WidePoint Corporation — Q1 2014 Form 10-Q
Business context and reporting period. This unaudited filing covers the three months ended March 31, 2014, with balance-sheet comparisons to December 31, 2013. WidePoint provides managed mobility, identity-management, and related IT services to commercial and government customers. It reports one business segment.
Financial results and liquidity
| Metric | Q1 2014 | Q1 2013 / comparison |
|---|---|---|
| Revenue | $9.60 million | $11.97 million; down 19.8% |
| Gross profit / margin | $2.47 million / 25.7% | $3.27 million / 27.4% |
| Operating loss | $1.50 million | $124,458 |
| Net loss | $926,698; $0.014 per share | $35,269; $0.001 per share |
| Operating cash flow | $(52,552) | $966,058 |
| Investing cash flow | $(157,857) | $(104,002) |
| Financing cash flow | $10.34 million | $(202,259) |
Cost of revenue was $7.14 million, or 74.3% of revenue, versus $8.69 million, or 72.6%, a year earlier. Period-end cash was $10.13 million, compared with no cash reported at December 31, 2013. Current assets were $17.69 million and current liabilities $7.96 million, for working capital of approximately $9.74 million and a current ratio of about 2.22. The company reported total debt of $3.46 million, no balance on its $8 million revolving credit facility, and total liabilities of $10.61 million.
On March 3, WidePoint completed a public offering of 9.06 million shares at $1.38 per share. It received approximately $11.5 million before company-paid offering expenses. The share offering materially improved working capital and helped restore compliance with tangible-net-worth and current-ratio loan covenants.
Changes versus the prior comparable period
- Revenue declined $2.37 million. Management attributed the decrease to severe winter weather affecting customer operations, contract transitions, lower government resale activity amid sequestration and budget constraints, and a change in procurement for a federal credentialing program.
- Management-services revenue fell $1.45 million; resale and other services fell $705,000; carrier services fell $210,000.
- Gross margin contracted by approximately 1.7 percentage points, while operating expenses increased to $3.97 million from $3.40 million. General and administrative expense rose to $3.06 million from $2.53 million; the prior-year amount included a $220,000 noncash gain. Excluding that gain, prior-year G&A was approximately $2.75 million.
- Operating cash flow declined from positive $966,000 to negative $53,000, which management attributed to lower billable revenue and timing differences between billing and collection.
Outlook, risks, contingencies, and unusual items
- Management expected DHS task orders under its $600 million blanket purchase agreement to accelerate through the rest of 2014 and said the second half of 2014 might be stronger than the first. It anticipated possible growth in carrier and management services and resale activity. These are expectations, not quantified revenue or earnings guidance.
- The $8 million Cardinal Bank working-capital facility matures June 30, 2014. WidePoint was not in compliance with its debt-service-ratio covenant at March 31; it had a waiver for covenant compliance through December 31, 2014. The offering restored compliance with the tangible-net-worth and current-ratio covenants.
- On May 1, 2014, after quarter-end, WidePoint acquired Soft-Ex Communications Ltd. for $5 million cash, subject to a working-capital adjustment, plus a $1 million subordinated note bearing 3% interest. The note is due May 31, 2015, but may be cancelled if specified revenue conditions are not met. Management said the cash purchase reduced cash available after quarter-end. The acquisition adds telecom data-intelligence SaaS operations in Europe and the Middle East; integration and performance are risks.
- TSA and DHS represented 23% and 19% of Q1 revenue, respectively, versus 18% and 15% in Q1 2013. This government-customer concentration exposes results to procurement timing, budget changes, and contract transitions.
- The company recorded a $616,145 income-tax benefit. Its deferred tax asset depends on future taxable income; management identified DHS task-order awards as an important support for realizing the asset and said delays or cancellation could require reassessment.
- Management stated that disclosure controls and internal control over financial reporting were ineffective at March 31 due to material weaknesses in accounting policies and procedures and segregation of duties. Remediation efforts were underway but the weaknesses were not yet remediated.
- Other cited risks include fixed personnel costs, dependence on subcontractors and vendors, ability to manage growth and costs, and the availability of additional financing for expansion or acquisitions. The filing reports no off-balance-sheet arrangements.
Most important facts for investors to verify
- Whether DHS task orders were issued and fulfilled on the expected timetable, and whether revenue and margins subsequently recovered.
- Cash and liquidity after the $5 million Soft-Ex closing payment and related acquisition costs, and the status or renewal of the credit facility after its June 30, 2014 maturity.
- Compliance with debt-service covenants and the terms and duration of the lender’s waiver.
- Soft-Ex’s post-acquisition revenue performance, integration progress, and any working-capital purchase-price adjustment or note cancellation.
- Progress in remediating the disclosed material weaknesses and whether controls became effective.
- Support for realization of deferred tax assets, including continued DHS awards and the company’s taxable-income outlook.