WidePoint Corporation — Q2 2012 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2012. The financial statements are unaudited. WidePoint provides telecommunications management, cybersecurity managed solutions, and IT consulting and products, primarily to government and commercial customers.
Financial performance
| Metric | Three months ended June 30, 2012 | Six months ended June 30, 2012 |
|---|---|---|
| Revenue | $12.51 million | $26.21 million |
| Gross profit / margin | $2.88 million / 23% | $6.20 million / 24% |
| Operating income (loss) | $(0.48) million | $(0.35) million |
| Net income (loss) | $(0.30) million | $(0.24) million |
| Operating cash flow | Not provided for quarter | $(1.19) million |
- Quarterly revenue grew 26% from $9.97 million; six-month revenue grew 28% from $20.50 million. Six-month net loss widened from $0.10 million in 2011.
- Quarterly gross margin fell from 27% to 23%; the six-month margin increased from 22% to 24%. Q2 cost of sales was 77% of revenue versus 73% a year earlier.
- Q2 sales and marketing expense rose to $0.88 million from $0.39 million, and G&A rose to $2.40 million from $1.88 million. Management attributed increases to marketing/channel commissions, the AGS acquisition, and internal capacity work.
- Interest expense increased to $0.12 million for the quarter and $0.18 million for six months, mainly from acquisition-related debt. A $0.30 million quarterly income-tax benefit reflected changes in expected use of net operating loss carryforwards.
Segments and material changes
- Telecommunications Management: Q2 revenue was $7.51 million, up 22%; six-month revenue was $14.84 million, up 26%. AGS-acquired customers contributed, partly offset by lower-margin resale of federal wireless minutes.
- Cybersecurity Managed Solutions: Q2 revenue was $1.12 million, down 51%; six-month revenue was $3.29 million, down 7%. The quarter comparison was affected by credentialing revenue recognized in Q1 2012; six-month results also reflected delays in state-government solution rollouts.
- IT Consulting Services and Products: Q2 revenue was $3.88 million, up from $1.51 million; six-month revenue was $8.08 million, up 56%. Growth included AGS customer activity and mobile-device and accessory resales. Management cautioned that results may vary by period.
- Management said growth reflected AGS-acquired customers and demand for credentialing services. The AGS acquisition’s purchase-price allocation remained preliminary; the company expected to finalize fair-value determinations before year-end 2012.
Liquidity, debt, and cash flow
- Cash declined to $0.28 million at June 30 from $2.14 million at December 31, 2011. Working capital was approximately $1.0 million, down from approximately $2.4 million.
- Six-month operating cash use was $1.19 million, versus $0.25 million provided in the prior-year period. Management cited accelerated mobile-carrier payments and timing delays in collecting large customer balances.
- Investing cash use was $0.16 million; financing cash use was $0.50 million. The company drew and repaid $2.29 million on its bank line during the period.
- Long-term debt was $8.21 million, including $2.16 million current; capital lease obligations totaled $0.17 million. The $8.0 million Cardinal Bank working-capital facility had no outstanding balance at quarter-end.
- Management believed cash and the credit facility would fund planned growth, capital expenditures, and recurring working-capital needs through 2013. It also warned that sustained positive cash flow is needed for debt service and that additional financing may be required for major expansion or acquisitions, with no assurance it would be available on acceptable terms.
Outlook, risks, and controls
- Management anticipated higher gross margins as the revenue mix shifts toward higher-margin services, but noted that segment mix may cause margin variability. It expected additional infrastructure investment and associated depreciation, and described consulting/product growth as potentially erratic.
- Revenue and receivables remain concentrated among federal customers: TSA and DHS represented 19% and 17% of Q2 revenue, respectively; DHS was 23% of receivables at June 30. Management noted increased commercial diversification following AGS.
- Disclosure controls and internal control over financial reporting were assessed as ineffective at June 30, 2012 due to material weaknesses in segregation of duties, accounting policies and procedures, and expertise for complex transactions, including income taxes. Remediation was ongoing and planned through the end of 2012.
- The company reported no off-balance-sheet arrangements. It identified financing needs, growth and operating strategy, and other risks disclosed in its 2011 Form 10-K as factors that could cause actual results to differ from forward-looking statements.
Important facts for investors to verify
- Whether collections normalize and operating cash flow improves given the low quarter-end cash balance and working-capital pressures.
- Debt repayment schedule and continued availability of the $8.0 million credit facility; assess debt-service capacity and any need for external financing.
- Progress on higher-margin service growth, cybersecurity program rollouts, and whether revenue concentration or segment volatility changes.
- Completion of AGS purchase accounting and the realized contribution of acquired customers to earnings and cash flow.
- Remediation and independent validation of the disclosed material weaknesses and ineffective disclosure controls.
Share count: 63,651,857 common shares were issued and outstanding as of August 14, 2012.