NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2020
1. Basis of Presentation
The accompanying 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. GAAP for complete financial statements. Certain figures presented for comparative purposes have been reclassified to conform to the presentation adopted on Form 10-K for the year ended September 30, 2019. The Company implemented this reclassification as it determined that including these indirect overhead costs within the category of “contract costs” rather than “general and administrative expenses” better reflects the relationship of these overhead costs to contract performance, as these costs are generally variable based on fluctuations in business volume. This reclassification does not result in any changes to the Company’s total operating costs and previously reported operating income, income before income taxes, or net income.
In management's opinion, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the period ended June 30, 2020 are not necessarily indicative of the results that may be expected for the year ending September 30, 2020. Amounts as of and for the periods ended June 30, 2020 and June 30, 2019 are unaudited. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended September 30, 2019 filed with the Securities and Exchange Commission on December 11, 2019.
2. Business Overview
The Company is a full-service provider of technology-enabled health and human services, providing solutions to three market focus areas: Defense and Veterans' Health Solutions, Human Solutions and Services and Public Health and Life Sciences. We deliver domain-specific expertise, industry best-practices and innovations to customers across these markets leveraging seven core competencies: secure data analytics, clinical trials and laboratory services, case management, performance evaluation, system modernization, operational logistics and readiness, and strategic digital communications. The Company manages its operations from its principal executive offices in Atlanta, Georgia, and we have a complementary headquarters office in Silver Spring, Maryland. We employ over 2,000 skilled employees working in more than 30 locations throughout the United States and one location overseas.
At present, the Company derives essentially all 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 two largest customers are the Department of Veteran Affairs ("VA") and the Department of Health and Human Services ("HHS"). The VA comprised approximately 47% and 65% of revenue for the nine months ended June 30, 2020 and 2019, respectively, and HHS comprised approximately 46% and 33% of revenue for the nine months ended June 30, 2020 and 2019, respectively.
3. New Accounting Pronouncements
In February 2016, the FASB issued an Accounting Standard Update ("ASU") 2016-02, Leases (Topic 842), to improve financial reporting about leasing transactions. This accounting standard requires organizations that lease assets, referred to as "Lessees", to recognize on the balance sheet right-of-use assets and lease liabilities. Per the ASU, we determine if a contract contains a lease by identifying an asset and determining if we have the right to control the use of the identified asset for a period of time in exchange for consideration. A contract conveys the right to control the use of an identified asset when the lessee has the right to direct the use of the identified asset and obtain substantially all economic benefits from its use throughout the period of its use. We also determine if a lease qualifies as an operating or finance lease. All Company leases at standard adoption were operating leases. The ASU also require lessees to identify and separate lease and non-lease components. The Company elected not to separate lease and non-lease components per the practical expedient provided in ASU 2018-11. Upon lease commencement, the lease liability and right-of-use asset are recorded on the balance sheet. The lease liability is measured as the
present value of future minimum lease payments, including all probable renewals, to be made during the lease term. The right-of-use asset is measured as the present value of future minimum lease payments to be made during the lease term, including all probable renewals, plus lease payments made to the lessor before or at commencement and indirect costs paid less lease incentives received. DLH adopted this standard on October 1, 2019 and recognized initial right-of use assets and lease liabilities of $17.4 million and $18.0 million, respectively. At adoption, the Company elected several practical expediencies to facilitate the implementation of the new standard and did not recast comparative prior year information. As such we did not reassess and include initial direct costs in the measurement of right-of-use assets, capitalize leases with terms of 12 months or less, nor reassess lease classification of existing leases.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses, which requires companies to record an allowance for 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 becomes effective for the Company in the first quarter of fiscal year 2021. We do not expect a material impact to our operating results, financial position or cash flows as a result of adopting this new standard.
In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment, which simplifies the accounting for goodwill impairments by eliminating step two from the goodwill impairment test. Instead, if the carrying amount of a reporting unit exceeds its fair value, an impairment loss shall be recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit. ASU 2017-04 also clarifies that an entity should consider income tax effects from any tax-deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. The new standard is effective for fiscal years beginning after December 15, 2019 for both interim and annual reporting periods. The Company adopted this standard in the first quarter of fiscal 2020 and adoption did not have an impact on the Company's consolidated financial statements.
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, and measurement of loss development on workers’ compensation 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.
Fair value of financial instruments
The carrying amounts of the Company's cash and cash equivalents, accounts receivable, contract assets, accrued expenses, and accounts payable approximate fair value due to the short-term nature of these instruments. The fair values of the Company's debt instruments approximated fair value because the underlying interest rates approximate market rates that the Company could obtain for similar instruments at the balance sheet dates.
Goodwill and other intangible assets
The Company 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.
At September 30, 2019, we performed a goodwill impairment evaluation on the year-end carrying value of approximately $53 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 impairment loss was warranted at September 30, 2019. For the nine months ended June 30, 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.
Equipment and improvements
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
The 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 no uncertain tax positions at either June 30, 2020 or September 30, 2019. We report interest and penalties as a component of income tax expense. In the three and nine months ended June 30, 2020 and June 30, 2019, 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 binomial 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 per share
Basic earnings per share is calculated by dividing 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 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 June 30, 2020, the Company did not hold any treasury 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 instrument for trading or speculative purposes.
5. Revenue Recognition
We account for a contract when both we and the customer approve and commit; our rights and those of the customer are identified, payment terms are identified; the contract has commercial substance; and collectability of consideration is probable. At contract inception, we identify the distinct goods or services promised in the contract, referred to as performance obligations. Then we determine the total transaction price for the contract; which is the total consideration which we can expect in exchange for the promised goods or services in the contract. The transaction price may include fixed or variable amounts. Due to our contracts being predominantly time and material, the Company does not have variable consideration. The transaction price is allocated to each distinct performance obligation using our best estimate of the standalone selling price for each service promised in the contract. The primary method used to estimate standalone selling price is the hourly billing rate for each labor category identified in the contract with the customer. Revenue is recognized as the performance obligation is satisfied.
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 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.
Contract liabilities - Amounts are a result of billings in excess of costs incurred.
The following table summarizes the contract balances recognized on the Company's consolidated balance sheets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
June 30,
|
|
September 30,
|
|
|
|
2020
|
|
2019
|
|
|
|
|
|
|
Contract assets
|
|
|
$
|
10,216
|
|
|
$
|
4,302
|
|
Contract liabilities
|
|
|
$
|
41
|
|
|
$
|
92
|
|
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 series of tables presents our revenue disaggregated by these categories:
Revenue by customer:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
(in thousands)
|
|
|
|
|
Three Months Ended
|
|
|
|
Nine Months Ended
|
|
|
|
|
June 30,
|
|
|
|
June 30,
|
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
|
|
|
|
|
|
|
|
Department of Veterans Affairs
|
|
$
|
24,783
|
|
|
$
|
23,056
|
|
|
$
|
74,402
|
|
|
$
|
68,563
|
|
Department of Health and Human Services
|
|
23,312
|
|
|
14,297
|
|
|
73,263
|
|
|
34,987
|
|
Other
|
|
3,364
|
|
|
1,347
|
|
|
10,830
|
|
|
2,658
|
|
Total revenue
|
|
$
|
51,459
|
|
|
$
|
38,700
|
|
|
$
|
158,495
|
|
|
$
|
106,208
|
|
Revenue by contract type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
(in thousands)
|
|
|
|
|
Three Months Ended
|
|
|
|
Nine Months Ended
|
|
|
|
|
June 30,
|
|
|
|
June 30,
|
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
|
|
|
|
|
|
|
|
Time and materials
|
|
$
|
36,315
|
|
|
$
|
33,426
|
|
|
$
|
110,918
|
|
|
$
|
98,841
|
|
Cost reimbursable
|
|
13,841
|
|
|
4,545
|
|
|
43,887
|
|
|
5,791
|
|
Firm fixed price
|
|
1,303
|
|
|
729
|
|
|
3,690
|
|
|
1,576
|
|
Total revenue
|
|
$
|
51,459
|
|
|
$
|
38,700
|
|
|
$
|
158,495
|
|
|
$
|
106,208
|
|
Revenue by whether the Company acts as a prime contractor or a subcontractor:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
(in thousands)
|
|
|
|
|
Three Months Ended
|
|
|
|
Nine Months Ended
|
|
|
|
|
June 30,
|
|
|
|
June 30,
|
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
|
|
|
|
|
|
|
|
Prime contractor
|
|
$
|
47,649
|
|
|
$
|
36,882
|
|
|
$
|
147,464
|
|
|
$
|
103,947
|
|
Subcontractor
|
|
3,810
|
|
|
1,818
|
|
|
11,031
|
|
|
2,261
|
|
Total revenue
|
|
$
|
51,459
|
|
|
$
|
38,700
|
|
|
$
|
158,495
|
|
|
$
|
106,208
|
|
6. Leases
We have leases for facilities and office equipment. Our lease liabilities are recognized as the present value of the future minimum lease payments over 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 at September 30, 2019. 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 incurred. The incremental borrowing rate on our credit facility was used in determining the present value of future minimum lease payments. The Company does not have any finance leases.
Upon the adoption of ASC 842, we recorded operating lease right-of-use assets of $17.4 million, current and long-term operating lease liabilities of $3.6 million and $14.4 million, and a $2 thousand cumulative adjustment to accumulated deficit.
The impact of adopting the standard on our consolidated balance sheet at October 1, 2019 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Ref
|
September 30, 2019
|
|
ASC 842 Adjustments
|
|
October 1, 2019
|
Long-term assets:
|
|
|
|
|
|
|
Operating leases right-of-use assets
|
|
$
|
—
|
|
|
$
|
17,398
|
|
|
$
|
17,398
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
Deferred rent liability - short-term
|
(a)
|
44
|
|
|
(44)
|
|
|
—
|
|
Operating leases liabilities - current
|
|
—
|
|
|
3,645
|
|
|
3,645
|
|
|
|
|
|
|
|
|
Long-term liabilities:
|
|
|
|
|
|
|
Deferred rent liability - long-term
|
(b)
|
276
|
|
|
(276)
|
|
|
—
|
|
Unamortized tenant improvement allowance
|
(c)
|
297
|
|
|
(297)
|
|
|
—
|
|
Operating leases liabilities - long-term
|
|
—
|
|
|
14,372
|
|
|
14,372
|
|
|
|
|
|
|
|
|
Shareholders' equity:
|
|
|
|
|
|
|
Accumulated deficit
|
|
(39,555)
|
|
|
(2)
|
|
|
(39,557)
|
|
Ref (a): The balance of short-term deferred rent liability was presented in our most recent annual 10K report within accounts payable, accrued expenses, and other accrued liabilities on our consolidated balance sheet at September 30, 2019.
Ref (b): The balance of long-term deferred rent liability was presented in our most recent annual 10K report within total long-term liabilities on our consolidated balance sheet at September 30, 2019.
Ref (c): The balance of unamortized tenant improvement allowance was presented in our most recent annual 10K report within total long-term liabilities on our consolidated balance sheet at September 30, 2019.
The Company executed a modification of a lease during the fiscal quarter ending December 31, 2019 and recognized adjustments to the right-of-use asset and lease liabilities in accordance with ASC 842. As a result of the modification, a gain of $0.1 million was recognized. The gain represents the difference between the change in values of the right-of-use-asset and lease liabilities, which were $7.3 million and $7.2 million, respectively. For the nine months ended June 30, 2020, the increase to right-of-use assets and lease liabilities was $24.7 million and $25.2 million, respectively. For more information, refer to Note 6, Supporting Financial Information.
As of June 30, 2020, operating leases for facilities and equipment have remaining lease terms of 0.8 to 10.8 years.
The following table summarizes lease balances in our consolidated balance sheet at June 30, 2020:
|
|
|
|
|
|
|
(in thousands)
|
|
June 30, 2020
|
|
|
|
|
Operating lease right-of-use assets
|
$
|
22,276
|
|
|
|
Operating lease liabilities, current
|
$
|
1,768
|
|
Operating lease liabilities - long-term
|
21,686
|
|
Total operating lease liabilities
|
$
|
23,454
|
|
The Company's lease costs are included within general and administrative costs and for the three and nine months ending June 30, 2020, total lease costs for our operating leases are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
June 30, 2020
|
|
June 30, 2020
|
Lease Costs:
|
|
|
|
Operating
|
$
|
834
|
|
|
$
|
3,350
|
|
Short-term
|
30
|
|
|
133
|
|
Variable
|
28
|
|
|
51
|
|
Total lease costs
|
$
|
892
|
|
|
$
|
3,534
|
|
The Company's future minimum lease payments as of June 30, 2020 are as follows:
|
|
|
|
|
|
For the Fiscal Year Ending September 30,
|
(in thousands)
|
2020 (Remaining)
|
$
|
758
|
|
2021
|
3,156
|
|
2022
|
3,244
|
|
2023
|
3,264
|
|
2024
|
3,215
|
|
Thereafter
|
17,776
|
|
Total future lease payments
|
31,413
|
|
Less: imputed interest
|
(7,959)
|
|
Present value of future minimum lease payments
|
23,454
|
|
Less: current portion of operating lease liabilities
|
(1,768)
|
|
Long-term operating lease liabilities
|
$
|
21,686
|
|
Other information related to our leases are as follows:
|
|
|
|
|
|
|
June 30, 2020
|
Weighted-average remaining lease term
|
9.5 years
|
Weighted-average discount rate
|
6.03
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
June 30, 2020
|
|
June 30, 2020
|
Cash paid for amounts included in the measurement of lease liabilities
|
|
$
|
336
|
|
|
$
|
2,803
|
|
Lease liabilities arising from obtaining right-of-use-assets
|
|
$
|
—
|
|
|
$
|
245
|
|
7. Supporting Financial Information
Accounts receivable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
June 30,
|
|
September 30,
|
|
Ref
|
|
2020
|
|
2019
|
Billed receivables
|
|
|
$
|
19,419
|
|
|
$
|
18,924
|
|
Contract assets
|
|
|
10,216
|
|
|
4,302
|
|
Total accounts receivable
|
|
|
29,635
|
|
|
23,226
|
|
Less: Allowance for doubtful accounts
|
(a)
|
|
—
|
|
|
—
|
|
Accounts receivable, net
|
|
|
$
|
29,635
|
|
|
$
|
23,226
|
|
Ref (a): Accounts receivable are non-interest bearing, unsecured and carried at net realizable value. 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 either June 30, 2020 or September 30, 2019.
Other current assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
June 30,
|
|
September 30,
|
|
|
|
2020
|
|
2019
|
Prepaid insurance and benefits
|
|
|
$
|
833
|
|
|
$
|
495
|
|
Other receivables
|
|
|
1,407
|
|
|
301
|
|
Other prepaid expenses
|
|
|
1,532
|
|
|
1,035
|
|
Other current assets
|
|
|
$
|
3,772
|
|
|
$
|
1,831
|
|
Equipment and improvements, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
June 30,
|
|
September 30,
|
|
Ref
|
|
2020
|
|
2019
|
Furniture and equipment
|
|
|
$
|
1,262
|
|
|
$
|
1,262
|
|
Computer equipment
|
|
|
1,171
|
|
|
1,043
|
|
Computer software
|
|
|
4,008
|
|
|
3,985
|
|
Leasehold improvements
|
|
|
1,595
|
|
|
1,595
|
|
Total equipment and improvements
|
|
|
8,036
|
|
|
7,885
|
|
Less accumulated depreciation and amortization
|
|
|
(4,267)
|
|
|
(2,542)
|
|
Equipment and improvements, net
|
(a)
|
|
$
|
3,769
|
|
|
$
|
5,343
|
|
Ref (a): Depreciation expense was $0.5 million and $0.3 million for the three months ended June 30, 2020 and 2019, respectively, and $1.7 million and $0.5 million for the nine months ended June 30, 2020 and 2019, respectively.
Intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
June 30,
|
|
September 30,
|
|
Ref
|
|
2020
|
|
2019
|
Intangible assets
|
(a)
|
|
|
|
|
Customer contracts and related customer relationships
|
|
|
$
|
45,600
|
|
|
$
|
45,600
|
|
Covenants not to compete
|
|
|
480
|
|
|
480
|
|
Trade name
|
|
|
2,109
|
|
|
2,109
|
|
Total intangible assets
|
|
|
48,189
|
|
|
48,189
|
|
Less accumulated amortization
|
|
|
|
|
|
Customer contracts and related customer relationships
|
|
|
(10,010)
|
|
|
(6,590)
|
|
Covenants not to compete
|
|
|
(200)
|
|
|
(164)
|
|
Trade name
|
|
|
(385)
|
|
|
(227)
|
|
Total accumulated amortization
|
|
|
(10,595)
|
|
|
(6,981)
|
|
Intangible assets, net
|
|
|
$
|
37,594
|
|
|
$
|
41,208
|
|
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 $1.2 million and $0.6 million for the three months ended June 30, 2020 and 2019, respectively, and $3.6 million and $1.5 million for the nine months ended June 30, 2020 and 2019, respectively.
|
|
|
|
|
|
|
Estimated amortization expense for future years:
|
|
(in thousands)
|
Remaining Fiscal 2020
|
|
$
|
1,205
|
|
Fiscal 2021
|
|
4,819
|
|
Fiscal 2022
|
|
4,819
|
|
Fiscal 2023
|
|
4,819
|
|
Fiscal 2024
|
|
4,819
|
|
Thereafter
|
|
17,113
|
|
|
|
|
Total amortization expense
|
|
$
|
37,594
|
|
|
|
|
|
|
|
Accounts payable, accrued expenses and other current liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
June 30,
|
|
September 30,
|
|
|
|
2020
|
|
2019
|
Accounts payable
|
|
|
$
|
11,827
|
|
|
$
|
10,054
|
|
Accrued benefits
|
|
|
2,963
|
|
|
2,252
|
|
Accrued bonus and incentive compensation
|
|
|
1,819
|
|
|
1,951
|
|
Accrued workers' compensation insurance
|
|
|
4,888
|
|
|
4,007
|
|
Other accrued expenses
|
|
|
2,756
|
|
|
2,369
|
|
Accounts payable, accrued expenses, and other current liabilities
|
|
|
$
|
24,253
|
|
|
$
|
20,633
|
|
Debt obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
June 30,
|
|
September 30,
|
|
|
|
2020
|
|
2019
|
|
|
|
|
|
|
Bank term loan
|
|
|
$
|
44,500
|
|
|
$
|
56,000
|
|
Less unamortized deferred financing cost
|
|
|
(1,958)
|
|
|
(2,371)
|
|
Net bank debt obligation
|
|
|
42,542
|
|
|
53,629
|
|
Less current portion of term loan debt obligations
|
|
|
—
|
|
|
—
|
|
Long-term portion of bank debt obligation
|
|
|
$
|
42,542
|
|
|
$
|
53,629
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
(in thousands)
|
|
|
|
|
|
Three Months Ended
|
|
|
|
Nine Months Ended
|
|
|
|
|
|
June 30,
|
|
|
|
June 30,
|
|
|
|
Ref
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Interest expense
|
(a)
|
|
$
|
(635)
|
|
|
$
|
(297)
|
|
|
$
|
(2,229)
|
|
|
$
|
(485)
|
|
Amortization of deferred financing costs
|
(b)
|
|
(178)
|
|
|
(265)
|
|
|
(551)
|
|
|
(799)
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense), net
|
(c)
|
|
—
|
|
|
—
|
|
|
121
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
$
|
(813)
|
|
|
$
|
(562)
|
|
|
$
|
(2,659)
|
|
|
$
|
(1,284)
|
|
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 June 30, 2020, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Arrangement
|
|
Loan Balance
|
|
|
Interest
|
|
Maturity Date
|
|
|
Secured term loan $70 million (a)
|
|
$
|
44.5
|
|
million
|
|
LIBOR* + 3.5%
|
|
June 7, 2024
|
|
|
Secured revolving line of credit $25 million ceiling (b)
|
|
$
|
—
|
|
million
|
|
LIBOR* + 3.5%
|
|
June 7, 2024
|
*LIBOR rate as of June 30, 2020 was 0.17%
(a) Represents the principal amounts payable on our secured term loan. The $70.0 million secured term loan was 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 June 7, 2024. Required amortization is 7.5% in years 1 and 2 of the term loan, 10.0% in years 3 and 4, and 12.5% in year 5, with the balance due at maturity.
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 commencing with the quarter ending September 30, 2019, and for all subsequent periods, and (ii) a Funded Indebtedness to Adjusted EBITDA ratio not exceeding the ratio of 4.25:1.0 to 3.25:1.0 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 September 2019 and ends in March 2024. The quarterly payments are equal installments which started in September 2019 at $1,312,500. The amortization amount will increase every two years by $437,500; the first will occur September 2021 and the final increase will occur in September 2023. 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. The Company has made voluntary principal prepayments that satisfy mandatory principal amortization until September 2023. 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 is $36 million that matures in 2024. 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 nine months ended June 30, 2020, interest expense has been increased by less than $0.1 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 but has no outstanding balance at June 30, 2020.
The Company's total borrowing availability, based on eligible accounts receivables at June 30, 2020, was $19.3 million. As part of the revolving credit facility, the lenders agreed to a sublimit of $3 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 June 7, 2024 and is subject to loan covenants as described above. DLH is fully compliant with those covenants.
9. Stock-based Compensation, Equity Grants, and Warrants
Stock-based compensation expense
Options issued under equity incentive plans are designated as either an incentive stock or a non-statutory stock option. No option is 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 June 30, 2020, there were 1.1 million shares available for grant.
Stock-based compensation expense, shown in the table below, is recorded in general and administrative expenses included in our statements of operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
(in thousands)
|
|
|
|
|
|
Three Months Ended
|
|
|
|
Nine Months Ended
|
|
|
|
Ref
|
|
June 30,
|
|
|
|
June 30,
|
|
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
DLH employees
|
|
|
$
|
95
|
|
|
$
|
67
|
|
|
$
|
306
|
|
|
$
|
196
|
|
Non-employee directors
|
(a)
|
|
87
|
|
|
132
|
|
|
260
|
|
|
395
|
|
Total stock option expense
|
|
|
$
|
182
|
|
|
$
|
199
|
|
|
$
|
566
|
|
|
$
|
591
|
|
Ref (a): Equity grants of restricted stock units, in accordance with DLH compensation policy for non-employee directors were made in the first quarter of fiscal 2020 and in total 77,500 restricted stock units were issued and outstanding.
Unrecognized stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
June 30,
|
|
|
|
Ref
|
|
2020
|
|
|
Unrecognized expense for DLH employees
|
(a)
|
|
$
|
1,007
|
|
|
|
Unrecognized expense for non-employee directors
|
|
|
87
|
|
|
|
Total unrecognized expense
|
|
|
$
|
1,094
|
|
|
|
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. On a weighted average basis, this expense is expected to be recognized within the next 3.82 years.
Stock option activity for the nine months ended June 30, 2020
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, 2019
|
|
|
|
2,134
|
|
|
$
|
4.36
|
|
|
5.9
|
|
$
|
4,815
|
|
Granted
|
|
|
(a)
|
250
|
|
|
$
|
4.17
|
|
|
—
|
|
|
—
|
|
Exercised
|
|
|
|
(345)
|
|
|
$
|
1.05
|
|
|
—
|
|
|
—
|
|
Cancelled
|
|
|
|
(160)
|
|
|
$
|
1.29
|
|
|
—
|
|
|
—
|
|
Options outstanding, June 30, 2020
|
|
|
|
1,879
|
|
|
$
|
4.60
|
|
|
6.5
|
|
$
|
7,280
|
|
Ref (a): Utilizing a volatility 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 quarter ended December 31, 2019, as follows using the Monte Carlo Method.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Volatility
|
|
|
|
|
|
|
|
50%
|
|
|
|
|
Vesting
|
|
Expected
|
|
|
|
Strike
|
Stock
|
Threshold
|
|
Term
|
Calculated
|
Grant Date
|
Ref
|
Price
|
Price
|
Price
|
|
(Years)
|
Fair Value
|
October 18, 2019
|
(a)
|
$
|
4.17
|
|
$
|
4.17
|
|
Service
|
|
10
|
$
|
2.54
|
|
October 18, 2019
|
|
$
|
4.17
|
|
$
|
4.17
|
|
$
|
8.00
|
|
|
10
|
$
|
2.56
|
|
October 18, 2019
|
|
$
|
4.17
|
|
$
|
4.17
|
|
$
|
10.00
|
|
|
10
|
$
|
2.53
|
|
|
|
|
|
|
|
|
|
October 18, 2019
|
|
$
|
4.17
|
|
$
|
4.17
|
|
$
|
12.00
|
|
|
10
|
$
|
2.51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes:
|
|
|
|
|
|
|
|
Results based on 100,000 simulations
|
|
|
|
|
|
|
|
Ref (a): Options granted vest after completion of a one year service period.
Stock options shares outstanding, vested and unvested for the period ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
September 30,
|
|
|
|
|
|
Ref
|
|
2020
|
|
2019
|
|
|
|
|
Vested and exercisable
|
(a)
|
|
1,072
|
|
|
1,300
|
|
|
|
|
|
Unvested
|
(b)
|
|
807
|
|
|
834
|
|
|
|
|
|
Options outstanding
|
|
|
1,879
|
|
|
2,134
|
|
|
|
|
|
Ref (a): Weighted average exercise price of vested and exercisable shares was $1.61 and $1.51 at June 30, 2020 and September 30, 2019, respectively. Aggregate intrinsic value was approximately $5.9 million and $3.9 million at June 30, 2020 and September 30, 2019, respectively. Weighted average contractual term remaining was 3.2 and 3.8 years at June 30, 2020 and September 30, 2019, respectively.
Ref (b): Certain awards vest upon satisfaction of certain performance criteria.
10. Earnings Per Share
The below details the calculation of basic and diluted earnings per share for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
Nine Months Ended
|
|
|
|
|
June 30,
|
|
|
|
June 30,
|
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Numerator:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
2,124
|
|
|
$
|
803
|
|
|
$
|
5,752
|
|
|
$
|
3,758
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Denominator for basic net income per share - weighted-average outstanding shares
|
|
12,354
|
|
|
12,036
|
|
|
12,246
|
|
|
12,011
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
Stock options and restricted stock
|
|
874
|
|
|
1,041
|
|
|
804
|
|
|
1,037
|
|
Denominator for diluted net income per share - weighted-average outstanding shares
|
|
13,228
|
|
|
13,077
|
|
|
13,050
|
|
|
13,048
|
|
|
|
|
|
|
|
|
|
|
Net income per share - basic
|
|
$
|
0.17
|
|
|
$
|
0.07
|
|
|
$
|
0.47
|
|
|
$
|
0.31
|
|
Net income per share - diluted
|
|
$
|
0.16
|
|
|
$
|
0.06
|
|
|
$
|
0.44
|
|
|
$
|
0.29
|
|
11. Commitments and Contingencies
Contractual obligations as of June 30, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period
|
|
|
|
|
|
|
|
|
|
|
Next 12
|
|
2-3
|
|
4-5
|
|
More than 5
|
(Amounts in thousands)
|
|
Total
|
|
Months
|
|
Years
|
|
Years
|
|
Years
|
Debt obligations
|
|
$
|
44,500
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
44,500
|
|
|
$
|
—
|
|
Facility leases
|
|
31,313
|
|
|
3,100
|
|
|
6,415
|
|
|
6,329
|
|
|
15,469
|
|
Equipment operating leases
|
|
100
|
|
|
34
|
|
|
44
|
|
|
22
|
|
|
—
|
|
Total obligations
|
|
$
|
75,913
|
|
|
$
|
3,134
|
|
|
$
|
6,459
|
|
|
$
|
50,851
|
|
|
$
|
15,469
|
|
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 June 30, 2020 and September 30, 2019 was $4.9 million and $4.0 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
The Company has determined that for the three and nine months ended June 30, 2020 there were no significant related party transactions that have occurred which require disclosure through the date that these financial statements were issued.