WidePoint Corporation — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013. WidePoint provides managed mobility, identity management, cybersecurity, and related IT services to government and commercial customers. The company reports these activities as one Managed Mobility Solutions (MMS) segment.
Financial results
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $12.22 million | $15.21 million | $35.53 million | $41.42 million |
| Gross profit / margin | $2.98 million / 24% | $3.57 million / 23% | $9.78 million / 28% | $9.78 million / 24% |
| Operating income (loss) | $(54,000) | $459,000 | $8,000 | $110,000 |
| Net income (loss) | $295,000 | $244,000 | $399,000 | $(1,000) |
| Basic and diluted EPS | $0.005 | $0.004 | $0.006 | $(0.000) |
- Cash flow: Nine-month operating cash flow was $1.88 million, versus $1.21 million in the 2012 cash flow statement. Investing used $289,000 and financing used $1.04 million. Cash increased $552,000 to $2.41 million.
- Liquidity: Current assets were $11.63 million and current liabilities $9.23 million; working capital was approximately $2.4 million. The company reported no borrowings on its $8 million receivables-based line of credit at September 30.
- Debt: Long-term debt, including its current portion, was $3.86 million, down from $6.02 million at December 31, 2012. Capital lease obligations were $113,000. The contingent seller obligation was remeasured to zero.
- Other balance-sheet items: Total assets were $37.64 million; goodwill was $16.62 million and net intangibles $3.94 million. The company reported approximately $4.8 million in deferred tax assets tied to tax-loss carryforwards.
Material changes and management commentary
- Revenue fell 20% in Q3 and 14% for the nine-month period. Management cited lower government product-resale activity amid sequestration-related delays, customer implementation delays, commercial telecommunications customer attrition, and a federal contract protest.
- Nine-month gross profit was roughly flat despite lower revenue, with gross margin increasing to 28% from 24%, reflecting a changed revenue mix. Management said margins may vary with lower-margin government resale transactions and emphasized growth in higher-margin recurring services.
- Operating income was near breakeven for the nine-month period. Reported net income benefited from a $1.25 million noncash gain from reducing the fair value of the contingent seller obligation to zero; the Q3 gain was $661,000. The remeasurement reflected management’s view that the 2013 adjusted gross profit target tied to that obligation was unlikely to be met.
- Sales and marketing spending rose for the nine-month period as the company hired sales and marketing staff and invested in a national MMS sales force. Management also described increased staffing and infrastructure costs.
- The company was awarded a DHS cellular wireless managed-services BPA with a $600 million ceiling and a one-year base period plus four option years. The award was protested again in August 2013; new services were stayed pending a GAO decision expected by December. The ceiling is not a statement of committed revenue.
- Management said it believed cash and the credit facility were sufficient for minimum current operating needs, but growth or new contracts could require additional working capital. The company said future financing might not be available on acceptable terms.
Risks, contingencies, and controls
- Although compliant with its Cardinal Bank covenants at September 30, management said it was probable the company might fail the required 1.2:1 debt-service ratio at December 31, 2013, citing reinvestment and reduced earnings. It planned to seek a waiver and/or covenant modification. Other covenants include a minimum $4.5 million tangible net worth and 1.1:1 current ratio.
- The DHS award protest could affect expected revenue, goodwill impairment assessment, and the realization of deferred tax assets. Management considered a successful protest outcome remote but said an unfavorable result would be evaluated in its year-end impairment test and could require reassessing the tax asset valuation allowance.
- Disclosure controls and internal control over financial reporting were deemed ineffective as of September 30, 2013 because of material weaknesses: inadequate segregation of duties, inadequate accounting policies and procedures, and insufficient expertise for complex accounting and tax disclosures. Management described a remediation plan, but the filing does not establish that the weaknesses were resolved.
- Forward-looking statements are subject to risks including government spending and regulation, growth execution, financing needs, and the company’s ability to grow higher-margin services. No numerical revenue or earnings guidance is provided.
Important facts for investors to verify
- Track the GAO decision on the DHS BPA protest, the timing of any new work, and actual revenue versus the BPA’s stated ceiling.
- Confirm the December 2013 debt-service covenant outcome and whether the bank grants a waiver or changes terms.
- Assess whether operating cash generation, working capital, and access to the receivables-based credit line can support planned growth and debt service.
- Separate recurring operating performance from the $1.25 million noncash contingent-obligation gain and tax benefits when evaluating earnings.
- Review progress on remediation of the disclosed material weaknesses and any subsequent changes in control effectiveness.
- Reconcile the cash-flow comparison: the cash-flow statement reports $1.21 million of operating cash provided in the first nine months of 2012, while the MD&A describes the comparable period as $1.2 million of cash used.