WidePoint Corporation — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018; balance-sheet comparisons are with December 31, 2017. The company provides trusted mobility management, identity management, and related services, with substantial reliance on U.S. federal government contracts. Interim financial statements are unaudited.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $21.29 million | $18.46 million | $58.92 million | $55.96 million |
| Gross profit | $3.69 million | $3.38 million | $10.78 million | $10.10 million |
| Gross margin | 17.3% | 18.3% | 18.3% | 18.0% |
| Operating loss | $64,510 | $283,834 | $933,423 | $2.71 million |
| Net loss | $110,011 | $314,601 | $1.04 million | $2.77 million |
| Net loss per share | $0.00* | $0.00* | $0.01 | $0.03 |
*Reported rounded loss per share.
- Q3 revenue rose 15%; the nine-month increase was 5%. Growth was led by carrier services and federal product resales. Federal government customers generated $45.13 million, or about 77%, of nine-month revenue.
- Nine-month cost of revenue increased to $48.13 million, while gross profit rose; gross margin was broadly stable for the nine-month period. In Q3, margin fell year over year, with management citing the mix of lower-margin resales and higher implementation labor costs.
- Cash flow: Net cash used in operating activities was $711,305 in the first nine months, versus $2.63 million used in 2017. Investing used $394,674 and financing used $153,785. Cash declined by $1.32 million to $3.95 million.
- Liquidity: Current assets were $20.74 million and current liabilities $18.05 million at September 30, implying a current ratio of about 1.15 and working capital of about $2.69 million. Management reported working capital of approximately $2.7 million.
- Debt and credit: The company has a $5.0 million revolving credit facility, subject to a borrowing base; eligible borrowing capacity was $4.8 million at quarter-end. The filing does not provide a clear quarter-end outstanding revolver balance. Capital leases and other term obligations totaled approximately $428,000. The facility matures April 30, 2019 and carries prime plus 1.0% interest.
Material changes versus the prior period
- Q3 carrier-services revenue increased $1.86 million, managed-service fees increased $434,000, and reselling and other revenue increased $910,000; billable-service fees declined $373,000.
- For the first nine months, carrier-services revenue rose $2.68 million and reselling and other revenue rose $1.44 million; billable-service fees fell $1.00 million and managed-service fees were down $150,000.
- Nine-month general and administrative expense declined to $10.04 million from $10.67 million. The 2017 comparison included about $600,000 of nonrecurring relocation and former-CEO severance costs.
- Interest expense increased to $71,531 from $36,402 for the first nine months, reflecting capital leases and line-of-credit advances. Share-based compensation rose to $593,075 from $138,036.
- Cash and cash equivalents fell from $5.27 million at year-end 2017 to $3.95 million. Total assets declined to $43.78 million from $45.89 million.
Outlook, risks, and unusual items
- Management expects managed-service fee revenue to expand in Q4 as the company onboards the U.S. Coast Guard, ramps work through systems-integrator partnerships, and expands services under existing federal contracts. No quantified full-year guidance is provided.
- Management anticipates higher cost of revenue as personnel support new implementations. It is pursuing contract changes to improve cash flow, including more frequent billing and pricing adjustments, and further cost savings.
- Management states that returning to profitability and positive cash flow depends on executing its growth and cost initiatives; additional capital may be required for major growth initiatives or acquisitions, with no assurance of availability on acceptable terms.
- Risks include dependence on government contract awards, renewals, funding and invoice processing; customer and contract concentration; quarterly volatility in resale and carrier revenue; fixed labor and facility costs; ability to borrow or raise capital; and execution of sales and automation plans. ICE accounted for 18% of nine-month revenue, while CBP accounted for 11%.
- The company paid $100,000 contingent consideration after renewal of a software customer’s contract. It recorded a valuation allowance against all deferred tax assets, citing cumulative losses; federal NOL carryforwards were approximately $36.7 million, subject to potential limitations and expiration.
- The credit facility includes minimum adjusted tangible net worth, adjusted EBITDA-to-interest, and current-ratio covenants. A modification added an adjusted EBITDA measure of at least twice interest expense. The filing does not clearly state quarter-end covenant compliance or headroom.
- The company reported no material legal proceedings, no material change in risk factors, and effective disclosure controls. It plans to adopt the new lease accounting standard effective January 1, 2019; the impact was still under evaluation.
Key facts for investors to verify
- Quarter-end revolver borrowings, unused availability, covenant compliance and covenant headroom.
- Collection and billing progress for the $7.80 million of unbilled receivables, including the timing of anticipated Q4 equipment and accessory billings.
- Whether Coast Guard onboarding and systems-integrator work translate into sustained, profitable revenue and improved operating cash flow.
- Exposure to federal contract renewals, budget delays, and major customers, as well as the margin and cash-flow effects of carrier services and resale activity.
- Potential share dilution: 4.14 million stock options were outstanding at September 30, 2018, in addition to restricted stock awards.