WidePoint Corporation — Form 10-Q Summary
Business context and reporting period. This unaudited filing covers the quarter and nine months ended September 30, 2014. WidePoint provides managed mobility and other IT services to commercial and government customers. It reported one operating segment. On May 1, 2014, the company acquired Soft-Ex Communications Limited (SCL), a telecom data-intelligence SaaS provider, for stated consideration of $6.0 million; purchase-price allocations remain provisional.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $14.56 million | $12.22 million | $36.55 million | $35.53 million |
| Gross profit | $3.98 million | $2.98 million | $10.07 million | $9.78 million |
| Gross margin | 27% | 24% | 27% | 28% |
| Operating income (loss) | $(0.88) million | $(0.05) million | $(3.62) million | $0.01 million |
| Net income (loss) | $(5.90) million | $0.29 million | $(7.50) million | $0.40 million |
| Operating cash flow | Not presented for quarter | Not presented for quarter | $(2.61) million | $1.75 million |
Q3 revenue grew about 19%; nine-month revenue grew about 3%. SCL contributed approximately $1.6 million of Q3 and $2.6 million of nine-month revenue. Q3 gross margin improved, while nine-month margin declined slightly. The nine-month loss included a $3.76 million income-tax provision despite a pretax loss; management attributed the tax expense principally to a full valuation allowance against deferred tax assets of approximately $5.0 million. Basic and diluted loss per share were $0.081 for Q3 and $0.106 for the nine months.
Financial position and liquidity
- At September 30, 2014, cash was $3.08 million, current assets $15.81 million, current liabilities $14.21 million, and reported net working capital approximately $1.6 million.
- Total assets were $42.91 million and total liabilities $16.06 million. Long-term debt, including current portion, was $3.72 million; the credit line balance was $0.39 million. Capital lease obligations totaled approximately $0.13 million.
- Nine-month investing cash outflow was $4.46 million, including $4.11 million for the SCL acquisition, property and equipment purchases, and software development. Financing cash inflow was $10.20 million, including $11.43 million net proceeds from the March stock offering.
- Accounts receivable and unbilled receivables together were $12.28 million, up from $9.17 million at December 31, 2013. Management cited longer billing-to-collection timing as a factor in weaker operating cash flow.
Material changes, outlook and risks
- Operating expenses rose materially: nine-month general and administrative expense was $10.54 million versus $7.20 million. The prior-year period included a noncash $1.25 million gain from remeasurement of an acquisition-related contingent obligation; 2014 costs included SCL, infrastructure and technology R&D, and acquisition expenses.
- Management said DHS task orders and planned Cert-on-Device deployment in 2015 could support future service growth. It also noted that resale revenue may be erratic and depends partly on procurement and equipment-upgrade timing. The filing provides no quantified earnings or revenue guidance.
- The $8.0 million Cardinal Bank working-capital facility was renewed through October 31, 2015. At quarter-end, WidePoint was not in compliance with its tangible-net-worth covenant after recording the tax valuation allowance. A waiver was in place, and the October 2014 stock offering subsequently restored covenant compliance, according to the filing.
- After quarter-end, WidePoint completed a second stock offering, including the underwriters’ full over-allotment, for approximately $11.5 million gross and approximately $10.8 million net proceeds before certain company expenses.
- Management warned that results can vary with contract timing, government awards, billable days, customer activity and fixed costs. Other cited risks include government spending, acquisition integration, financing needs and market acceptance of new offerings.
- Disclosure controls were deemed ineffective as of September 30, 2014 because of continuing material weaknesses involving accounting policies and procedures and segregation of duties. Management described remediation efforts, but the weaknesses had not been remediated by quarter-end.
Most important facts for investors to verify
- Whether operating cash flow improves as receivables are billed and collected, and whether the rise in unbilled receivables persists.
- Progress and economics of DHS BPA task orders and Cert-on-Device deployment, including whether expected growth converts to profitable revenue.
- Final SCL purchase-price allocation, acquisition integration results, and the contingent $1.0 million note’s repayment or cancellation conditions.
- Ongoing compliance with Cardinal Bank covenants and the effect of the October 2014 offering on liquidity and share dilution.
- Whether the deferred-tax valuation allowance, losses and material weaknesses in internal control change in subsequent filings.
- Customer concentration: DHS and TSA each represented 18% of nine-month 2014 revenue; Sword & Shield represented 15% of Q3 revenue.