WidePoint Corporation — Q1 2012 Form 10-Q
Business context and reporting period. Unaudited results cover the three months ended March 31, 2012, compared with Q1 2011. WidePoint provides technology and IT services through Telecommunications Management, Cybersecurity Managed Solutions, and Consulting Services and Products. Q1 2012 included customers acquired with Avalon Global Solutions at the end of 2011.
Financial performance and position
| Metric | Q1 2012 / March 31, 2012 | Comparable period / December 31, 2011 |
|---|---|---|
| Revenue | $13.70 million | $10.53 million; up approximately 30% |
| Gross profit and margin | $3.33 million; 24% | $1.84 million; 17% |
| Operating income (loss) | $128,000 | $(505,000) |
| Net income (loss) | $57,000; $0.001 per basic and diluted share | $(317,000); $(0.005) per share |
| Operating cash flow | $(333,000) | $609,000 |
| Cash and cash equivalents | $1.43 million | $2.14 million at December 31, 2011 |
| Total assets | $40.23 million | $42.29 million at December 31, 2011 |
| Total debt | $8.33 million, including $756,000 current | $8.57 million at December 31, 2011 |
| Working capital | Approximately $2.73 million; current ratio approximately 1.29 | Management says working capital was about $0.3 million above the year-earlier level |
Q1 2012 investing cash outflow was $56,000, versus $172,000 in Q1 2011. Financing cash outflow was $314,000, versus $46,000; the company drew and repaid $1.9 million on its bank line during the quarter. A $180,000 server acquisition was financed through capital leases. The $8 million working-capital credit facility had no balance outstanding at quarter-end. Stockholders’ equity was $22.95 million.
Material changes and segment results
- Revenue grew across all three segments. Telecommunications Management revenue increased 31% to $7.33 million; Cybersecurity Managed Solutions rose 73% to $2.17 million; Consulting Services and Products rose 15% to $4.20 million.
- Management attributed growth principally to Avalon-acquired customers and demand for credentialing services, including services supporting federal access requirements and the Transportation Worker Identification Credentialing program.
- Cost of sales rose in dollars but declined to 76% of revenue from 83%, reflecting a higher proportion of higher-margin services. Gross margin improved to 24% from 17%.
- Segment operating income was $546,000 for Telecommunications Management and $724,000 for Cybersecurity; Consulting Services and Products had a $204,000 operating loss. Corporate costs were $938,000.
- Sales and marketing expense increased to $641,000 from $430,000. General and administrative expense rose to $2.50 million from $1.87 million, which management attributed to project-based efforts to improve operating capacity.
- Interest expense increased to $61,000 from $21,000, primarily due to acquisition-related borrowing. Intangible amortization increased to approximately $390,000 from $152,000.
Outlook, risks, and controls
- No formal quantified revenue or earnings guidance is provided. Management expected gross margin to improve as higher-margin services grow, while cautioning that margins and consulting segment growth may vary with revenue mix and period-to-period demand.
- Management stated that cash and the available credit facility should meet planned capital expenditures and working-capital needs through 2013. It also said sustained positive cash flow is important to service debt and fund growth; additional financing may be needed for major expansion, and availability on acceptable terms is not assured.
- Customer and government-program concentration remains a risk: TSA and DHS represented 18% and 21% of Q1 2012 revenue, respectively. Together they represented 29% of receivables at March 31, 2012.
- Debt includes a $4 million seller-financed subordinated note; $3 million is subject to certain acquisition-related claw-back provisions. Scheduled long-term debt repayments total $756,000 in 2012 and approximately $2.1 million annually in 2013–2015.
- Management concluded disclosure controls were not effective as of March 31, 2012 because of material weaknesses involving segregation of duties, accounting policies and procedures, and expertise for complex transactions, including income taxes. A remediation plan was underway through 2012; the filing does not report that the weaknesses were remediated.
- The company reported no off-balance-sheet arrangements. It was finalizing an Illinois examination of its 2007 and 2008 tax returns and was not otherwise under IRS or state examination, except as disclosed.
Important facts for investors to verify
- Whether the reported control weaknesses are remediated and whether subsequent filings identify any resulting accounting or reporting issues.
- Whether revenue growth and improved gross margin persist after separating Avalon-acquired business from organic growth.
- Whether operating cash flow improves, given the Q1 cash outflow and decline in cash balances.
- How concentrated revenue and receivables remain among TSA, DHS, and other government customers, and the status of relevant contracts and credentialing programs.
- Debt repayment capacity, the terms and potential claw-back exposure of the seller note, and continued access to the bank credit facility.