UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549 

FORM 10-Q

 

ý     QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 

 

o        TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 

 

 

 

 

 

(Amounts in thousands except per share amounts)

 

 

(Amounts in thousands except par value of shares) 

 

The accompanying notes are an integral part of these consolidated financial statements.

(Amounts in thousands) 

The accompanying notes are an integral part of these consolidated financial statements.

 

1. Basis of Presentation 

The accompanying unaudited consolidated financial statements include the accounts of DLH and its subsidiaries, 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 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") for complete financial statements. In the 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, 2017June 30, 2018 are not necessarily indicative of the results that may be expected for the year ending September 30, 2018. Amounts as of and for the periods ended December 31,June 30, 2018 and June 30, 2017 and December 31, 2016 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, 2017 filed with the Securities and Exchange Commission on December 9, 2017.2017, as well as interim quarterly filings thereafter.

2. Restatement of Previously Issued Financial Statements

Presently, the Company derives 100% of its revenue from agencies of the federal 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 largest customer continues to be the VA, which comprised approximately 66%64% and 61%58% of revenue for the threenine months ended December 31,June 30, 2018 and 2017, and 2016, respectively. Additionally, HHS, represents a major customer, comprisingwhich comprised approximately 34% and 32% of revenue for the threenine months ended December 31,June 30, 2018 and 2017, respectively, represents a major customer. Our current contracts are within the following markets: Defense/VA (65%), Human Services and 29% for the three months ended December 31, 2016.Solutions (32%) and Public Health/Life Sciences (3%); of which 97% of these contracts have been awarded on a Time and Materials basis, 2% are Cost plus Fixed Fee contracts and 1% are Firm Fixed Price contracts. In addition, substantially all accounts receivable, including unbilled accounts receivable, are from agencies of the U.S. Government as of December 31, 2017June 30, 2018 and September 30, 2017. We generally operate as a prime contractor, but have also entered into contracts as a subcontractor. The Company's current business base is 99% prime contracts and 1% subcontracts. We believe that the credit risk associated with our receivables is limited due to the creditworthiness of these customers. See Note 5,4, Supporting Financial Information-Accounts Receivable.

As of December 31, 2017,June 30, 2018, awards from VA and HHS have anticipated periods of performance ranging from approximately onefour months 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 terms of the contracts.

The VA comprised approximately 64% and 58% of revenue for the nine months ended June 30, 2018 and 2017, which was derived from 16 separate contracts. Approximately 55% of the Company's current business base with the VA is derived from nine contracts which are currently operating under extensions through October 31, 2018. We expect further extensions until the procurement is completed. A single renewal request for proposal ("RFP") has currently been issued for these contracts that requires the prime contractor be a service-disabled veteran owned small business (SDVOSB), which precludes the Company from bidding on the RFP as a prime contractor. The Company has teamed to respond to this RFP. Should the contract term. be awarded to an SDVOSB partner of DLH, the Company expects to continue to perform a significant amount of the contract's volume of business.

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.HHS, or if the amount of services we provide to them was

 

InBeginning in May 2014, the Financial Accounting Standards Board ("FASB") issued amended guidance for revenue recognition. Subsequently, the FASB issued an amendment to defer for one year the effective date of the new guidance on revenue recognition, as well as issued additional clarifying amendments. The new guidance outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods 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. The new guidance supersedes most current revenue recognition guidance, including industry-specific guidance, and is effective for annual periods (including interim periods therein) beginning after December 15, 2017. The guidance allows either a full retrospective or modified retrospective transition method. The Company is evaluating the effects of this guidance. The Company will adopt the new guidance beginning October 1, 2018. Given our current contract mix, where performance obligations are predominantly billed on a time and materials basis as rendered, we do not anticipate any material impact to our revenue recognition methodology or timing as a result of this new guidance.

In February 2016, the FASB issued new accounting guidance related to leases. This update, effective for the Company 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 11,9, the Company currently has approximately $3.5$3.0 million of lease obligations as of June 30, 2018 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. The Company has elected to adopt the provisions of this ASU as of December 31, 2017.

Accounts receivable

Other current assets

Equipment and improvements, net

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 was $0.4 million and $0.4 million for the periodthree months ended December 31,June 30, 2018 and 2017, was $0.4 million.respectively, and $1.3 million and $1.0 million for the nine months ended June 30, 2018 and 2017, respectively.

Accounts payable, accrued expenses and other current liabilities

Debt obligations

Interest expense

Ref (a): Interest expense on borrowing

Ref (b): Amortizations of expenses related to securing financing

A summary of our loan facilities and subordinated debt financing as of December 31, 2017June 30, 2018 is as follows:

(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:

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).2018. DLH does not expect to make any future excess cash flow payments.

(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,June 30, 2018, was $10.0 million. This capacity was comprised of $0.6$1.3 million in a stand-by letter of credit and unused borrowing capacity of $9.4$8.7 million.

The revolving line of credit has a maturity date of May 1, 2021 and is subject to loan covenants as described above in the Term Loan, andLoan. DLH is fully compliant with those covenants.

 

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, 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.

 

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.

 

The carrying amounts of the Company's cash and cash equivalents, accounts receivable, unbilled revenues,receivables, 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 approximate fair value because the underlying interest rates approximate market rates that the Company could obtain for similar instruments at the balance sheet dates.

DLH continues to review its goodwill and other intangible 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’s carrying amount is greater than its fair value.

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. Maintenance and repair costs are expensed as incurred.

Income Taxes

DLH 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 no uncertain tax positions at either December 31, 2017June 30, 2018 or September 30, 2017. We report interest and penalties as a component of income tax expense. In the fiscal quartersthree and nine months ended December 31, 2017June 30, 2018 and SeptemberJune 30, 2017, we recognized no interest and no penalties related to income taxes.

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 simulation option pricing model 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.

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) per 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.

7. Stock-based Compensation, Equity Grants, and Warrants

 

Options issued under equity incentive plans were designated as either an incentive stock or a non-statutory stock option. No option was 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,June 30, 2018, there were 0.21.7 million shares available for grant.

Stock-based compensation expense, shown in the table below, is recorded in general and administrative expenses included in our statement of operations:

Ref (a): Equity grants of restricted stock, in accordance with DLH compensation policy for non-employee directors.

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’s common stock achieving and maintaining defined market prices, the Company values the awards with a 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 the weighted average expense of these shares will be 5953 months.

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.

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.

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 granted during the current fiscal year as follows using the Monte Carlo Method.

Ref (a): Certain awards vest upon satisfaction of certain performance criteria.

 

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

11.9. Commitments and Contingencies

 

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, 2017June 30, 2018 and September 30, 2017 was $2.06$2.18 million and $1.60 million, respectively.

 

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.

12.10. Related Party Transactions.

The Company has determined that for the quarterthree and nine months ended December 31,June 30, 2018 and 2017 there were no significant related party transactions that have occurred which require disclosure through the date that these financial statements were issued.

13.11. 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 lossincome for the quarternine months ended December 31, 2017June 30, 2018 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. As of June 30, 2018, the Company is reporting a $4.9 million deferred tax asset, which is presented on the balance sheet as deferred taxes in the long-term assets section.

 

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, 2017.2017, 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. Those risks and uncertainties include, but are not limited to, the following: failure to achieve contract awards in connection with re-competes for present business and/or competition for new business; the risks and uncertainties associated with client interest in and purchases of new services; 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 our recent and any 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, 2017, 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:

DLH is a provider of technology-enabled business process outsourcing and program management solutions, primarily to improve and better deploy large-scale federal health and human service initiatives. DLH derives 100% 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").

Our business offerings are now focused on three primary sources of revenue within the Federal health services market space, as follows:

Our services include advancing the technology readiness level of new development items, which is a critical priority 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-aligned with the VA strategic goals to manage and improve operations and to deliver seamless and integrated support. Our unique capabilities and solutions help the VA optimize efficiency and help ensure program accountability as well as better service.

Forward Looking Business Trends:

DLH's mission is to expand our position as a trusted provider of technology-enabled healthcare and public health services, medical logistics, and readiness enhancement services to active duty personnel, veterans, and civilian populations and communities. Our primary focus within 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 within 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.

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.

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, and we are actively pursuing growth opportunities within this vital agency.

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.

Large government contractors have been divesting from the Federal services market to increase their focus on advanced military products, which typically generate higher margins than services. This trend may open up increased opportunities for smaller Federal service providers such as DLH.

Industry consolidation among federal government contractors:

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 to small business contractors, primarily through the use of set-asides in Federal agency RFPs (requests for proposal). As previously reported, various agencies within the federal government have polices that support small business goals, including the adoption of the "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 small businesses. To restrict competition pursuant to this rule, the contacting 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 partfair 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 VA comprised approximately 64% and 58% of revenue for the nine months ended June 30, 2018 and 2017, which was derived from 16 separate contracts. Approximately 55% of the Company's current business base with the VA is derived from nine contracts which are currently operating under extensions through October 31, 2018. We expect further extensions until the procurement is completed. A single renewal request for proposal ("RFP") has currently been issued for these contracts that

While the effect of set-aside provisions may limit our ability to compete for prime contractor positions on programs that we recompete or that we have targeted for growth, plan, DLH may elect to team in support of such small businesses for specific pursuits that align with our core markets and corporate growth strategy.

 

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:

Revenue

 

Revenue for the three months ended December 31, 2017June 30, 2018 was $30.2$36.1 million, an increase of $4.1$6.9 million or 15.7%23.5% over prior year period. The increase in revenue is due primarily to expansion of workload volumes on existingour VA and HHS contracts.

 

Direct Expenses

 

Direct expenses generally comprise of direct labor (including benefits), taxes and insurance, workers compensation expense, subcontract cost, and other direct costs. Direct expenses for the three months ended December 31, 2017June 30, 2018 were $23.7$27.8 million, an increase of $3.4$4.9 million, or 16.7%21.5% over prior year due principally to increased professional service costs attributed to increased revenue. As a percentage of revenue, direct expenses were 78.4%76.9%, compared with 77.7%78.2% the prior year period.

  

Gross Margin

 

Gross margin for the three months ended December 31, 2017June 30, 2018 was approximately $6.5$8.3 million, an increase of $0.7$2.0 million, or 12.4%30.6%, over prior year period. As a percentage of revenue, our gross margin rate of 21.6% was 70 basis points lower thanperiod, largely driven by the prior year period, though within the expected 20-22% range for gross margins, based upon the current business.increase in revenue.

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, 2017June 30, 2018 were approximately $4.9$5.1 million, an increase of $0.2$1.0 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 points24.6% over the prior year period as the Company achieves additional scaledue principally to increased spending on integration of its corporate functions.business development.

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 equipment and other fixed assets. For the three months ended December 31,June 30, 2018 and June 30, 2017, and December 31, 2016, depreciation and amortization were approximately $0.6 million and $0.5 million, and $0.2 million, respectively. The December 31, 2016 value is net of an adjustment of depreciation expense associated with the May, 2016 acquisition.

Income from Operations

 

Income from operations for the three months ended December 31, 2017June 30, 2018 was approximately $1.1$2.6 million, an increase of approximately $0.3$0.9 million over the prior year period.

 

Interest Expense, net

 

Interest expense, net, includes interest expense on the Company’sCompany's term loan and amortization of deferred financing costs on debt obligations, for the three months ended December 31,June 30, 2018 and 2017, interest expense, net was approximately $0.3 million a decrease of approximately $0.1and $0.3 million, over the prior year period.respectively.

Income Tax Expense

For the three months ended December 31,June 30, 2018 and 2017, DLH recorded a $3.7$0.7 million and $0.5 million provision for tax expense, including $3.4 million relatedrespectively. The effective tax rates were 31.4% and 36.3% for the three months ended June 30, 2018 and 2017, respectively, due to the write-downprorated impact of deferredthe tax assets resultingrate reduction from the 2017 Tax Act enacted in December 2017.

Net Income (Loss)

Net income (loss) for the three months ended December 31, 2017June 30, 2018 was approximately $(2.9)$1.6 million, or $(0.24)$0.14 per basic and $0.13 per diluted share, an increase of approximately $0.7 million primarily due to increased gross margin derived from higher revenue offset in part by increased G&A expenses.

Net income for the nine months ended June 30, 2018 was approximately $0.1 million, or $0.01 and $0.01 per basic and diluted share, respectively, a decrease of approximately $3.2$2.2 million or $0.19 and $0.17 per basic and diluted share over the prior year period. The decrease was primarily due to the write downwrite-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.

On a non-GAAP basis, Earnings Before Interest Tax Depreciation and Amortization (“EBITDA”("EBITDA") for the three months ended December 31, 2017June 30, 2018 was approximately $1.7$3.2 million, an increase of approximately $0.6$0.9 million, or 51.6%41.5% over the prior year three months ended. The increase is attributable principally to increased gross margin from higher revenue.

On a non-GAAP basis, EBITDA for the nine months ended June 30, 2018 was approximately $7.6 million, an increase of approximately $1.9 million, or 32.6% over the prior year nine months ended. The increase is attributable principally to increased gross margin from higher revenue.

Reconciliation of GAAP net income to net income excluding the effect of write-down,the 2017 Tax Act, a non-GAAP measure: