UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
ýQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 20172020
oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 0-18492
DLH HOLDINGS CORP.
(Exact name of registrant as specified in its charter)
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| | | | | | | |
New Jersey (State or other jurisdiction of incorporation or organization)
| | 22-1899798 (I.R.S. Employer Identification No.)
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3565 Piedmont Road, NE, Building 3, Suite 700 Atlanta, Georgia (Address of principal executive offices)
| |
30305 (Zip Code)
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(770) 554-1647554-3545
(Registrant’s telephone number, including area code)
Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report
Securities registered pursuant to Section 12(b) of the Exchange ActAct:
| | | | | | | | |
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock | DLHC | Nasdaq Capital Market |
Indicate by check mark whether the Registrantregistrant (1) has filed all reports required to be filed by Section 13 or 15 (d)15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging“emerging growth company"company” in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer o | | Accelerated filer o |
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Large accelerated filer o
| | Accelerated filer o
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Non-accelerated filer o (Do not check if a smaller reporting company)x | | Smaller Reporting Company x |
| | Emerging Growth Company o
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 11,882,49412,543,906 shares of Common Stock, par value $.001$0.001 per share, were outstanding as of January 31, 2018.
2021.
DLH HOLDINGS CORP.
FORM 10-Q
For the Quarter Ended December 31, 2017
Table of Contents
PART I — FINANCIAL INFORMATION
ITEM I: FINANCIAL STATEMENTS
DLH HOLDINGS CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts inIn thousands, except per share amounts)
|
| | | | | | | | |
| | (unaudited) |
| | Three Months Ended |
| | December 31, |
| | 2017 | | 2016 |
Revenue | | $ | 30,215 |
| | $ | 26,111 |
|
Direct expenses | | 23,683 |
| | 20,300 |
|
Gross margin | | 6,532 |
| | 5,811 |
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General and administrative expenses | | 4,880 |
| | 4,721 |
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Depreciation and amortization | | 506 |
| | 201 |
|
Income from operations | | 1,146 |
| | 889 |
|
Interest expense, net | | 278 |
| | 364 |
|
Income before income taxes | | 868 |
| | 525 |
|
Income tax expense, net | | 3,719 |
| | 201 |
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Net income (loss) | | $ | (2,851 | ) | | $ | 324 |
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| | | | |
Net income (loss) per share - basic | | (0.24 | ) | | $ | 0.03 |
|
Net income (loss) per share-diluted | | (0.24 | ) | | $ | 0.03 |
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| | | | |
Weighted average common shares outstanding | | | | |
Basic | | 11,837 |
| | 11,201 |
|
Diluted | | 11,837 |
| | 12,690 |
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| | | | | | | | | | | | | | | | | | |
| | (unaudited) | | |
| | Three Months Ended | | |
| | December 31, | | |
| | 2020 | | 2019 | | | | |
Revenue | | $ | 57,852 | | | $ | 52,238 | | | | | |
Cost of Operations: | | | | | | | | |
Contract costs | | 46,005 | | | 41,340 | | | | | |
General and administrative costs | | 6,150 | | | 5,913 | | | | | |
| | | | | | | | |
Depreciation and amortization | | 2,062 | | | 1,859 | | | | | |
Total operating costs | | 54,217 | | | 49,112 | | | | | |
Income from operations | | 3,635 | | | 3,126 | | | | | |
Interest expense, net | | 1,080 | | | 941 | | | | | |
Income before income taxes | | 2,555 | | | 2,185 | | | | | |
Income tax expense | | 741 | | | 634 | | | | | |
Net income | | $ | 1,814 | | | $ | 1,551 | | | | | |
| | | | | | | | |
Net income per share - basic | | $ | 0.15 | | | $ | 0.13 | | | | | |
Net income per share - diluted | | $ | 0.13 | | | $ | 0.12 | | | | | |
| | | | | | | | |
Weighted average common stock outstanding | | | | | | | | |
Basic | | 12,498 | | | 12,088 | | | | | |
Diluted | | 13,445 | | | 13,014 | | | | | |
The accompanying notes are an integral part of these consolidated financial statements.
DLH HOLDINGS CORP.
CONSOLIDATED BALANCE SHEETS
(Amounts inIn thousands, except par value of shares)
| |
| | December 31, 2017 | | September 30, 2017 | | December 31, 2020 | | September 30, 2020 |
| | (unaudited)
|
| | | | (unaudited)
| | |
ASSETS | | |
| | |
| ASSETS | | | | |
Current assets: | | |
| | |
| Current assets: | | | | |
Cash and cash equivalents | | $ | 3,243 |
| | $ | 4,930 |
| Cash and cash equivalents | | $ | 370 | | | $ | 1,357 | |
Accounts receivable | | 12,843 |
| | 11,911 |
| Accounts receivable | | 44,885 | | | 32,541 | |
| Other current assets | | 586 |
| | 598 |
| Other current assets | | 3,468 | | | 3,499 | |
Total current assets | | 16,672 |
| | 17,439 |
| Total current assets | | 48,723 | | | 37,397 | |
Equipment and improvements, net | | 1,701 |
| | 1,391 |
| Equipment and improvements, net | | 2,976 | | | 3,339 | |
Operating leases right-of-use assets | | Operating leases right-of-use assets | | 21,737 | | | 22,427 | |
Deferred taxes, net | | 6,100 |
| | 9,639 |
| Deferred taxes, net | | 0 | | | 37 | |
Goodwill and other intangible assets, net | | 40,676 |
| | 41,116 |
| |
Goodwill | | Goodwill | | 65,450 | | | 67,144 | |
Intangible assets, net | | Intangible assets, net | | 52,408 | | | 52,612 | |
| Other long-term assets | | 139 |
| | 139 |
| Other long-term assets | | 572 | | | 606 | |
Total assets | | $ | 65,288 |
| | $ | 69,724 |
| Total assets | | $ | 191,866 | | | $ | 183,562 | |
| | | | | | | | |
LIABILITIES AND SHAREHOLDERS’ EQUITY | | |
| | |
| LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | |
Current liabilities: | | |
| | |
| Current liabilities: | | | | |
Debt obligations - current | | $ | 6,529 |
| | $ | 6,518 |
| |
Derivative financial instruments, at fair value | | — |
| | 306 |
| |
Debt obligations - current, net of deferred financing costs | | Debt obligations - current, net of deferred financing costs | | $ | 15,884 | | | $ | 6,727 | |
Operating lease liabilities - current | | Operating lease liabilities - current | | 2,053 | | | 2,045 | |
| Accrued payroll | | 3,592 |
| | 3,723 |
| Accrued payroll | | 10,073 | | | 10,611 | |
Accounts payable, accrued expenses, and other current liabilities | | 9,536 |
| | 10,895 |
| Accounts payable, accrued expenses, and other current liabilities | | 27,392 | | | 28,578 | |
Total current liabilities | | 19,657 |
| | 21,442 |
| Total current liabilities | | 55,402 | | | 47,961 | |
Total long term liabilities | | 11,541 |
| | 12,427 |
| |
Long-term liabilities: | | Long-term liabilities: | | | | |
Deferred taxes, net | | Deferred taxes, net | | 589 | | | 0 | |
Debt obligations - long-term, net of deferred financing costs | | Debt obligations - long-term, net of deferred financing costs | | 58,923 | | | 60,544 | |
Operating lease liabilities - long-term | | Operating lease liabilities - long-term | | 21,017 | | | 21,620 | |
| Total long-term liabilities | | Total long-term liabilities | | 80,529 | | | 82,164 | |
Total liabilities | | 31,198 |
| | 33,869 |
| Total liabilities | | 135,931 | | | 130,125 | |
Commitments and contingencies | |
|
| |
|
| |
| Shareholders' equity: | | | | | Shareholders' equity: | |
Common stock, $.001 par value; authorized 40,000 shares; issued and outstanding 11,882 at December 31, 2017 and 11,767 at September 30, 2017 | | 12 |
| | 12 |
| |
| Common stock, $0.001 par value; authorized 40,000 shares; issued and outstanding 12,544 and 12,404 at December 31, 2020 and September 30, 2020, respectively | | Common stock, $0.001 par value; authorized 40,000 shares; issued and outstanding 12,544 and 12,404 at December 31, 2020 and September 30, 2020, respectively | | 13 | | | 12 | |
Additional paid-in capital | | 83,644 |
| | 82,687 |
| Additional paid-in capital | | 86,551 | | | 85,868 | |
| Accumulated deficit | | (49,566 | ) | | (46,844 | ) | Accumulated deficit | | (30,629) | | | (32,443) | |
| Total shareholders’ equity | | 34,090 |
| | 35,855 |
| Total shareholders’ equity | | 55,935 | | | 53,437 | |
Total liabilities and shareholders' equity | | $ | 65,288 |
| | $ | 69,724 |
| Total liabilities and shareholders' equity | | $ | 191,866 | | | $ | 183,562 | |
The accompanying notes are an integral part of these consolidated financial statements.
DLH HOLDINGS CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts inIn thousands)
| | | | | | | | | | | | | | | | | |
| | | (unaudited) |
| | | Three Months Ended |
| | | December 31, |
| | | | | 2020 | | 2019 |
Operating activities | | | | | | | |
Net income | | | | | $ | 1,814 | | | $ | 1,551 | |
Adjustments to reconcile net income to net cash used in operating activities: | | | | | | | |
Depreciation and amortization expense | | | | | 2,062 | | | 1,859 | |
| | | | | | | |
| | | | | | | |
Amortization of deferred financing costs | | | | | 210 | | | 210 | |
| | | | | | | |
Stock based compensation expense | | | | | 458 | | | 203 | |
| | | | | | | |
Deferred taxes, net | | | | | 626 | | | 535 | |
Non-cash gain from lease modification | | | | | 0 | | | (121) | |
Changes in operating assets and liabilities | | | | | | | |
Accounts receivable | | | | | (12,344) | | | (4,769) | |
Other current assets | | | | | 284 | | | (147) | |
| | | | | | | |
Accrued payroll | | | | | (538) | | | (254) | |
Accounts payable, accrued expenses, and other current liabilities | | | | | (1,185) | | | (2,103) | |
Other long-term assets/liabilities | | | | | 95 | | | 152 | |
Net cash (used in) operating activities | | | | | (8,518) | | | (2,884) | |
Investing activities | | | | | | | |
| | | | | | | |
Purchase of equipment and improvements | | | | | (53) | | | (162) | |
Net cash (used in) investing activities | | | | | (53) | | | (162) | |
Financing activities | | | | | | | |
Borrowing on revolving line of credit, net | | | | | 9,150 | | | 1,800 | |
| | | | | | | |
Repayments of senior debt | | | | | (1,750) | | | 0 | |
| | | | | | | |
Payment of debt financing costs | | | | | (41) | | | (3) | |
| | | | | | | |
Repurchase of common stock | | | | | 0 | | | (206) | |
Proceeds from issuance of common stock upon exercise of options | | | | | 225 | | | 27 | |
Net cash provided by financing activities | | | | | 7,584 | | | 1,618 | |
| | | | | | | |
Net change in cash and cash equivalents | | | | | (987) | | | (1,428) | |
Cash and cash equivalents at beginning of period | | | | | 1,357 | | | 1,790 | |
Cash and cash equivalents at end of period | | | | | $ | 370 | | | $ | 362 | |
| | | | | | | |
Supplemental disclosures of cash flow information | | | | | | | |
Cash paid during the period for interest | | | | | $ | 852 | | | $ | 845 | |
| | | | | | | |
Supplemental disclosures of non-cash activity | | | | | | | |
| | | | | | | |
Non-cash cancellation of common stock | | | | | $ | 0 | | | $ | 95 | |
| | | | | | | |
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| | | | | | | | |
| | (unaudited) |
| | Three Months Ended |
| | December 31, |
| | 2017 | | 2016 |
Operating activities | | |
| | |
|
Net income (loss) | | $ | (2,851 | ) | | $ | 324 |
|
Adjustments to reconcile net income(loss) to net cash (used in) provided by operating activities: | | |
| | |
|
Depreciation and amortization expense | | 506 |
| | 201 |
|
Amortization of debt financing costs as interest expense | | 65 |
| | 60 |
|
Change in fair value of derivative financial instruments | | — |
| | 79 |
|
Stock based compensation expense | | 757 |
| | 485 |
|
Deferred taxes, net | | 3,539 |
| | — |
|
Changes in operating assets and liabilities | | |
| | |
|
Accounts receivable | | (931 | ) | | (655 | ) |
Other current assets | | 11 |
| | (83 | ) |
Accounts payable, accrued payroll, accrued expenses and other current liabilities | | (1,486 | ) | | (199 | ) |
Other long term assets/liabilities | | (4 | ) | | 85 |
|
Net cash (used in)provided by operating activities | | (394 | ) | | 297 |
|
| | | | |
Investing activities | | |
| | |
|
Acquisition net of cash acquired | | — |
| | (250 | ) |
Purchase of equipment and improvements | | (375 | ) | | (41 | ) |
Net cash used in investing activities | | (375 | ) | | (291 | ) |
| | | | |
Financing activities | | |
| | |
|
Repayments on senior debt | | (937 | ) | | (938 | ) |
Repayments of capital lease obligations | | (5 | ) | | (24 | ) |
Proceeds from issuance of stock upon exercise of options | | 24 |
| | — |
|
Net cash used in financing activities | | (918 | ) | | (962 | ) |
| | | | |
Net change in cash and cash equivalents | | (1,687 | ) | | (956 | ) |
Cash and cash equivalents at beginning of period | | 4,930 |
| | 3,427 |
|
Cash and cash equivalents at end of period | | $ | 3,243 |
| | $ | 2,471 |
|
| | | | |
Supplemental disclosures of cash flow information | | |
| | |
|
Cash paid during the period for interest | | $ | 219 |
| | $ | 225 |
|
Cash paid during the period for income taxes | | $ | 480 |
| | $ | 300 |
|
Derivatives, financial instruments reclassified as equity (see Note 4) | | $ | (306 | ) | | $ | — |
|
The accompanying notes are an integral part of these consolidated financial statements.
DLH HOLDINGS CORP.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands)
(unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | Treasury Stock | Additional Paid-In Capital | | Accumulated Deficit | | | | | | Total Shareholders' Equity |
| | Shares | | Amount | | Shares | Amount | | | | | | |
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| | | | | | | | | | | | | | | | |
Three Months Ended December 31, 2020 | | | | | | | | | | | | | | | | |
Balance at September 30, 2020 | | 12,404 | | | $ | 12 | | | 0 | | $ | 0 | | $ | 85,868 | | | $ | (32,443) | | | | | | | $ | 53,437 | |
Expense related to director restricted stock unit | | 78 | | | — | | | — | | — | | 116 | | | — | | | | | | | 116 | |
| | | | | | | | | | | | | | | | |
Expense related to employee stock based compensation | | — | | | — | | | — | | — | | 342 | | | — | | | | | | | 342 | |
Exercise of stock options | | 62 | | | 1 | | | — | | — | | 225 | | | — | | | | | | | 226 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Net income | | — | | | — | | | — | | — | | — | | | 1,814 | | | | | | | 1,814 | |
Balance at December 31, 2020 | | 12,544 | | | $ | 13 | | | 0 | | 0 | | $ | 86,551 | | | $ | (30,629) | | | | | | | $ | 55,935 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | Treasury Stock | Additional Paid-In Capital | | Accumulated Deficit | | | | | | Total Shareholders' Equity |
| | Shares | | Amount | | Shares | Amount | | | | | | |
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Three Months Ended December 31, 2019 | | | | | | | | | | | | | | | | |
Balance at September 30, 2019 | | 12,036 | | | $ | 12 | | | $ | 0 | | $ | 0 | | $ | 85,114 | | | $ | (39,555) | | | | | | | $ | 45,571 | |
Cumulative-effect adjustment for adoption of ASC 842 | | — | | | — | | | — | | — | | — | | | (2) | | | | | | | (2) | |
Expense related to director restricted stock unit | | 90 | | | — | | | — | | — | | 87 | | | — | | | | | | | 87 | |
Expense related to employee stock options | | — | | | — | | | — | | — | | 116 | | | — | | | | | | | 116 | |
Exercise of stock options | | 20 | | | — | | | — | | — | | 27 | | | — | | | | | | | 27 | |
Repurchases of common stock | | — | | | — | | | 27 | | (111) | | — | | | — | | | | | | | (111) | |
Cancellation of common stock | | (22) | | | — | | | — | | — | | (95) | | | — | | | | | | | (95) | |
Net income | | — | | | — | | | — | | — | | — | | | 1,551 | | | | | | | 1,551 | |
Balance at December 31, 2019 | | 12,124 | | | $ | 12 | | | 27 | | $ | (111) | | $ | 85,249 | | | $ | (38,006) | | | | | | | $ | 47,144 | |
The accompanying notes are an integral part of these consolidated financial statements.
DLH HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 20172020
1. Basis of Presentation
The accompanying unaudited consolidated financial statements include the accounts of DLH Holdings Corp. and its subsidiaries (together with its subsidiaries, "DLH" or the "Company" and also referred to as "we," "us" and "our"), all of which are wholly owned. All significant intercompany balances and transactions have been eliminated in consolidation. The accompanying financial statements have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP") for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, these statements do not include all of the information and footnotes required by U.S. generally accepted accounting principles ("GAAP")GAAP for complete financial statements.
In themanagement's opinion, of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the period ended December 31, 20172020 are not necessarily indicative of the results that may be expected for the year ending September 30, 2018.2021. Amounts as of and for the periods ended December 31, 20172020 and December 31, 20162019 are unaudited. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Annual reportReport on Form 10-K for the year ended September 30, 20172020 filed with the Securities and Exchange Commission on December 9, 2017.7, 2020.
2. Restatement of Previously Issued Financial Statements
In preparation of the Company’s condensed financial statements as of and for the three months ended December 31, 2017, the Company concluded it should correct the amount previously recorded as Debt obligations - current. In January 2018, the Company made an additional debt repayment of $2.9 million, resulting from an excess cash flow provision in its credit facility. This payment was calculated based upon the year ended September 30, 2017 operating results. As such, the $2.9 million should have been reflected within the Debt obligations - current on the Company’s Balance Sheet at September 30, 2017. In addition, the Company has concluded that based on its working capital position at June 30, 2017, it was more likely than not that an excess cash flow payment would be generated as of September 30, 2017. The Company’s estimate of the additional debt payment resulting from the projected excess cash flow provision totaling $2.2 million should have been reflected within the Debt obligations - current on the Company’s Unaudited Balance Sheet at June 30, 2017.
Funding of the excess cash flow payment from cash on hand has no impact to the Company’s net debt position, as the use of cash has an offsetting reduction to debt. From a liquidity position, the Company continues to have sufficient access to cash to support the operations of the business, through access to its revolving credit facility. The Company does not expect to make further excess cash flow payments under the provisions of the credit facility. See Note 6 for further information.
The following table summarizes the effect of the restatement to the Company’s financial statements for (i) its audited balance sheet as of September 30, 2017, and (ii) its unaudited condensed interim balance sheet as of June 30, 2017. The reclassification of an additional debt repayment resulting from an excess cash flow provision of our credit facility did not affect any previously reported operating results, net income, earnings per share, cash flows, total assets, total liabilities or stockholders equity.
|
| | | | | | | | | | | | |
| | In thousands |
| | As Previously Reported | | Adjustments | | As Restated |
Balance sheet as of September 30, 2017 (audited) | | | | | | |
Debt obligations - current | | $ | 3,601 |
| | $ | 2,917 |
| | $ | 6,518 |
|
Total current liabilities | | $ | 18,525 |
| | $ | 2,917 |
| | $ | 21,442 |
|
Total long term liabilities | | $ | 15,344 |
| | $ | (2,917 | ) | | $ | 12,427 |
|
Total liabilities | | $ | 33,869 |
| | $ | — |
| | $ | 33,869 |
|
| | | | | | |
Balance sheet as of June 30, 2017 (unaudited) | | | | | | |
Debt obligations - current | | $ | 3,590 |
| | $ | 2,154 |
| | $ | 5,744 |
|
Total current liabilities | | $ | 16,114 |
| | $ | 2,154 |
| | $ | 18,268 |
|
Total long term liabilities | | $ | 16,215 |
| | $ | (2,154 | ) | | $ | 14,061 |
|
Total liabilities | | $ | 32,329 |
| | $ | — |
| | $ | 32,329 |
|
3. Business Overview
DLHThe Company is a full-service provider of technology-enabled health and readiness enhancementhuman services, providing solutions to government agencies including the Department of Veteran Affairs ("VA"), Department of3 market focus areas: Defense and Veterans' Health Solutions, Human Solutions and Services, and Public Health and Human Services ("HHS"), Department of Defense ("DoD"),Life Sciences. We deliver domain-specific expertise, industry best-practices and other government agencies. DLH Holdings Corp. (together with its subsidiaries, "DLH" or the "Company"innovations to customers across these markets leveraging 7 core competencies: secure data analytics, clinical trials and also referred to as "we," "us"laboratory services, case management, performance evaluation, system modernization, operational logistics and "our")readiness, and strategic digital communications. The Company manages its operations from its principal executive offices in Atlanta, Georgia. WeGeorgia, and we have complimentarya complementary headquarters officesoffice in Silver Spring, Maryland. We employ over 1,4002,200 skilled employees workingworking in more than 30 locations throughout the United States.States and 1 location overseas.
Presently,At present, the Company derives 100%99% of its revenue from agencies of the federalFederal government, primarily as a prime contractor but also as a subcontractor to other Federal prime contractors. A major customer is defined as a customer from whom the Company derives at least 10% of its revenues.
Our two largest customer continues to becustomers are the Department of Veteran Affairs ("VA") and the Department of Health and Human Services ("HHS"). The VA which comprised approximately 66%48% and 61%46% of revenue for the three months ended December 31, 20172020 and 2016, respectively. Additionally,2019, respectively, and HHS represents a major customer, comprising 32%comprised approximately 35% and 46% of revenue for the three months ended December 31, 20172020 and 29% for the three months ended December 31, 2016. In addition, substantially all accounts receivable, including unbilled accounts receivable, are from agencies of the U.S. Government as of December 31, 2017 and September 30, 2017. We believe that the credit risk associated with our receivables is limited due to the creditworthiness of these customers. See Note 5, Supporting Financial Information-Accounts Receivable.2019, respectively.
As of December 31, 2017, awards from VA and HHS have anticipated periods of performance ranging from approximately one to up to two years. These agreements are subject to the Federal Acquisition Regulations. While there can be no assurance as to the actual amount of services that the Company will ultimately provide to VA and HHS under its current contracts, we believe that our strong working relationships and our effective service delivery support ongoing performance for the contract term. The Company's results of operations, cash flows and financial condition would be materially adversely affected in the event that we were unable to continue our relationship with VA or HHS.
4.3. New Accounting Pronouncements
In May 2014,June 2016, the Financial Accounting Standards Board ("FASB") issued amended guidanceAccounting Standards Updated ("ASU") 2016-13, Financial Instruments - Credit Losses, which requires companies to record an allowance for revenue recognition. Subsequently,expected credit losses over the contractual term of certain financial assets, including short-term trade receivables and contract assets. Additionally, it expands disclosure requirements for credit quality of financial assets. ASU 2016-13 became effective for the Company in the first quarter of fiscal year 2021. The adoption of this standard did not have a material impact on our operating results, financial position, or cash flows. For further detail of our outstanding receivables see Note 7.
In March 2020, the FASB issued an amendmentASU 2020-04, Reference Rate Reform (Topic 848), which provides optional expedients and exceptions for the application of U.S. GAAP to defercontracts, hedging relationships, and other transactions that reference the London Interbank Offered Rate ("LIBOR") and other reference rates expected to be discontinued due to reference rate reform. ASU 2020-04 became effective on March 12, 2020 for one yearall entities meeting certain criteria. The Company may elect to apply the effective dateamendments using a prospective approach through December 31, 2022. The Company is currently assessing the impact of electing this standard on its consolidated financial statements and related disclosures and does not expect the impact to be material.
In April 2020, the FASB issued a Staff Q&A, Topic 842 and 840: Accounting For Lease Concessions Related to the Effects of the newCOVID-19 Pandemic in order to provide clarity regarding the accounting treatment for lease concessions provided as a result of COVID-19. Under existing lease guidance, on revenue recognition, as well as issued additional clarifying amendments. The new guidance outlines a single comprehensive model for entitieschanges to usecertain lease terms not specified in the original lease agreement require modification accounting for revenue arising from contracts with customers. The core principletreatment. To provide relief, the FASB Staff Q&A permits alternatives to modification accounting under Topic 842. For concessions related to the effects of the COVID-19 pandemic that do not result in a substantial increase in the rights of the lessor or our obligations as the lessee, we are not required to analyze each contract to determine whether enforceable rights and obligations for concessions exist in the lease agreement and can elect to apply or not apply the lease modification guidance is that an entity should recognize revenuein Topic 842. For the quarter ended December 31, 2020, we elected to depictaccount for lease concessions received for 1 of our operating leases as a resolution of a contingency, whereby we remeasured our lease liability and recorded the transferadjustment against the right-of-use asset, without reassessing lease classification or modifying the original discount rate. As a result of promised goods or services to customersthis election, our lease liability and right-of-use-asset decreased by less than $0.1 million.
In August 2020, the FASB issued ASU 2020-06, which amends the measurement and disclosure of convertible instruments, contracts in an amount that reflects the consideration to which the entity expects toentity's own equity, and EPS guidance. The guidance can be entitled in exchange for those goodsadopted using a modified retrospective method or services. Additionally, the guidance requires improved disclosure to help the users of the financial statements better understand the nature, amount, timing, and uncertainty of revenue that is recognized.a fully retrospective method. The new guidance supersedes most current revenue recognition guidance, including industry-specific guidance, and isamendments are effective for annual periods (including interim periods therein)fiscal years beginning after December 15, 2017. The guidance allows either a full retrospective or modified retrospective transition method. The Company is evaluating2021 for public entities, excluding those that are smaller reporting companies. For all other entities the effects of this guidance.
In February 2016, the FASB issued new accounting guidance related to leases. This update,amendments are effective for the Companyfiscal years beginning October 1, 2019, will replace existing guidance in GAAP and will require lessees to recognize lease assets and lease liabilities on the balance sheet for all leases and disclose key information about leasing arrangements. When implemented, lessees and lessors will be required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. As shown in Note 11, the Company currently has approximately $3.5 million of lease obligations that would be evaluated as the implementation of this guidance becomes effective.
In July 2017, the FASB issued new accounting guidance related to certain equity-linked financial instruments with down round features, such as warrants. The guidance provides for a scope exception from derivative accounting if the instruments qualify for equity classification. Should the instruments qualify for equity classification, they would no longer be considered liabilities subject to fair value measurement at each reporting period. This update is effective for the Company as of its fiscal year beginning October 1, 2019, with early adoption permitted.after December 15, 2023. The Company has elected to adopt the provisions of this ASU as of December 31, 2017.
ADOPTION OF NEW ACCOUNTING STANDARD
Effective December 31, 2017, the Company adopted the provisions of Accounting Standards Update ("ASU") 2017-11, "Earning Per Share (Topic 260): Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815). The provisions of this ASU change the classification analysis of certain equity-linked financial instruments (or embedded features) with down round features. The fair value of a financial instrument with a down round features is now permitted to be classified as a component of stockholder's equity, as opposed to a liability as it was previously required to be reported. In addition, the recorded fair value of the financial instruments is no longer required to be subsequently revalued. Should the down round feature of the financial instrument be triggered due to a change in the underlying strike price, the change in the fair value would be treated as a dividend and as a reduction of income available to common stockholders in accordance with the guidance of ASC-260.
Prior accounting treatment In connection with issuing subordinated debt to finance its May 2, 2016 acquisition, the Company issued warrants to purchase 53,619 shares of Common Stock. These warrants contain certain pricing previsions which apply if the Company sells or issues Common Stock or Common Stock equivalents at a price that is less than the exercise price of the warrants, over the life of the warrants, excluding certain exempt issuances. In addition, these warrants may only be exercised with cash. Accordingly, the Company recognized a liability for these warrants based on their fair value as of the date of grant. The initial warrant liability recognized on the related warrants totaled $177 thousand. At each subsequent quarter end, the Company then remeasured the fair value of the warrants, and recorded the change in the warrant liability as a component of net income. As of September 30, 2017, the warrant liability was valued at $306 thousand.
Current accounting treatment.. The Company chose a modified retrospective adoption, and therefore, is recognizing the cumulative effect of the change as an adjustment to retained earnings in the period of adoption. The warrant liability has been eliminated from the Company's balance sheet for the quarterly period as of December 31, 2017. The fair value of the warrant liability has been reduced by $306 thousand by reclassifying this liability to retained earnings and additional paid in capital by $129 thousand and $177 thousand, respectively.
5. Supporting Financial Information
Accounts receivable
|
| | | | | | | | | |
| | | (in thousands) |
| | | December 31, | | September 30, |
| Ref | | 2017 | | 2017 |
Billed receivables | | | $ | 12,843 |
| | $ | 11,862 |
|
Unbilled receivables | | | — |
| | 49 |
|
Total accounts receivable | | | 12,843 |
| | 11,911 |
|
Less: Allowance for doubtful accounts | (a) | | — |
| | — |
|
Accounts receivable, net | | | $ | 12,843 |
| | $ | 11,911 |
|
Ref (a): Accounts receivable are non-interest bearing, unsecured and carried at fair value, which is net of an allowance for doubtful accounts. We evaluate our receivables on a quarterly basis and determine whether an allowance is appropriate based on specific collection issues. No allowance for doubtful accounts was deemed necessary at both December 31, 2017 and September 30, 2017.
Other current assets
|
| | | | | | | | | |
| | | (in thousands) |
| | | December 31, | | September 30, |
| Ref | | 2017 | | 2017 |
Prepaid insurance and benefits | | | $ | 381 |
| | $ | 240 |
|
Other receivables and prepaid expenses | | | 205 |
| | 358 |
|
Other current assets | | | $ | 586 |
| | $ | 598 |
|
Equipment and improvements, net
|
| | | | | | | | | |
| | | (in thousands) |
| | | December 31, | | September 30, |
| Ref | | 2017 | | 2017 |
Furniture and equipment | | | $ | 331 |
| | $ | 331 |
|
Computer equipment | | | 753 |
| | 715 |
|
Computer software | (a) | | 1,445 |
| | 1,108 |
|
Leasehold improvements | | | 66 |
| | 66 |
|
Total fixed assets | | | 2,595 |
| | 2,220 |
|
Less accumulated depreciation and amortization | | | (894 | ) | | (829 | ) |
Equipment and improvements, net | (b) | | $ | 1,701 |
| | $ | 1,391 |
|
Ref (a): The Company is in the process of configuring a new Enterprise Resource Planning system. Capitalized costs include $1.0 million and $0.7 million as of December 31, 2017 and September 30, 2017, respectively, of software licenses and implementation labor related to application development. Since the asset has not been placed in service, no depreciation related to the asset has been recognized. The asset was placed in service on January 1, 2018 with an estimated useful life of 5 years.
Ref (b): Equipment and improvements are stated at cost. Depreciation and amortization are provided using the straight-line method over the estimated useful asset lives (3 to 7 years) and the shorter of the initial lease term or estimated useful life for leasehold improvements. Maintenance and repair costs are expensed as incurred. Depreciation of equipment was $65 thousand and $85 thousand for the three months ended December 31, 2017 and 2016 respectively.
Goodwill and Intangibles
|
| | | | | | | | | | | | | | | | | | | | | | |
|
|
| (in thousands) |
| | | as of December 31, 2017 |
| Ref |
| Goodwill |
| Customer Relationships (a) |
|
| Non Compete Agreement (a) |
| Trade Name (a) |
| Total |
Gross Balance at December 31, 2017 | | | $ | 25,989 |
| | $ | 16,626 |
| | $ | 480 |
| | $ | 517 |
| | $ | 43,612 |
|
Accumulated amortization at September 30, 2017 | | | $ | — |
| | $ | (2,355 | ) | — |
| $ | (68 | ) | | $ | (73 | ) | | $ | (2,496 | ) |
Current period amortization |
|
| — |
|
| (416 | ) |
| (12 | ) |
| (12 | ) |
| (440 | ) |
Total accumulated amortization |
|
| — |
|
| (2,771 | ) |
| (80 | ) |
| (85 | ) |
| (2,936 | ) |
Net balance at December 31, 2017 |
|
| $ | 25,989 |
|
| $ | 13,855 |
|
| $ | 400 |
|
| $ | 432 |
|
| $ | 40,676 |
|
Ref (a): Intangible assets subject to amortization. The intangibles are amortized on a straight-line basis over their estimated useful lives of 10 years. Total amount of amortization expense for the period ended December 31, 2017 was $0.4 million.
|
| | | | |
Estimated amortization expense for future years: | | (in thousands) |
Year 1 | | $ | 1,762 |
|
Year 2 | | 1,762 |
|
Year 3 | | 1,762 |
|
Year 4 | | 1,762 |
|
Year 5 | | 1,762 |
|
Thereafter | | 5,877 |
|
| | $ | 14,687 |
|
Accounts payable, accrued expenses and other current liabilities
|
| | | | | | | | | |
| | | (in thousands) |
| | | December 31, | | September 30, |
| Ref | | 2017 | | 2017 |
Accounts payable | | | $ | 4,070 |
| | $ | 5,205 |
|
Accrued benefits | | | 2,283 |
| | 1,831 |
|
Accrued bonus and incentive compensation | | | 721 |
| | 1,544 |
|
Accrued workers compensation insurance | | | 2,062 |
| | 1,598 |
|
Other accrued expenses | | | 400 |
| | 717 |
|
Accounts payable, accrued expenses, and other current liabilities | | | $ | 9,536 |
| | $ | 10,895 |
|
Debt obligations
|
| | | | | | | | | |
| | | (in thousands) |
| | | December 31, | September 30, |
| Ref | | 2017 | | 2017 |
Bank term loan | (a) | | $ | 18,750 |
| | $ | 19,688 |
|
Less unamortized debt issuance costs | | | (889 | ) | | (961 | ) |
Net bank debt obligation | | | 17,861 |
| | 18,727 |
|
Less current portion of bank debt obligations | | | (6,529 | ) | | (6,518 | ) |
Long term portion of bank debt obligation | | | $ | 11,332 |
| | $ | 12,209 |
|
|
| | | | |
Ref (a): Maturity of the bank debt obligation as follows, in thousands: | | |
Year 1 | | $ | 6,667 |
|
Year 2 | | 3,750 |
|
Year 3 | | 3,750 |
|
Year 4 | | 4,583 |
|
Total bank debt obligation | | $ | 18,750 |
|
Interest expense
|
| | | | | | | | | |
| | | (in thousands) |
| | | Three Months Ended |
| | | December 31, |
| Ref | | 2017 | | 2016 |
Interest expense | (a) | | $ | (219 | ) | | $ | (225 | ) |
Amortization of debt financing costs as interest expense | (b) | | (65 | ) | | (60 | ) |
Change in fair value of derivative financial instruments | | | — |
| | (79 | ) |
Other income (expense), net | | | 6 |
| | — |
|
Interest expense, net | | | $ | (278 | ) | | (364 | ) |
Ref (a): Interest expense on borrowing
Ref (b): Amortizations of expenses related to securing financing
6. Credit Facilities
A summary of our loan facilities and subordinated debt financing as of December 31, 2017 is as follows:
|
| | | | | | | | | | |
| | ($ in Millions) |
| | As of December 31, 2017 |
Lender | | Arrangement | | Loan Balance | | Interest | | Maturity Date |
Fifth Third Bank | | Secured term loan $25 million ceiling (a) | | $ | 18.8 |
| | LIBOR* + 3.0% | | 05/01/21 |
Fifth Third Bank | | Secured revolving line of credit $10 million ceiling (b) | | $ | — |
| | LIBOR* + 3.0% | | 05/01/18 |
*LIBOR rate as of December 31, 2017 was 1.69%
(a) Represents the principal amounts payable on our Term Loan with Fifth Third Bank. The $25.0 million term loan from Fifth Third Bank was funded at closing and is secured by liens on substantially all of the assets of the Company. The principal of the Term Loan is payable in fifty-nine consecutive monthly installments of $312,500 with the remaining balance due on May 1, 2021.
The Term Loan agreement requires compliance with a number of financial covenants and contains restrictions on our ability to engage in certain transactions. We are in compliance with all loan covenants and restrictions.
Among other matters, we must comply with limitations on: granting liens; incurring other indebtedness; maintenance of assets; investments in other entities and extensions of credit; mergers and consolidations; and changes in nature of business. The loan agreement also requires us to comply with certain quarterly financial covenants including:
(i) a minimum fixed charge coverage ratio of at least 1.35 to 1.0 commencing with the quarter ending June 30, 2016, and for all subsequent periods, and
(ii) a Funded Indebtedness to Adjusted EBITDA ratio not exceeding the ratio of 2.99 to 1.0 at closing and thereafter a ratio ranging from 3.0 to 1.0 for the period through December 31, 2017 to 2.5 to 1.0 for the period ending September 30, 2018 through maturity. Adjusted EBITDA ratio is calculated by dividing the Company's total interest-bearing debt by net income adjusted to exclude (i) interest and other expenses, including acquisition expenses, net, (ii) provision for or benefit from income taxes, if any, (iii) depreciation and amortization, and (iv) G&A expenses - equity grants.
In addition to monthly payments of the outstanding indebtedness, the loan agreement also requires annual payments of a percentage of excess cash flow, as defined in the loan agreement. The loan agreement states that an excess cash flow recapture payment must be made equal to (a) 75% of the excess cash flow for each year in which the Funded Indebtedness to Adjusted EBITDA ratio is greater than or equal to 2.50:1.0, or (b) 50% of the Excess Cash Flow for each fiscal year in which the funded indebtedness to Adjusted EBITDA Ratio is less than 2.50:1.0 but greater than or equal to 2.0:1.0. DLH made an excess cash flow payment of $2.9 million on January 16, 2018 (see Note 14). DLH does not expect the update to make any future excess cash flow payments.have a material impact on its consolidated financial statements and related disclosures.
(b) The secured revolving line of credit from Fifth Third Bank has a ceiling of up to $10.0 million. Borrowing on the line of credit is secured by liens on substantially all of the assets of the Company.
The Company's total borrowing availability, based on eligible accounts receivables at December 31, 2017, was $10.0 million. This capacity was comprised of $0.6 million in a stand-by letter of credit and unused borrowing capacity of $9.4 million.
The revolving line of credit is subject to loan covenants as described above in the Term Loan, and DLH is fully compliant with those covenants.
7.4. Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates include valuation of goodwill and intangible assets, interest rate swaps, stock-based compensation, right-of-use assets and lease liabilities, valuation allowances established against accounts receivable and deferred tax assets, excess cash flow payments on our term debt,and measurement of loss development on workers’ compensation claims, and fair value of derivatives.claims. We evaluate these estimates and judgments on an ongoing basis and base our estimates on historical experience, current and expected future outcomes, third-party evaluations and various other assumptions that we believe are reasonable under the circumstances. The results of these estimates form the basis for making judgments about the carrying values of assets and liabilities as well as identifying and assessing the accounting treatment with respect to commitments and contingencies. We revise material accounting estimates if changes occur, such as more experience is acquired, additional information is obtained, or there is new information on which an estimate was or can be based. Actual results could differ from those estimates. In particular, a material reduction in the fair value of goodwill could have a material adverse effect on the Company’s financial position and results of operations. We account for the effect of a change in accounting estimate during the period in which the change occurs.
Revenue Recognition
DLH’s revenue is derived from professional and other specialized service offerings to US Government agencies through a variety of contracts, some of which are fixed-price in nature and/or sourced through Federal Supply Schedules administered by the General Services Administration (“GSA”) at fixed unit rates or hourly arrangements. Revenue on time and materials contracts is recognized based on hours performed times the applicable hourly rate, plus materials and other direct costs incurred on the contract. Revenue on fixed fee for service contracts is recognized over the period of performance of the contract. Revenue on cost reimbursable contracts is recognized equal to allowable costs incurred, plus a ratable portion of the applicable fee.
We generally operate as a prime contractor, but have also entered into contracts as a subcontractor. Our company's current business base is 95% prime contracts and 5% subcontracts. DLH recognizes and records revenue on government contracts when: (a) persuasive evidence of an arrangement exists; (b) the services have been delivered to the customer; (c) the sales price is fixed or determinable and free of contingencies or significant uncertainties; and (d) collectibility is reasonably assured.
Business Combinations
In accordance with Accounting Standards Codifications 805, "Business Combinations" ("ASC 805") the Company records acquisitions under the purchase method of accounting, under which the acquisition purchase price is allocated to the assets acquired and the liabilities assumed based upon the respective fair values. The Company utilizes some estimates and in some instances, may retain the services of an independent third-party valuation firm to assist in determining the fair values of assets acquired, liabilities, assumed, and contingent considerations granted. Such estimates and valuation require the Company to make significant assumptions. These assumptions may include projections of future events and operating performance.
Fair Value of Financial Instruments
The carrying amounts of the Company's cash and cash equivalents, accounts receivable, unbilled revenues, accrued expenses, accrued earn outs payable, and accounts payable approximate fair value due to the short-term nature of these instruments. The fair values of the Company's debt instruments approximateapproximated fair value because the underlying interest rates approximate market rates that the Company could obtain for similar instruments at the balance sheet dates.
GoodwillLong-Lived Assets
Our long-lived assets include equipment and otherimprovements, intangible assets,
DLH and goodwill. The Company continues to review its goodwill and other intangiblelong-lived assets for possible impairment or loss of value at least annually, or more frequently upon the occurrence of an event or when circumstances indicate that a reporting unit’sunit's carrying amount is greater than its fair value.
Equipment and improvements are stated at cost. Depreciation and amortization are provided using the straight-line method over the estimated useful asset lives (3 to 7 years) and the shorter of the initial lease term or estimated useful life for leasehold improvements. Intangible assets (other than goodwill) are originally recorded at fair value and are amortized on a straight-line basis over their estimated useful lives of 10 years. Maintenance and repair costs are expensed as incurred.
Leases
Right-of-use assets are measured at the present value of future minimum lease payments, including all probable renewals, plus lease payments made to the lessor before or at lease commencement and indirect costs paid, less incentives received. Our right-of-use assets include long-term leases for facilities and equipment and are amortized over their respective lease terms.
Goodwill
At September 30, 2017,2020, we performed a goodwill impairment evaluation on the year-end carrying value of approximately $26$67 million. We performed both a qualitative and quantitative assessment of factors to determine whether it was necessary to perform the goodwill impairment test. Based on the results of the work performed, the Company has concluded that no
0 impairment loss was warranted at September 30, 2017.2020. For the three months ended December 31, 2017,2020, the Company determined that no change in business conditions occurred which would have a material adverse effect on the valuation of goodwill. Our assessment incorporated effects of the COVID-19 pandemic, which is not expected to have a meaningful impact on our financial results. Notwithstanding this evaluation, factors including non-renewal of a major contract or other substantial changes in business conditions could have a material adverse effect on the valuation of goodwill in future periods and the resulting charge could be material to future periods’ results of operations.
Long Lived Assets
Equipment and improvements are stated at cost. Depreciation and amortization are provided using the straight-line method over the estimated useful asset lives (3 to 7 years) and the shorter of the initial lease term or estimated useful life for leasehold improvements.
Income Taxes
DLHThe Company accounts for income taxes in accordance with the liability method, whereby deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities, using enacted tax rates in effect for the year in which the differences are expected to reverse. Deferred tax assets are reflected on the consolidated balance sheet when it is determined that it is more likely than not that the asset will be realized. This guidance also requires that
deferred tax assets be reduced by a valuation allowance if it is more likely than not that some or all of the deferred tax asset will not be realized. We account for uncertain tax positions by recognizing the financial statement effects of a tax position only when, based upon the technical merits, it is "more-likely-than-not" that the position will be sustained upon examination. We had no0 uncertain tax positions at either December 31, 20172020 or September 30, 2017.2020. We report interest and penalties as a component of income tax expense. InDuring the fiscal quartersthree months ended December 31, 20172020 and September 30, 2017,December 31, 2019, we recognized no0 interest and no0 penalties related to income taxes.
Stock-basedStock-Based Equity Compensation
The Company uses the fair value-based method for stock-based equity compensation. Options issued are designated as either an incentive stock option or a non-statutory stock option. NoNaN option may be granted with a term of more than 10 years from the date of grant. Option awards may depend on achievement of certain performance measures determined by the Compensation Committee of our Board. Shares issued upon option exercise are newly issued common shares. All awards to employees and non-employees are recorded at fair value on the date of the grant and expensed over the period of vesting. The Company uses a Monte Carlo simulationbinomial and Black Scholes option pricing modelmodels, as appropriate to estimate the fair value of each stock option at the date of grant. Any consideration paid by the option holders to purchase shares is credited to capitalcommon stock.
Cash and Cash Equivalents
We consider all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents. We maintain cash balances at financial institutions that are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000. Deposits held with financial institutions may exceed the $250,000 limit.
Earnings (Loss) perPer Share
Basic earnings per share is calculated by dividing income(loss)income available to common shareholders by the weighted average number of common stock outstanding and restricted stock grants that vested or are likely to vest during the period. Diluted earnings per share is calculated by dividing income (loss) available to common shareholders by the weighted average number of basic common shares outstanding, adjusted to reflect potentially dilutive securities. Diluted earnings per share is calculated using the treasury stock method.
Treasury Stock
The Company periodically purchases its own common stock that is traded on public markets as part of announced stock repurchase programs. The repurchased common stock is classified as treasury stock on the consolidated balance sheets and held at cost. As of December 31, 2020 and September 30, 2020, the Company did 0t hold any treasury stock.
Preferred Stock
Our certificate of incorporation authorizes the issuance of "blank check" preferred stock with designations, rights and preferences as may be determined from time to time by our board of directors up to an aggregate of 5,000,000 shares of preferred stock. As of December 31, 2020 and September 30, 2020, the Company has 0t issued any preferred stock.
Interest Rate Swap
The Company uses derivative financial instruments to manage interest rate risk associated with its variable rate debt. The Company's objective in using these interest rate derivatives is to manage its exposure to interest rate movements and reduce volatility of interest expense. The gains and losses due to changes in the fair value of the interest rate swap agreements completely offset changes in the fair value of the hedged portion of the underlying debt. Offsetting changes in fair value of both the interest rate swaps and the hedged portion of the underlying debt both are recognized in interest expense in the Consolidated Statements of Operations. The Company does not hold or issue any derivative instruments for trading or speculative purposes.
Risks & Uncertainties
Management continues to evaluate the impact of the COVID-19 pandemic on the industry, primarily through the introduction of additional regulations and restrictions. Due to the nature of our work, we believe that these impacts are mitigated and concluded that while it is reasonably possible that the virus could have a negative effect on the Company's financial position and the results of its operations, the specific impact is not readily determinable as of the date of these financial statements.
5. Revenue Recognition
We present financial statements consistent withrecognize revenue over time when there is a consolidation model for all entities. Certain reclassifications have been madecontinuous transfer of control to our customer. For our U.S. government contracts, this continuous transfer of control to the prior period financial statementscustomer is supported by clauses in the contract that allow the U.S. government to conformunilaterally terminate the contract for convenience, pay us for costs incurred plus a reasonable profit and take control of any work in process. When control is transferred over time, revenue is recognized based on the extent of progress towards completion of the performance obligation. For services contracts, we satisfy our performance obligations as services are rendered. We use a cost-based input method to measure progress.
Contract costs include labor, material and allocable indirect expenses. For time-and-material contracts, we bill the customer per labor hour and per material, and revenue is recognized in the amount invoiced since the amount corresponds directly to the value of our performance to date. We consider control to transfer when we have a present right to payment. Essentially, all of our contracts satisfy their performance obligations over time. Contracts are often modified to account for changes in contract specifications and requirements. Contract modifications impact performance obligations when the modification either creates new or changes the existing enforceable rights and obligations. The effect of a contract modification on the transaction price and our measure of progress for the performance obligation to which it relates is recognized as an adjustment to revenue and profit cumulatively. Furthermore, a significant change in one or more estimates could affect the profitability of our contracts. We recognize adjustments in estimated profit on contracts in the period identified.
For time-and-materials contracts, revenue is recognized to the extent of billable rates times hours delivered plus materials and other reimbursable costs incurred. Revenue for cost-reimbursable contracts is recorded as reimbursable costs are incurred, including an estimated share of the applicable contractual fees earned. Contract costs are expensed as incurred. Estimated losses are recognized when identified.
Contract assets - Amounts are invoiced as work progresses in accordance with agreed-upon contractual terms. In part, revenue recognition occurs before we have the right to bill, resulting in contract assets. These contract assets are reported within receivables, net on our consolidated balance sheets and are invoiced in accordance with payment terms defined in each contract. Period end balances will vary from period to period due to agreed-upon contractual terms. Refer to the Liquidity and capital management located in Managements' Discussion and Analysis of Financial Condition and Results of Operations in this report for more information.
Contract liabilities - Amounts are a result of billings in excess of costs incurred. These contract liabilities are reported within accounts payable, accrued expenses, and other current liabilities on our consolidated balance sheets.
The following table summarizes the contract balances recognized on the Company's consolidated balance sheets:
| | | | | | | | | | | | | | | |
| | | (in thousands) |
| | | December 31, | | September 30, |
| | | 2020 | | 2020 |
| | | | | |
Contract assets | | | $ | 15,576 | | | $ | 7,943 | |
Contract liabilities | | | $ | 200 | | | $ | 200 | |
Disaggregation of revenue from contracts with customers
We disaggregate our revenue from contracts with customers by customer, contract type, as well as whether the Company acts as prime contractor or subcontractor. We believe these categories best depict how the nature, amount, timing and uncertainty of our revenue and cash flows are affected by economic factors. The following tables present our revenue disaggregated by these categories:
Revenue by customer:
| | | | | | | | | | | | | | | | | | |
| | (in thousands) | | |
| | Three Months Ended | | |
| | December 31, | | |
| | 2020 | | 2019 | | | | |
| | | | | | | | |
Department of Veterans Affairs | | $ | 27,642 | | | $ | 24,063 | | | | | |
Department of Health and Human Services | | 20,163 | | | 24,089 | | | | | |
Department of Defense | | 6,980 | | | 331 | | | | | |
Other | | 3,067 | | | 3,755 | | | | | |
Total revenue | | $ | 57,852 | | | $ | 52,238 | | | | | |
Revenue by contract type:
| | | | | | | | | | | | | | | | | | |
| | (in thousands) | | |
| | Three Months Ended | | |
| | December 31, | | |
| | 2020 | | 2019 | | | | |
| | | | | | | | |
Time and materials | | $ | 44,194 | | | $ | 36,441 | | | | | |
Cost reimbursable | | 11,721 | | | 14,617 | | | | | |
Firm fixed price | | 1,937 | | | 1,180 | | | | | |
Total revenue | | $ | 57,852 | | | $ | 52,238 | | | | | |
Revenue by whether the Company acts as a prime contractor or a subcontractor:
| | | | | | | | | | | | | | | | | | |
| | (in thousands) | | |
| | Three Months Ended | | |
| | December 31, | | |
| | 2020 | | 2019 | | | | |
| | | | | | | | |
Prime contractor | | $ | 51,764 | | | $ | 48,896 | | | | | |
Subcontractor | | 6,088 | | | 3,342 | | | | | |
Total revenue | | $ | 57,852 | | | $ | 52,238 | | | | | |
6. Leases
We have leases for facilities and office equipment. Our lease liabilities are recognized as thepresent value of the future minimum lease paymentsover the lease term. Our right-of-use assets are recognized as the present value of the future minimum lease payments over the lease term less unamortized lease incentives and the balance remaining in deferred rent liability under ASC 840. Our lease payments consist of fixed and in-substance fixed amounts attributable to the use of the underlying asset over the lease term. Variable lease payments that do not depend on an index rate or are not in-substance fixed payments are excluded in the measurement of right-of-use assets and lease liabilities and are expensed in the period presentation.incurred. The incremental borrowing rate on our credit facility was used in determining the present value of future minimum lease payments. Some of our lease agreements include options to extend the lease term or terminate the lease. These reclassifications had no effectoptions are accounted for in our right-of-use assets and lease liabilities when it is reasonably certain that the Company will extend the lease term or terminate the lease. The Company does not have any finance leases. As of December 31, 2020, operating leases for facilities and equipment have remaining lease terms of 1.0 to 10.3 years.
The following table summarizes lease balances in our consolidated balance sheets at December 31, 2020 and September 30, 2020:
| | | | | | | | | | | |
| (in thousands) |
| December 31, 2020 | | September 30, 2020 |
| | | |
| | | |
Operating lease right-of-use assets | $ | 21,737 | | | $ | 22,427 | |
| | | |
Operating lease liabilities, current | $ | 2,053 | | | $ | 2,045 | |
Operating lease liabilities - long-term | 21,017 | | | 21,620 | |
Total operating lease liabilities | $ | 23,070 | | | $ | 23,665 | |
The Company subleases a portion of 1 of its leased facilities. The sublease is classified as an operating lease with respect to the underlying asset. The sublease was assumed from the acquisition of Social & Scientific Systems, Inc. ("S3") in fiscal 2019. The sublease term is 5 years with 2 additional 1-year term extension options.
The Company's lease costs are included within contract costs in our Consolidated Statements of Operations. For the three months ended December 31, 2020 and December 31, 2019, total lease costs for our operating leases are as follows:
| | | | | | | | | | | |
| (in thousands) |
| Three Months Ended |
| December 31, |
| 2020 | | 2019 |
Operating | $ | 970 | | | $ | 1,312 | |
Short-term | 29 | | | 56 | |
Variable | 5 | | | 20 | |
Sublease income | (95) | | | (49) | |
Total lease costs | $ | 909 | | | $ | 1,339 | |
The Company's future minimum lease payments as of December 31, 2020 are as follows:
| | | | | |
For the Fiscal Year Ending September 30, | (in thousands) |
2021 (remaining) | $ | 2,454 | |
2022 | 3,501 | |
2023 | 3,375 | |
2024 | 3,251 | |
2025 | 3,092 | |
Thereafter | 14,684 | |
Total future lease payments | 30,357 | |
Less: imputed interest | (7,287) | |
Present value of future minimum lease payments | 23,070 | |
Less: current portion of operating lease liabilities | (2,053) | |
Long-term operating lease liabilities | $ | 21,017 | |
Other information related to our leases are as follows:
| | | | | |
| December 31, 2020 |
Weighted-average remaining lease term | 8.9 years |
Weighted-average discount rate | 5.99 | % |
| | | | | | | | |
| | (in thousands) | | |
| | Three Months Ended | | |
| | December 31, 2020 | | |
Cash paid for amounts included in the measurement of lease liabilities | | $ | 881 | | | |
Lease liabilities arising from obtaining right-of-use-assets | | $ | 0 | | | |
7. Supporting Financial Information
Accounts receivable
| | | | | | | | | | | | | | | | | |
| | | (in thousands) |
| | | December 31, | | September 30, |
| Ref | | 2020 | | 2020 |
Billed receivables | | | $ | 29,309 | | | $ | 24,598 | |
Contract assets | | | 15,576 | | | 7,943 | |
Total accounts receivable | | | 44,885 | | | 32,541 | |
Less: Allowance for doubtful accounts | (a) | | 0 | | | 0 | |
Accounts receivable, net | | | $ | 44,885 | | | $ | 32,541 | |
Ref (a): Accounts receivable are non-interest bearing, unsecured and carried at net realizable value. We evaluate our receivables on previously reported results of operationsa quarterly basis and determine whether an allowance is appropriate based on specific collection issues. NaN allowance for doubtful accounts was deemed necessary at either December 31, 2020 or accumulated deficit.September 30, 2020.
Other current assets
| | | | | | | | | | | | | | | |
| | | (in thousands) |
| | | December 31, | | September 30, |
| | | 2020 | | 2020 |
Prepaid insurance and benefits | | | $ | 431 | | | $ | 665 | |
Other receivables | | | 1,617 | | | 1,363 | |
Other prepaid expenses | | | 1,420 | | | 1,471 | |
Other current assets | | | $ | 3,468 | | | $ | 3,499 | |
Equipment and improvements, net
| | | | | | | | | | | | | | | | | |
| | | (in thousands) |
| | | December 31, | | September 30, |
| Ref | | 2020 | | 2020 |
Furniture and equipment | | | $ | 958 | | | $ | 958 | |
Computer equipment | | | 1,212 | | | 1,171 | |
Computer software | | | 4,353 | | | 4,341 | |
Leasehold improvements | | | 1,595 | | | 1,595 | |
Total equipment and improvements | | | 8,118 | | | 8,065 | |
Less accumulated depreciation and amortization | | | (5,142) | | | (4,726) | |
Equipment and improvements, net | (a) | | $ | 2,976 | | | $ | 3,339 | |
Ref (a): Depreciation expense was $0.4 million and $0.7 million for the three months ended December 31, 2020 and 2019, respectively.
Intangible assets
| | | | | | | | | | | | | | | | | |
| | | (in thousands) |
| | | December 31, | | September 30, |
| Ref | | 2020 | | 2020 |
Intangible assets | (a) | | | | |
Customer contracts and related customer relationships | | | $ | 62,281 | | | $ | 45,600 | |
Covenants not to compete | | | 522 | | | 480 | |
Trade name | | | 3,051 | | | 2,109 | |
Acquired intangibles - IBA acquisition | (b) | | — | | | 16,223 | |
Total intangible assets | | | 65,854 | | | 64,412 | |
Less accumulated amortization | | | | | |
Customer contracts and related customer relationships | | | (12,707) | | | (11,150) | |
Covenants not to compete | | | (225) | | | (212) | |
Trade name | | | (514) | | | (438) | |
Total accumulated amortization | | | (13,446) | | | (11,800) | |
Intangible assets, net | | | $ | 52,408 | | | $ | 52,612 | |
Ref (a): Intangible assets subject to amortization. The intangibles are amortized on a straight-line basis over their estimated useful lives of 10 years. The total amount of amortization expense was $1.6 million and $1.2 million for the three months ended December 31, 2020 and 2019, respectively.
Ref (b): Intangible assets reported at September 30, 2020 from the acquisition of IBA were based on an estimate and subject to revision. As of December 31, 2020, a third party valuation was completed and of the $17.7 million intangible assets acquired from the acquisition of IBA, $16.7 million was allocated to customer contracts and customer relationships, $0.1 million to covenants not to compete, and $0.9 million to trade name.
| | | | | | |
Estimated amortization expense for future years: | | (in thousands) |
Remaining Fiscal 2021 | | $ | 4,939 | |
Fiscal 2022 | | 6,585 | |
Fiscal 2023 | | 6,585 | |
Fiscal 2024 | | 6,585 | |
Fiscal 2025 | | 6,585 | |
Thereafter | | 21,129 | |
| | |
Total amortization expense | | $ | 52,408 | |
| | |
| | |
Goodwill
The changes in the carrying amount of goodwill as of December 31, 2020 are as follows:
| | | | | | | | |
| | (in thousands) |
| Ref | Total |
Balance at September 30, 2019 | | $ | 52,758 | |
Preliminary increase from IBA acquisition | | 14,386 | |
Balance at September 30, 2020 | | 67,144 | |
Adjustment from IBA acquisition | (a) | (1,694) | |
Balance at December 31, 2020 | | $ | 65,450 | |
| | |
| | |
Ref (a): The adjustment was determined based on third party valuation.
Accounts payable, accrued expenses, and other current liabilities
| | | | | | | | | | | | | |
| | | (in thousands) |
| | | December 31, | | September 30, |
| | | 2020 | | 2020 |
Accounts payable | | | $ | 14,195 | | | $ | 14,645 | |
Accrued benefits | | | 2,719 | | | 2,833 | |
Accrued bonus and incentive compensation | | | 591 | | | 2,340 | |
Accrued workers' compensation insurance | | | 6,067 | | | 5,529 | |
Other accrued expenses | | | 3,820 | | | 3,231 | |
Accounts payable, accrued expenses, and other current liabilities | | | $ | 27,392 | | | $ | 28,578 | |
Debt obligations
| | | | | | | | | | | | | | | |
| | | (in thousands) |
| | | December 31, | | September 30, |
| | | 2020 | | 2020 |
Bank revolving line of credit | | | $ | 9,150 | | | $ | 0 | |
Bank term loan | | | 68,250 | | | 70,000 | |
Less unamortized deferred financing costs | | | (2,593) | | | (2,729) | |
Net bank debt obligations | | | 74,807 | | | 67,271 | |
Less current portion of bank debt obligations, net of deferred financing costs | | | (15,884) | | | (6,727) | |
Long-term portion of bank debt obligations, net of deferred financing costs | | | $ | 58,923 | | | $ | 60,544 | |
Interest expense
| | | | | | | | | | | | | | | | | | | | | | | |
| | | (in thousands) | | |
| | | Three Months Ended | | |
| | | December 31, | | |
| Ref | | 2020 | | 2019 | | | | |
Interest expense | (a) | | $ | (870) | | | $ | (852) | | | | | |
Amortization of deferred financing costs | (b) | | (210) | | | (210) | | | | | |
| | | | | | | | | |
Other income (expense), net | (c) | | 0 | | | 121 | | | | | |
| | | | | | | | | |
Interest expense, net | | | $ | (1,080) | | | $ | (941) | | | | | |
Ref (a): Interest expense on borrowing
Ref (b): Amortization of expenses related to term loan and revolving line of credit
Ref (c): Gain on lease modification due to a lease amendment
8. Credit Facilities
A summary of this loan facility as of December 31, 2020, is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | ($ in Millions) |
| | As of December 31, 2020 |
Lender | | Arrangement | | Loan Balance | | Interest | | Maturity Date |
First National Bank of Pennsylvania ("FNB") | | Secured term loan (a) | | $ | 68.3 | | | LIBOR* + 3.5% | | 09/30/2025 |
First National Bank of Pennsylvania ("FNB") | | Secured revolving line of credit (b) | | $ | 9.2 | | | LIBOR* + 3.5% | | 09/30/2025 |
*LIBOR rate as of December 31, 2020 was 0.15%. As of December 31, 2020, our LIBOR rate is subject to a minimum floor of 0.5%.
(a) Represents the principal amounts payable on our term loan, which is secured by liens on substantially all of the assets of the Company. The principal of the term loan is payable in quarterly installments with the remaining balance due on September 30, 2025.
The Credit Agreement requires compliance with a number of financial covenants and contains restrictions on our ability to engage in certain transactions. Among other matters, we must comply with limitations on the following: granting liens; incurring other indebtedness; maintenance of assets; investments in other entities and extensions of credit; mergers and consolidations; and changes in nature of business. The loan agreement also requires us to comply with certain quarterly financial covenants including: (i) a minimum fixed charge coverage ratio of at least 1.25 to 1.00, and (ii) a Funded Indebtedness to Adjusted EBITDA ratio not exceeding the ratio of 3.75:1.0 to 2.75:1.0 through maturity. Adjusted EBITDA ratio is calculated by dividing the Company's total interest-bearing debt by net income
adjusted to exclude (i) interest and other expenses, (ii) provision for or benefit from income taxes, if any, (iii) depreciation and amortization, and (iv) non-recurring charges, losses or expenses to include transaction and non-cash equity expense. The term loan has an interest rate spread range from 2.5% to 4.5% depending on the funded indebtedness to adjusted EBITDA ratio. We are in compliance with all loan covenants and restrictions.
We are required to pay quarterly amortization payments, which commenced in December 2020 through September 2025. The annual amortization amounts are $7.0 million for fiscal years 2021 and 2022 and $8.75 million each for fiscal years 2023 - 2025. The quarterly payments are equal installments. In addition to quarterly payments of the outstanding indebtedness, the loan agreement also requires annual payments of a percentage of excess cash flow, as defined in the loan agreement. The loan agreement states that an excess cash flow recapture payment must be made equal to (a) 75% of the excess cash flow for the immediately preceding fiscal year in which indebtedness to consolidated EBITDA ratio is greater than or equal to 2.50:1.0; (b) 50% of the excess cash flow for the immediately preceding fiscal year in which the funded indebtedness to consolidated EBITDA Ratio is less than 2.50:1.0 but greater than or equal to 1.5:1.0; or (c) 0% of the excess cash flow for the immediately preceding fiscal year in which the funded indebtedness to consolidated EBITDA Ratio is less than 1.5:1.0. In addition, the Company must make additional mandatory prepayment of amounts outstanding based on proceeds received from asset sales and sales of certain equity securities or other indebtedness. For additional information regarding the schedule of future payment obligations, please refer to Note 11, Commitments and Contingencies.
On September 30, 2019, we executed a floating-to-fixed interest rate swap with First National Bank ("FNB") as counter party. The notional amount in the floating-to-fixed interest rate swap for the current fiscal year is $28.8 million and matures in 2024. The notional amount was $36 million in the prior fiscal year. The remaining outstanding balance of our term loan is subject to interest rate fluctuations. On the notional amount, the Company pays a base fixed rate of 1.61%, plus applicable credit spread. As a result, for the three months ended December 31, 2020, interest expense has been increased by less than $0.2 million.
(b) The secured revolving line of credit has a ceiling of up to $25.0 million. Borrowing on the line of credit is secured by liens on substantially all of the assets of the Company. The Company accessed funds from the revolving credit facility during the quarter and has an outstanding balance of $9.2 million at December 31, 2020.
The Company's total borrowing availability, based on eligible accounts receivables at December 31, 2020, was $25.0 million. As part of the revolving credit facility, the lenders agreed to a sublimit of $5 million for letters of credit for the account of the Company, subject to applicable procedures.
The revolving line of credit has a maturity date of September 30, 2025 and is subject to loan covenants as described above. The Company is fully compliant with those covenants.
9. Stock-based Compensation and Equity Grants and Warrants
Stock-based compensation expense
Options issued under equity incentive plans were designated as either an incentive stock or a non-statutory stock option. NoNaN option wasis granted with a term of more than 10 years from the date of grant. Exercisability of option awards may depend on achievement of certain performance measures determined by the Compensation Committee of our Board. Shares issued upon option exercise are newly issued shares. As of December 31, 2017,2020, there were 0.20.5 million shares available for grant.
Stock-based compensation expense, shown in the table below, is recorded in general and administrative expenses included in our statementConsolidated Statements of operations:Operations:
| | | | | | | | | | | | | | | | | | | | | | | |
| | | (in thousands) | | |
| | | Three Months Ended | | |
| Ref | | December 31, | | |
| | | 2020 | | 2019 | | | | |
DLH employees | (a) | | $ | 342 | | | $ | 116 | | | | | |
Non-employee directors | (b) | | 116 | | | 87 | | | | | |
Total stock option expense | | | $ | 458 | | | $ | 203 | | | | | |
|
| | | | | | | | | |
| | | (in thousands) |
| | | Three Months Ended |
| Ref | | December 31, |
| | | 2017 |
| | 2016 |
|
DLH employees |
| | $ | 64 |
| | $ | 6 |
|
Non-employee directors | (a) | | 693 |
| | 479 |
|
Total stock option expense | | | $ | 757 |
| | $ | 485 |
|
Ref (a): Equity grants of restricted stock units were made in accordance with the DLH long-term incentive compensation policy for Named Executive Officers ("NEO") and totaled 147,431 restricted stock units issued and outstanding at December 31, 2020.
Ref (b): Equity grants of restricted stock units were made in accordance with DLH compensation policy for non-employee directors.directors and totaled 63,177 restricted stock units issued and outstanding at December 31, 2020.
Unrecognized stock-based compensation expense
| | | | | | | | | | | | | |
| | | (in thousands) | | |
| | | December 31, | | |
| Ref | | 2020 | | |
Unrecognized expense for DLH employees | (a) | | $ | 3,445 | | | |
Unrecognized expense for non-employee directors | | | 351 | | | |
Total unrecognized expense | | | $ | 3,796 | | | |
|
| | | | | | | | | |
| | | (in thousands) |
| | | Three Months Ended |
| | | December 31, |
| Ref | | 2017 | | 2016 |
Unrecognized expense for DLH employees | (a) | | $ | 1,076 |
| | $ | 12 |
|
Unrecognized expense for non-employee directors | (b) | | — |
| | 8 |
|
Total unrecognized expense | | | $ | 1,076 |
| | $ | 20 |
|
Ref (a): Compensation expense for the portion of equity awards for which the requisite service has not been rendered is recognized as the requisite service is rendered. The compensation expense for that portion of awards has been based on the grant-date fair value of those awards as calculated for recognition purposes under applicable guidance. For options that vest based on the Company’sCompany's common stock achieving and maintaining defined market prices, the Company values the awards with a Monte Carlo binomial model that utilizes various probability factors and other criterion in establishing fair value of the grant. The related compensation expense is recognized over the derived service period determined in the valuation. The remaining term for theOn a weighted average basis, this expense of these shares willis expected to be 59 months.recognized within the next 4.51 years.
Ref (b): Unrecognized stock expense related to prior year's equity grants of restricted stock to non-employee directors, based on performance criteria, in accordance with DLH compensation policy for non-employee directors.
Stock option activity for the three months ended December 31, 20172020
The aggregate intrinsic value in the table below represents the total pretax intrinsic value (i.e., the difference between the Company’s closing stock price on the last trading day of the period and the exercise price, times the number of shares) that would have been received by the option holders had all option holders exercised their in the money options on those dates. This amount will change based on the fair market value of the Company’s stock.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | (in years) | | |
| | | | | | | | Weighted | | |
| | | | | | Weighted | | Average | | (in thousands) |
| | | | (in thousands) | | Average | | Remaining | | Aggregate |
| | | | Number of | | Exercise | | Contractual | | Intrinsic |
| | | Ref | Shares | | Price | | Term | | Value |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Options outstanding, September 30, 2020 | | | | 2,129 | | | $ | 6.14 | | | 7.4 | | $ | 6,593 | |
Exercised | | | | (62) | | | $ | 3.62 | | | — | | | — | |
Granted | | | (a) | 220 | | | $ | 10.05 | | | — | | | — | |
| | | | | | | | | | |
Options outstanding, December 31, 2020 | | | | 2,287 | | | $ | 6.95 | | | 7.7 | | $ | 10,261 | |
Ref (a): The options granted in the first quarter of fiscal 2021 occurred at the end of the period and an amount of less than $0.1 million was accrued as stock compensation expense.
|
| | | | | | | | | | | | |
| | | | | | | (in years) | | |
| | | | | | | Weighted | | |
| | | | | Weighted | | Average | | (in thousands) |
| | | (in thousands) | | Average | | Remaining | | Aggregate |
| | | Number of | | Exercise | | Contractual | | Intrinsic |
| Ref | | Shares | | Price | | Term | | Value |
Options outstanding September 30, 2017 | | | 1,994 |
| | $3.83 | | 6.4 | | 8,489 |
|
Granted | | | 217 |
| | | | | | |
Exercised | | | (25 | ) | | | | | | |
Options outstanding, December 31, 2017 | | | 2,186 |
| | $4.37 | | 6.9 | | $ | 7,799 |
|
Indication of Value Summary
Utilizing a volatility range of 50% along with assumptions of a 10 year term and the aforementioned 10-day stock price threshold results in an indicated range of value of the Options as follows using the Monte Carlo Method.
|
| | | | | | | | | | | | | | | |
| | | | | | Volatility |
| | | | | | 50% |
| | | Vesting | | Expected | |
| Strike | Stock | Threshold | Risk-Free | Term | Calculated |
Grant Date | Price | Price | Price | Rate | (Years) | Fair Value |
11/29/2017 | $ | 6.46 |
| $ | 6.46 |
| $ | 12.00 |
| 2.4 | % | 10 | $ | 3.98 |
|
12/1/2017 | $ | 6.28 |
| $ | 6.28 |
| $ | 8.00 |
| 2.4 | % | 10 | $ | 3.87 |
|
12/1/2017 | $ | 6.28 |
| $ | 6.28 |
| $ | 10.00 |
| 2.4 | % | 10 | $ | 3.82 |
|
| | | | | | |
Notes: | | | | | | |
Results based on 100,000 simulations | | | | |
Stock options shares outstanding, vested, and unvested for the periodperiods ended
| | | | | | | | | | | | | | | | | | | | | |
| | | (in thousands) | | | | |
| | | | | |
| | | December 31, | | September 30, | | |
| Ref | | 2020 | | 2020 | | | | |
Vested and exercisable | (a) | | 1,151 | | | 1,213 | | | | | |
Unvested | (b) | | 1,136 | | | 916 | | | | | |
Options outstanding | | | 2,287 | | | 2,129 | | | | | |
|
| | | | | | | | | |
| | | (in thousands) |
| | | Number of Shares |
| | | December 31, |
| Ref | | 2017 | | 2016 |
Vested and exercisable | (a) | | $ | 1,302 |
| | $ | 1,959 |
|
Unvested | | | 884 |
| | 267 |
|
Options outstanding | | | $ | 2,186 |
| | $ | 2,226 |
|
Ref (a): Weighted average exercise price of vested and exercisable shares was $2.18 and $2.25 at December 31, 2020 and September 30, 2020, respectively. Aggregate intrinsic value was approximately $8.2 million and $6.1 million at December 31, 2020 and September 30, 2020, respectively. Weighted average contractual term remaining was 3.8 and 4.6 years at December 31, 2020 and September 30, 2020, respectively.
Ref (b): Certain awards vest upon satisfaction of certain performance criteria.
9. Fair Value of Financial Instruments
The Company has financial instruments, including accounts receivable, accounts payable, loan payable, notes payable, and accrued expense. Due to the short term nature of these instruments, DLH estimates that the fair value of all financial instruments at December 31, 2017 and September 30, 2017 does not differ materially from the aggregate carrying values of these financial instruments recorded in the accompanying consolidated balance sheets.
10. Earnings (Loss) Per Share
Basic earnings per share is calculated by dividing income(loss)income available to common shareholders by the weighted average number of common shares outstanding and restricted stock grants that vested or are likely to vest during the period. Diluted earnings per share is calculated by dividing income(loss)income available to common shareholders by the weighted average number of
basic common shares outstanding, adjusted to reflect potentially dilutive securities. Diluted earnings per share is calculated using the treasury stock method.
| | | | | | | | | | | | | | | | | | |
| | (in thousands) | | | | |
| | Three Months Ended | | |
| | December 31, | | |
| | 2020 | | 2019 | | | | |
Numerator: | | | | | | | | |
Net income | | $ | 1,814 | | | $ | 1,551 | | | | | |
Denominator: | | | | | | | | |
Denominator for basic net income per share - weighted-average outstanding shares | | 12,498 | | | 12,088 | | | | | |
Effect of dilutive securities: | | | | | | | | |
Stock options and restricted stock | | 947 | | | 926 | | | | | |
Denominator for diluted net income per share - weighted-average outstanding shares | | 13,445 | | | 13,014 | | | | | |
| | | | | | | | |
Net income per share - basic | | $ | 0.15 | | | $ | 0.13 | | | | | |
Net income per share - diluted | | $ | 0.13 | | | $ | 0.12 | | | | | |
|
| | | | | | | | |
| | Three Months Ended |
| | December 31, | | December 31, |
| | 2017 | | 2016 |
Numerator: | | | | |
Net income (loss) | | $ | (2,851 | ) | | $ | 324 |
|
Denominator: | | | | |
Denominator for basic net income per share - weighted-average outstanding shares | | 11,837 |
| | 11,201 |
|
Effect of dilutive securities: | | | | |
Stock options and restricted stock | | — |
| | 1,489 |
|
Denominator for diluted net income per share - weighted-average outstanding shares | | 11,837 |
| | 12,690 |
|
| | | | |
Net income (loss) per share - basic | | $ | (0.24 | ) | | $ | 0.03 |
|
Net income (loss) per share-diluted | | $ | (0.24 | ) | | $ | 0.03 |
|
11. Commitments and Contingencies
Contractual Obligationsobligations as of December 31, 20172020
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Payments Due Per Fiscal Year |
| | | (Remaining) | | | | | |
(Amounts in thousands) | | Total | 2021 | 2022 | 2023 | 2024 | 2025 | Thereafter |
Debt obligations | | $ | 77,400 | | $ | 14,400 | | $ | 7,000 | | $ | 8,750 | | $ | 8,750 | | $ | 38,500 | | $ | 0 | |
Facility leases | | 30,077 | | 2,392 | | 3,418 | | 3,292 | | 3,199 | | 3,092 | | 14,684 | |
Equipment operating leases | | 280 | | 62 | | 83 | | 83 | | 52 | | 0 | | 0 | |
Total Contractual Obligations | | $ | 107,757 | | $ | 16,854 | | $ | 10,501 | | $ | 12,125 | | $ | 12,001 | | $ | 41,592 | | $ | 14,684 | |
|
| | | | | | | | | | | | | | | | | | | | |
| | | | Payments Due By Period |
Contractual Obligations | | | | Next 12 | | 2-3 | | 4-5 | | More than 5 |
(Amounts in thousands) | Ref | Total | | Months | | Years | | Years | | Years |
Debt Obligations | | $ | 18,750 |
| | $ | 6,667 |
| | $ | 7,500 |
| | $ | 4,583 |
| | — |
|
Facility leases | | 3,450 |
| | 911 |
| | 1,423 |
| | 656 |
| | 460 |
|
Equipment operating leases | | 67 |
| | 35 |
| | 32 |
| | — |
| | — |
|
Total Obligations | | $ | 22,267 |
| | $ | 7,613 |
| | $ | 8,955 |
| | $ | 5,239 |
| | $ | 460 |
|
Worker's Compensation
We accrue worker's compensation expense based on claims submitted, applying actuarial loss development factors to estimate the costs incurred but not yet recorded. Our accrued liability for claims development as of December 31, 20172020 and September 30, 20172020 was $2.06$6.1 million and $1.60$5.5 million, respectively.
Legal Proceedings
As a commercial enterprise and employer, the Company is subject to various claims and legal actions in the ordinary course of business. These matters can include professional liability, employment-relations issues, workers’ compensation, tax, payroll and employee-related matters, other commercial disputes arising in the course of its business, and inquiries and investigations by governmental agencies regarding our employment practices or other matters. The Company is not aware of any pending or threatened litigation that it believes is reasonably likely to have a material adverse effect on its results of operations, financial position, or cash flows.
12. Related Party Transactions.Transactions
The Company has determined that for the quarterthree months ended December 31, 20172020 there were no significant related party transactions that have occurred which require disclosure through the date that these financial statements were issued.
13. Income Taxes
DLH accounts for income taxes in accordance with the liability method. Under this method, deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities, using enacted tax rates in effect for the year in which the differences are expected to reverse. Deferred tax assets are reflected on the balance sheet when it is determined that it is more likely than not that the asset will be realized. This guidance also requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some or all of the deferred tax asset will not be realized.
On December 22, 2017, the Tax Cuts and Jobs Act (the “2017 Tax Act”) was enacted. The 2017 Tax Act significantly reduces U.S. federal tax rates, modifies rules regarding deductibility of executive compensation, limits deductions of interest expense, and revises rules regarding usability of net operating losses.
Net loss for the quarter ended December 31, 2017 includes an aggregate net discrete tax provision of $3.4 million as a result of the 2017 Tax Act, principally associated with revaluing the benefits of our net operating loss carryforwards from the previously recognized 34% federal rate to the 21% rate enacted.
14. Subsequent Events.
On January 16, 2018 the Company made an excess cash flow payment of $2.9 million as provided in its Loan Agreement. Management has evaluated subsequent events through the date that the Company's financial statements were issued. Based on this evaluation, the Company has determined that no other subsequent events have occurred which require disclosure through the date that these financial statements were issued.
ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward Looking and Cautionary Statements
You should read the following discussion in conjunction with the Consolidated Financial Statements and the notes to those statements included elsewhere in this Quarterly Report on Form 10-Q, as well as our Annual Report on Form 10-K for the year ended September 30, 2017.2020, and in other reports we have subsequently filed with the SEC. This Quarterly Report on Form 10-Q contains certain statements that are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. Certain statements contained in this Management’s Discussion and Analysis are forward-looking statements that involve risks and uncertainties. Any statements that refer to expectations, projections or other characterizations of future events or circumstances or that are not statements of historical fact (including without limitation statements to the effect that the Company or its management “believes”, “expects”, “anticipates”, “plans”, “intends” and similar expressions) should be considered forward looking statements that involve risks and uncertainties which could cause actual events or DLH’s actual results to differ materially from those indicated by the forward-looking statements. Forward-looking statements in this report include, among others, statements regarding benefits of the acquisition, estimates of future revenues, operating income, earnings, earnings per share, backlog, and cash flows. These statements reflect our belief and assumptions as to future events that may not prove to be accurate. Our actual results may differ materially from such forward-looking statements made in this report due to a variety of factors, including: the outbreak of the novel coronavirus (“COVID-19”), including the measures to reduce its spread, and its impact on the economy and demand for our services, are uncertain, cannot be predicted, and may precipitate or exacerbate other risks and uncertainties; the risk that we will not realize the anticipated benefits of an acquisition; the challenges of managing larger and more widespread operations resulting from the acquisition; contract awards in connection with re-competes for present business and/or competition for new business; compliance with new bank financial and other covenants; changes in client budgetary priorities; government contract procurement (such as bid protest, small business set asides, loss of work due to organizational conflicts of interest, etc.) and termination risks; the ability to successfully integrate the operations of future acquisitions; and other risks described in our SEC filings. For a discussion of such risks and uncertainties which could cause actual results to differ from those contained in the forward-looking statements, see “Risk Factors” in the Company’s periodic reports filed with the SEC, including our Annual Report on Form 10-K for the fiscal year ended September 30, 2020, as well as interim quarterly filings thereafter. The forward-looking statements contained herein are not historical facts, but rather are based on current expectations, estimates, assumptions and projections about our industry and business. Actual results could differ materially from the results contemplated or implied by theseSuch forward-looking statements due to a numberare made as of factors.the date hereof and may become outdated over time. The Company does not assume any responsibility for updating forward-looking statements.
Business Overview:and Markets Overview
DLH Holdings Corp. is a provider of technology-enabled business process outsourcing and program management solutions, and public health research and analytics; primarily focused to improve and better deploy large-scale federal health and human service initiatives. DLHThe Company derives 100%99% of its revenue from agencies of the Federal government, providing services to several agencies including the Department of Veteran Affairs ("VA"), Department of Health and Human Services ("HHS"), and the Department of Defense ("DoD"). Incorporated in New Jersey in 1969, the Company contracts with its government customers through its subsidiaries.
In recent years we have successfully completed acquisitions to increase future organic growth, diversify our customer base, and to expand into adjacent markets. On September 30, 2020, we acquired Irving Burton Associates, LLC ("IBA") and in June 2019 we acquired Social & Scientific Systems, Inc. ("S3").
Our business offerings are now focused onaligned to three primary sources of revenuemarket focus areas within the Federalfederal health services market space, as follows:space.
Department of •Defense and veteran health solutions, comprising approximately 66%Veteran Health Solutions;
•Human Services and Solutions;
•Public Health and Life Sciences;
The following table summarizes the revenues by market for the three months ended December 31, 2020 and 2019, respectively:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | (in thousands) |
| | | | Three Months Ended |
| | | | December 31, |
| | | | | | 2020 | | 2019 |
| | | | | | Revenue | Percent of total revenue | | Revenue | Percent of total revenue |
Defense and Veteran Health Solutions | | | | | | $ | 34,872 | | 60 | % | | $ | 24,063 | | 46 | % |
Human Services and Solutions | | | | | | 7,439 | | 13 | % | | 11,910 | | 23 | % |
Public Health and Life Sciences | | | | | | 15,541 | | 27 | % | | 16,265 | | 31 | % |
Total revenue | | | | | | $ | 57,852 | | 100 | % | | $ | 52,238 | | 100 | % |
Position and Distribution of Services and Solutions in Our Markets
The markets in which we compete and the manner in which we are positioned within them are characterized by a number of features including, but not limited to:
•specialized credentials and licenses held by a substantial component of our current businessemployee base;
Human services and solutions, approximately 32%
•prime contractor position in contracts representing 89% of our current business base;revenue;
•strong past performance record, as evidenced by our VA customer scoring the highest in overall satisfaction in the J.D. Power National Pharmacy Study over the past nine years; and
Public
•targeted expansion in critical national priority markets with Federal budget stability to include public health and life sciences, approximately 2%epidemiological support related to COVID-19.
We operate primarily through prime contracts awarded by the government through competitive bidding processes. We have a diverse mix of contract vehicles with various agencies of the United States Government, which supports our overall corporate growth strategy. Our revenue is distributed to time and materials contracts (77%), cost reimbursable contracts (20%) and firm fixed price contracts (3%). We provide services under Indefinite Duration, Indefinite Quantity ("IDIQ") and government wide acquisition contracts, such as General Services Administration ("GSA") schedule contracts. The Company currently holds multiple GSA schedule contracts, under which we provide services that constitute a significant percentage of our current business base.total revenue. These Federal contract schedules are renewed on a recurring basis for a multi-year period.
Major Customers
Defense
A major customer is defined as a customer from whom we derive at least 10% of our revenues. Our two largest customers are HHS and veterans’ health solutions: DLH provides a wide range of healthcare servicesthe VA. The following table summarizes the revenues by customer for the three months ended December 31, 2020 and delivery solutions2019, respectively:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | (in thousands) |
| | | | Three Months Ended |
| | | | December 31, |
| | | | | | 2020 | | 2019 |
| | | | | | Revenue | Percent of total revenue | | Revenue | Percent of total revenue |
| | | | | | | | | | |
Department of Veterans Affairs | | | | | | $ | 27,642 | | 48 | % | | $ | 24,063 | | 46 | % |
Department of Health and Human Services | | | | | | 20,163 | | 35 | % | | 24,089 | | 46 | % |
Department of Defense | | | | | | 6,980 | | 12 | % | | 331 | | 1 | % |
Customers with less than 10% share of total revenue | | | | | | 3,067 | | 5 | % | | 3,755 | | 7 | % |
Total revenue | | | | | | $ | 57,852 | | 100 | % | | $ | 52,238 | | 100 | % |
Major Contracts
The revenue attributable to the DepartmentVA was derived from 16 separate contracts covering the Company's performance of Veteran Affairs, US Army Medical Materiel Commandpharmacy and logistics services in support of the VA's consolidated mail outpatient pharmacy program. Nine contracts for pharmacy services, which represent revenues of approximately $15.9 million and $13.3 million for the three months ended December 31, 2020 and 2019, are currently operating under extensions through October 2021.
As previously reported, a single renewal request for proposal (“RFP”) had been issued for the nine (9) pharmacy contracts that required the prime contractor be a service-disabled veteran owned small business (“SDVOSB”), which would have precluded us from bidding on the RFP as a prime contractor. We had joined a SDVOSB team as a subcontractor to respond to this RFP. However, the government has canceled the previously issued RFP for these contracts. The government has neither indicated nor announced its subordinate US Army Medical Research Acquisition Activity, Navy Bureaufuture procurement strategy. Due to the time required to conduct a procurement process, we expect these contracts to be further extended.
The remaining seven contracts for logistics services, which represent approximately $11.8 million and $10.8 million of Medicinerevenues for the three months ended December 31, 2020 and Surgery, Defense Health Agency and Army Medical Command. We believe that our DLH-developed tools and processes, including SPOT-m TM and e-PRAT TM , along with our cloud-based case management system2019, have been major contributorsextended through June 2021. A renewal RFP for the seven logistics contracts has been issued and provides for evaluation and award of the contract based on the classification of the bidder. The RFP initially included award preference for a SDVOSB prime contractor. The government has since removed that preference thereby making the procurement a full and open acquisition, which allows for us to be evaluated as the prime contractor.
The Company's contract with HHS in differentiatingsupport of its Head Start program generated $6.0 million and $9.5 million of its revenue for the company within this Federal market.three months ended December 31, 2020 and 2019, respectively. This contract has a period of performance through April 2025.
Our services include advancingWe remain dependent upon the technology readiness level of new development items, which is a critical prioritycontinuation of our federal agency customers. Our project managers and biomedical engineers perform state-of-the-art research and development, testing and evaluation, and development of new medical systems and devices intended to enhance the medical readiness of troops in combat theaters across the globe. Our medical logistics support assists the uniformed services plan for fielding these new systems and devices. Further, we deliver clinical drug and alcohol counseling services to Navy installations worldwide as part of the clinical preceptorship program, thereby improving sailor health and readiness. DLH provides a range of case management, physical and behavioral health examinations and associated medical administration services to enhance the assessment and transition process for military personnel readiness commands and individual service members. DLH is also engaged in efforts to alleviate homelessness among Veterans. We provide a range of professional case management services to support Veterans' transition back into the community. These services include mental health evaluations, behavioral readiness, skills assessment, career counseling, and job preparation services.
DLH works to ensure that veterans receive their out-patient prescriptions on time, each day, through the VA CMOP pharmacy program which has been recognized for service excellence, citing the JD Powers evaluation of mail order pharmacy for each of the past eight years.We believe that our operational efficiency and expertise is well-alignedrelationships with the VA strategic goalsand HHS. Our results of operations, cash flows, and financial condition would be materially adversely affected if we were unable to manage and improve operations andcontinue our relationship with either of these customers, if we were to deliver seamless and integrated support. Our unique capabilities and solutions helplose any of our material current contracts, or if the VA optimize efficiency and help ensure program accountability as well as better service.
Human services and solutions: DLH provides a wide range of human services and solutions to the Department of Health and Human Services' Office of Head Start and the Department of Homeland Security. DLH provides a systems-based approach toward assuring that underserved children and youth throughout the country are getting proper educational and environmental support, including health, nutritional, parental, and behavioral services. Performance verification of grantees delivering such services nationwide is conducted using an evolving system of monitoring, evaluation, tracking and reporting tools against selected key performance indicators relative to school readiness. Large scale federally-funded, regionally managed, and locally delivered services demand innovative monitoring and protocol systems integration to ensure productive and cost-effective results. DLH provides the enterprise-level IT system architecture design, migration plan, and ongoing maintenance (including call center) to manage the implementation using experienced subject matter experts and project management resources.
Public health and life sciences: DLH provides a wide rangeamount of services we provide to Departmentthem was to be materially reduced.
Backlog
Backlog represents total estimated contract value of Healthpredominantly multi-year government contracts and Human Services' Center for Disease Controlwill vary depending upon the timing of new/renewal contract awards. Backlog is based upon customer commitments that the Company believes to be firm over the remaining performance period of our contracts. The value of multi-client, competitive Indefinite Delivery/Indefinite Quantity ("IDIQ") contract awards is included in backlog computation only when a task order is awarded or if the contract is a single award IDIQ contract. While no assurances can be given that existing contracts will result in earned revenue in any future period, or at all, the Company’s major customers have historically exercised their contractual renewal options. At December 31, 2020, our total backlog was approximately $665.2 million compared to $688.4 million as of September 30, 2020.
Backlog value is quantified from management's judgment and Prevention,assumptions about the Departmentvolume of the Interior,services based on past volume trends and the Departmentcurrent planning developed with customers. Our backlog may consist of Agriculture. DLH services include advancing disease prevention methodsboth funded and health promotion to underserved at-risk communities through development of strategic communication campaigns, research on emerging trends, health informatics analyses,unfunded amounts under existing contracts including option periods. At December 31, 2020, our funded backlog was approximately $103.9 million, and application of best practices including mobile, social, and interactive media. The company leverages evidence-based methods and web technology to drive health equity to our most vulnerable populations through public engagement. For at-risk wildlife, DLH conducts biological research and surveys covering waterways in key parts of the country to protect and conserve aquatic populations as well as manage wetlands and habitats through environmental assessments. Projects often involve highly specialized expertise and research methodologies. This work is often very seasonal with regard to resources and funding.unfunded backlog was $561.3 million.
Forward Looking Business Trends:Trends
DLH's missionCOVID-19 impact
We are exposed to and impacted by macroeconomic factors and U.S. government policies. Current general economic conditions are highly volatile due to the COVID-19 pandemic, resulting in both market size contractions due to economic slowdowns and government restrictions on movement.We have seen continued demand for the services we provide under our current contract portfolio as the services we provide are largely deemed essential. While the pandemic has had minor offsetting impacts due to social distancing and travel restrictions, we do not expect material impacts to our consolidated results of operations from COVID-19 in this fiscal year.
The pandemic may cause reduced demand for certain services we provide, particularly if it results in a recessionary economic environment or the spending priorities of the U.S. government shift in ways adverse to our business focus. Our ability to continue to operate without any significant negative impacts will in part depend on our continued ability to protect our employees. We have endeavored to follow recommended actions of government and health authorities to protect our employees and were able to broadly maintain our operations. Further, we have partnered with our clients to adopt particular measures to protect our employees at distribution centers, and we expect to execute on a remainder of our contracts through remote and teleworking arrangements. We intend to continue to work with government authorities and implement our employee safety measures to ensure that we are able to continue our operations during the pandemic. However, uncertainty resulting from the pandemic could result in an unforeseen disruption to our operations (for example a closure of a key distribution facility) that may not be fully mitigated. To date we have experienced continuity in the majority of our work for our government clients. While there have been postponements of events and challenges around some project work requiring travel, overall, our government clients have continued to require our services. We are unable to predict whether, and to what extent, this trend will continue. It would be reasonable to expect some deterioration of certain client activities due to COVID-19. The longer the duration of the pandemic, the more likely it is that it could have an adverse effect on our business, financial position, results of operations and/or cash flows. However, we also believe that we are likely to expandsee additional demand from federal agencies such as the CDC and the NIH for our position asservices.
Due to our ability to continue to perform under our contracts and our cash flow generation, we do not presently expect liquidity constraints related to COVID-19. We are presently in compliance with all covenants in our term loan and have access to a trusted providerrevolving line of technology-enabled healthcare and public health services, medical logistics, and readiness enhancement servicescredit to active duty personnel, veterans, and civilian populations and communities. Our primary focus withinmeet any short-term cash needs that cannot be funded by operations. As such, mandatory demands on our cash flow remain low. Further, we have not observed any material impairments of our assets or a significant change in the defense agency markets include military service members and veterans' requirements for telehealth services, behavioral healthcare, medication therapy management, health IT commodities, process management, clinical systems support, and healthcare delivery. Our primary focus withinfair value of our assets due to the civilian agency markets include healthcare and social programs delivery and readiness. These include compliance monitoring on large scale programs, technology-enabled program management, consulting, and digital communications solutions ensuring that education, health, and social standards are being achieved within underserved and at risk populations. We believe these business development priorities will position DLH to expand within top national priority programs and funded areas.COVID-19 pandemic.
Federal budget outlook for 2018:2021:
The President ofOur business is impacted by the United States’ broad agenda calls for increased militaryoverall federal government's spending priorities. As such, we continue to carefully follow federal budget, legislative and in certain cases, domestic spending, with reduced spending on foreign programs. Most relevantcontracting trends and activities, and evolve our strategies to DLH’s targeted markets, the President advocates the lifting of sequestration caps in the defense sector; increasing infrastructure spending in the United States; and tightening controls on immigration.take these into consideration.
A final FY2018 budget was not passed into law prior to October 1, 2017. Consequently, a continuing resolution was passed into law on September 8, 2017 and, following a brief government shutdown in January 2018, was subsequently extended through February 8, 2018. On February 9, 2018, Congress passed, andDecember 27, 2020, the President signed into law the Bipartisan Budget Act of 2018, which provides for a further short-term continuing resolution through March 23, 2018, along with an increase in federal spending for both defense and nondefense programs by approximately $300 billion over the next two years. The Bipartisan Budget Act of 2018 also extends the debt ceiling for one year. Spending priorities under the new budget act, in addition to defense spending, including additional funds for a number of federal health programs including allocations to address the opioid crisis, extending the Children’s Health Insurance Program and investments in community health centers.
While Congress will still need to enact a more comprehensive budget bill to fund the federal government through the end of the 2018 fiscal year, the Bipartisan Budget Act provides a measure of stability and a significant increase in federal funding for non-defense programs. While further delays in addressing funding may result in another government shutdown or otherwise impede the timing of awards for new business, the Company continues to believe that its key programs benefit from bipartisan support and that federal budgetary uncertainty will not have a material impact on our current business base for fiscal year 2018.
Department of Veterans Affairs (VA) health spending trends:
DLH continues to see critical need for expanded health care solutions within our sector of the Federal health market, largely focused on the needs of veterans and their families. Serving nearly nine million veterans each year, the VA operates the nation's largest integrated health care system, with more than 1,700 hospitals, clinics, community living centers, readjustment counseling centers, and other facilities.
On July 27, 2017, the House of Representatives approved the Department of DefenseConsolidated Appropriations Act, for the 2018 fiscal year. The bill includes funding for the VA of $182.3 billion, an increase of $5.3 billion or 3% above the 2017 budgeted amounts. The fiscal 2018 VA funding includes Medical Care2021 (H.R.133), enacting consolidated appropriations of approximately $69.0 billion, which is $5.7 billion (9.0%) above the 2017 budgeted level. The Trump administration has expressed strong support for veterans and members of the armed forces, and we believe there is a reasonable expectation that fiscal year 2018 funding will be consistent with the House bill.
Department of Health and Human Services (HHS) spending trends:
HHS is the principal federal department charged with protecting the health of all Americans and providing essential human services. DLH has existing contracts with multiple agencies under HHS,funding through September 30, 2021 for projects and we are actively pursuing growth opportunities within this vital agency.activities of Federal Government agencies.
HHS spending priorities are being evaluated by the Trump administration with particular focus on the Affordable Care Act programs which are outside of our market space.
On July 19, 2017 the House Appropriations Committee approved a draft funding bill for Labor, Health and Human Services and Education. The bill cuts funding to lower-priority programs, while targeting investments in medical research, and biodefense. The draft FY2018 funding bill proposed an increase of $24 million for the Head Start program. While the new Administration’sBiden administration has not formally proposed its priorities via a budget submission, the President has signaled certain priorities. Among those priorities for HHS are evolving, Head Start has historically received strong bipartisan support.
Large defense companies divesting from Federal services market:
Large government contractors have been divesting from the Federal services market to increase theira focus on advanced military products, which typically generate higher margins than services. This trend may open up increasedcombating the global COVID-19 pandemic, improving health care delivery to our nation's veterans, enhancing the IT infrastructure of many federal agencies to include the VA and HHS, and broadening opportunities for smaller Federal service providersand access to early childhood programs such as DLH.Head Start. We believe our competencies, customer portfolio, and company values are well aligned with the proposed vision of the incoming administration.
We recommend that you read this discussion and analysis in conjunction with our Annual Report on Form 10-K for the fiscal year ended September 30, 2020, previously filed with the Securities and Exchange Commission.
Industry consolidation among federal government contractors:
There has been active consolidation and a strong increase in M&Amerger and acquisition activity among federal government contractors over the
past few years that we expect to continue, into fiscal year 2018 and beyond, fueled by public companies leveraging strong
balance sheets. Companies often look to acquisitions that augment core capabilities, contracts, customers, market differentiators, stability, cost synergies, and higher margin and revenue streams. We plan continued focus on our core capabilities, as we look at potential future strategic acquisitions to supplement our organic growth and enhance shareholder value.
Potential small business team opportunities:impact of Federal Contractual set-aside Laws and Regulations:
The Federal government has an overall goal of 23% of prime contracts flowing tothrough small businesses. As previously reported, various agencies within the federal government have policies that support small business contractors, primarily throughgoals, including the useadoption of set-asidesthe “Rule of Two” by the VA, which provides that the agency shall award contracts by restricting competition for the contract to service-disabled or other veteran owned businesses. To restrict competition pursuant to this rule, the contracting officer must reasonably expect that at least two of these businesses, which are capable of delivering the services, will submit offers and that the award can be made at a fair and reasonable price that offers best value to the United States. When two qualifying small businesses cannot be identified, the VA may proceed to award contracts following a full and open bid process.
The Company believes that its past performance in Federal agency RFPs (requeststhis market and track record of success provide a competitive advantage. However, the effect of set-aside provisions may limit our ability to compete for proposal). As a part of our growth plan, DLHprime contractor positions on programs that we recompete or that we have targeted for growth. In these cases, the Company may elect to join a team with an eligible contractor as prime in support of such small businesses for specific pursuits that align with our core markets and corporate growth strategy.
Restatement
In this Form 10-Q, we are restating (i) our audited consolidated balance sheet as of September 30, 2017, and (ii) our unaudited condensed consolidated balance sheet as of June 30, 2017. The reclassification of an additional debt repayment resulting from a excess cash flow provision of our credit facility did not affect any previously reported operating results, net income, earnings per share, cash flows, total assets, total liabilities or stockholders' equity.
The restatement results from a correction of the amount recorded as Debt obligations - current. In January 2018, the Company made an additional debt repayment of $2.9 million, resulting from an excess cash flow provision in its credit facility. This payment was calculated based upon the year ended September 30, 2017 operating results. As such, the $2.9 million should have been reflected within the Debt obligations - current on the Company’s Balance Sheet at September 30, 2017. In addition, the Company has concluded that based on its working capital position at June 30, 2017, it was more likely than not that an excess cash flow payment would be generated as of September 30, 2017. The Company’s estimate of the additional debt payment resulting from the projected excess cash flow provision totaling $2.2 million should have been reflected within the Debt obligations - current on the Company’s Unaudited Balance Sheet at June 30, 2017.
Funding of the excess cash flow payment from cash on hand has no impact to the Company’s net debt position, as the use of cash has an offsetting reduction to debt. From a liquidity position, the Company continues to have sufficient access to cash to support the operations of the business, through access to its revolving credit facility. The Company does not expect to make further excess cash flow payments under the provisions of the credit facility.
We have not amended our previously filed Annual Report on Form 10-K or Quarterly Report on Form 10-Q for (i) our audited consolidated balance sheet as of September 30, 2017, and (ii) our unaudited condensed consolidated balance sheet as of June 30, 2017 affected by the restatement. The financial information that has been previously filed or otherwise reported for these periods and which has been corrected by the foregoing information in this Quarterly Report on Form 10-Q is superseded by the financial information in this Quarterly Report on Form 10-Q, as described above and in Note 2 to the consolidated financial statements filed herewith.
The restatement is more fully described in Note 2 of the notes to the financial statements included herein.
Results of Operations for the three months ended December 31, 20172020 and 20162019
The following table summarizes, for the periods indicated, consolidated statements of income data expressed in dollars in thousands except for per share amounts, and as a percentage of revenue:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | |
| | December 31, 2020 | | December 31, 2019 | Change |
Revenue | | $ | 57,852 | | | 100.0 | % | | $ | 52,238 | | | 100.0 | % | $ | 5,614 | |
Cost of operations: | | | | | | | | | |
Contract costs | | 46,005 | | | 79.5 | % | | 41,340 | | | 79.1 | % | 4,665 | |
General and administrative costs | | 6,150 | | | 10.6 | % | | 5,913 | | | 11.3 | % | 237 | |
| | | | | | | | | |
Depreciation and amortization | | 2,062 | | | 3.6 | % | | 1,859 | | | 3.6 | % | 203 | |
Total operating costs | | 54,217 | | | 93.7 | % | | 49,112 | | | 94.0 | % | 5,105 | |
Income from operations | | 3,635 | | | 6.3 | % | | 3,126 | | | 6.0 | % | 509 | |
Interest expense, net | | 1,080 | | | 1.9 | % | | 941 | | | 1.8 | % | 139 | |
Income before income taxes | | 2,555 | | | 4.4 | % | | 2,185 | | | 4.2 | % | 369 | |
Income tax expense | | 741 | | | 1.3 | % | | 634 | | | 1.2 | % | 107 | |
Net income | | $ | 1,814 | | | 3.1 | % | | $ | 1,551 | | | 3.0 | % | 263 | |
Net income per share - basic | | $ | 0.15 | | | | | $ | 0.13 | | | | $ | 0.02 | |
Net income per share - diluted | | $ | 0.13 | | | | | $ | 0.12 | | | | $ | 0.01 | |
|
| | | | | | | | | | | | |
| | Three Months Ended |
| | December 31, |
| | 2017 | | 2016 | | Change |
Revenue | | $ | 30,215 |
| | $ | 26,111 |
| | $ | 4,104 |
|
Direct expenses | | 23,683 |
| | 20,300 |
| | 3,383 |
|
Gross margin | | 6,532 |
| | 5,811 |
| | 721 |
|
General and administrative expenses | | 4,880 |
| | 4,721 |
| | 159 |
|
Depreciation and amortization | | 506 |
| | 201 |
| | 305 |
|
Income from operations | | 1,146 |
| | 889 |
| | 257 |
|
Interest expense, net | | 278 |
| | 364 |
| | 86 |
|
Income before income taxes | | 868 |
| | 525 |
| | 343 |
|
Income tax expense, net | | 3,719 |
| | 201 |
| | 3,518 |
|
Net income (loss) | | $ | (2,851 | ) | | $ | 324 |
| | (3,175 | ) |
Net income (loss) per share - basic | | $ | (0.24 | ) | | $ | 0.03 |
| | $ | (0.27 | ) |
Net income (loss) per share-diluted | | $ | (0.24 | ) | | $ | 0.03 |
| | $ | (0.27 | ) |
Revenue
Revenue for the three months ended December 31, 20172020 was $30.2$57.9 million, an increase of $4.1$5.6 million or 15.7%10.7% over the prior year period. The increase in revenue is due primarily to expansionthe inclusion of workload volumes on existing contracts.revenue from our acquisition of Irving Burton Associates, LLC ("IBA"), which generated $7.0 million of revenue, offset in part by reductions in organic revenue principally from reimbursement of travel expenses.
Direct ExpensesCost of Operations
Direct expensesContract costs primarily include the costs associated with providing services to our customers. These costs are generally comprisecomprised of direct labor (including benefits), taxes and insurance, workers compensation expense,associated fringe benefit costs, subcontract cost, and other direct costs. Direct expenses for the three months ended December 31, 2017 were $23.7 million, an increase of $3.4 million, or 16.7% over prior year due principally to increased professional service costs, attributed to increased revenue. As a percentage of revenue, direct expenses were 78.4%, compared with 77.7% the prior year period.
Gross Margin
Gross margin for the three months ended December 31, 2017 was approximately $6.5 million, an increase of $0.7 million, or 12.4%, over prior year period. As a percentage of revenue, our gross margin rate of 21.6% was 70 basis points lower than the prior year period, though within the expected 20-22% range for gross margins, based upon the current business.
General and Administrative Expenses
General and administrative (“G&A”) expenses primarily relate to functions such as operations overhead, corporate management, legal, finance, accounting, contracts administration, human resources, management information systems, and business development. G&A expenses for the three months ended December 31, 2017 were approximately $4.9 million, an increase of $0.2 million or 3.4% over the prior year period. As a percent of revenue, G&A expenses were 16.2%, an improvement of approximately 190 basis points over the prior year period, as the Company achieves additional scale on integration of its corporate functions.
Depreciation and Amortization
This category comprises depreciation on fixed assets and the amortization of definite-lived intangible assets. As a professional services organization, DLH does not require significant expenditures on capital equipmentrelated management and other fixed assets.infrastructure costs. For the three months ended December 31, 20172020, contract costs increased by approximately $4.7 million, principally due to the addition of IBA.
General and December 31, 2016, depreciationadministrative costs are for those employees not directly providing services to our customers, to include but not limited to executive management, bid and amortization were approximately $0.5 millionproposal, accounting, and human resources. These costs increased as compared to the prior fiscal year period by $0.2 million respectively. The December 31, 2016 value is netprimarily from the inclusion of an adjustment of depreciation expense associated withIBA, offset by reductions in travel, outside consultants, and other G&A costs as compared to the May, 2016 acquisition.prior fiscal year period.
Income from Operations
Income from operations forFor the three months ended December 31, 2017 was2020, depreciation and amortization costs were approximately $1.1$0.4 million anand $1.6 million, respectively, as compared to approximately $0.7 million and $1.2 million for the prior fiscal year period. The increase of approximately $0.3$0.2 million overwas principally due to the prior year period.amortization of the acquired definite-lived intangible assets of IBA.
Interest Expense, net
Interest expense, net, includes items such as interest expense on the Company’s term loan and amortization of deferred financing costs on debt obligations, for the three months ended December 31, 2017, interest expense, net, was approximately $0.3 million, a decrease of approximately $0.1 million over the prior year period.
Income before Income Taxes
obligations.
For the three months ended December 31, 2017, income before taxes2020 and 2019, interest expense was approximately $1.1 million and $0.9 million, anrespectively. The increase in interest expense was due to the borrowing required to finance the acquisition of approximately $0.3 million over the prior year period, due principally to increased gross margin derived from higher revenue.IBA.
Income Tax Expense
For the three months ended December 31, 2017,2020 and 2019, DLH recorded a $3.7$0.7 million and $0.6 million provision for tax expense, including $3.4 million related to the write-down of deferredrespectively. The effective tax assets resulting from the 2017 Tax Act enacted in December 2017.
Net Income (Loss)
Net income (loss)rate for the three months ended December 31, 20172020 and 2019 was approximately $(2.9) million, or $(0.24) per basic and diluted share, a decrease of approximately $3.2 million primarily due to the write down of deferred tax assets described above which offset the increase in revenues and related gross margins. On a Non-GAAP basis net income excluding the write down of deferred tax assets would have been $0.5 million or $0.04 per diluted share, compared to $0.3 million or $0.03 per diluted share in the prior year period.29%.
Non-GAAP Financial Measures
On a non-GAAP basis, Earnings Before Interest Tax Depreciation and Amortization (“EBITDA”) for the three months ended December 31, 2017 was approximately $1.7 million, an increase of approximately $0.6 million, or 51.6% over the prior three months ended. The increase is attributable principally to increased gross margin from higher revenue.
The Company uses Earnings Before Interest Tax Depreciation and Amortization ("EBITDA")EBITDA as a supplemental non-GAAP measure of our performance. DLH defines EBITDA as net income excluding (i) interest expense, (ii) provision for or benefit from income taxes, if any, and (iii)depreciation and amortization.
Beginning withOn a non-GAAP basis, Earnings Before Interest, Tax, Depreciation, and Amortization ("EBITDA") for the first quarterthree months ended December 31, 2020 was approximately $5.7 million. The increase of approximately $0.7 million from the same period in the prior fiscal year 2018, we have commenced reporting EBITDA rather than adjusted EBITDA, as a key non-GAAP financial measure of our business. We believe thatwas principally due to the growthcontribution of IBA and maturationeffective management of our business, this change will improve the transparency of our business performancegeneral and increase the comparability of our results with peers. Non-GAAP measures for prior periods have been recast to conform to this change in our reporting. It is important to note that our GAAP results and presentation of GAAP metrics do not change and this change has no effect on our business, nor how we manage our business.administrative expenses.
In addition, for the quarter ended December 31, 2017, we are also reporting for the first time our net income excluding the impact of the Tax Cut and Jobs Act of 2017 on the valuation of our deferred tax assets. On December 22, 2017, the Tax Cut and Jobs Act was enacted, which, among other things, reduced corporate tax rates and revised rules regarding the usability of net operating losses. These changes have resulted in a tax provision of $3.4 million associated with revaluing the benefit of our net operating losses. We are reporting this non-GAAP metric beginning with this quarter since applicable guidance requires that the Company's deferred tax assets must be revalued immediately.
These non-GAAP measures of our performance are used by management to conduct and evaluate its business during its regular review of operating results for the periods presented. Management and the Company'sour Board utilize these non-GAAP measures to make decisions about the use of the Company'sour resources, analyze performance between periods, develop internal projections and measure managementsmanagement's performance. DLH believesWe believe that these non-GAAP measures are useful to investors in evaluating the Company'sour ongoing operating and financial results and understanding how such results compare with the Company'sour historical performance. By providing this non-GAAP measure as a supplement to GAAP information, DLH believeswe believe this enhances investors understanding of itsour business and results of operations.operations.
Reconciliation of GAAP net income to EBITDA, a non-GAAP measure:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | (in thousands) | | | | | | |
| | Three Months Ended | | | | |
| | December 31, | | | | |
| | 2020 | | 2019 | | Change | | | | | | |
Net income | | $ | 1,814 | | | $ | 1,551 | | | $ | 263 | | | | | | | |
(i) Interest expense, net | | 1,080 | | | 941 | | | 139 | | | | | | | |
(ii) Provision for taxes | | 741 | | | 634 | | | 107 | | | | | | | |
(iii) Depreciation and amortization | | 2,062 | | | 1,859 | | | 203 | | | | | | | |
EBITDA | | $ | 5,697 | | | $ | 4,985 | | | $ | 712 | | | | | | | |
| | | | | | | | | | | | |
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| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
|
| | | | | | | | | | | | |
| | Three Months Ended |
| | December 31, |
| | 2017 | | 2016 | | Change |
Net income (loss) | | $ | (2,851 | ) | | $ | 324 |
| | $ | (3,175 | ) |
(i) Interest expense | | 278 |
| | 364 |
| | (86 | ) |
(ii) Provision for taxes | | 3,719 |
| | 201 |
| | 3,518 |
|
(iii) Depreciation, amortization, and loss on fixed assets | | 506 |
| | 201 |
| | 305 |
|
EBITDA | | $ | 1,652 |
| | $ | 1,090 |
| | $ | 562 |
|
Reconciliation of GAAP net income to net income excluding the effect of write-down, a non-GAAP measure:Liquidity and capital management
|
| | | | | | | | | | | | |
| | Three Months Ended |
| | December 31, |
| | 2017 | | 2016 | | Change |
Net income (loss) | | $ | (2,851 | ) | | $ | 324 |
| | $ | (3,175 | ) |
Write-down of deferred tax assets | | 3,365 |
| | | | 3,365 |
|
Net income, excluding effect of write-down of deferred tax assets | | $ | 514 |
| | $ | 324 |
| | $ | 190 |
|
| | | | | | |
Net income (loss) per fully-diluted share | | $ | (0.24 | ) | | 0.03 |
| | $ | (0.27 | ) |
Write-down of deferred tax assets | | 0.28 |
| | | | 0.28 |
|
Net income (loss) per fully-diluted share, excluding effect of write-down of deferred tax assets | | $ | 0.04 |
| | $ | 0.03 |
| | $ | 0.01 |
|
Sources of cash and cash equivalents
As of December 31, 2017,2020, the Company's immediate sources of liquidity include cash and cash equivalents,generated from operations, accounts receivable, and access to its secured revolving line of credit facility with Fifth Third Bank.facility. This credit facility provides us with access of up to $10.0$25 million, subject to certain conditions including eligible accounts receivable. As of December 31, 2020, we have $25.0 million of available borrowing capacity on the revolving line of credit and a balance outstanding of $9.2 million.
The Company's present operating liabilities are largely predictable and consist of vendor and payroll related obligations. Our current investment and financing obligations are adequately covered by cash generated from profitable operations.
Management's assessment of cashoperations and cash equivalents at December 31, 2017
Management believes that: (a) cash and cash equivalents of approximately $3.2 million as of December 31, 2017; (b) the amount available under its line of credit that was in effect at December 31, 2017 (which is limited to the amount of eligible assets); and (c) planned operating cash flow should be sufficient to support the Company's operations for twelve months from issuance of these consolidated financial statements.
LoanA summary of the change in cash and cash equivalents is presented below:
| | | | | | | | | | | | | | | |
| | | (in thousands) |
| | | Three Months Ended |
| | | December 31, |
| | | 2020 | | 2019 |
Net cash used in operating activities | | | $ | (8,518) | | | $ | (2,884) | |
Net cash used in investing activities | | | (53) | | | (162) | |
Net cash provided by financing activities | | | 7,584 | | | 1,618 | |
Net change in cash and cash equivalents | | | $ | (987) | | | $ | (1,428) | |
For the three months ended December 31, 2020, the Company used $8.5 million in cash flows from operations. The reduction of operating cash was primarily due to the impact from the continuing resolution for the fiscal 2021 federal budget and transitions in key contract payment offices. The Company believes that these impacts are short-term in nature.
Cash used in investing activities during the three months ended December 31, 2020 was $0.1 million, mainly for the purchase of capital assets.
Cash provided by financing activities was $7.6 million during the three months ended December 31, 2020. We made net repayments under our credit facility of $1.8 million during the three months ended December 31, 2020. We intend to resume using cash to make debt prepayments in future quarters subject to available cash.
Sources of cash and cash equivalents
As of December 31, 2020, our immediate sources of liquidity include cash and cash equivalents of approximately $0.4 million, accounts receivable, and access to our secured revolving line of credit facility. This credit facility provides us with access of up to $25.0 million, subject to certain conditions including eligible accounts receivable. As of December 31, 2020, we had unused borrowing capacity of $13.9 million. The Company's present operating liabilities are largely predictable and consist of vendor and payroll related obligations. We believe that our current investment and financing obligations are adequately covered by
cash generated from profitable operations and that planned operating cash flow should be sufficient to support our operations for twelve months from the date of issuance of these consolidated financial statements.
Credit Facility
A summary of our secured loan facilities and subordinated debt financingfacility for the period ended December 31, 20172020 is as follows:
| | | | | | | | | | | | | | | | | | | | | | |
| | |
| | |
| | Arrangement | | Loan Balance | | Interest* | | Maturity Date |
| | Secured term loan $70 million (a) | | $ | 68.3 | million | | LIBOR* + 3.5% | | September 30, 2025 |
| | Secured revolving line of credit $25 million ceiling (b) | | $ | 9.2 | million | | LIBOR* + 3.5% | | September 30, 2025 |
|
| | | | | | | | | | |
| | ($ in Millions) |
| | |
Lender | | Arrangement | | Loan Balance | | Interest* | | Maturity Date |
Fifth Third Bank | | Secured term loan $25 million ceiling (a) | | $ | 18.8 |
| | LIBOR + 3.0% | | 05/01/21 |
Fifth Third Bank | | Secured revolving line of credit $10 million ceiling (b) | | $ | — |
| | LIBOR + 3.0% | | 05/01/18 |
*InterestLIBOR rate as of December 31, 20172020 was 1.69%0.15%. The credit facility has an interest rate spread range from 2.5% to 4.5% depending on the funded indebtedness to adjusted EBITDA ratio.
(a) a securedRepresents the principal amounts payable on our term loan, which is secured by liens on substantially all of the assets of the Company. The principal of the term loan is payable in quarterly installments with an original aggregate principalthe remaining balance due on September 30, 2025.
On September 30, 2019, we executed a floating-to-fixed interest rate swap with First National Bank ("FNB") as counter party. The notional amount in the floating-to-fixed interest rate swap for the current fiscal year is $28.8 million and matures in 2024. The notional amount was $36 million in the prior fiscal year. The remaining outstanding balance of our term loan is subject to interest rate fluctuations.
(b) The secured revolving line of credit has a ceiling of up to $25.0 million (the “Term Loan”).
(b)and a securedmaturity date of September 30, 2025. The Company has accessed funds from the revolving credit facility in an aggregate principal amountduring the quarter and had a balance outstanding at December 31, 2020 of up to $10.0 million (the “Revolving Credit Facility”) and$9.2 million.
The Term Loan matures on May 1, 2021 and the Revolving Credit Facility matures on May 1, 2018.
The Term Loan and Revolving Credit Facility bear interest at the rate of LIBOR plus a margin of 3.0% and the loans are secured by liens on substantially all of the assets of the Company. The provisions of the Term Loan and Revolving Credit Facility are fully described in Note 6 of8 to the consolidated financial statements.
Contractual Obligations as of December 31, 20172020
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Payments Due by Period |
| | | | Next 12 | | 2-3 | | 4-5 | | More than 5 |
(Amounts in thousands) | | Total | | Months | | Years | | Years | | Years |
Debt obligations | | $ | 77,400 | | | $ | 16,150 | | | $ | 16,187 | | | $ | 45,063 | | | $ | — | |
Facility leases | | 30,077 | | | 3,298 | | | 6,629 | | | 6,253 | | | 13,897 | |
Equipment operating leases | | 280 | | | 83 | | | 166 | | | 31 | | | — | |
Total Contractual Obligations | | $ | 107,757 | | | $ | 19,531 | | | $ | 22,982 | | | $ | 51,347 | | | $ | 13,897 | |
|
| | | | | | | | | | | | | | | | | | | | |
| | | | Payments Due by Period |
Contractual obligations | | | | Next 12 | | 2-3 | | 4-5 | | More than 5 |
(Amounts in thousands) | Ref | Total | | Months | | Years | | Years | | Years |
Debt Obligations | | $ | 18,750 |
| | $ | 6,667 |
| | $ | 7,500 |
| | $ | 4,583 |
| | — |
|
Facility Leases | | 3,450 |
| | 911 |
| | 1,423 |
| | 656 |
| | 460 |
|
Equipment operating leases | | 67 |
| | 35 |
| | 32 |
| | — |
| | — |
|
Total Obligations | | $ | 22,267 |
| | $ | 7,613 |
| | $ | 8,955 |
| | $ | 5,239 |
| | $ | 460 |
|
Off-Balance Sheet Arrangements
The Company did not have any material off-balance sheet arrangements subsequent to, or upon the filing of our consolidated financial statements in our Annual Report as defined under SEC rules.
Effects of Inflation
Inflation and changing prices have not had a material effectimpact on DLH’sthe Company’s net revenues, and results of operations, and cash flows as DLH expects to beinflation has generally been limited. However, the Company has been able to modify its prices and cost structure to respond to inflation and changing prices.prices as needed and expects to be able to do so in future periods.
Critical Accounting Policies and Estimates
Use of Estimates
Our consolidatedThe preparation of financial statements and accompanying notes are prepared in accordanceconformity with accounting principles generally accepted in the United States of America. Preparation of our financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities revenues, expenses, and the related disclosure of contingent liabilities. These assumptions, estimatesassets and judgments are based on historical experience and assumptions that are believed to be reasonableliabilities at the time.date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates include valuation of goodwill and intangible assets, interest rate swaps, stock-based compensation, right-of-use assets and lease liabilities, valuation allowances established against deferred tax assets, and measurement of loss development on workers' compensation claims. In addition, the Company estimates overhead charges and allocates such charges throughout the year. Actual results could differ from suchthose estimates. Critical policies and practices are important toIn particular, a material reduction in the portrayalfair value of goodwill would have a company’smaterial adverse effect on the Company’s financial conditionposition and results of operations,operations. For a detailed discussion on the application of these and may require management’s subjective judgments about the effects of matters that are uncertain. See the information under Note 7 "Significant Accounting Policies" to the consolidated financial statements in DLH’s Annual Report on Form 10-K for the year ended September 30, 2017, as well asother accounting policies, you should review the discussion under the caption “CriticalSignificant Accounting Policies in Note 4 of the notes to our Consolidated Financial Statements contained elsewhere in this report on Form 10-Q.
Revenue Recognition
We recognize revenue over time when there is a continuous transfer of control to our customer. For our U.S. government contracts, this continuous transfer of control to the customer is supported by clauses in the contract that allow the U.S. government to unilaterally terminate the contract for convenience, pay us for costs incurred plus a reasonable profit and Estimates” beginningtake control of any work in process. When control is transferred over time, revenue is recognized based on page 25 thereinthe extent of progress towards completion of the performance obligation. For services contracts, we satisfy our performance obligations as services are rendered. We use a cost-based input method to measure progress.
For time-and-materials contracts, revenue is recognized to the extent of billable rates times hours delivered plus materials and other reimbursable costs incurred. Revenue for cost-reimbursable contracts is recorded as reimbursable costs are incurred, including an estimated share of the applicable contractual fees earned. Contract costs are expensed as incurred. Estimated losses are recognized when identified.
Refer to Note 5 of the accompanying notes to our Consolidated Financial Statements contained elsewhere in this report.
Long-Lived Assets
Our long-lived assets include equipment and improvements, right-of-use assets, intangible assets, and goodwill. The Company continues to review its long-lived assets for possible impairment or loss of value at least annually or more frequently upon the occurrence of an event or when circumstances indicate that a discussionreporting unit’s carrying amount is greater than its fair value.
Equipment and improvements are stated at cost. Depreciation and amortization are provided using the straight-line method over the estimated useful asset lives (3 to 7 years) and the shorter of our critical accounting policiesthe initial lease term or estimated useful life for leasehold improvements.
Costs incurred to place the asset in service are capitalized and estimates. DLH senior managementcosts incurred after implementation are expensed. Amortization expense is recorded when the software is placed in service on a straight-line basis over the estimated useful life of the software.
Right-of-use assets are measured at the present value of future minimum lease payments, including all probable renewals, plus lease payments made to the lessor before or at lease commencement and indirect costs, less incentives received. Our right-of-use assets include long-term leases for facilities and equipment and are amortized over their respective lease terms.
Intangible assets are originally recorded at fair value and amortized on a straight-line basis over their assessed useful lives. The assessed useful lives of the assets are 10 years.
Goodwill
The Company continues to review its goodwill for possible impairment or loss of value at least annually or more frequently upon the occurrence of an event or when circumstances indicate that a reporting unit’s carrying amount is greater than its fair value. Based on the results of the work performed, the Company has reviewed these critical accounting policies and relatedconcluded that no impairment loss was warranted, as no change in business conditions occurred which would have a material adverse effect on the valuation of goodwill.
disclosures and determined that there were no significantOur assessment incorporated effects of the COVID-19 pandemic, which did not have a meaningful impact on our financial results. Notwithstanding this evaluation, factors including non-renewal of a major contract or other substantial changes in our critical accounting policies, orbusiness conditions could have a material adverse effect on the estimates associated with those policiesvaluation of goodwill in future periods and the three months ended December 31, 2017,resulting charge could be material to future periods’ results of operations.
Income Taxes
The Company accounts for income taxes in accordance with the exception of the change inliability method, whereby deferred tax assets and liabilities are determined based uponon the change in projecteddifference between the financial statement and tax bases of assets and liabilities, using enacted tax rates disclosed in Note 13, Income Taxes.effect for the year in which the differences are expected to reverse. Deferred tax assets are reflected on the consolidated balance sheet when it is determined that it is more likely than not that the asset will be realized. This guidance also requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some or all of the deferred tax asset will not be realized. The Company believes it has adequate sources of taxable income to fully utilize its net operating loss carryforwards before their expiration. The Company recorded no valuation allowance.
Stock-based Equity Compensation
The Company uses the fair value-based method for stock-based equity compensation. Options issued are designated as either an incentive stock or a non-statutory stock option. No option may be granted with a term of more than 10 years from the date of grant. Option awards may depend on achievement of certain performance measures determined by the Compensation Committee of our Board. Shares issued upon option exercise are newly issued common shares. All awards to employees and non-employees are recorded at fair value on the date of the grant and expensed over the period of vesting. The Company uses a Monte Carlo binomial and Black Scholes option pricing models to estimate the fair value of each stock option at the date of grant. Any consideration paid by the option holders to purchase shares is credited to capital stock.
New Accounting Pronouncements
A discussion of recently issued accounting pronouncements is described in Note 4 in3 of the Notesaccompanying notes to our Consolidated Financial Statements contained elsewhere in this Quarterly Report,report, and we incorporate such discussion by reference.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
DLH doesExcept as described elsewhere in this report, the Company has not undertakeengaged in trading practices in securities or other financial instruments and therefore does not have any material exposure to interest rate risk, foreign currency exchange rate risk, commodity price risk or other similar risks, which might otherwise result from such practices. DLHThe Company has limited foreign operations and therefore is not materially subject to fluctuations in foreign exchange rates, commodity prices or other market rates or prices from market sensitive instruments. DLH believes it does not haveOn September 30, 2019, we executed a materialfloating-to-fixed interest rate riskswap with respect toFNB as counter party. The notional amount in the floating-to-fixed interest rate swap is $28.8 million for the current fiscal year and was $36 million in the prior fiscal year; the remaining outstanding balance of our prior workers’ compensation programs, for which funds were deposited into trust for possible future payments of claims. DLH does not believe the level of exposureterm loan is subject to interest rate fluctuations on its debt instruments is material givenfluctuations. We have determined that a 1.0% increase to the amount ofLIBOR rate would impact our debt is subject to LIBOR plus 3.0% appliedinterest expense by the Lender.less than $0.4 million per year. As of December 31, 20172020, the Lender's interest rate on the floating interest rate debt was 4.69%3.65%.
ITEM 4: CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our CEO and President and Chief Financial Officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) or 15d-15(e) under the Exchange Act) as of the end of the period covered by this report, hashave concluded that, based on the evaluation of these controls and procedures, our disclosure controls and procedures were effective at the reasonable assurance level to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our CEO and President and Chief Financial Officer, to allow timely decisions regarding required disclosure.
Our management, including our CEO and President and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be
considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been detected. Our management, however, believes our disclosure controls and procedures are in fact effective to provide reasonable assurance that the objectives of the control system are met.
Changes in Internal Controls
There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) identified in connection with the evaluation of our internal control that occurred during ourthe fiscal quarter ended
December 31, 20172020, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Part II — OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
As a commercial enterprise and employer, the Company is subject to various claims and legal actions in the ordinary course of business. These matters can include professional liability, employment-relations issues, workers’ compensation, tax, payroll and employee-related matters, other commercial disputes arising in the course of its business, and inquiries and investigations by governmental agencies regarding our employment practices or other matters. The Company is not aware of any pending or threatened litigation that it believes is reasonably likely to have a material adverse effect on its results of operations, financial position or cash flows.
ITEM 1A: RISK FACTORS
Our operating results and financial condition have varied in the past and may in the future vary significantly depending on a number of factors. In addition to the other information set forth in this report, you should carefully consider the factors discussed in the “Risk Factors” section in our Annual Report on Form 10-K for the year ended September 30, 20172020 and in our other reports filed with the SEC for a discussion ofconcerning the risks associated with our business, financial condition and results of operations. These factors, among others, could have a material adverse effect uponmaterially and adversely affect our business, results of operations, financial condition or liquidity and cause our actual results to differ materially from those contained in statements made in this report and presented elsewhere by management from time to time. The risks we have identified by DLH in itsour reports are not the only risks facing us.For example, these risks now include the impacts from the novel coronavirus (“COVID-19”) outbreak on our business, financial condition and results of operations. Additional risks and uncertainties not currently known to us or that we currently believe are immaterial may also may materially adversely affect our business, results of operations, financial condition or liquidity. We believe there have been no material changes in our risk factors from those disclosedSee Item 1A, Risk Factors, in our Annual Report on Form 10-K for the fiscal year ended September 30, 2017.2020. Other than as described in this report, we believe that there have been no material changes from the risk factors described in our Annual Report on Form 10-K for the fiscal year ended September 30, 2020.
ITEM 2: UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
During the period covered by this report, the Company did not issue any securities that were not registered under the Securities Act of 1933, as amended, except as has been reported in previous filings with the SEC or as set forth elsewhere herein.
Registrant Repurchases of Securities
On September 18, 2013, the Company announced that our Board of Directors authorized a stock repurchase program (the Program) under which we could repurchase up to $350 thousand of shares of our common stock through open market transactions in compliance with Securities and Exchange Commission Rule 10b-18, privately negotiated transactions, or other means. This repurchase program does not have an expiration date.
The following table provides certain information with respect to the status of our publicly announced stock repurchase program during first quarter ended December 31, 2017: |
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| | | | | | | | ($ in thousands) |
Period | | Total Number of Shares Purchased | | Average Price Paid Per Share | | Total Number of Shares Purchased As Part of Publicly Announced Programs | | Dollar Value of Shares that May Yet Be Purchased Under the Plan or Program |
October 2017 | | — |
| | $ | — |
| | — |
| | $ | 77 |
|
November 2017 | | — |
| | — |
| | — |
| | 77 |
|
December 2017 | | — |
| | — |
| | — |
| | 77 |
|
First Quarter Total | | — |
| | $ | — |
| | — |
| | $ | 77 |
|
ITEM 3: DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4: MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5: OTHER INFORMATION
None.
ITEM 6: EXHIBITS
Exhibits to this report which have previously been filed with the Commission are incorporated by reference to the document referenced in the following table. The exhibits designated with a number sign (#) indicate a management contract or compensation plan or arrangement. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Exhibit | | | | Incorporated by Reference | | Filed |
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101 | | The following financial information from the DLH Holdings Corp. Quarterly Report on Form 10-Q for the fiscal quarter ended December 31, 2017,2020, formatted in XBRL (eXtensibleiXBRL (Inline eXtensible Business Reporting Language) and filed electronically herewith: (i) the Consolidated Balance Sheets; (ii) the Consolidated Statements of Operations; (iii) the Consolidated Statements of Cash Flows; and, (iv) the Notes to the Consolidated Financial Statements. | | | | | | | | X |
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Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
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| | DLH HOLDINGS CORP. |
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| | DLH HOLDINGS CORP. | |
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| | By: | /s/ Zachary C. Parker |
| | By: | Zachary C. Parker |
| | | Chief Executive Officer |
| | | (Principal Executive Officer) |
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| | By: | /s/ Kathryn M. JohnBull |
| | | Kathryn M. JohnBull |
| | | Chief Financial Officer |
| | | (On behalf of the registrant and as Principal Financial and Accounting Officer) |
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Date: February 13, 20182, 2021 | | | |