Net income | $218,000 | $1.12 million | $115,000 | $1.77 million |
| Diluted EPS | $0.003 | $0.018 | $0.002 | $0.028 |
Cash flow and liquidity. Nine-month operating cash flow was $1.20 million, versus cash used of $1.27 million in 2010. Investing activities used $667,000 and financing activities used $353,000; cash increased $182,000 to $6.00 million. Management reported working capital of approximately $6.3 million, with $6.4 million of accounts receivable and unbilled receivables. Operating cash flow benefited from a $4.46 million reduction in receivables, partly offset by a $3.73 million decline in accounts payable and accrued expenses.
Debt and balance sheet. Total assets were $30.13 million, compared with $34.40 million at year-end 2010; total liabilities were $7.68 million, down from $12.38 million. The balance sheet lists approximately $739,000 of short- and long-term debt, plus a $153,000 earnout liability. No borrowings were outstanding under the $5 million revolving facility at September 30, and the company reported covenant compliance. On October 5, 2011, the facility maturity was extended to December 31, 2012 and its interest-rate floor reduced to 3.75%.
Material changes and management commentary
- Revenue fell 22% in Q3 and 17% for the nine-month period. In Q3, Wireless Mobility revenue declined 9.7%, Cyber Security revenue declined 60.7%, and Consulting revenue was nearly flat. Nine-month revenue declined in all three segments.
- Management attributed weakness primarily to reduced billable calling minutes and delayed government contract awards amid federal budget and debt-ceiling uncertainty. Lower Cyber Security revenue and a greater consulting mix also reduced gross margins.
- Management expected Q4 revenue growth as work began on awards received in Q3, including two federal contracts and three municipal awards. It cited federal identity-assurance/PKI mandates and partner relationships as potential Cyber Security growth drivers, while cautioning that consulting revenue could be erratic. The filing gives no quantified company-wide guidance.
- Federal customers represented substantial concentration: TSA and DHS together were 51% of Q3 revenue and 52% of nine-month revenue. DHS, TSA, and FSS Naval Sea Logistics accounted for 30%, 17%, and 11% of receivables and unbilled receivables at quarter-end.
- Management said current cash was sufficient for near-term working capital and capital needs, but longer-term liquidity depends on revenue and cash-flow growth. Acquisitions or expansion could require external financing, which may not be available on acceptable terms.
Risks, contingencies, and unusual items
- Management stated disclosure controls were not effective at the required reasonable-assurance level. Reported material weaknesses included inadequate segregation of duties, insufficient accounting policies and procedures, and a lack of expertise for complex accounting and tax matters. Remediation efforts were underway and could continue into early 2012.
- The current federal continuing resolution was due to expire November 15, 2011; management warned that a lapse or spending reductions could suspend work or reduce revenue. The filing also discussed potential automatic reductions if congressional deficit-reduction efforts failed.
- The State of Illinois was conducting an ongoing tax examination. No unrecognized tax benefits were reported. The company reported no material off-balance-sheet arrangements and no identified goodwill impairment as of September 30, 2011.
- The MD&A describes the nine-month result as a net loss of approximately $0.1 million, but the financial statements report net income of $115,010. The filing text is inconsistent; the statements show positive net income.
Important facts for investors to verify
- Reconcile the MD&A’s “net loss” description with the reported $115,010 net income and confirm the correct nine-month result.
- Track whether delayed federal awards and Q3 federal and municipal contracts convert into revenue, particularly in Cyber Security and Wireless Mobility.
- Monitor federal budget actions, customer concentration, receivable collections, and working-capital requirements.
- Assess progress in remediating the disclosed material weaknesses and the effect on reliable financial reporting.
- Confirm continued compliance with bank covenants and the availability and terms of the extended revolving facility.