WidePoint Corporation — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. Unaudited consolidated results. WidePoint provides trusted mobility management, identity management, and related services, with significant reliance on U.S. federal government contracts.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $17.54 million | $18.88 million | $37.62 million | $37.49 million |
| Gross profit / margin | $3.55 million / 20% | $3.29 million / 17% | $7.10 million / 19% | $6.72 million / 18% |
| Operating loss | $(0.44) million | $(1.25) million | $(0.87) million | $(2.43) million |
| Net loss | $(0.47) million | $(1.30) million | $(0.93) million | $(2.45) million |
| Loss per share | $(0.01) | $(0.02) | $(0.01) | $(0.03) |
- Q2 revenue declined about 7%; six-month revenue was nearly flat, up about 0.4%. Q2 carrier-services revenue rose, but billable services and reselling/other services fell.
- For the six months, operating cash flow was $350,000, compared with cash use of $3.22 million in 2017. Cash at June 30 was $5.36 million, versus $5.27 million at year-end 2017.
- Capital investment and software development used $246,000 of cash in the first half. Reported net financing cash flow was $26,000.
- Current assets were $20.69 million and current liabilities $18.00 million, yielding working capital of approximately $2.69 million. Total liabilities were $19.34 million; capital-lease debt was $282,000. The company had a $5 million revolving credit facility, with borrowing-base eligibility of up to $3.6 million; $155,000 was outstanding at quarter-end.
Changes, outlook, and risks
- Management attributed improved gross margin and lower losses primarily to labor savings from 2017 restructuring and lower operating expenses. Q2 revenue pressure reflected reduced accessories, billable project work, and reselling; management said some completed commercial projects were not expected to return.
- Carrier-services growth was attributed to additional task orders under a Department of Homeland Security blanket purchase agreement. Federal government customers generated about 74% of first-half revenue; ICE alone represented 18% of first-half revenue.
- Management expected significant development of the TDI Optimiser application to conclude in Q3 2018. No quantified full-year revenue or earnings guidance is provided. Management said it may consider further cost reductions and may require additional capital for major growth initiatives or acquisitions.
- The company reported indicators of goodwill impairment during the quarter; the supplied filing text does not clearly state the outcome of any impairment test or whether an impairment charge was recorded.
- Key risks include dependence on government contracts and funding, delays in government invoicing and collections, customer and contract concentration, fixed labor and facility costs, ability to win renewals and new business, and the possibility of needing additional capital. A new bank covenant requires minimum adjusted EBITDA of at least twice interest expense; the facility also includes adjusted tangible net worth and current-ratio covenants.
- WidePoint extended its Fairfax office lease through March 2029, with up to $535,000 in leasehold-improvement allowances and an early-termination option in March 2023 subject to specified costs. It paid $100,000 of contingent consideration after a government customer renewed a license tied to acquired software assets.
- Management stated disclosure controls were effective and reported no material change in internal controls, no material legal proceedings, and no material change in risk factors from the 2017 Form 10-K.
Important facts for investors to verify
- Reconcile the MD&A’s stated first-half net loss of approximately $896,800 with the financial statements’ net loss of $934,344; the Q2 MD&A also gives a slightly different net-loss figure than the statements.
- Reconcile cash-flow narrative figures with the cash-flow statement, which reports operating cash flow of $350,039, investing cash use of $245,542, and financing cash flow of $26,150 for the first half.
- Obtain management’s conclusion on the reported goodwill-impairment indicators and any resulting impairment assessment or charge.
- Check compliance with the revised credit-facility covenants, actual available borrowing capacity, and the company’s ability to fund operations and growth without additional capital.
- Monitor federal contract renewals, revenue and receivable concentration, collections of unbilled balances, and potential dilution from the 980,851 restricted shares granted in the first half.