Business context and reporting period
WidePoint Corporation provides communications and secure identity-management solutions, with substantial federal-government business. This unaudited Form 10-Q covers the three months ended March 31, 2017, compared with the first quarter of 2016; balance-sheet comparisons are to December 31, 2016.
Key financial results
| Metric | Q1 2017 | Q1 2016 / comparison |
|---|---|---|
| Revenue | $18.61 million | $20.51 million; down 9% |
| Gross profit / margin | $3.43 million / 18% | $4.20 million / 20% |
| Operating loss | $1.17 million | $0.64 million |
| Net loss | $1.15 million | $0.66 million |
| Loss per share, basic and diluted | $0.01 | $0.01 |
| Operating cash flow | $(1.96) million | $(2.04) million |
| Cash and cash equivalents | $7.04 million at March 31 | $9.12 million at December 31, 2016 |
| Current assets / current liabilities | $20.93 million / $16.77 million | Net working capital approximately $4.2 million |
Gross margin was approximately 18.4%, versus 20.5% a year earlier. Cost of revenue fell in dollars but rose as a share of revenue to 82% from 80%. The filing reports no operating margin guidance. Total liabilities were $17.72 million. The company had no balance on its revolving credit line at quarter-end, and reported up to $4.9 million of borrowing availability under its borrowing base. Debt included a $427,483 mortgage on the facility held for sale and $80,527 of capital-lease obligations; the short-term note payable was $76,613.
Material changes versus prior period
- Revenue declined by $1.90 million, mainly because carrier-services revenue fell by $1.98 million; managed-services revenue increased by $88,000.
- Gross profit fell by $775,000, reflecting a lower proportion of higher-margin device and accessory sales and fewer billable service arrangements.
- Operating expenses decreased by about $245,000 overall, but general and administrative costs rose about $74,000, including CEO-transition costs and higher compliance and professional-services expenses. Lower sales and marketing and product-development costs partly offset that increase.
- Net loss widened by approximately $495,000. Cash used in operations remained near $2.0 million; cash declined by $2.08 million during the quarter.
- Management said interest expense fell, reflecting lower line-of-credit usage and repayment of the term note’s final scheduled installment in January 2017.
Outlook, risks and unusual items
Management’s stated priority is to return to profitability and positive cash flow through cost reductions, operational streamlining, improved customer-project profitability, sales initiatives, and a focus on higher-margin offerings. It also plans to develop its proprietary solutions and pursue complementary acquisitions. These are strategic aims, not quantified financial guidance; management cautioned that execution may require additional capital and is not assured.
- Liquidity and credit facility: The company reported working with Cardinal Bank and other lenders to renew or replace its facility. A note says the maturity was extended from April 30 to July 31, 2017; MD&A also describes the facility as expiring July 30. Renewal on favorable terms, or at all, is not assured. Management said additional capital may be needed.
- Customer and government exposure: DHS represented 59% of Q1 revenue and 54% of accounts receivable at March 31. Federal funding, contract timing, and changes in government priorities can affect results. The company also cites customer concentration, competition, fixed short-term costs, and challenges in reaching profitability as risks.
- Facility and lease: The company expected to sell its Lewis Center, Ohio facility in Q2 2017 and use net proceeds to repay its mortgage and fund relocation costs. It entered a 10-year lease for a replacement facility, with monthly minimum rent and estimated expenses of about $20,700 after a six-month free-rent period. The filing discloses a potential early-termination penalty of $260,000–$265,000.
- Subsequent acquisition: On May 3, 2017, a subsidiary acquired commercial identity and authentication software assets for $400,000: $300,000 paid at closing and $100,000 contingent on an optional license renewal expected in 2018.
- Taxes and accounting: Management maintained a valuation allowance against all deferred tax assets, citing cumulative losses. Federal NOL carryforwards were approximately $31.9 million, subject to limitations and expiration. Management expected the new revenue-recognition standard to change timing and classification but not significantly affect pretax income; it anticipated a material balance-sheet and cash-flow effect from recognizing operating leases under the new lease standard.
- The company reported no material legal proceedings, no material change in market-risk exposure, and effective disclosure controls as of quarter-end.
Important facts for investors to verify
- Whether the credit facility was renewed or replaced by its stated July 2017 maturity, and on what terms.
- Whether operating cash burn and losses improve, and whether planned cost reductions and sales initiatives restore gross margin and profitability.
- Whether DHS contract and billing concentrations, government funding timing, or collection delays affect revenue and liquidity.
- Whether the Lewis Center sale closes as expected and how proceeds, relocation spending, and the new lease affect cash and debt.
- How the Probaris asset purchase and any contingent payment perform commercially, and the eventual accounting effects of new revenue and lease standards.