WidePoint Corporation (NYSE American: WYY) — Q1 2020 Form 10-Q
Business and period: Provider of trusted mobility management, identity management and related services, with substantial reliance on U.S. federal government contracts. This unaudited report covers the three months ended March 31, 2020; comparisons are with Q1 2019 unless noted.
Financial results
| Metric | Q1 2020 | Q1 2019 | Change / context |
|---|---|---|---|
| Revenue | $39.67 million | $21.92 million | Up 81% |
| Gross profit / margin | $4.97 million / 12.5% | $4.25 million / 19.4% | Profit up 17%; margin declined |
| Operating income | $739,781 | $485,175 | Up 52% |
| Net income | $483,888 | $384,101 | Up 26%; diluted EPS $0.01 vs. $0.00 |
| Operating cash flow | $3.03 million | $2.43 million | Increase reflected collections and temporary payable timing differences |
| Cash and cash equivalents | $9.32 million | $6.88 million at Dec. 31, 2019 | Quarter-end balance |
| Working capital | Approximately $5.8 million | Approximately $5.0 million at Dec. 31, 2019 | Current ratio was approximately 1.16 |
| Total liabilities | $44.88 million | $39.35 million at Dec. 31, 2019 | Includes operating lease liabilities of about $6.05 million |
Investing activities used $393,039, mainly for internally developed software and equipment; financing activities used $153,750, including $143,637 of finance lease principal repayments. The company reported $82,117 of interest expense. The $5.0 million revolving credit facility had up to $4.9 million available under its borrowing-base formula at quarter-end; the filing does not provide a clear quarter-end outstanding balance. A subsequent April 30 modification extended facility maturity to April 30, 2021 and set the variable rate at prime plus 0.25%. Financial covenants include a 1.10:1 minimum current ratio, specified minimum tangible net worth and EBITDA-to-interest coverage.
Material changes and operating drivers
- Carrier services rose to $28.14 million from $14.34 million, primarily due to the 2020 Census and other federal programs. Management said Census activities were scheduled to wind down in Q4 2020.
- Managed service fees increased to $7.48 million from $6.21 million. Reselling and other services rose to $2.74 million from $285,314, reflecting timing of large product resales.
- Federal government customers generated $33.54 million, or about 85% of revenue. The Census Bureau represented 37% of revenue, 37% of trade receivables and 50% of unbilled receivables at March 31.
- Cost of revenue rose faster than sales, to 87% of revenue from 81%; management attributed the lower gross margin to the higher mix of carrier services and lower-margin reselling. General and administrative expense increased to $3.47 million, including share-based compensation of $281,441 versus $89,266.
- Accounts receivable and unbilled receivables increased in aggregate, while accrued expenses rose to $22.07 million from $14.95 million, largely reflecting accrued carrier service costs. These timing and working-capital balances contributed materially to cash flow.
- The company recorded 39 contractual actions with an approximate value of $20 million, including new wins, option exercises and extensions. DHS issued a notice of intent to solicit and award WidePoint an interim 12-month sole-service contract; the filing does not establish that the award had been completed.
Outlook, risks and other matters
- No quantified financial guidance was provided. Management’s stated priorities include growing higher-margin managed services, expanding sales and commercial business, improving its platform, pursuing FedRAMP certification, maintaining federal authorizations and renewing the DHS Blanket Purchase Agreement.
- COVID-19 had not caused significant disruption in Q1, and most employees transitioned to working from home in mid-March. Management said future effects on customers, government budgets, operations, financial position and cash flows remained uncertain and could be material.
- Key risks include dependence on federal contracts and funding, contract renewal and new-win outcomes, quarter-to-quarter revenue variability, customer concentration, pricing and fixed-cost pressures, credit-facility renewal or borrowing access, and the company’s ability to sustain profitability and positive cash flow.
- Management recorded a valuation allowance against all deferred tax assets, citing cumulative losses over the preceding three years. Federal NOL carryforwards were approximately $37.5 million, but some may be limited or expire unused.
- The company repurchased 24,174 shares for about $10,100 during the quarter; the repurchase plan was suspended on March 9, 2020. No material legal proceedings or off-balance-sheet arrangements were reported. Management concluded disclosure controls were effective.
Important facts for investors to verify
- Whether the interim DHS contract was awarded and the status, timing and renewal prospects of the DHS BPA.
- How Census-related revenue winds down after Q4 2020 and whether managed-services growth can offset the change.
- Whether receivables, unbilled receivables and accrued carrier costs convert to cash as expected, especially given Census customer concentration.
- The quarter-end balance and ongoing availability of the revolving credit facility, covenant compliance, and the effect of its amended terms.
- COVID-19 impacts on federal funding, contract activity, delivery and collections, as well as any change in the deferred-tax-asset valuation allowance.