WidePoint Corporation — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; financial statements are unaudited. WidePoint provides trusted mobility management, communications, and identity-management solutions, with substantial reliance on U.S. federal government customers.
Financial performance
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Revenue | $20.08 million | $18.61 million |
| Gross profit / margin | $3.55 million / 17.7% | $3.43 million / 18.4% |
| Operating loss | $0.43 million | $1.17 million |
| Net loss | $0.46 million | $1.15 million |
| Loss per share | $0.01 | $0.01 |
| Operating cash flow | $2.25 million provided | $1.96 million used |
| Investing cash flow | $0.08 million used | $0.04 million used |
Revenue increased 8%. Reselling and other services rose $1.68 million, including an approximately $1.8 million U.S. Air Force transaction; carrier services increased $0.20 million. Billable service fees declined $0.43 million. Gross margin was lower than the prior-year quarter despite reported rounded margins of 18% in both periods.
Operating expenses fell to $3.99 million from $4.60 million, chiefly reflecting prior-year restructuring and lower general and administrative costs. Interest expense increased to approximately $26,000 from $10,000, which management attributed to capital leases and line-of-credit advances. The 2018 tax expense of approximately $6,000 primarily related to foreign earnings.
Financial position and liquidity
- Cash was $7.45 million at March 31, up from $5.27 million at December 31, 2017. Operating cash generation was driven largely by collections and working-capital movements.
- Current assets were $23.29 million and current liabilities $20.72 million, implying working capital of approximately $2.57 million and a current ratio of about 1.12.
- Accounts receivable, net, were $8.66 million; unbilled receivables were $6.16 million. Accounts payable increased to $10.53 million from $7.27 million.
- Long-term debt consisted of $311,000 in capital lease obligations. Other term obligations totaled $215,000. No revolving-credit balance is presented on the balance sheet; the company reported $4.1 million of borrowing availability under the credit facility borrowing-base formula.
- The Access National Bank facility has a $5 million maximum and is secured by U.S. personal property. On April 30, 2018, the company extended maturity through April 30, 2019 and added a minimum adjusted EBITDA-to-interest covenant of 2.0x. Other covenants include a $2 million minimum adjusted tangible net worth, 2.0x minimum adjusted EBITDA-to-interest, and a 1.10 current ratio.
Changes, outlook, and risks
- Management cited labor savings from 2017 restructuring and continued efforts to streamline service delivery. It is shifting away from lower-margin carrier services and pursuing higher-margin offerings, federal and commercial opportunities, and sales partnerships.
- No numerical earnings or revenue guidance is provided. Management said successful execution of its strategy and cost initiatives is needed to achieve positive earnings and cash flow; it cautioned that there is no assurance of timely or eventual profitability and that additional capital may be needed for growth initiatives or acquisitions.
- Results can vary with government budgets, contract awards, task orders, renewals, billing and collection timing, and customer demand. Federal revenue was $14.27 million, about 71% of quarterly revenue. A single commercial customer represented 21% of trade receivables at quarter-end.
- Management highlighted fixed labor and facility costs, competition and pricing pressure, reliance on key personnel, and the ability to win contracts, renewals, and borrow under the facility. Government invoice processing and funding delays may affect collections.
- The company recorded $100,000 of contingent consideration related to the 2017 Probaris asset purchase, believing a government-customer renewal was probable. A January 2018 Fairfax office-lease modification extended the lease through March 2029, with up to $535,000 in improvement allowances and an early termination option in 2023 subject to a fee.
- Management maintained a valuation allowance against all deferred tax assets, citing cumulative three-year losses; federal NOL carryforwards were approximately $36.7 million, subject to limitations and expiration. ASC 606 was adopted January 1, 2018 with no material cumulative adjustment or expected significant change in revenue timing. The company planned to adopt the new lease standard in 2019.
- Disclosure controls were deemed effective; no material legal proceedings were reported, and risk factors were not materially changed from the 2017 Form 10-K.
Important facts for investors to verify
- Whether improved operating cash flow is sustainable, given its dependence on working-capital changes and increased accounts payable.
- Credit-facility availability, covenant compliance, and the effect of the April 30 amendment, including the new EBITDA-to-interest test.
- Revenue quality and customer concentration, particularly the large federal customer exposure and the commercial receivable concentration.
- Progress toward profitable growth, margin improvement, and the stated shift toward higher-margin services; no quantified guidance was provided.
- Collection and billing status of unbilled receivables, and the expected timing and likelihood of the $100,000 contingent payment.