WidePoint Corporation — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017; unaudited. WidePoint provides trusted mobility management, carrier, identity-management and related services, with substantial reliance on U.S. government contracts. The filing identifies DHS as its largest customer.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $18.46M | $22.11M | $55.96M | $60.16M |
| Gross profit / margin | $3.38M / 18% | $4.04M / 18% | $10.10M / 18% | $11.60M / 19% |
| Operating loss | $0.28M | $0.13M | $2.71M | $1.64M |
| Net loss | $0.31M | $0.15M | $2.77M | $1.70M |
For the nine months, carrier-services revenue declined to $32.19M from $35.72M; managed-services revenue declined to $23.77M from $24.44M. Q3 basic and diluted loss per share rounded to $(0.00); nine-month loss per share was $(0.03), versus $(0.02). The filing attributes the lower revenue chiefly to fewer DHS task orders, a deliberate move away from low-margin carrier work, and weaker or delayed managed-services activity. Gross margin was unchanged year over year in Q3 but lower for the nine-month period.
Cash, liquidity and balance sheet
- Nine-month operating cash use was $2.63M, compared with $1.21M in 2016; investing cash use was $0.64M. Financing provided $0.40M. Cash fell $2.70M to $6.42M.
- At September 30, current assets were $21.39M and current liabilities $18.58M; working capital was approximately $2.81M, versus $4.94M at December 31, 2016. Total assets were $44.90M and stockholders’ equity $25.77M.
- The company had $0.55M outstanding on a $5.0M revolving facility, subject to a borrowing base; borrowing availability under that formula was $4.4M. The facility matures April 30, 2018 and has financial covenants, including a 1.10:1 minimum current ratio. Long-term debt was zero; capital-lease obligations were $0.08M.
- Net accounts receivable was $7.94M and unbilled receivables $6.13M. DHS represented 46% of trade receivables and 60% of revenue in both the quarter and nine-month period.
Material changes, outlook and risks
- Management said cost actions taken to date were expected to reduce annual operating expenses by approximately $2.5M, with a further estimated $0.4M annual reduction from planned fourth-quarter consolidation and staffing actions. It also cited approximately $1.6M of annual savings from Q3 expense reductions. These are management estimates, not reported results.
- Management expected managed-services revenue to improve over the next year if it retains and grows its customer base and ramps recently awarded FEMA and Coast Guard task orders. It anticipated further TDI Optimiser software capitalization before launch. The filing provides no quantified revenue or earnings guidance and cautions that strategy execution and return to profitability are uncertain.
- Management identified the need to generate positive cash flow and improve liquidity; additional capital may be needed for major growth initiatives or acquisitions, with no assurance it will be available on acceptable terms. Government budget, award and renewal timing, customer administrative delays, pricing pressure, fixed short-term costs, and customer concentration pose risks.
- The company sold its Lewis Center facility in May for $730,000 gross and received approximately $236,400 net proceeds after debt payoff and costs; it recorded a $66,700 gain. Relocation included a $176,700 loss on abandoned leasehold improvements. A new Columbus facility has a 10-year lease, with monthly rent and estimated operating expenses of about $20,700 after six months’ free rent.
- WidePoint purchased identity/authentication software assets for approximately $304,300 and recorded $50,000 estimated fair value for contingent consideration of up to $100,000, dependent on a customer renewal in 2018. It recorded a $274,500 specific bad-debt write-off, partly explaining the lower allowance at period-end.
- The former CEO resigned June 30; subsequent to quarter-end the CFO resigned, and the company expected approximately $0.3M of fourth-quarter severance costs. Q3 share-based compensation included an $81,043 benefit, reflecting cancellation of awards. The company granted 3.44M options in the first nine months; 4.10M options were outstanding at September 30.
- The company reported a full valuation allowance against deferred tax assets, citing cumulative losses. It had approximately $33.4M of federal NOL carryforwards, some potentially subject to limits or expiration. Revenue recognition guidance effective January 1, 2018 was expected to change timing and classification, but management did not expect a significant pretax-income impact. No material legal proceedings or material changes in risk factors were reported; disclosure controls were assessed as effective.
Most important facts to verify
- Whether the cost reductions and new FEMA and Coast Guard work translate into improved margins, revenue and positive operating cash flow.
- Revolver availability, compliance with its financial covenants, and liquidity needs given cash burn and the April 2018 facility maturity.
- DHS contract/task-order concentration, award and renewal timing, and collection of billed and unbilled government receivables.
- Actual fourth-quarter severance and restructuring costs, and the effect of executive departures and option awards on execution and potential dilution.
- Realization and impairment assumptions for goodwill and intangible assets, and limits on use of tax-loss carryforwards.