WidePoint Corporation (NYSE American: WYY) — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020; filed August 13, 2020. WidePoint provides trusted mobility management, identity management and related services, primarily to U.S. federal government customers. Interim financial statements are unaudited.
Financial performance
| Metric | Q2 2020 | Q2 2019 | First half 2020 | First half 2019 |
|---|---|---|---|---|
| Revenue | $54.8 million | $22.1 million | $94.4 million | $44.0 million |
| Gross profit | $5.1 million | $4.1 million | $10.0 million | $8.3 million |
| Gross margin | 9% | 18% | 11% | 19% |
| Operating income (loss) | $618,000 | $(166,000) | $1.36 million | $319,000 |
| Net income (loss) | $489,000 | $(308,000) | $973,000 | $76,000 |
| Diluted EPS | $0.01 | $0.00 | $0.01 | $0.00 |
| Operating cash flow | Not separately stated | Not separately stated | $1.63 million | $3.51 million |
- Q2 revenue rose 148%; first-half revenue rose 115%. Carrier services drove most of the increase, principally through work supporting the 2020 U.S. Census. First-half carrier services revenue was $73.1 million, versus $28.4 million.
- Lower-margin carrier and resale activity reduced gross margin despite higher gross profit. First-half cost of revenue was 89% of revenue, compared with 81% in 2019.
- First-half net income improved to $973,000 from $76,000. Income tax expense was $230,000 versus $94,000; management reported an estimated effective tax rate of 19.1%, compared with 55%.
Financial position and liquidity
- At June 30, 2020, cash was $7.52 million; current assets were $57.7 million and current liabilities were $51.1 million, implying working capital of approximately $6.6 million. Working capital was approximately $5.0 million at December 31, 2019.
- Accounts receivable were $22.1 million and unbilled receivables were $26.7 million, both materially higher than year-end. Management reported increased time to collect from government customers during Q2.
- Operating cash flow was $1.63 million for the first half, down from $3.51 million. The filing attributes cash movements in part to receivable growth and temporary payable timing differences. Investing cash outflow was $685,000, including $519,000 of capitalized software costs; financing cash outflow was $301,000.
- The company has a $5.0 million revolving credit facility, amended to mature April 30, 2021, at the Wall Street Journal prime rate plus 0.25%. The borrowing base permitted up to $4.9 million at June 30. The filing does not clearly state the period-end amount outstanding. Covenants include a minimum 1.10:1 current ratio and minimum adjusted tangible net worth of $2.0 million.
- Total liabilities were $58.9 million, including operating lease liabilities of approximately $5.9 million. The balance sheet reports $31,887 of current other term obligations. The filing does not present a separate total debt figure.
Material changes, outlook and risks
- The U.S. Census project supports nearly 700,000 mobile devices, but related activity is scheduled to wind down in Q4 2020; management expects this to reduce future carrier-service revenue. The Census Bureau accounted for 60% of Q2 revenue and 51% of first-half revenue.
- Government contracts are the primary expected revenue source. Customer concentration and government funding, budget and administrative timing may affect collections and results. NASA represented 16% of receivables and the Census Bureau 50% at June 30; the Census Bureau also represented 61% of unbilled receivables.
- Management reported no significant COVID-19 business disruption in the first half, but said future effects on operations, liquidity and government budgets remain uncertain. Most employees moved to remote work; facilities remained operational.
- Management’s priorities include growing higher-margin managed services, developing sales channels and products, pursuing FedRAMP certification, renewing the DHS Blanket Purchase Agreement, and expanding into commercial markets. It also identified successful management of the Census wind-down as a risk. No formal financial guidance was provided.
- The company deferred approximately $166,200 of employer Social Security taxes under the CARES Act, with repayment scheduled in 2021 and 2022. It recorded a valuation allowance against all deferred tax assets, citing cumulative losses over the latest three-year period. Federal NOL carryforwards were approximately $37.5 million, subject to potential limitations and expirations.
- The $25 million shelf registration permits securities sales, but the company cautioned that additional capital may not be available on acceptable terms. The stock repurchase plan was suspended March 9, 2020; the filing reports approximately $10,100 of first-half repurchases.
- No material legal proceedings were reported. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether Census-related revenue declines as scheduled after Q4 2020, and what replacement contract activity or recurring managed-services growth offsets the wind-down.
- Collection and billing progress on the $22.1 million of billed and $26.7 million of unbilled receivables, especially the Census concentration and reported increase in government collection days.
- Current revolver borrowings, covenant compliance and liquidity headroom; the filing gives borrowing availability but not a clear period-end facility balance.
- Whether the lower gross-margin revenue mix persists and how it affects profitability and operating cash generation.
- Renewal status of the DHS Blanket Purchase Agreement, COVID-19 and government budget effects, and actual repayment of deferred payroll taxes.