WidePoint Corporation — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014. The unaudited consolidated statements cover WidePoint and subsidiaries. WidePoint provides managed mobility, identity-management, telecom data-intelligence and related IT services to commercial and government customers.
Financial performance
| Metric | Three months ended June 30, 2014 | Three months ended June 30, 2013 | Six months ended June 30, 2014 | Six months ended June 30, 2013 |
|---|---|---|---|---|
| Revenue | $12.39 million | $11.34 million | $22.00 million | $23.31 million |
| Gross profit / margin | $3.61 million / 29% | $3.53 million / 31% | $6.08 million / 28% | $6.80 million / 29% |
| Operating income (loss) | $(1.23) million | $0.19 million | $(2.74) million | $0.06 million |
| Net income (loss) | $(0.67) million | $0.14 million | $(1.60) million | $0.10 million |
| Net cash from (used in) operations | Not presented by quarter | $(1.27) million | $1.56 million |
Q2 revenue increased about 9% year over year, while first-half revenue declined about 6%. First-half net results turned to a loss from modest income in 2013. Basic and diluted loss per share were $0.009 in Q2 and $0.023 for the six months. The filing attributes margin pressure in Q2 partly to low-margin resale activity; first-half gross profit also reflected a less favorable mix, including lower management-services revenue.
Balance sheet, liquidity and financing
- At June 30, 2014, cash was $4.10 million, current assets $13.73 million and current liabilities $11.67 million; reported net working capital was approximately $2.1 million. Cash was zero at December 31, 2013.
- Total assets were $46.10 million, including $20.84 million of goodwill and $4.08 million of net intangibles. Total liabilities were $13.59 million.
- Debt totaled $3.92 million, including $2.16 million classified as current and a $1.0 million contingent subordinated note issued for the SCL acquisition. The company had no balance drawn on its $8.0 million receivables-based Cardinal Bank line at quarter-end. The facility had been extended to September 30, 2014 while the company worked to incorporate SCL.
- First-half investing cash outflow was $4.39 million, including $4.08 million for the SCL acquisition and $0.14 million of software development. Financing provided $9.78 million, primarily reflecting $11.43 million of net proceeds from a March public stock offering, partly offset by debt and line-of-credit repayments. Cash at June 30 was $4.10 million.
Material changes and significant items
- On May 1, 2014, WidePoint acquired all of Soft-ex Communications Limited for stated consideration of $6.0 million: $5.0 million cash and a $1.0 million subordinated note. SCL provides telecom data-intelligence SaaS services and expands WidePoint’s reach in Europe and the Middle East. Purchase-price allocation and acquired asset and liability values were provisional; recorded goodwill from the transaction was $4.22 million.
- The March 2014 public offering of 9.06 million shares generated approximately $11.43 million net proceeds. Shares outstanding were 73.04 million at June 30 and 73.13 million as of August 14, 2014.
- General and administrative expense rose substantially, to $3.67 million in Q2 and $6.72 million for the first half. The company cited SCL costs, acquisition expenses, and technology infrastructure and research spending. Prior-year expense comparisons included noncash gains of $0.37 million for Q2 and $0.59 million for the first half related to a contingent obligation.
- First-half accounts receivable and unbilled receivables increased in aggregate versus year-end, while operating cash flow was negative. Management cited longer billing-and-collection timing and lower billable revenues.
Outlook, risks and controls
- Management said the second half of 2014 could be stronger than the first half, citing delayed contract awards and DHS task orders expected to move into fulfillment. It anticipated growth in carrier and managed services as task orders and commercial awards were implemented, but provided no quantified guidance.
- Management described Certificate-on-Device as a developing cloud-based digital-certificate service; during Q2, certificates were loaded onto multiple devices and platforms. Commercial scale or revenue contribution was not quantified.
- Results may vary with government procurement and task-order timing, contract transitions, customer purchasing patterns, resale activity, and the timing of billings and collections. TSA and DHS each accounted for 19% of first-half 2014 revenue, indicating customer concentration. The filing also identifies government spending, regulation, acquisition integration, and financing availability as risks.
- The company reported it was not in compliance with its debt-service-ratio covenant at June 30, although it had a waiver through December 31, 2014. It said it was renewing the credit facility and believed renewal and remediation were more likely than not. The facility’s stated extension ran only through September 30, 2014.
- Management concluded disclosure controls and internal control over financial reporting were ineffective at June 30 because of material weaknesses in accounting policies and procedures and segregation of duties. Remediation efforts were underway but the weaknesses had not been remediated by quarter-end.
- The recorded $5.5 million deferred tax asset depends on future taxable income; management considered realization more likely than not, with DHS task orders cited as an important supporting factor. Delay or cancellation could require reassessment.
Investor verification priorities
- Check subsequent filings for renewal and terms of the Cardinal Bank facility, covenant compliance, and any further waiver or financing needs.
- Track DHS task-order timing, contract transitions, and whether expected second-half activity translated into revenue, collections and operating cash flow.
- Review final SCL purchase accounting, working-capital adjustments, acquired intangibles and goodwill, integration costs, and the revenue condition governing cancellation of its $1.0 million note.
- Assess progress remediating the disclosed material weaknesses and whether later management assessments find controls effective.
- Monitor customer concentration, the deferred-tax-asset assumptions, and the effect of resale mix on gross margins.