WidePoint Corporation (WIDEPOINT CORP) — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016; unaudited. WidePoint provides cloud-based IT services, including communications management and identity management, to government and commercial customers. The company reports as one operating segment.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $22.1m | $17.0m | $60.2m | $52.1m |
| Gross profit / margin | $4.0m / 18% | $3.1m / 18% | $11.6m / 19% | $10.0m / 19% |
| Operating loss | $(0.13)m | $(1.63)m | $(1.64)m | $(4.13)m |
| Net loss | $(0.15)m | $(1.76)m | $(1.70)m | $(4.33)m |
- Q3 revenue grew 30%; nine-month revenue grew 15%. Carrier services drove growth, rising $4.4m in Q3 and $8.3m year to date. Managed-services revenue rose in Q3 but declined slightly for the nine-month period.
- Gross margin was broadly unchanged year over year. Operating and net losses narrowed, reflecting higher gross profit and lower sales, general and administrative, and other operating expenses.
- Operating cash flow was negative $1.21m for the first nine months, compared with negative $2.83m in 2015. Investing cash outflow was $0.63m, including $0.48m of capitalized software development. Financing cash outflow was $0.60m.
- Cash declined $2.34m to $5.59m from year-end 2015. At September 30, working capital was approximately $7.0m; current assets were $24.78m and current liabilities $17.79m.
- Total reported debt was approximately $0.66m, plus $0.13m outstanding on the line of credit. The company reported $5.6m of borrowing availability under the borrowing-base formula as of September 30.
Changes, outlook and risks
- Management is refocusing on higher-margin services, streamlining sales and operations, and developing identity-management products such as Certificate-on-Device and derived credentials. No numerical financial guidance is provided.
- DHS task orders drove carrier-services growth. DHS represented 62% of Q3 revenue and 63% of nine-month revenue, and 49% of receivables at September 30, creating significant customer concentration. Two major DHS BPA agencies had not yet issued initial task orders.
- Management cited delayed new contracts related to Brexit and regulatory matters, foreign-exchange impacts, and labor-intensive fulfillment of certain federal task orders. Revenue and profitability may fluctuate with contract timing, service mix, and government award schedules.
- The company did not meet its minimum after-tax net income covenant for Q3; Cardinal Bank waived the breach on November 4, 2016. The same modification reduced the receivables-based borrowing-base percentage from 75% to 65% and reduced the Q4 minimum after-tax net income covenant to $1. The facility matures April 30, 2017; other stated covenants include a $6.5m minimum tangible net worth at year-end and a 1.1:1 current ratio.
- Management said it may need additional capital or alternative debt financing if it cannot generate sufficient cash flow; availability on acceptable terms is not assured. The company recorded a valuation allowance against all deferred tax assets, citing cumulative losses and uncertainty over future taxable income.
- Disclosure controls were deemed ineffective due to unremediated material weaknesses in contract-management and billing controls and entity-level controls. A remediation plan was underway. Management also identified profitability, liquidity, competition, customer penetration, and retention of key personnel as risks. No material legal proceedings were reported.
Important facts for investors to verify
- Whether the DHS BPA generates additional task orders, particularly from the Coast Guard and FEMA, and whether customer concentration changes.
- Progress toward positive operating cash flow and profitability, including working-capital collection trends and fulfillment costs.
- Compliance with Cardinal Bank covenants, borrowing availability after the reduced borrowing-base percentage, and refinancing or repayment plans before facility maturity.
- Whether the material control weaknesses are remediated and whether product-development investment produces commercial adoption and higher-margin revenue.