WidePoint Corporation (NYSE American: WYY) — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019; filed August 14, 2019. Unaudited. WidePoint provides trusted mobility management and related services through a single reportable segment. Federal government contracts are its primary revenue source.
Financial results
| Metric | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Revenue | $22.09 million | $17.54 million | $44.01 million | $37.62 million |
| Gross profit / margin | $4.06 million / 18.4% | $3.55 million / 20.2% | $8.31 million / 18.9% | $7.10 million / 18.9% |
| Operating income (loss) | $(0.17) million | $(0.44) million | $0.32 million | $(0.87) million |
| Net income (loss) | $(0.31) million | $(0.47) million | $0.08 million | $(0.93) million |
| Operating cash flow | Not separately presented for the quarter | Not separately presented for the quarter | $3.51 million | $0.35 million |
- Q2 revenue increased 26% year over year; first-half revenue rose 17%. Carrier services drove most of the growth, supported by the U.S. Coast Guard contract and expansion of a Customs and Border Protection task order. Managed services also grew.
- Q2 gross margin fell to 18.4% from 20.2%, which management attributed to a greater mix of lower-margin resale activity. First-half gross margin was approximately unchanged year over year.
- First-half net income turned positive, despite higher interest and income tax expense. Q2 remained loss-making, though the loss narrowed from the prior-year quarter.
- First-half operating cash flow improved to $3.51 million, which management attributed to better receivable collections and temporary payable timing differences. Investing cash use was $0.27 million; financing cash use was approximately $0.24 million. Cash increased $2.99 million to $5.42 million.
Liquidity, obligations, and balance sheet
- At June 30, 2019, current assets were $25.80 million and current liabilities were $21.47 million, for working capital of approximately $4.34 million and a current ratio of about 1.20.
- Total liabilities were $28.96 million; stockholders’ equity was $24.85 million. The balance sheet reported $5.42 million of cash.
- The Atlantic Union Bank revolving credit facility has a $5.0 million maximum, subject to a borrowing base. The company was eligible to borrow up to $4.2 million at quarter-end. First-half draws and repayments were each $6.26 million; the filing text does not provide a clear quarter-end outstanding balance on the facility.
- At June 30, operating lease liabilities totaled approximately $5.95 million, alongside a $5.83 million right-of-use asset. The filing reports total finance lease liabilities of $176,375. Adoption of the new lease standard in January added approximately $6.1 million of right-of-use assets and operating lease liabilities; management said it did not materially affect operating results or cash flows.
Material changes, outlook, and risks
- Federal government customers generated $36.60 million, or about 83%, of first-half revenue. Management cautioned that government budget, funding, administrative, and contract timing can cause revenue and collections to vary.
- Management’s 2019 priorities include growing higher-margin managed services, building the sales pipeline, pursuing systems-integrator opportunities, improving its platform, seeking FedRAMP certification for ITMS on GovCloud, renewing the DHS Blanket Purchase Agreement, and expanding commercial sales. It expects strategic sales and marketing hires in the second half of 2019. The filing provides no quantified revenue or earnings guidance.
- The company said it must execute cost and revenue initiatives to generate positive cash flows and improve liquidity. It may need additional capital for growth initiatives or acquisitions, with no assurance financing will be available on acceptable terms.
- Credit-facility covenants include minimum adjusted tangible net worth of $2.0 million, adjusted EBITDA of at least twice interest expense, and a 1.10:1 current ratio, subject to the agreement’s definitions and exclusions. The filing text does not clearly state covenant compliance status.
- Federal contract renewal and concentration, competition, commercial-market expansion, hiring and retention, working-capital borrowing, and achieving sustainable profitability and positive cash flows are identified risks. Long-term facility leases also limit near-term flexibility; some early termination costs could be $0.2 million to $0.8 million.
- Management maintained a valuation allowance against all deferred tax assets because of cumulative losses, notwithstanding federal NOL carryforwards of approximately $38.5 million and state tax benefits of approximately $39.8 million. Some carryforwards may be limited or expire unused.
- No material legal proceedings were reported, and the company said risk factors had not materially changed from its 2018 Form 10-K. Management concluded disclosure controls were effective at period-end.
Important facts for investors to verify
- Progress and renewal timing for the DHS BPA, and the revenue and margin contribution of major federal contracts.
- Quarter-end revolver borrowings, covenant compliance, and available borrowing capacity under the borrowing-base formula.
- Whether operating cash generation is repeatable, particularly given collection timing and accrued carrier-service costs.
- Revenue mix and gross-margin trends, including the balance of carrier, resale, and higher-margin managed and billable services.
- Assumptions supporting future use of tax NOLs, and potential restrictions or expirations.