WidePoint Corporation — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017; unaudited. WidePoint provides hosted mobility management, identity management and related IT services, primarily to government customers. It reports as one operating segment.
Financial results
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Revenue | $18.88 million | $17.54 million | $37.49 million | $38.05 million |
| Gross profit / margin | $3.29 million / 17% | $3.36 million / 19% | $6.72 million / 18% | $7.57 million / 20% |
| Operating loss | $1.25 million | $0.87 million | $2.43 million | $1.52 million |
| Net loss | $1.30 million | $0.90 million | $2.45 million | $1.56 million |
| Basic and diluted loss per share | $0.02 | $0.01 | $0.03 | $0.02 |
- For the six months, carrier services revenue declined $1.24 million, partly offset by a $0.69 million increase in managed services. Q2 revenue rose 8%, with increases in carrier and managed services.
- Cost of revenue was 83% of Q2 revenue and 82% for the six months, versus 81% and 80%, respectively, in 2016. Management attributed lower gross margins mainly to a less favorable mix of higher-margin credentialing, device and accessory sales, and fewer billable service arrangements.
- Six-month operating cash flow was negative $3.22 million, compared with positive $0.98 million a year earlier. Investing cash use was $0.41 million; financing cash use was $0.14 million. Cash declined $3.65 million to $5.47 million.
- At June 30, current assets were $20.90 million and current liabilities $17.84 million; working capital was approximately $3.1 million, down from $5.0 million at year-end 2016. Total assets were $44.51 million and total liabilities $18.40 million.
- No borrowings were outstanding on the new $5.0 million revolving credit facility at June 30; the company reported eligibility to borrow up to that amount, subject to its borrowing base. Long-term debt was zero. Capital lease obligations totaled approximately $79,000.
Material changes and unusual items
- Six-month revenue fell 1% year over year while gross profit fell 11%; net loss widened by approximately $0.90 million. Q2 revenue increased, but gross profit declined and net loss widened.
- Cash and cash equivalents fell from $9.12 million at December 31, 2016 to $5.47 million at June 30, 2017. Management attributed working-capital pressure to operating losses, investment, one-time costs, and delayed government invoice processing and collections.
- WidePoint sold its Lewis Center, Ohio facility on May 22 for $730,000 gross proceeds, received approximately $236,400 net after debt payoff and costs, and recorded a $66,700 gain. Relocation to a larger Columbus facility also resulted in a reported $176,700 loss on disposal of leasehold improvements.
- The company paid approximately $304,300 for commercial identity and authentication software assets from Probaris and recorded $50,000 of estimated contingent consideration; up to $100,000 is payable if the seller’s government customer renews its license in 2018.
- WidePoint entered a 10-year Columbus lease. After six months of free rent, monthly rent and estimated operating expenses/taxes are approximately $20,700; early termination in October 2023 would require a stated penalty of $260,000–$265,000.
- CEO Jeffrey Nyweide resigned effective June 30. Jin H. Kang became CEO July 1, and the company announced management restructuring. A July 20 agreement with significant stockholder Nokomis Capital provided for two director appointments and customary standstill and voting commitments.
Management outlook, risks and contingencies
- No numerical earnings or revenue guidance is provided. Management’s stated priority is to return to profitability and positive cash flow through cost reductions, operational streamlining, improved sales execution, and emphasis on higher-margin services. Management cautions that execution may take time, may require additional capital, and is not assured.
- Cost actions include office and technology-platform consolidation, staffing reductions, changes to sales and channel arrangements, and review of client profitability. Management said it expects G&A costs to fall in the short term as initiatives are implemented.
- Results may fluctuate with contract timing, government budgets and invoice processing, customer demand, and the mix of reselling and higher-margin services. The Department of Homeland Security represented 60% of six-month revenue and 50% of receivables at June 30.
- Management identifies risks including continued losses and negative cash flow, possible need for additional capital, competition, customer retention and contract performance, ability to expand commercial business and sell higher-margin services, and retention of key personnel. The company had cumulative losses and maintained a valuation allowance against all deferred tax assets.
- The new revenue recognition standard is expected to be adopted in 2018 using the full retrospective method. Management anticipates changes in revenue and expense timing/classification but does not expect a significant pretax-income impact. The lease standard is expected to be adopted in 2019; financial effects were still under evaluation.
- The company reported no material legal proceedings, no material change in its stated risk factors or market-risk exposure, and effective disclosure controls as of quarter-end.
Key facts investors should verify
- Whether operating cash burn and losses improve, and whether the $5.0 million facility remains available under its borrowing-base and financial covenants.
- Whether government contract activity, DHS concentration, and collection timing support revenue and liquidity; monitor receivables and unbilled receivables.
- Whether management’s cost, sales and margin initiatives deliver results without impairing service delivery or growth.
- Whether the Probaris customer renews in 2018 and triggers contingent consideration, and whether software assets support the intended credentialing offering.
- Potential costs and commitments from the Columbus lease, continued office consolidation, and any future capital needs.
- Execution of the management and board changes, and the eventual financial effects of the new revenue and lease accounting standards.