Cartesian's (CRTN) CEO Peter Woodward on Q1 2016 Results - Earnings Call Transcript

| About: Cartesian, Inc. (CRTN)

Cartesian, Inc. (NASDAQ:CRTN)

Q1 2016 Earnings Conference Call

May 16, 2016, 04:30 PM ET

Executives

Peter Woodward - Chief Executive Officer

John Ferrara - Chief Financial Officer

Analysts

Harvey Poppel - Poptech LP

Richard Nespola - Private Investor

Jeff Kiley - Kam Asset Management

Lawrence Stern - Stern Capital

Operator

Good afternoon. Welcome to Cartesian's first quarter 2016 earnings conference call. Joining us for today's call is Cartesian's CEO, Peter Woodward; and CFO, John Ferrara. Following their remarks, we will open up the call up for your questions.

And before we conclude today's call, I'll provide the necessary cautions regarding the forward-looking statements made by management during the call. I would like to remind everyone that this call will be recorded and made available for replay via a link available in the Investor Relations section of the company's website at www.cartesian.com.

Now, I would like to turn the call over to Cartesian's CEO, Peter Woodward. Sir, please proceed.

Peter Woodward

Welcome, everyone, and thank you for joining us today. After the market closed, we issued a press release announcing our results for the first quarter ended April 2, 2016, a copy of which is available in the Investor Relations section of the website.

We began fiscal 2016 very much as we had predicted on our prior call. Revenues from North America and EMEA, ex the impact of the Farncombe acquisition, came in softer during the quarter compared to the prior quarter, while revenues as a whole including Farncombe were up 13% year-over-year.

Although we've been seeing stronger sales trends emerge during the back-half of the quarter, our primary focus in Q1 was laying the groundwork to optimize our cost structure and align our expenses as our revenue expectations change. A simple process on the surface is critical work to enable us to leverage our core strengths and customer relationship, in order to maximize the yield on our consulting and technology project.

While this process is not easy and certainly not a one-time occurrence or something that will happen right away, it has steered us in the right direction in many respect. For, one, it's required us to make a holistic evaluation of our offerings and to support and invest in the areas with the highest growth opportunities and best business model.

It also kept us razor-focused on managing our cost and improving liquidity to fund our operations. Finally, it's given us a pathway to secure larger, more long-term projects that can scale our company over time.

But before I elaborate further on some of these important themes that will shape our success in the months and quarters ahead, I'd like to turn the call over to John, who will walk us through the financial details for the quarter. This will give a better sense of where we are today, which will inform our discussion of where we're going next.

Afterward, I'll return to talk more in depth about some of the operational progress we experienced during the quarter as well as a few initiatives we are implementing to improve our operations and get us running profitably in 2016. John?

John Ferrara

Thank you, Peter. Now, turning to our financial results for the quarter ended April 2, 2016, our revenues in the first quarter of 2016 increased 13% to $20.3 million from $18.1 million in the same year-ago period and decreased 8% from $22.2 million in the prior quarter.

The year-over-year increase was primarily due to revenues from Farncombe, which was acquired in July of 2015, and which contributed $3.5 million of revenues in the quarter. Our non-GAAP revenues on a constant currency basis for the first quarter of 2016 increased 15% to $20.8 million from $18.1 million in the first quarter of 2015.

Looking at Q1 2016 revenues by region, EMEA accounted for $11.7 million or 58% of total revenues and North America accounted for $8.5 million or 42% of total revenues. Our Q1 2016 revenue by source, excluding Farncombe, are as follows: execution accounted for $10.1 million or 60%; management consulting accounted for $2.8 million or 16%; strategy consulting accounted for $2.7 million or 16%; and managed solutions accounted for $1.3 million or 8%.

Our gross profit for the first quarter of 2016 increased 5% to $7 million or 35% of total revenues from $6.7 million or 37% of total revenues in the first quarter of 2015. The decline in gross margin percentage was primarily due to lower utilization and project mix. Gross margins were also negatively impacted due to the pricing pressures from some of our large global customers.

As we have discussed on prior calls, one of our main objectives this year is to transition our current business model to one that is defined by longer-term, more substantial engagement. In particular, we are positioning our go-to-market sales strategy to target projects that can improve our margin profile, specifically projects that include sub-component of our higher-margin strategy or management consulting and/or technology-based management solution.

Although we've had some recent successes in transferring a portion of our revenues from lower margin execution business to higher margin strategy consulting business, we still have more work to do in this area. As a result, we are actively working to refine and optimize our revenue mix. Once we gain further traction in securing these types of projects, we expect our operating margins to improve.

Our SG&A expenses in the first quarter of 2016 was $7.8 million or 38% of revenues compared to $7.3 million or 40% of revenues in the prior-year period. The increase was primarily due to expenses at Farncombe as well as lower utilization of our consultants. To be more specific, when our consultants are not billable, their compensation and related cost are reflected in our SG&A expense.

Peter will talk about this in greater length, but we are expecting to have a better control of these expenses, as we further improve the utilization of our consultants, particularly by allocating our overall sales resources to the areas where we see the greatest growth opportunity.

Our GAAP loss from operations in the first quarter of 2016 totaled $744,000 compared to a GAAP loss from operations of $628,000 in the prior-year period. Our GAAP net loss for the first quarter of 2016 totaled $880,000 or $0.10 per diluted share. This is an improvement from the GAAP net loss of $1 million or $0.13 per diluted share in the first quarter of 2015.

Now, turning to our non-GAAP financial results. Our non-GAAP adjusted loss from operations for the first quarter of 2016 totaled $434,000 compared to a non-GAAP adjusted income from operations of $54,000 in the first quarter of 2015. Our non-GAAP adjusted net loss for the first quarter of 2016 totaled $639,000 or $0.07 per diluted share compared to non-GAAP adjusted net loss of $200,000 or $0.03 per diluted share in the prior-year period.

Please see today's earnings release, which is posted on our website for further details, including a reconciliation of the GAAP to non-GAAP results.

At the end of the quarter, our cash and cash equivalents totaled $3.1 million compared to $6.9 million at the end of the fourth quarter of 2015. Our net working capital at the end of the quarter was $8 million compared to $9.4 million at the end of the fourth quarter of 2015. The sequential decrease in cash of $3.8 million in Q1 2016 was primarily due to an increase in accounts receivable related to the timing of collection.

Last month we entered into an agreement with RTS Financial Services that will allow us to factor certain of our North American accounts receivable. Under the terms of the agreement, RTS may purchase our accounts receivable in exchange for paying us a cash advance of 80% of the amount of the purchase account. We'll receive the remaining 20%, minus a daily fee paid to RTS, once RTS collects the accounts receivable from the customer.

This agreement has an initial term of 24 months with automatic renewal of successive 12-month period. We believe our cash generated from operations, along with the working capital available from our agreement with RTS, will be sufficient to meet our cash flow requirements and support our growth.

I will now turn the call back over to Peter.

Peter Woodward

Thanks, John. As I talked about earlier, improving our cost structure will be a central focus for us looking ahead. This begins with managing our overhead better and making reductions wherever necessary to ensure our business is run smoothly and cost efficiently. It also involves deploying our sales personnel and consultants in the most productive and effective possible way.

We have significant operating cost included in our SG&A. In order to improve our operating margin, it's imperative that we improve both project yield and overall utilization. Where we can improve pricing, we have implemented changes to do so, and where it's appropriate from a risk management and client engagement perspective to adjust the delivery structure to a fixed-price deliverable we are.

In terms of utilization, there are obviously short-term adjustments that can be made and are being made to improve utilization, but aligning our delivery capacity with our selling capacity has a more fundamental element to it. First, we're evaluating the areas of our business, where we see the highest growth, and then investing in those areas to make sure our capabilities and technology fit with the customer's strategic initiatives, and where they may benefit from specialization or outside support.

We are well through this process and it's beginning to drive positive changes to the business. I mentioned at the start that sales in North America and EMEA were slightly down sequentially. In both regions, we have ample market opportunity as we'll discuss later.

We continue to try to improve our customer engagement to get enough opportunities into our pipeline and have seen progress on that front, but sales cycles in parts of our business are such that we are not closing enough deals consistently yet. While this obviously has impacted our financial results, it draws attention away from some of the success we've had on less prominent projects that we secured during the quarter.

An interesting area to highlight is our revenue assurance offering. Revenue assurance helps customers to manage their revenue streams, while protecting against cost inefficiencies that might threaten margins or topline growth. The revenue assurance market has been mature for several years. We acquired the ascertained revenue assurance product in 2007 and have several installations currently active in the field.

Today, we are seeing additional revenue assurance interest, although we are able to work with customers to deliver the capability in a more user-friendly format that requires less IT involvement and deployment. As a result, we recently secured two additional clients and others are in the pipeline. These two newest clients are in the deployment stage and should begin to contribute to revenue later in 2016. The margin profile of this business is solid and the business model should add to the consistency we're seeking to drive.

We announced during the quarter that we were accepted as a supplier for the U.K.'s latest government procurement framework G-Cloud 7. The framework is part of the U.K. government's broader initiative to accelerate and simplify the process of a cloud-based IT procurement, while making it easier for suppliers like Cartesian to sell their services to the public sector.

We understand the unique strategy that need to be considered when transitioning to the cloud. We're excited to help the U.K. government develop some of these strategies with the help of our cloud data analytics and cloud adoption studies. This is a newer market for us with lots of potential and we're making the investments necessary to successfully bid for some of the larger and more meaningful government contract.

Looking at the broader picture though, we are seeing a number of industry and market catalysts that will be beneficial for our business, in both the near and longer term. We talked briefly on our last call, how the whole communications landscape is changing, creating pressures for organizations within this highly competitive space to transform their business models and remain technologically relevant. This has been the reason why major telcos are committing to spend billions of dollars this year alone to improve their network infrastructure.

As these providers make these large scale investments, we will be in prime position to capitalize on the demand for telecom consulting, especially in addressing some of the prevalent changes in today's communications world, including network migration and decommissioning, access and interconnect and software-defined networking.

While we can't determine with certainty when and how these industry drivers will impact our business, we can say that it is already been a positive contributor. In fact, during the quarter, we completed the bulk of the work for a systems migration project for one of our North American client. As a reminder, we were engaged by this client early in the second half of last year to help migrate millions of subscribers on to the customer's network before a flash cutover date.

This engagement involves a few different assignments and has had a delivery model that leverages our team, supplemented by external deal-specific contractor. This has been an extremely challenging delivery for many reasons that's created some short-term pressure on our margin, and is the largest contributor to our higher accounts receivable balances. We are investing in the engagement because we believe this relationship ultimately can involve longer and more substantial project, especially for our Farncombe digital TV consulting and advisory businesses.

Farncombe has been a key contributor to our core business, since its acquisition in Q2 of last year providing multiple cross-selling and up-selling revenue opportunities. One interesting example is a large U.K. telco that's a legacy Farncombe customer. We're engaged to do ongoing work in video, but now have expanded to be part of a large network transformation initiative that is just getting kicked off. This client is one that could become a much larger consistent customer for us, and while we're showcasing expertise in traditional Cartesian topical areas.

I'd now like to spend a moment talking about our strategic partnership with Elutions. We continue to work with them to bring in new client, but to date there has been no additional business. Coming out of Q1, we have essentially no significant operating expenses dedicated exclusively to the relationship, but we remain open to working with Elutions to close any feasible customer acquisition opportunity.

We also announced during the quarter the creation of an advisory board that will support us in areas of business development, strategic planning and business operation. The board will consist of leading technology and telecom industry veterans, who are engaged to not only help us with customers' specific concerns, but to think through our business model and how to drive profitable growth. The level of engagement is different than our Board of Directors. Advisors are more involved and are part of regular processes to understand how the business works day-to-day.

We've already appointed former AT&T executive Kevin Peters and former CenturyLink executive Dennis Huber. Both gentlemen were previous customer of Cartesian and can adjust to the quality of our solution. They've already been helpful in thinking through our offering on specific topics, how we market our offering and how we engage with customers to improve our business model. We're talking to other advisory board candidates with a more immediate focus on EMEA.

It's also worth mentioning that we appointed Tom William's and Don Tringali to our Board last month. Both members have extensive telecom experience, with Tom having held senior financial and officer positions at AT&T and Harbinger Capital. Don was a former EVP and CEO of Telemundo up to its sale to Sony. They have replaced David Mahoney and Don Klumb who resigned from the Board on April 25. As with our advisory board, we are looking to benefit from our Board of Directors collective guidance that will put us on track to meet our financial goals.

So to put all this into perspective Q1 was short of our internal planning, but a number of positive steps have been taken. We know how important it is how important to manage our cost. So a key objective for the rest of the year will be to adjust our cost structure to grow revenues profitably. On top of that, we will continue to invest in some of the key growth areas of our business, procure larger more long-term and higher margin projects that can scale our company.

And with that we're ready to open the call for questions. Operator, please provide the appropriate instructions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from Harvey Poppel from Poptech LP.

Harvey Poppel

So Peter, your call today and what you've expressed, seems like it could have almost been copied from what you said two months ago or so when you did your yearend report, other than the fact that you fell short of your first quarter expectations. So really what actually changed over that period of time relative to the strategy that you announced at that point? And then to what extent is it anymore credible now than it was then that you're facing -- that you're going to have some sort of a turnaround in the next couple of quarters?

Peter Woodward

Well, I wouldn't say there has been radical shift in the strategy with respect to the offering or our go-to market strategy in the short period between the Q4 report and the Q1 report. Obviously, we learned as we went through that period that the revenue projections that we had internally weren't being met, and so not that we don't manage cost all the time, but we've certainly taken a different attitude towards costs and the need to make sure that cost are in line with the expectations.

So as we got into the early part of the year I think we saw how the pipeline was developing and how the pipeline was maturing into revenue. And when we didn't see the opportunities maturing into realized revenue in the quarter, and started to take a more conservative approach to our expectations going forward. We're managing the cost accordingly.

Harvey Poppel

Well, overall kind of reading into what you're saying that the pipeline itself today is no bigger maybe, but smaller than it was couple of few months ago?

Peter Woodward

I don't know that it's smaller; it's really the rate at which deals are closing. So the activity in the pipeline is good. When we look through the pipeline, I wouldn't say that we look at any particular area and find problems. There is no customer that we look at and say, they're very far off of our expectations. I'd say, the level of activity is good, really in both regions in North America and EMEA, we're just not closing enough.

We need to get more deals closed and we need to get more deals to the finished line. And we had a capacity to be able to deliver revenue according to the projections. And if the revenue is going to be projected to be less than -- not hugely less, but modestly less, then we'll right size the cost structure of the company accordingly.

Harvey Poppel

That all said then, what should we expect in terms of a revenue turnaround in terms of timing and magnitude?

Peter Woodward

I think we're really thinking more the second half of the year. In terms of Q2, I don't think we're going to see a very quick turnaround in this timeframe. I think we've said in the comments that the back half of the first quarter -- really later in the first quarter were better, and so going into Q2 things have been better, but I wouldn't expect a very rapid turnaround in just a short number of months, but what the activity that we're seeing in the pipeline, I think there is plenty of cause for optimism that the back half of the year can be better.

Operator

The next question comes from Richard Nespola, who is a Private Investor.

Richard Nespola

I have a couple of questions on obviously this quarter's results, and then couple of questions relating to the proxy that you have out to shareholders looking for various approvals. I'll start with a highlight concern, that the alarms bell go off when cash is down for the level where it's at, as the lowest cash balance at the end of the quarter in the 16 years of the company been public. And it appears to me, and John, please correct if I'm wrong, that you are now reliant upon RTS simply to make payroll?

John Ferrara

It's not true. But continue with your comments and questions.

Richard Nespola

Well, what's your payroll per month and your DSOs related to essentially a flat receivables requirement? So look we can defer this, but I'm just saying, I would be very much concerned about that. And my next question relates to RTS, so you get, if I heard you correctly, you get 80% and 20% based upon the efforts of their collection activity, is that correct?

John Ferrara

We get 80% of receivable upfront. And then when they collect it, we get the remaining 20% less their fee, that's correct.

Richard Nespola

And my question then becomes who supervises the collection of the 20%? So again, I’m assuming that these are not customers that are one-time shot, so let's say --

John Ferrara

Well, maybe Rich, it maybe.

Richard Nespola

Okay, maybe, but some of them, maybe I'm just picking a name, AT&T or BT or some of your other clients, so who supervises the conversation with AT&T when they're asking the other 20%?

John Ferrara

That's going to be on a case-by-case basis and understanding an agreement between RTS and ourselves. The truth of the matter is for the one-timers, it's just easy for them to do it. For existing customers, where we have relationships, then we may continue the collection. But it's really a one-off on each individual customer that we present.

And let me just clarify, there's a couple of things is that, so this is a facility where we have the option of presenting any invoice that is within this financing arrangement to be processed by them and then they collect it and take their fee. And if we decide that we don't need the cash or we want to collect it ourselves, we don't present it to them, then there is no fee involved at all. So this is totally at our discretion as to what invoices we submit to them and which ones that they will collect on our behalf.

Richard Nespola

So it sounds like you would skew that towards someone where you have receivables problems, what I'll call a one-off or non-continuing relationship, is that fair?

John Ferrara

That's fair, except that, to be quite honest, if you read through the entire agreement, at the end of the 90-day period if they don't collect then we have to buy the receivable back, it's with recourse. So this is just a timing facility when we need short-term liquidity when and if there is a working capital shortfall, you indicated, to meet short-term needs.

But based on our projections, we're not in that position now. I agree with you that this is the lowest cash balance in the company's history. And you can see for the last 12 years that that cash has been dwindling down over that entire period. But you're correct, this is the lowest balance.

Richard Nespola

So let me switch things to what you're asking or the company is asking for approvals on the proxy statement.

John Ferrara

Okay.

Richard Nespola

One of the things [indiscernible] is directed to both you and Peter, one of them is an advisory vote on executive compensation. So my first question becomes has your compensation committee or the company engaged any outside experts to do a review of your executive compensation?

Peter Woodward

Not recently.

Richard Nespola

What is recently meaning, year, two years, five years?

Peter Woodward

Not in the last year. And I don't recall if one was used in the years leading up to that.

Richard Nespola

So let me focus in on, what I call a highlight that jumps off the page on executive comp and it's not an indictment to any individual, but just trying to get a better understanding of how your incentive compensation plan works. Obviously, you had, over the past, what I'll call it, six or so quarters you had revenue growth, but very mixed and negative result on the bottomline.

So how exactly does your business development senior executive get compensated for topline, bottomline, and what other components go in there? Specifically, I'm talking about Bill Hill having a big salary of $232,000 in 2015, but an executive bonus of $372,800 plus an additional $47,000 in compensation related to his retirement plan. Let's focus on the bonus first. How did he earn $372,800 with the company's bottomline in 2015 being a significant loss?

John Ferrara

That was his compensation for 2015 when he was head of the EMEA sales operation. So he was compensated based upon a commission of those revenues. And it's not in his current position.

Richard Nespola

[Multiple speakers] what is your compensation plan component of it? Is it you get rewarded over revenue? Is it 5% for revenue, 40% for contribution margin, 20% for overall company performance, 10% for stock appreciation, what's the mix of how Bill Hill or anybody else who's on commission plan, how did they get motivated and compensated for the benefit of shareholders?

John Ferrara

It's a different plan.

Peter Woodward

Yes. There is a variety of different plans for different people. When you're talking about a commission structure, there aren't very many people outside of the sales group that are compensated directly on commission; sales people are, so sales people have a standard commission structure. Bill was unusual on that end. His previous role before he became President of the Corporation, he was sort of outside of the normal level of sales person in EMEA, but was still paid along a previous structure.

Richard Nespola

But the quarter of 2015, he was President of the company, if the proxy dates are correct. So in essence he must have had a very lucrative 75% of that plan to earn this $372,000.

Peter Woodward

His structure didn't change in the 2013. For reasons that are probably beyond the parameters of this call, his employment structure didn't change until an immigration issue changed and he came over to the U.S.

Richard Nespola

Obviously, there are always problems in expectation. But another highlight here, of all the other executives you have listed, is $47,000 contribution that is retirement plan, it's approximately 10x of all the others combined. How did that happened with a company that struggled to make bottomline. I don't get it. So give me some --

Peter Woodward

I think he's [indiscernible] European.

Richard Nespola

So he remains a U.K. citizen?

John Ferrara

Well, do remember this is 2015, and when he comes over here -- yes, 2015. Yes, he didn't get his visa until --

Peter Woodward

Early this year.

John Ferrara

Early this year. So last year he was paid under the Europe EMEA pay scheme and those are the requirements. We have social security over there. They've got a pension plan that the company kicks into.

Richard Nespola

Yes, but this is 401(k), this is not social security --

John Ferrara

No. The pension plan is the requirement over there I believe.

Richard Nespola

So is that extraordinary expense going to disappear in 2016? What about in the first quarter? Is he under 401(k) U.S. plan or whole U.K. plan?

Peter Woodward

He transitioned at some point in the first quarter and he'll have access to the same 401(k) plan in North America, that all of the rest of the North American employees have. But his employment status didn't changed until some part of the way through the first quarter.

Richard Nespola

So we can anticipate, let's talk, second quarter, third quarter, fourth quarter that that will dissipate, I think that's a fair assumption.

Peter Woodward

Yes.

Richard Nespola

And what was your utilization rate by the way, both of you said that there was lower utilization, what was it?

John Ferrara

I mean as you know, Rich, the utilization theory is wildly across the mode of delivery. Our overall utilization, especially if you sort of weighted around dollars, it wasn't terrible. It was not a number we disclose every quarter, but it was in the mid-70s companywide. But as you know in various parts of the company that can change or vary widely and for the first couple of months in the quarter we had quite a low utilization in certain parts of the company. By the tail end of the quarter, utilization has improved pretty dramatically.

Richard Nespola

That's always the key statistic in any professional services organization and I know the company used to publish it every quarter, because that was a key metric.

John Ferrara

And I wasn't part of the management team when that policy changed. And I think it largely changed, because the portion of the business that's delivered by contractors, delivers a very, very high utilization by definition until it throws off the overall -- publish one utilization statistic, and it's not particularly reflective of how utilization in various fixed cost portions of the business ran. And so you get insight, as my understanding is, how the policy was removed when either, you can publish a factor that isn't particularly descriptive or you can publish utilizations down to a very granular level and make it more descriptive.

Richard Nespola

Well, we can discuss that. But it's easy to convert just full timings of everyone, whether they are contractors or full time employees. So it doesn't make any difference as long as you use a FTE equivalent based upon billable days regardless of where they come from. So let's get on to my favorite topic, which I believe you still have yourself and two of the Directors who are directly involved in the approval of the Elutions deal, which in my opinion continues to be a millstone around the company's neck. If I understand both your proxy and your financial results, you still have inventory on the balance sheet, correct, about $600,000?

John Ferrara

That's correct, Rich.

Richard Nespola

So somewhere along the line that has to be addressed. So if I understand what you said in your proxy, you notified solution that after one year of utilized -- by having equipment they have been utilized both in the U.K. and the U.S., that equipment has been purchased from you at a 10% discount, if they have a successful sale in the perspective, is that correct?

John Ferrara

That's correct.

Peter Woodward

Yes.

Richard Nespola

But, there has been no sale.

Peter Woodward

That is their representation to us that there have been no sales that qualify --

Richard Nespola

If they do sell into the sector, they have to come and take that equipment, correct?

Peter Woodward

That's the way the agreement is structured.

Richard Nespola

That's what I thought I just want to confirmed that. And the other point of that is, with only the one customer, which is Consolidated Communication, as to which I believe Mr. Currey is still Chairman, correct?

Peter Woodward

Yes.

Richard Nespola

So over the course of this deal, February 14 through April, a change in your topline was $1.231 million, and then out of that you paid Elution to $1.112 million. Is that pretty accurate?

John Ferrara

Yes. It's about a 10% margin on that business, yes.

Richard Nespola

So that's over the course of the two years that was about a gross contribution of $119,000?

John Ferrara

Yes.

Richard Nespola

And you realize that just for legal cost alone to the deal was $263,000. So we'll move on from that. I hold the Directors accountable, and of course Mr. Klum has gone and should be gone just taken this deal alone. So let's talk about going forward with this transaction. If nothing else change and you just remain with the Consolidated Communication field, there are two components to that. One, assuming that there is nothing out of norm related to the contingency portion, which is based upon energy savings, but just a continuation of the engagements. That's contingent liability in excess of $2 million going forward on your estimate. Is that correct?

John Ferrara

I'm sorry, Rich, I'm not sure I follow your question, the continuing liability?

Richard Nespola

In your proxy, you indicated that you have an obligation in excess of $2 million as the project contingency?

John Ferrara

I'm sorry, for the delivery of the project.

Richard Nespola

Correct. Yes. But that's sort of an obligation to Elutions, so it will come into your topline and get paid out whatever they have, minus your program management fee, minus whatever the energy savings contingent is, and then they get the rest. And now, also disclosed in your proxy is that Consolidated Communications that Mr. Currey consolidated is required to help the market into the telecom sector in U.S. and they are incentivized to do that and confirm in excess $2 million from Elutions, if they're successful. So hypothetically then, if Currey consolidated throughout and sell two more engagements, you have an obligation to support them, correct?

John Ferrara

I don't know about that aspect of it. I'm not trying to [multiple speakers].

Richard Nespola

We can follow your further researches, but --

John Ferrara

It's not a research question. There is the language in the agreement around that obligation, makes it so that blanket statement around our obligation isn't quite so clear.

Richard Nespola

Well, you can always look what we were just trying to figure it out.

John Ferrara

Right.

Richard Nespola

My bottomline is you can anticipate that by proxy vote to three directors, who participated in this horrendous deal will never get my vote, just based up on the performance of this, and the structure of it which was highly dilutive and certainly reduce its focus and hurt the financial performance of the company. That's all I have to say on this and I don't have any further questions.

John Ferrara

Okay.

Operator

The next question comes from Jeff Kiley from Kam Asset Management.

Jeff Kiley

It seems like there is reasonable [indiscernible] there, there was the separate press release about this being accepted as the supplier for the United Kingdom government procurement framework, then its highlighted again in your operational reports today. Did you all put any kind of budget or estimated revenues from this new accomplishment?

And the next question goes back to what was just mentioned with $3.1 million in cash and depending on GAAP or non-GAAP you launched $600,000 to $800,000 this quarter, what are the options for the company, if revenue gets delayed another quarter as far as cash flow there?

Peter Woodward

So the question around the U.K. government fees, no we haven't published publicly any kind of expectation for the revenue size of that. And with respect to the balance sheet we'll continue to manage the cost structure of the company. We believe the company should run profitably. It should generate positive cash. And if revenues are delayed, we'll continue to manage the cost structure accordingly. So make sure that the costs are in line with the revenue opportunity.

John Ferrara

But also that's why we have the financing facility to meet the short-term working capital needs, if the need it. You're right about Q1, we lost $800,000, but it was $2.3 million of use of cash was the working capital drain. And then we had $500,000 to $600,000 investments. There was $300,000 due to additional working capital payments for related to acquisition. And then there was some $300,000 of client property and equipment acquisitions. So the biggest piece of that was the use of working capital. And again, that's why we have the facility to meet those short-term needs.

Jeff Kiley

And then my final question is, today was a big day, Cartesian traded 5,200 shares. But are there any thoughts about the liquidity in the issue in the security, I mean for anybody who wanted to purchase more because of this turnaround or who wanted to exit because of the disappointments that they've had over the years?

Peter Woodward

Any thoughts about the liquidity and the stock?

Jeff Kiley

How to increase liquidity, yes.

Peter Woodward

I mean, we're not looking at any other kind of corporate action around the stock, if that's what you're referring to, other than continuing to trying to speak to investors and try to convey our sense that the business has significantly greater value than it's reflected in the stock and with some time to execute on the revenue side of the business to make sure the costs are aligned, we think it should generate a reasonable profit.

Operator

Our next question comes from Lawrence Stern from Stern Capital.

Lawrence Stern

Beside all the other questions that have been asked, I guess I'm still left scratching my head, Peter. You've now been CEO for 11 months of this company, correct, June of last year?

Peter Woodward

Correct.

Lawrence Stern

And it never seems that there is a sense of urgency to move this company forward on a faster basis looking towards the bottomline. You've heard me say this before, I don't understand how payroll is met and clients get deliberate services, but the owner based upon your actions and the rest of the Board never get a bottomline profit. So tell me why over the next three quarter, life is going to change since in your first three quarters nothing seems to improve on the bottomline?

Peter Woodward

I certainly think, Lawrence, that over time the operational execution in the business can improve. I think you and I had a number of conversations, that I think in a focused area with a focused strategy on certain markets, I think, we can drive growth. I think if we --

Lawrence Stern

A year later, Peter, and we're still not there. We are not turning around IBM. Cartesian is a small company with a limited number of employees and we sill can't manage to get any type of profitability on an operating basis.

Peter Woodward

I don't know what else to say, Lawrence, from additional conversations we have other than no one wants to drive a good business model with the company and a reasonable amount of profit more than I do. We've tried to manage the cost up until this quarter. We had projections that would have delivered a perfectly good business model, an improving business model as we went through the year.

And the revenue side of the business came in lighter than we had expected in the first quarter. So we're making continued adjustments. We're trying to grow the business and do it in a focused way, so that the profitability of the business can improve. Lots of opportunities out in the market, there is no shortage of market opportunities, but we're trying to do without investing huge amounts of resources to deliver the business model that you and I would like to see.

Lawrence Stern

How much of headcount dropped over the past year?

Peter Woodward

How much of headcount dropped over the past year? Headcount is lower today, not taking into account the Farncombe acquisition and the headcount that came along with that. We're reducing headcount in the company to try to reach our business model to work.

Lawrence Stern

Well, if management and the Board believe in whatever strategy that you've crafted, I guess we should see massive insight or buying if they believe in the story and that never seems to occur. So I'll leave it there. But I guess, from an ownership perspective, we just seem to be treading water and going backwards day after day, quarter-after-quarter, and the acceleration of getting to profitability never occur.

Operator

No more questions at this time. And this concludes the question-and-answer session. I'd now like to turn the call back over to Mr. Woodward for his closing remarks.

End of Q&A

Peter Woodward

Thank you, everyone, for joining today. And we'll look forward to chatting with you after the second quarter. Thanks.

Operator

Before we conclude today's call, I would like to provide Cartesian's Safe Harbor statement that includes important cautions regarding forward-looking statements made during this call. All statements made during today's call that do not relate to the present or historical facts are considered forward-looking statements. These include any statements regarding the company's plan for future operations, anticipated future financial position, anticipated results of operation, business strategy, competitive position and the company's expectation regarding opportunities for growth. These statements are based on management's current expectations and are subject to risks, uncertainties and assumptions.

Potential risks and uncertainties that could cause the company's business and financial results to differ materially from those forward-looking statements include, but are not limited to, its ability to successfully implement a strategic relationship with Elutions, conditions in the telecommunications industry, overall economic and business condition, the level of cash and non-cash expenditures incurred by the company, its ability to protect client or Cartesian data or information systems from security breaches and cyber attacks, technological advances and competitive factors in the markets in which the company competes, foreign currency exchange rate fluctuations and the factors described in the company's periodic reports filed with the SEC, including in the section cautionary statement regarding forward-looking information under Part 1 of it's Annual Report on Form 10-K for the fiscal year ended January 2, 2016 and the subsequent periodic reports containing updated disclosures of such risks. These filings are available at the SEC's website at www.sec.gov. All information discussed on this call is, as of today, May 16, 2016, and Cartesian does not intend and undertakes no duty to update further events or circumstances.

Further, this conference call included a discussion of non-GAAP financial measures, as that term is defined in Regulation G. The most directly comparable GAAP financial measures and information reconciling these non-GAAP financial measures to the company's financial results prepared in accordion to GAAP are included in the earnings release, which is posted on the company's website at www.cartesian.com.

Finally, I would like to remind everyone that a recording of today's call will be available for replay via a link available in the Investors section of the company's website. Thank you for joining us today for Cartesian's Q1 2016 earnings call. You may now disconnect your lines. Thank you for participating. And have a pleasant day.

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