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TABLE OF CONTENTS
DLH Holdings Corp. and Subsidiaries Index to Consolidated Financial Statements
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
FORM 10-K
| (Mark One) | ||
ý | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended September 30, 2012 | ||
o | TRANSITION 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.
| New Jersey | ||
(State or other jurisdiction of incorporation or organization) | 22-1899798 (I.R.S. Employer Identification No.) | |
1776 Peachtree Street, NW Atlanta, Georgia (Address of principal executive offices) | 30309 (Zip Code) |
1 Executive Drive, Somerset, NJ 08873, Suite 130(866) 952-1647
(Address of principal executive offices) (Zip Code)
Securities registered pursuant to Section 12(b) of the Exchange Act
| Title of Each Class | Name of Each Exchange on | ||||
|---|---|---|---|---|---|
| Which Registered | |||||
| COMMON STOCK, PAR VALUE $.001 PER SHARE | THE NASDAQ STOCK MARKET, LLC |
Securities registered pursuant to Section 12(g) of the Securities Exchange Act:NONE
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.Yeso Noþý
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15 (d) of the Securities Exchange Act.Yeso Noþý
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act 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 Yesþý Noo
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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes Yesoý Noo
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (ss.229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’sregistrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.þý
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large"large accelerated filer,” “accelerated filer”" "accelerated filer" and “smaller"smaller reporting company”company" inRule 12b-2 of the Exchange Act. (check one):
| Large accelerated filero | Accelerated filero | Non-accelerated filero | ||||
| (do not check if a smaller reporting company) | Smaller reporting company ý |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yeso Noþý
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’sregistrant's most recently completed second fiscal quarter (March 31, 2009)2012): $4,586,028.
APPLICABLE ONLY TO CORPORATE REGISTRANTS
Indicate the number of shares outstanding of each of the registrant’sregistrant's classes of common stock, as of the latest practicable date: On January 5, 2010November 30, 2012, there were 4,940,9829,265,702 shares outstanding of common stock of the Registrant.
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents if incorporated by reference and the Part of the Form 10-K (e.g., Part I, Part II, etc.) into which the document is incorporated: (1) Any annual report to security holders; (2) Any proxy or information statement; and (3) Any prospectus filed pursuant to Rule 424(b) or (e) under the Securities Act of 1933.
Part III of this report incorporates information by reference from the Company's definitive proxy statement, which proxy statement is due to be filed with the Securities and Exchange Commission not later than 120 days after September 30, 2012.
| PAGE | ||||||||
|---|---|---|---|---|---|---|---|---|
PART I | ||||||||
Item 1. | Business | 3 | ||||||
Item 1A. | Risk Factors | 11 | ||||||
Item 1B. | Unresolved Staff Comments | 28 | ||||||
Item 2. | Properties | 28 | ||||||
Item 3. | Legal Proceedings | 28 | ||||||
Item 4. | Mine Safety Disclosure | 29 | ||||||
PART II | ||||||||
| 5. | ||||||||
29 | ||||||||
Item 6. | Selected Financial Data | 30 | ||||||
| 7. | ||||||||
Management's Discussion and Analysis of Financial Condition and Results of Operations | ||||||||
Item 7A. | ||||||||
Quantitative and Qualitative Disclosures About Market Risk | ||||||||
Item 8. | ||||||||
Financial Statements and Supplemental Data | ||||||||
Item 9. | ||||||||
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure | ||||||||
Item 9A. | Controls and Procedures | 50 | ||||||
Item 9B. | Other Information | 51 | ||||||
PART III | ||||||||
Directors, Executive Officers and | 52 | |||||||
Item 11. | Executive Compensation | 52 | ||||||
Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | 52 | ||||||
Item 13. | Certain Relationships and Related Transactions, and Director Independence | 52 | ||||||
Item 14. | Principal Accountant Fees and Services | 52 | ||||||
PART IV | ||||||||
| 15. | ||||||||
53 | ||||||||
GENERAL
GeneralCompany Profile
For more than 25 years, DLH Holdings Corp. ("DLH") through its subsidiaries, (“TeamStaff”has provided professional services to the U.S. Government. Headquartered in Atlanta, Georgia, DLH employs approximately 1,100 skilled technicians, logisticians, engineers, healthcare and support personnel at more than 25 locations around the United States. DLH's operating subsidiary, DLH Solutions, Inc., is organized into three broad integrated business areas: Healthcare Delivery Solutions, Logistics and Technical Services, and Contingency / Staff Augmentation Services. Our government customers, a majority of whom are within the Departments of Defense ("DoD") and Veterans Affairs ("DVA"), benefit from proven leadership processes, technical excellence, industry-leading productivity and affordability enhancement tools, and Lean Six Sigma-based quality improvement processes.
In February 2012, the Company's shareholders approved a proposal to change its corporate name to DLH Holdings Corp. This change was driven by management in order to better align the Company's branding with its core competencies and revised strategic focus. On June 25, 2012 the Company filed an amendment to its certificate of incorporation to implement the change in its corporate name to DLH Holdings Corp. (together with its subsidiaries, "DLH" or the “Company”,"Company" and also referred to as “we,” “us”"we," "us" and “our”"our"), provide staffing services to the United States Department of Veterans Affairs (“DVA”) and other US governmental entities. TeamStaff’s primary operations are located in Loganville, Georgia. DLH's corporate headquarters and its principal executive office isoffices are located at 1 Executive Drive, Suite 130, Somerset,1776 Peachtree Street, Atlanta, Georgia 30309.
Corporate History
DLH Holdings Corp. was originally incorporated in New Jersey 08873 where its telephone number is (877) 523-9897.
Strategic Development
In late 2010, the Company realigned its business into three broad integrated business areas: Healthcare Delivery Solutions, Logistics & Technical Services, and Contingency/Staff Augmentation. This structure enables us to leverage our core competencies and drive towards profitable growth within our focused target markets. We intend to strategically enhance the Company's value through sustainable, profitable growth leveraging our core competencies and performance track record within current customers and adjacent markets.
During fiscal 2011, the Company continued to strengthen its leadership team and its business base, with substantial competitive contract wins (including renewals within the Department of Veterans Affairs), leading to a contract backlog of approximately three times revenue at year end. In fiscal 2011, the Company reported its first major prime DoD IDIQ contract awards, including the Navy's Seaport-e contract. In addition, Management initiated a strategic market advisory board consisting of two former high-ranking military officers aligned with the Company's top strategic focus areas (Healthcare and Logistics). During fiscal 2012, the Company invested in key initiatives to bolster its performance, roll-out its market differentiators, enhance performance tracking and reporting, and achieve
government certification of its business systems. The company made significant progress toward achieving these goals during fiscal 2012.
The Company operates primarily through prime contracts awarded competitively through full and open competition by the government. Additionally, the Company has a diverse mix of contract vehicles with various agencies of the United States Government, which we expect to support our overall corporate growth strategy. The majority of our contracts are fixed-price type contracts that were awarded on a best-value basis. As such, the Company has developed and continues to leverage a suite of solution offerings geared toward enhancing performance and productivity while reducing costs to its US government clients. With a voluntary turnover rate in the low single digits, the Company continues to demonstrate that it values and effectively supports its workforce. In addition, we have implemented a Quarterly Performance Review program which provides effective oversight to ensure that we meet or exceed safety, technical, quality, schedule, cost and customer satisfaction objectives on our projects. We also utilize various components of Lean Six Sigma and other management techniques to achieve continuous improvement. We believe that since 2010, the Company's track record of growth and improved results of operations are leading indicators of the effectiveness of these and other measures.
Major Lines of Business
Healthcare Delivery Solutions
The Healthcare Delivery Solutions business unit, provides a broad continuum of care for our nation's servicemen/women and veterans in various settings and facilities. These include DSI Combat Trauma Centers (CTCs), Military Treatment Facilities (MTFs), Medical Centers, Community-based Outpatient Clinics (CBOCs), and Pharmacy Distribution Centers (including VA Consolidated Mail-order Outpatient Pharmacy). We leverage our network of over 400 active clinicians and other healthcare workers throughout selected regions in the US, applying differentiating tools, databases and technology (including e-PRAT and SPOT-m) to deliver these services. For over a decade, DLH Solutions has been serving the DVA and DoD in providing qualified medical and other professionals in a variety of positions. Healthcare Delivery Solutions is one of our strategic focus areas for growth and a major business area that DLH Solutions services. As more and more Federal and DoD programs increase their performance-based requirements, DLH Solutions' workforce profile of medical talent and credentials (as described above) will help it to compete and differentiate itself in the market place. Our healthcare and medical service new business pipeline adds important credentials strategically linked to diversifying and profitably growing our Healthcare Delivery Solutions business base. Professional services have included case management, health and injury assessment, critical care, medical/surgical, emergency room/trauma center, counseling, behavioral health and traumic brain injury management, medical systems analysis, and medical logistics. While the DVA is its largest customer in this business unit, the Company has focused on leveraging that experience in adjacent healthcare markets within DoD and other federal agencies. In fiscal 2012, approximately 54% of our revenue was derived from the Healthcare Delivery Solutions business unit.
Logistics & Technical Services
The Logistics & Technical Services business unit draws heavily upon our proven logistics expertise and processes. DLH resources possess expertise covering a wide range of logistics, readiness, and project engineering. The experience of DLH Solutions' project personnel is diverse from operational unit level to major systems and program office experience. Our core competencies include; supply chain management, performance-based logistics, distribution center and inventory management, statistical process control, packaging/handling/storage & transportation, configuration management, readiness planning and supply support operations. In addition, we provide program and project management, systems engineering and applicable information technology services, integrated logistics support (including operational systems), readiness assessments, training, equipment maintenance, hazardous
material management, facilities and shipyard support services and more. DLH Solutions also provides professional staff to the federal government specializing in logistics, office administration, IT, and facilities/warehouse management.
Through competitively awarded contracts and task orders (including its LOGWORLD contract) DLH Solutions has developed a strong portfolio of logistics processes, personnel and tools to help its clients achieve nationally recognized awards for customer satisfaction. While the DVA is its largest customer in this area, the Company has taken steps to expand in adjacent logistics markets within DoD and other federal agencies. In fiscal 2012, over 45% of our revenue was derived from the Logistics & Technical Services business unit.
Contingency/Staff ConnXions Northeast, Inc.Augmentation
The Contingency/Staff Augmentation business unit provides disaster and emergency response services and civilian workforce augmentation services. General staffing and selective recruitment process outsourcing are key components of this service area. Less than 1% of fiscal 2012 revenue was derived from the Contingency/Staff Augmentation line of service.
Recent Business Trends
Though the recent Federal election is now behind us, the uncertainty surrounding the budget deficit negotiations and potential sequestration continues to cause delays in funding and contract awards by government program offices. While it is unclear whether sequestration will occur and what the exact impact of it would be, we are continuously reviewing our operations and new pursuits in an attempt to identify those programs that could be at risk so that we can make appropriate contingency plans. While we may experience reduced funding on some of our targeted programs, we do not expect the cancellation of any of our major programs. In addition, financial developments in the U.S., DSI Staff ConnXions Southwest, Inc., TeamStaff Solutions, Inc., TeamStaff I, Inc., TeamStaff II, Inc., TeamStaff III, Inc., TeamStaff IV, Inc., TeamStaff VIII, Inc., TeamStaff IX, Inc., Digital Insurance Services, Inc., HR2, Inc.Europe and BrightLane.com, Inc.emerging markets will continue to have a significant impact on U.S. Gross Domestic Product growth and in turn, U.S. fiscal deficits for the foreseeable future.
In addition, the government has continued to change the manner in which it purchases goods and services. We have noticed an increased emphasis on the use of low priced, technically acceptable proposal evaluations, which could challenge our ability to maintain value added differentiation to our solutions. Further, we have also seen a reduced rate of usage of T&M and sole-source contracts along with a commitment to expand small business set asides. In addition, more scrutiny is being placed on the amount of fee bid on cost reimbursable type contracts. Pricing competition is taking on an increasing role in best value determinations with more detailed pricing oversight.
Based on the above considerations, from an overall budget perspective it is likely that government discretionary spending will be constrained for several years to come. Although specific funding priorities are subject to change from year to year, we believe that our strategic business alignment around DoD and Veterans healthcare and logistics sustainment services allows us to remain well-placed to address what we consider are top national priority budget areas (along with cyberspace and intelligence). We particularly benefit from the multi-year budgeting process unique to the Department of Veterans Affairs. As with other companies operating in the Federal government market, the possibility remains, however, that one or more of our targeted programs could be cut back or terminated as a result of the salebudget deficit negotiations.
Intellectual Property
We claim copyright, trademark and other proprietary rights in a variety of intellectual property, including each of our Professional Employer Organizationproprietary computer software and data products and the related documentation. Because our business involves providing services to government entities, our operations generally are not substantially dependent upon obtaining and/or maintaining copyright or trademark protections,
although our operations make use of such protections and benefit from them as discriminators in competition. We maintain a number of trade secrets that contribute to our success and competitive distinction and endeavor to accord such trade secrets protection adequate to ensure their continuing availability to us.
An important aspect of the Company's strategy is the use of program management to achieve the integration of people, processes and tools. The key principles of our program management approach begin with a joint understanding of the project requirements, and include attaining and sustaining excellence from all Program Management Office staff members, consistent quality control measures, and the delivery of compliant task order solutions on time and within budget. We tailor our program management methodologies and apply them to individual task orders, depending on their complexity and duration. Our goal is to manage cost, schedule, and performance by implementing our integrated People, Processes, and Tools methodology. Our tools and processes include our electronic Practitioner Resource Allocation Tool ("ePRAT"), which is a proprietary software solution and our SPOT-m supply chain management optimization process.
Customers
Our primary customers are agencies of the U.S. Government. Total revenue from all agencies of the U.S. Government accounted, either directly or indirectly, for 100% of our total revenue during the 2012 fiscal year. Our largest service line is healthcare, which accounted for approximately 54% and 45% of revenue in fiscal year 20042012 and 2011, respectively. Within the U.S. Government, our largest customer in fiscal 2012 and 2011 continued to be the DVA with whom the Company held over a dozen unique contracts and/or task orders for logistics, pharmaceutical, and other medical services covering a substantial percentage of the Company's revenues as discussed in Note 13 to the accompanying consolidated financial statements. During fiscal 2011 the Company was awarded contracts with an estimated value of up to $145 million for pharmaceutical and other medical services during a period of up to five years which will both retain and expand its business changes, these “other” subsidiaries are not actively operating.
The staffing services offered by TeamStaff GS are provided through independent Federal Supply Schedule (“FSS”) contracts through the United States General Services Administration (“GSA”). The provision of logistical and administrative personnel is accomplished through the Logistics Worldwide Schedule and medical personnel are supplied through the Professional and Allied Healthcare Staffing Services Schedule. TeamStaff also provides its staffing services to federal government agencies through competitively bid contracts and has a GSA schedule contract to provide information technology professional services. TeamStaff provides these services to the DVA, the US Department of Defense and other US governmental agencies and placed contract employees at over 40 facilities during the 2009 fiscal year.
1
We currently hold multiple GSA schedule contracts, under which we provide services that constitute a pre-qualified vendor under Schedule 621 I, and offerssignificant percentage of our total revenue. During the fiscal year ended September 30, 2012 our federal supply schedule contract for professional and medical personnel inallied healthcare services was extended through June 30, 2017. In October 2012, our logistics worldwide services contract was extended through November 2017.
We provide services to the healthcare field, including nursing, pharmacists and pharmaceutical personnel. TeamStaff GS helps its clients bridge gaps in professional clinical staffing inU.S. Government pursuant to a variety of locationscontract types, including fixed-price awards, indefinite delivery/indefinite quantity (IDIQ) and government wide acquisition contracts such as General Services Administration (GSA) schedule contracts, which are awarded competitively through full and open competition by the government. The majority of our contracts are fixed-price type contracts that were awarded on a shortbest-value basis. As such, the Company has developed and continues to leverage a suite of solution offerings geared toward enhancing performance and productivity while reducing costs to its US government client. Management believes the expanded use of these differentiating tools will become even more valuable as the Federal government deficit reduction initiatives evolve. The award of an IDIQ contract does not represent a firm order for services and is subject to competitive bidding. Generally, under an IDIQ contract, the government is not
obligated to order a minimum of services or long-term basis.
Backlog
At September 30, 2012, the total backlog was issued purchase orders for all sites from the DVA’s consolidated pharmacy national contracting office, which allowed for standardizationapproximately $153 million. Total backlog as of labor categories as well as implementationSeptember 30, 2011 was approximately $160 million. Backlog represents total estimated contract value of correct Department of Labor Wage Determinations. Although, the current task orders expired on December 31, 2009, a six month continuation of services extension for all six locations serviced by TeamStaff GS was awarded on December 14, 2009.
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Government Regulation
Our business is affected by numerous laws and regulations relating to the award, administration and performance of U.S. Government contracts. In addition, many Federal and state laws materially affect the Company's operations. These laws relate to ethics, labor, tax, and employment matters. As any employer, DLH is subject to Federal and state statutes and regulations governing their standards of business conduct with the DVA, no assurancesgovernment. The development of additional statutes and regulations and interpretation of existing statutes and regulations with respect to our industry can be given that inexpected to evolve over time. Through its corporate membership with the event the DVA issues such a solicitation, that any purchase orders would be awarded to the Company or if it is granted subsequent orders, that such orders would be of a scope comparable to the services that the Company has provided to date.
3
Most of our TeamStaff GS subsidiary is accomplished through contractsrevenue arrangements with various agencies of the United States Government. In fiscal 2009, through its FSS contracts primarily with the DVA, TeamStaff GS had independent task–orders with four DVA-related facilities which comprised 31%, 23%, 12% and 11%, or 77% in the aggregate, of the Company’s overall consolidated revenue. In fiscal 2009, TeamStaff GS had five task-orders that each individually comprised greater than 5% of the subsidiary’s revenue. As described in greater detail above, we are currently providing these services under extended task orders, which are scheduled to expire on or around June 30, 2010 and we anticipate that the DVA may release new requests for proposals related to staffing services at its pharmacy distribution facilities in early 2010. In such an event, the Company intends to submit a proposal to address any such solicitation.
The U.S. government also regulates the methods by which allowable costs may be allocated under U.S. government contracts. Our government contracts are subject to audits at various points in the contracting process. Pre-award audits are performed at the time a proposal is submitted to the U.S. government for cost-reimbursement contracts. During the performance of a contract, the U.S. government has the right to examine our costs incurred on the contract, including any labor charges, material purchases and indirect cost allocations. Upon a contract's completion, the U.S. government typically performs an incurred cost audit of all aspects of contract performance for cost-reimbursement contracts to ensure that we have performed the contract in a manner consistent with our proposal.
As is common in the U.S. defense industry, we are subject to business risks, including changes in the U.S. Government's procurement policies (such as greater emphasis on competitive procurement), governmental appropriations, and availability of funds. A reduction in expenditures by the U.S. Government for the services that we provide, lower margins resulting from increasingly competitive procurement policies, a reduction in the volume of contracts or subcontracts awarded to us or the incurrence of substantial contract cost overruns could materially adversely affect our business. All of our U.S. Government contracts can be terminated by the U.S. Government either for its convenience or if we default by failing to perform under the contract. Termination for convenience provisions provide only for our recovery of costs incurred or committed and settlement of expenses and profit on the work completed prior to termination. Termination for default provisions provide for the contractor to be liable for excess costs incurred by the U.S. Government in procuring undelivered items from another source.
Employee Relations
As of September 30, 2012, the Company employed approximately 1,100 employees performing in over 22 states throughout the U.S. The Company believes it maintains good relations with its employees as evidenced by a voluntary attrition rate of approximately 5 percent. As of this date, the Company has no assurance thatemployees covered by a collective bargaining agreement.
Competitive Landscape
Intense competition and long business development cycles are characteristics of our business and the government and defense industry. For major program competition, the business acquisition cycle typically ranges from 18 to 36 months for prime contractor companies. Companies may pursue work either as prime contractor or partner with other companies in a subcontractor role. Those competing as prime contractors normally expend substantially more resources than those in subcontractor roles. We partner and compete with several large and small-business companies in pursuit of acquiring new business.
In the Federal and Defense logistics and technical services sector, we compete and partner with major tier I and very large companies such protest process or implementation delays will not haveas Lockheed Martin, Raytheon Company, BAE Systems, SAIC, General Dynamics, Northrop Grumman, and L-3 Communications Corporation. Other companies in our space include Honeywell, CACI, Computer Sciences Corp., Mantech, URS, DynCorp International, Deloitte and many others. We compete and partner with many of these same companies and a material adverse effect on our financial condition, resultsrange of operations or cash flowsothers in the future.
DLH competes with these companies by offering customized products, personalized service,leveraging our differentiating suite of tools and uniquely integrating People, Processes, and Tools resulting in highly competitive pricesproposals and specialized personnel to satisfy a client’s particular requirements. Manysolid track record of these companies have greater name-recognitionpast performance. We compete for awards through a full and financial resources than we do.open competition on a "best-value basis". The Company believes thatdraws heavily from its broad scope of servicesconsistent high quality past performance ratings, proven and its commitmentevolving technical differentiators, key personnel credentials and growing market recognition to quality service differentiate it fromteam and compete favorably against its competition. Further, the Company believes that TeamStaff GS’sour track record, knowledge and processes with respect to government contract bidding processes represents a competitive advantage. In addition,
Our recent and future success in this competitive landscape hinges on our ability to continue to uniquely integrate people, processes and technology tools to deliver best value solutions for our targeted clients (both government and industry partners). Due in large part to government fiscal pressures and major defense platform cancellations and budget cuts, our ability to remain cost-competitive remains important, particularly in labor-intensive markets where we may face additional competition from other larger staffing companies that do not focuscan see greater pressure on the government staffing sector.margin rates.
4
In November 2011, we entered into an amendment of our Loan and Security Agreement with Presidential Financial Corporation, pursuant to which they agreed to not seek to terminate the Loan and Security Agreement without cause until after December 31, 2012. Following that date, the terms of the original loan continue to apply, which provide that the agreement automatically renews upon each anniversary date, unless the Borrower or Lender provides written notice of intent to not renew 60 days in advance of the anniversary date. The financial institution has the ability to terminate the Company's line of credit immediately upon the occurrence of a defined event of default, including among others, a material adverse change in the Company's circumstances or if the financial institution deems itself to be insecure in the ability of the Company to repay its obligations or, as to the sufficiency of the collateral. At present, the Company has moved all aspectsnot experienced, and the financial institution has not declared, an event of ITdefault.
Further, in house; improving overall support, while reducingMay 2012, we again amended the Company’s IT-related expenditures by approximately $75,000 per year.
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Corporate
Our principal executive offices are located at 1776 Peachtree Street NW, Suite 300S, Atlanta, Georgia 30309. Our telephone number is 866-952-1647 and our new consolidated homepage is www.dlhcorp.com. References herein to our website are provided purely as a convenience and do not constitute, and should not be viewed as, incorporation by reference of the information contained on, or available through, the website.
Executive Officers
Our executive officers are:
Name | Age | Positions | |||
|---|---|---|---|---|---|
Zachary C. Parker | 55 | President, Chief Executive Officer and Director | |||
Kathryn M. JohnBull | 53 | Chief Financial Officer | |||
John F. Armstrong | 63 | Executive Vice President—Corporate Development | |||
Kevin Wilson | 47 | President, DLH Solutions, Inc. | |||
Zachary C. Parker became Chief Executive Officer and President of DLH Holdings Corp. in February 2010. He has over 25 years of experience with the government services market, including DoD, holding several senior and executive management positions in addition to business development posts. His tenure includes approximately 19 years with Northrop Grumman, 7 years with GE Government Services (now Lockheed Martin), and 3 and 2 years with VSE Corporation and VT Group, respectively. Prior to joining DLH, Mr. Parker held executive positions, including President and previously Executive Vice President for Business Development, within VT Group , from March 2008 to February 2010. His executive development includes the GE Crotonville Executive Development Program, Darden Executive Leadership Program, Northrop Grumman Action Leadership Program, Wharton Earned Value Management, California Institute of Technology Strategic Marketing Program, and is Lean Six Sigma Green Belt certified among other professional and technical certifications. Mr. Parker is active in both professional and community associations including the Governmental Affairs Committee and the Veteran Affairs Task Force of the Washington DC-based Professional Services Council and has served as industry co-chair of the Government/Industry Partnership Executive council. He is an advisory board member of Hero Health Hire (a non-profit entity). Our annualHe has also served as board member on joint venture companies in the government services business. Mr. Parker earned his bachelors degree from California State University, Northridge (with honors) specializing in Human Factors Engineering and has completed post-graduate studies.
Kathryn M. JohnBull was named Chief Financial Officer on June 25, 2012. She has 25 years of experience within the government services market, principally with publicly-traded companies who experienced substantial organic and acquisitive growth. From January 2008 to June 2012, Ms. JohnBull was a senior financial executive with QinetiQ North America, serving in both corporate and operating group roles, including as Senior Vice President—Finance for its overall operations. From August 2002 to December 2007, Ms. JohnBull served as Operations Segment Chief Financial Officer for MAXIMUS, Inc, a publicly-traded provider of business process outsourcing, consulting and systems solutions. Prior industry positions, with emphasis on tax and treasury, were with BDM International, Inc. and United Defense. Ms. JohnBull is a certified public accountant and from 1985 to 1988 was with Arthur Andersen & Company as a tax manager and staff. Ms. JohnBull received a Bachelor of Business Administration, summa cum laude, from the University of Tulsa.
John F. Armstrong, FACHE joined DLH Holdings Corp. as its Executive Vice President on December 1, 2010 and leads our strategic partnerships corporate business development efforts. Mr. Armstrong has over three decades of in-depth experience (both public and private) in the military and the government services industry. Mr. Armstrong most recently served as director of the Sustainment and Health Services operation within Lockheed Martin Corporation from May 2008 to November 2010. Previously, from August 2002 to May 2008, he served as senior vice president of business development for Eagle Group International where he was instrumental in successfully growing the company to a competitive large business prior to being acquired by Lockheed Martin. Additionally, Mr. Armstrong served a distinguished career as an officer in the U.S. Army (Medical Services Corps), retiring as a Colonel in 2002. Mr. Armstrong is a fellow in the American College of Healthcare Executives and earned a Master of Business Administration degree from Marymount University, a
Master of Arts from Ball State University and completed his undergraduate studies at the University of Central Florida.
Kevin Wilson was appointed as the President of our subsidiary DLH Solutions in October 2008, previously serving as the Director of DLH Solutions from June 2007 through September 2008. From January 2004 to June 2007, Mr. Wilson served as the Director of Strategic Alliances of government services provider SAIC, Inc., where he was responsible for business development in the domestic and foreign defense markets. From March 1997 to January 2004, Mr. Wilson was the Program Manager for a multiyear defense services contract with Endress Hauser Systems & Gauging. Mr. Wilson also worked at Tracer Research Corporation from January 1990 to March 1997, where he was Project Manager for the United States Air Force, Air Combat Command professional services contract. Mr. Wilson holds a BS in Business Marketing from Northwest Missouri State University.
Available Information
We file registration statements, periodic and current reports, proxy statements, and other materials with the Securities and Exchange Commission (SEC). You may read and copy any materials we file with the SEC at the SEC's Public Reference Room at 100 F Street, NE, Room 1580, Washington, DC 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains a web site at www.sec.gov that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC, including our filings. We make our public filings with the SEC, including our Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all exhibits and amendments to thosethese reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the Exchange Act), are available free of charge on our Web site, http://www.dlhcorp.com, as soon as reasonably practicable after we file such material with the SEC. We also make available on our Web site reports filed by our executive officers and directors on Forms 3, 4 and 5 regarding their ownership of our securities. These materials are available in the “Investor Relations” section"Investor Relations" portion of our Web site, under the link "SEC Filings." We also use our website to make generally available important information about our company. Important information, including press releases, presentation and financial information regarding our company, is routinely posted on and accessible on the Investor Relations subpage of our website, at www.teamstaff.com. Our Internetwhich is accessible by clicking on the tab labeled "Investor Relations" on our website andhome page. Therefore, investors should look to the information"Investor Relations" subpage of our web site for important information. Information contained on that website, or accessible from our website,Web site is not intended to be incorporated intopart of this Annual Report on Form 10-K or any other filings we make with the SEC. These reports, and any amendments to these reports, are made available on our website as soon as reasonably practicable after such reports are filed with or furnished to the SEC. Such reports are also available, free of charge, from the SEC’s EDGAR database at www.sec.gov.
As provided for under the Private Securities Litigation Reform Act of 1995 (“("1995 Reform Act”Act"), we wish to caution shareholders and investors that the following important factors, among others discussed throughout this Annual Report on Form 10-K for the fiscal year ended September 30, 2009,2012, have affected, and in some cases could affect, our actual results of operationoperations and cause our results to differ materially from those anticipated in forward looking statements made herein. Our business, results of operations, cash flows and financial condition may be materially and adversely affected due to any of the following risks. The risks described below are not the only ones we face. Additional risks we are not presently aware of or that we currently believe are immaterial may also impair our business operations. The trading price of our common stock could decline due to any of these risks. In assessing these risks, you should also refer to the other information contained or incorporated by reference in this Annual Report on Form 10-K, including our consolidated financial statements and related notes.
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Certain statements contained herein constitute “forward-looking statements”"forward-looking statements" within the meaning of the 1995 Reform Act. TeamStaffDLH desires to avail itself of certain “safe harbor”"safe harbor" provisions of the 1995 Reform Act and is therefore including this special note to enable it to do so. Forward-looking statements included in this Annual Report on Form 10-K for fiscal year ended September 30, 20092012 involve known and unknown risks, uncertainties, and other factors which could cause TeamStaff’sDLH's actual results, performance (financial or operating) or achievements to differ from the future results, performance (financial or operating) or achievements expressed or implied by such forward-lookingforward- looking statements. Such future results are based upon management’smanagement's best estimates based upon current conditions and the most recent results of operations. These risks include, but are not limited to, the risks identified below.
We believe it is important to communicate our expectations to our shareholders and potential shareholders. There may be events in the future, however, that we are not accurately able to predict or over which we have no control. The risk factors listed below, as well as any cautionary language in this filing, provide examples of risks, uncertainties and events that may cause our actual results to differ materially from the expectations we describe in our forward-looking statements. You should be aware that the occurrence of any of the events described in the risk factors below, elsewhere in this filing and other events that we have not predicted or assessed could have a material adverse effect on our earnings, financial condition, cash flows or business. In such case, the price of our securities could decline.
Risks Relating to Our Business and Our Industry
TeamStaff GS’sWe depend on contracts with the federal government for virtually all of our revenue are derived from U.S. Government customers.and our business could be seriously harmed if the federal government decreased or ceased doing business with us or changed its budgets or budgetary priorities.
We derive a substantial portionvirtually all of our revenues in our TeamStaff GS subsidiary from the U.S. Government as a prime contractor or a subcontractor. Revenues fromFurther, our revenue concentration is heavily dependent upon contracts with the DVA. Accordingly, the loss or delay of all or a substantial portion of our sales to the U.S. Government, represented approximately 98% of the total revenues of TeamStaff GS for each of the 2009 and 2008 fiscal years. Further, in fiscal 2009, through its FSS contracts primarily with the DVA, TeamStaff GS had independent task-orders with four DVA-related facilities that comprised 31%, 23%, 12% and 11% of the Company’s overall consolidated revenue, or 77% in the aggregate. Accordingly, our consolidated revenues could be materially adversely impacted bywhether due to a reduction in the overall level of U.S. Government spending and by changesor a change in its spending priorities, would have a material adverse effect on our results of operations and cash flows.
Presently, the Company derives all of its revenue from yearagencies of the Federal government and the Company has derived a substantial portion of its revenues through various contracts awarded by the DVA. The Company currently provides services to year.
affected.
Furthermore, even if the overall level of U.S. Government spending does increase or remains stable, the budgets of the government agencies with whomwhich we do business may be decreased or our projects with them may not be sufficiently funded, particularly because Congress usually appropriates funds for a given project on a fiscal-year basis even though contract performance may take more than one year.funded. In the event the budgets or budgetary priorities of the U.S. Government entities with which we do business, particularly the DVA, are decreased or underfunded, our consolidated revenues and results of operations could be materially and adversely affected. In addition, obtaining U.S. Government contracts remains a highly competitive process and this has led to a greater portion of our revenue base being associated with contracts providing for a lower amount of reimbursable cost than we have traditionally been able to recover. We are heavily dependent upon the U.S. Government as the primary customer to our TeamStaff GS subsidiary. In light of the recent disposition of our TeamStaff Rx business, our dependence on the results of operations of TeamStaff is significantly increased as compared to prior periods. Our future success and revenue growth will depend in part upon our ability to continue to expand our customerbusiness base.
During 2011, the federal government was unable to reach agreement on budget reduction measures required by the Budget Control Act of 2011 (Budget Act) passed by Congress. Unless Congress and the Administration take further action, the Budget Act will trigger automatic reductions in both defense and discretionary spending in January 2013. While the impact of sequestration is yet to be determined, automatic across-the-board cuts would approximately double the $487 billion top-line reduction already reflected in the defense funding over a ten-year period, with a $52 billion reduction occurring in the government's fiscal year 2013. The resulting automatic across-the-board budget cuts in sequestration could have significant consequences to our business and industry. While it is unclear whether sequestration will occur and what the exact impact of it would be, we are continuously reviewing our operations in an attempt to identify those programs that could be at risk so that we can make appropriate contingency plans. These or other factors could result in a significant decline in, or redirection of, current and future budgets and could adversely affect our operating performance, including the possible loss of revenue and reduction in our operating cash flow.
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Many of the U.S. Government programs in which we participate as a contractor or subcontractor may extend for several years. However, these programs are normally funded on an annual basis. TheAs mentioned above the U.S. Government may modify, curtail or terminate its contracts and subcontracts at itsfor convenience. Due to our increasing dependence on these relationships, the modification, curtailment or termination of our major programs or contracts would have a material adverse effect on our results of operations and financial condition.
If the government terminates a cost reimbursable contract for convenience, we may not recover the cost of work which has not been completed. We can recover only our incurred or actual cost, to include in certain cases committed costs, and cost for settling outstanding debts and restocking fees. We will also be able to negotiate for a fee based upon the percentage of the work performed or cost incurred. If the government terminates a contract for default, normally we would be unable to recover all costs for work performed and in some cases may be liable for liquidated damages in excess of actual costs incurred. Additionally, the government may seek to have the contract pay for its re-procurement cost for all undelivered items and services not received from another source. Depending on the value of a contract, such termination could cause our actual results to differ materially and adversely from those anticipated. The Company has never had a contract terminated for default.
We incurred a net loss from operations for the year ended September 30, 2012 and industry conditions under which we operate have negatively impacted our revenues. Any failure to increase our revenues and keep our expenses consistent with revenues could prevent us from achieving and maintaining profitability.
We incurred a net loss from continuing operations of approximately $2.0 million for the fiscal year ended September 30, 2012 and had an accumulated deficit of approximately $67.4 million at such date. Our business is under economic pressures due to Federal government procurement delays, substantial Federal budget uncertainty, an economy in recession, and other challenging industry dynamics. We have expended, and will continue to be required to expend, substantial funds to enhance our marketing efforts and to otherwise operate our business. Therefore, we will need to generate higher revenues to continue increasing profitability and cannot assure you that we will be profitable in any particular future period. Our prospects should be considered in light of the difficulties we are facing, including the current economic climate and the overall competitive environment in which we operate. Revenue levels achieved from our customers, the mix of solutions that we offer and our ability to reduce and manage our operating expenses will affect our financial results.
Our capital requirements are significant and we may need to raise additional capital to supplement our revenues derived from operations.
Our working capital requirements have been and will continue to be significant. As previously reported, in July 2010, we entered into a secured loan arrangement with Presidential Financial Corporation which, as amended to date, provides us with a maximum amount of $6.0 million of credit, subject to the conditions and limitations of the facility. As described in greater detail in Note 6, our ability to borrow against the increased available credit is subject to the satisfaction of a number of conditions, and presently, the maximum availability under this loan facility is $3.0 million, subject to eligible accounts receivable. In addition, as further described in Note 10, during 2012 the Company completed a rights offering and raised gross proceeds of $4.2 million from the sale of 3,230,769 shares of its common stock. However, we have, from time to time, utilized our secured credit facility to supplement cash flows from operations in order to satisfy our working capital needs. We used approximately $2.8 million and $1.0 million in cash for operating activities for the fiscal years ended September 30, 2012 and 2011, respectively, and our available cash and cash equivalents as of September 30, 2012 totaled approximately $3.1 million. Based on our business plan and current working capital position, we presently believe that we have sufficient liquidity resources, including those expected to be generated by forecasted operations and from timely collection of unbilled receivables from the DVA as well as those expected to be available under our credit facility, and the effects of cost reduction programs and initiatives to fund our operations for the next twelve months. This in part assumes the ultimate non-payment of certain liabilities and recorded guarantees which we are currently contesting or are not expected to be settled in cash (see Note 6 to the accompanying consolidated financial statements) (classified as current at September 30, 2012) in fiscal 2013. During 2011, the Company received equity and debt funding of $150,000 and $350,000, respectively, exclusive of direct costs. Such proceeds were derived from management and board members and our largest shareholder, all of whom are considered related parties.
However, it may be necessary for us to raise additional capital to accelerate growth, fund operations and to meet our obligations in the future. To meet our financing requirements, we may seek to raise funds through equity, debt or equity-based financings (such as convertible debt) or strategic alliances. Raising additional funds by issuing equity or convertible debt securities may cause our stockholders to experience substantial dilution in their ownership interests and new investors may have rights superior to the rights of our other stockholders. Raising additional funds through debt financing, if available, may involve covenants that restrict our business activities and options. We currently have no firm agreements with any third-parties for such transactions and no assurances can be given that we will be successful in raising sufficient capital from any proposed financings, or that additional financing,
if at all available, can be obtained on acceptable terms to us. If we are unable to obtain additional capital when required, or on acceptable terms, we may need to reduce expenses and operations and you may lose your investment in our Company. Our future capital requirements will depend on, and could increase substantially as a result of, many factors, including:
Our contract costsproposals and in many cases our invoices are subject to audits and investigations by U.S. Government agencies and unfavorable government audit results could force us to refund previously recognized revenues and could subject us to a variety of penalties and sanctions.
From time to time, U.S. Government representatives may audit our performance on and costs incurredinvoices submitted on our U.S. Government contracts, including allocated indirect costs.contract. Further, federal agencies can also audit and review our compliance with applicable laws, regulations and standards. TheseUnder these audits, if it is found that we incorrectly invoiced or invoiced work not performed or claimed hours to be performed that were not performed we would have to refund these amounts. Normally, these audits are performed throughout the year and as such if found represent a refund within the current year. However, the government may go further back in time than the present fiscal year and adjustments may result in adjustments to our contract costs. In the event that it is determined that our payments from Government agencies was in excess of contractual costs, we could be assessed for these excess payments. We would expect that we would normally negotiate with U.S. Government representatives before settling on final adjustments to our contract costs. However, we do not know the outcome of any future audits and adjustments and we may be required to reduce our revenuesover one or profits upon completion and final negotiation of these audits. Further, an audit of our work, including an audit of work performed by companies we have acquired or may acquire, or subcontractors we have hired or may hire, could force us to refund previously recognized revenues. Similarly,more fiscal years. Additionally, as a government contractor, we are from time to time subject to inquiries and investigations of our business practices by the U.S. Government due to our participation in government contracts. We cannot assure you that any such inquiry or investigation will not have a material adverse effect on our results of operations, cash flows, and financial condition.
If a government audit uncovers improperillegal activities or illegal activities not in compliance with a contract's terms or conditions, we may be subject to civil and criminal penalties and administrative sanctions, including termination of contracts, forfeiture of profits, suspension of payments, fines, and suspension or debarment from doing business with federal government agencies. In addition, we could suffer serious harm to our reputation if allegations of impropriety were made against us, whether or not true. If we were suspended or debarred from contracting with the federal government generally or with any specific agency, if our reputation or relationships with government agencies were impaired, or if the government otherwise were to cease doing business with us or were to significantly decrease the amount of business it does with us, our revenue, cash flows and operating results would be materially adversely affected.
If an audit determines that any of our administrative processes and systems do not comply with requirements, we may be subjected to increased government scrutiny and approval that could delay or otherwise adversely affect our ability to compete for or perform contracts or collect our revenue in a timely manner. Therefore, an unfavorable outcome of an audit could cause actual results to differ materially and adversely from those anticipated. Moreover, if an audit determines that costs were improperly allocated to a specific contract, such amounts will not be reimbursed, and any such costs already reimbursed must be refunded and certain penalties may be imposed.
The U.S. Government contract bid process is highly competitive, complex and sometimes lengthy, and is subject to protest and implementation delays.
Many of our contracts and task orders with the federal government are awarded through a competitive bidding process, which is complex and sometimes lengthy. OnceWe expect that much of the business that we will seek in the foreseeable future will continue to be awarded through competitive bidding. If a bid is won and a contract awarded, there still is the possibility of a bid protest or numerous delays in implementation. ThereOur business could be adversely affected by delays caused by our competitors protesting major contract awards received by us, resulting in the delay of the initiation of work. It can take many months to resolve protests by one or more of our competitors of contract awards we receive. The resulting delay in the start up and funding of the work under these contracts may cause our actual results to differ materially and adversely from those anticipated, and there can be no assurance that such protest process or implementation delays will not have a material adverse effect on our financial condition or results of operations in the future.
If we are unable to win particular contracts, we may be prevented from providing to clients services that are purchased under those contracts for a number of years. If we are unable to consistently win new contract awards over any extended period, our business and prospects will be adversely affected and that could cause our actual results to differ materially and adversely from those anticipated. In addition, upon the expiration of a contract, if the client requires further services of the type provided by the contract, there is frequently a competitive rebidding process. There can be no assurance that we will win any particular bid, or that we will be able to replace business lost upon expiration or completion of a contract, and the termination or non-renewal of any of our significant contracts could cause our actual results to differ materially and adversely from those anticipated.
Our failure to comply with complex federalFederal procurement laws and regulations could cause us to lose business, incur additional costs, and subject us to a variety of penalties.
We must comply with complex laws and regulations relating to the formation, administration, and performance of federal government contracts. These laws and regulations create compliance risk and affect how we do business with our federal agency clients, and may impose added costs on our business. If a government review or investigation uncovers improperillegal activities or illegal activities not in compliance with a particular contract's terms or conditions, we may be subject to civil and criminal penalties and administrative sanctions, including termination of contracts, forfeiture of profits, harm to our reputation, suspension of payments, fines, and suspension or debarment from doing business with federal government agencies. The government may in the future reform its procurement practices or adopt new contracting rules and regulations, including cost accounting standards, that could be costly to satisfy or that could impair our ability to obtain new contracts. A failure to comply with applicable laws and regulations could result in contract termination, price or fee reductions, or suspension or debarment from contracting with the federal government, each of which could lead to a material reduction in our revenues, cash flows and operating results.
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The reputation and relationships that we have established and currently maintain with government personnel and agencies are important to maintaining existing business and identifying new business. If our reputation or relationships were damaged, it could have a material adverse effect on our ability to maintain or expand our business relationship with U.S. Government entities. In addition, if our performance does not meet agency expectations, our revenue and operating results could be materially harmed.
Competition is intense in the government services business.
There is often intense competition to win federal agency contracts. If we are unable to successfully compete for new business or win competitions to maintain existing business, our revenue growth and margins may materially decline. Many of our competitors are larger and have greater resources than we do, larger client bases and greater brand recognition. Our larger competitors, alsoindividually or through relationships with third parties, may be able to provide clients with different or greater capabilities or benefits than we can provide.
Budgetary pressures and changes in the procurement process have caused many government clients to increasingly purchase goods and services through Indefinite Delivery Indefinite Quantity ("IDIQ") contracts, General Services Administration ("GSA") schedule contracts and other government-wide acquisition contracts. These contracts, some of which are awarded to multiple contractors, have increased competition and pricing pressure, requiring that we make sustained post-award efforts to realize revenue under each such contract. In addition, in consideration of the practice of agencies awarding work under such contracts that is arguably outside the intended scope of the contracts, both the GSA and the DoD have initiated programs aimed to ensure that all work fits properly within the scope of the contract under which it is awarded. The net effect of such programs may reduce the number of bidding opportunities available to us. Moreover, even if we are highly qualified to work on a particular new contract, we might not be awarded business because of the federal government's policy and practice of maintaining a diverse contracting base.
We may not receive the full amounts authorized under the contracts included in our backlog, which could reduce our revenue in future periods below the levels anticipated.
Our backlog consists of funded backlog, which is based on amounts actually committed by a client for payment for goods and services, and unfunded backlog, which is based upon management's estimate of the future potential of our existing contracts and task orders, including options, to generate revenue. Our backlog may not result in actual revenue in any particular period, or at all, which could cause our actual results to differ materially and adversely from those anticipated. The maximum contract value specified under a government contract or task order awarded to us is not necessarily indicative of the revenue that we will realize under that contract. Although many of our Federal government contracts contemplate performance over a period of years, Congress often appropriates funds for these contracts for only one year at a time. As a result, our contracts typically are only partially funded at any point during their term, and all or some of the work intended to be performed under the contracts will remain unfunded pending subsequent Congressional appropriations and the obligation of additional funds to the contract by the procuring agency. Nevertheless, we may estimate our share of the contract values, including values based on the assumed exercise of options relating to these contracts, in calculating the amount of our backlog. Because we may not receive the full amount we expect under a contract, our estimate of our backlog may be inaccurate and we may generate results that differ materially and adversely from those anticipated.
Failure to maintain strong relationships with other contractors could materially and adversely affect our revenue.
We intend to derive substantial revenue from contracts in which we act as a subcontractor or from teaming arrangements, in which we and other contractors bid on particular contracts or programs. As a subcontractor or teammate, we will often lack control over fulfillment of a contract, and poor performance on the contract could impact our customer relationship, even if we perform as required. We expect to increasingly depend on relationships with other contractors for a portion of our revenue in the foreseeable future. Moreover, our revenue and operating results could differ materially and adversely from those anticipated if any such prime contractor or teammate chose to offer directly to the client services of the type that we provide or if they team with other companies to provide those services.
Loss of our General Services Administration (“GSA”)GSA schedule contracts or other contracting vehicles could impair our ability to win new business.business and perform under existing contracts.
We currently hold multiple GSA schedule contracts, constituteincluding a significant percentagefederal supply schedule contract for professional and allied healthcare services and the logistics worldwide services contract. During 2012, our professional and allied healthcare services schedule was extended through June 2017. In October 2012, the term of revenue from our federal agency clients. Duelogistics worldwide schedule was extended to our dependence on providing staffing services to U.S. government entities, ifNovember 2017. If we were to lose one or more of these contracts or other contracting vehicles, we could lose a significant revenue source and our operating results and financial condition would be materially and adversely affected. These contracts typically have an initial term with multiple options that may be exercised by our government agency clients to extend the contract for successive periods of one or more years. We can provide no assurance that our clients will exercise these options.
Our employees (or those of others, with whom we are associated, such as teammates, prime or sub-contractors) may engage in misconduct or other improper activities, which could harm our business.
Like all government contractors, we are exposed to the risk that employee fraud or other misconduct could occur. Misconduct by our employees (or those of others, with whom we are associated, such as teammates, prime or sub-contractors) could include intentional failures to comply with federal government procurement regulations, engaging in unauthorized activities, seeking reimbursement for improper expenses, or falsifying time records. Employee misconduct could also involve the improper use of our clients’clients' sensitive or classified information which couldand result in regulatory sanctions against us anda serious harm to our reputation. While we have policies in effect to deter illegal activities and promote proper conduct, these are not a failsafe. It is not always possible to deter employee misconduct, and precautions to prevent and detect this activity may not be effective in controlling such risks or losses, which could materially and adversely affect our business.
liquidity.
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On an annual basis, Congress must approve budgets that govern spending by each of the federal agencies we support. When Congress is unable to agree on budget priorities and is unable to pass the annual budget on a timely basis, Congress typically enacts a continuing resolution. A continuing resolution allows government agencies to operate at spending levels approved in the previous budget cycle. When government agencies must operate under a continuing resolution, it may delay funding we expect to receive from clients on work we are already performing and will likely result in any new initiatives being delayed or, in the extreme, cancelled. In particular, if the Federal government does not adopt, or delays adoption of, a budget for each fiscal year beginning on October 1, or fails to pass a continuing resolution, federal agencies may be forced to suspend our contracts and potentially cancelled. Changes in federal government fiscal or spending policies could adversely affectdelay the award of
new and follow-on contracts and orders due to a lack of funding. Therefore, period-to-period comparisons of our government agency business. Theoperating results may not be a good indication of our future performance and the occurrence of either scenario wouldany of the above mentioned scenarios may materially and adversely impact our results of operations.
Our profits and revenues could suffer if we are involved in legal proceedings, investigations and disputes.
As with much of the government services market, workers performance can result in substantial injury and we are exposed to legal proceedings, investigations and disputes. As previously reported, in fiscal 2012, we were advised of a claim by the U.S. Attorney based on an alleged failure to pay certain classes of employees the prevailing wages as required by the Service Contract Act during the years 2003-2010. The Company is continuing to review the data allegedly supporting the claims with the U.S. Department of Justice in an effort to determine whether any wage adjustment is required. These claims appear, in part, to be part of the claims previously disclosed by DLH and related to services provided to the Department of Veterans Affairs by DLH. See "Potential Contractual Billing Adjustments" in the Management Discussion and Analysis, below. Until the analysis of the data is complete, we cannot finally determine either the merits of the claim or the potential impact on us. However, we continue to believe that we have acted in conformity with our contractual commitments and no wage adjustment is required. Nevertheless, there can be no assurance that an adverse decision or settlement would not have a material adverse impact on us.
In addition, in the ordinary course of our business we may become involved in legal disputes regarding personal injury or employee disputes. While we provision for these types of incidents through commercial party insurance carriers, we often defray these types of cost through higher deductibles. Any unfavorable legal ruling against us could result in substantial monetary damages by losing our deductible portion of carried insurance or even criminal violations. We maintain insurance coverage as part of our overall legal and risk management strategy to lower our potential liabilities. If we sustain liabilities that exceed our insurance coverage or for which we are not insured, it could have a material adverse impact on our results of operations, cash flows and financial condition, including our profits, revenues and liquidity.
We are dependent upon certain of our management personnel.personnel and do not maintain "key personnel" life insurance on our executive officers.
Our success to date has resulted in part from the significant contributions of our executive officers. Our executive officers are expected to continue to make important contributions to our success. The lossAs of September 30, 2012, our CEO, CFO, Executive Vice President of Business Development and the President of DLH Solutions are under employment contracts. However, we do not maintain "key person" life insurance on any of our executive officers. Loss for any reason of the services of our key personnel could materially affect our operations. Currently, our CEO, CFO and the President of TeamStaff GS are under employment contracts. The Company does not maintain “key person” life insurance policies on any of our key personnel.
Demand for staffingour services could be significantly affected by the general level of economic activity and unemployment or by factors beyond our control (i.e.;(e.g. hurricanes, weather conditions, acts of war, etc.) in the United States.
Our business, financial condition, cash flow and results of operations may be affected by various economic factors. Unfavorable economic conditions may make it more difficult or impossible for us to maintain and continueor grow our revenue growth.revenue. In an economic recession or under other adverse economic conditions, customers and vendors may be more likely to be unable to meet contractual terms or their payment obligations. When economic activity increases, contract
We may be held liable for the actions of our employees are often added before full-time employees are hired. However,and therefore incur unforeseen liabilities.
While we carry insurance for these types of liabilities, as economic activity slows, many companies, includinga result of our hospital and healthcare facility clients, reduce their useemployer status, we may be liable for violations of contract employees before laying off full-time employees.these or other laws despite contractual protections. In addition, as our employees may be deemed to be our agents, we experience more competitive pricing pressure during periods of economic downturn. A decline in economic conditionscould be held liable for their actions which may have a material adverse effect on our business.
Our staffing of healthcare professionals exposes us to potential malpractice liability.
Through our subsidiaries, we engage or have recently engaged in the business of providing healthcare professionals. The current recessionplacement of such employees increases our potential liability for negligence and professional malpractice of those employees and any such liabilities may not become immediately apparent. Although we are covered by professional malpractice liability insurance on a claims made basis in the continuation or intensificationaggregate amount of $5.0 million with a $2.0 million per occurrence limit, which we deem reasonable under the circumstances, not all of the potential liability we face may be fully covered by insurance. Any significant adverse claim which is not covered by insurance may have a material adverse effect on our financial condition, results of operations and liquidity.
We may not be fully covered by the insurance we procure and our business could be adversely impacted if we were not able to renew all of our insurance plans.
Although we carry liability insurance, it may not be sufficient to cover the total cost of any continued volatilityjudgments, settlements or costs relating to any present or future claims, suits or complaints. In addition, sufficient insurance may not be available to us in the financial markets may have an adversefuture on satisfactory terms or at all. Also, any increase in our costs of insurance will impact on the availability of creditour profitability to our customers and businesses generally and could lead to a further weakening of the U.S. and global economies. To the extent that disruption inwe cannot offset these increases into our costs of services. If the insurance we carry is not sufficient to cover any judgments, settlements or costs relating to any present or future claims, suits or complaints, our business, financial markets continues and/or intensifies, it has the potential to materially affect our customers’ ability to tap into debt and/or equity markets to continue their ongoing operations, have access to cash and/or pay their debts as they come due, all of which could reasonably be expected to have an adverse impact on the number of open positions for healthcare staff they request, as well as their ability to pay for our staffing services. Continued economic weakness is likely to adversely impact ourcondition, results of operations.
adversely affected.
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Our current workers' compensation and medical plans are partially self-funded insurance programs. The Company currently pays base premiums plus actual losses incurred, not to exceed certain individual and aggregate stop-loss limits. In addition, health insurance premiums, state unemployment taxes and workers’workers' compensation rates for the Company are in large part determined by our claims experience andexperience. These categories of expenditure comprise a significant portion of our direct costs. If we experience a large increase in claim activity, our direct expenditures, health insurance premiums, unemployment taxes or workers’workers' compensation rates couldwill increase. Although we employ internal and external risk management procedures in an attempt to manage our claims incidence and estimate claims expenses and structure our benefit contracts to provide as much cost stability as reasonably possible given the self-funded nature of our plans, we may not be able to prevent increases in claim activity, accurately estimate our claims expenses or pass the cost of such increases on to our clients. Since our ability to incorporate such increases into our fees to our clients is constrained by contractual arrangements with our clients, a delay could occur before such increases could be reflected in our fees, which may reduce our profit margin. As a result, such increases could have a material adverse effect on our financial condition, results of operations cash flows and liquidity.
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The maintenance of health and workers’workers' compensation insurance and administration plans that cover our contract healthcare employees is a significant part of our business. If we were unable to secure renewal of
contracts for such plans or the renewal of such plans with favorable rates and with competitive benefits, our business would be adversely affected. The current health and workers’workers' compensation contracts are provided by vendors with whom we have an established relationship and on terms that we believe to be favorable. While we believe that renewal contracts could be secured on competitive terms without causing significant disruption to our business, there can be no assurance in this regard.
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We rely heavily on our ability to attract and retain nursesqualified professionals and allied health professionalsother personnel who possess the skills, experience and licenses necessary in order to provide staffingour solutions for hospital and healthcare facilityour assignments. We compete for healthcare professionals with other healthcare staffing companies and with hospitals and healthcare facilities. We must continually evaluate and expandOur business is materially dependent upon the continued availability of such qualified personnel. Our inability to secure qualified personnel would have a material adverse effect on our healthcare professional network to keep pace with our hospital and healthcare facility clients’ needs. Currently, there is a shortage of qualified nurses in most areas of the United States and competition for nursing personnel is increasing. We may be unable to continue to increase the number of healthcare professionals that we recruit, thereby decreasing the potential for growing our business. Our ability to attract and retain healthcare professionals depends on several factors, including our ability to provide healthcare professionals with assignments that they view as attractive and to provide them with competitive benefits and wages. The cost of attracting healthcare professionalsqualified personnel and providing them with attractive benefits packages may be higher than we anticipate and, as a result, if we are unable to pass these costs on to our hospital and healthcare facility clients, our profitability could decline. Moreover, if we are unable to attract and retain healthcare professionals,qualified personnel, the quality of our services to our hospital and healthcare facility clients may decline and, as a result, we could lose clients.
Our results of operations and cash flow are affected by our ability to leverage our cost structure.
We have technology, operations and human capital infrastructures in place to support both our current business operations and future growth. As revenues grow, these costs are leveraged over a larger revenue base, which positively impacts our results of operations and cash flows. Similarly, in orderperiods of contraction, these costs are no longer as leveraged, adversely affecting our results of operations and cash flow. During the last fiscal year, in light of the adverse market conditions being experienced by our business, we took steps to provide contract logistic,attempt to manage our general and administrative or other employeesexpenses. However, we expect reductions in such costs to be limited and there to be areas where additional spend may be deemed appropriate by management in preparation for anticipated growth, which will adversely affect our clients, we are dependent on securing a poolresults of qualified persons willing to accept assignments for our clients. Our business is materially dependent upon the continued availability of such qualified personnel. Our inability to secure qualified personnel would have a material adverse effect on our business.
We are exposed to increased costs and risks associated with complying with increasing and new regulation of corporate governance and disclosure standards.
Since the effectiveness for us of the Sarbanes-Oxley Act of 2002, we spend an increasing amount of management's time and resources (both internal and external) to comply with changing laws, regulations and standards relating to corporate governance and public disclosures. This compliance requires management's annual review and evaluation of our internal control systems. This process has caused us to engage outside advisory services and has resulted in additional accounting and legal expenses. We may encounter problems or delays in completing these reviews and evaluation and the implementation of improvements. If we are not able to timely comply with the requirements set forth in the Sarbanes-Oxley Act of 2002, we might be subject to sanctions or investigation by regulatory authorities. Any such action could materially adversely affect our business and our stock price.
We are highly dependent on the proper functioning of our information systems.
We are highly dependent on the proper functioning of our information systems in operating our business. Critical information systems used in daily operations identify and match staffing resources and client assignments. The system also tracks regulatory credentialing expirations and other relevant client and healthcare information. They also perform payroll, billing and accounts receivable functions. OurWhile we have multiple back up plans for these types of contingencies, our information systems are vulnerable to fire, storm, flood, power loss, telecommunications failures, physical or software break-ins and similar events. If our information systems fail or are otherwise unavailable, these functions would have to be accomplished manually, which in turn could impact our abilityfinancial viability, due to identify business opportunities quickly, maintain billing and staffing records reliably, pay our staff in a timely fashion and bill for services efficiently.the increased cost associated with performing these functions manually.
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The Company has received several notices from the Internal Revenue Service regarding potential underpayment, overpayment or non-payment("IRS") claiming taxes, interest and penalties due related to payroll taxes predominantly from its former PEO operations which were sold in fiscal 2003. The Company has also received notices from the IRS reporting overpayments of payroll-related taxes. We have disputedManagement believes that these notices and strongly believe that such notices wereare predominantly the result of errors made in reporting taxes paid and the resulting misapplication of taxes paid, in large part duepayroll tax payments between its legal entities. If not resolved favorably, the Company may incur interest and penalties. Until the sale of certain assets related to our operation of approximately seventeen differentthe former PEO operations, the Company operated through 17 subsidiaries, predominantly from our former Professional Employer Organization discontinued operations. Theand management believes that the IRS has not correctly identified payments made through the different entities, therefore leading to the notices. To date, the Company has been working with the IRS to resolve these discrepancies and has had certain interest and penalty claims abated. DLH has also received notices from the Social Security Administration claiming variances in wage reporting compared to IRS transcripts. The Company believes the notices from the Social Security Administration are directly related to the IRS notices received. The Company believes that if we were required to pay in full, could materially adversely affect our financial conditionafter the IRS applies all the funds correctly, any significant interest and cash flows. We are contesting these notices because we believe all material payroll-related taxes have been paid. We further believe that once all tax payments are applied appropriately, all material penalties and interest shouldwill be abated. We have retained the services of Ernst & Young, LLP to assist us in this regard. However,abated; however, there can be no assurance that weeach of these matters will be successful in our efforts.resolved favorably. In settling various years for specific subsidiaries with the IRS, the Company has received refunds for those specific periods; however, as the process of settling and concluding on other periods and subsidiaries is not yet completed, and the potential exists for related penalties and interest,interest. No payments have been made by the remainingCompany in fiscal 2012 or 2011, but as disclosed in Note 9 to the Financial Statements, a liability ($1.1of $1.3 million is recorded at September 30, 2009) has been recorded in accounts payable in the accompanying balance sheets. In fiscal 2009, the Company paid $1.1 million, related to this matter. Based on an assessment of periods settled and the status of open periods under review by the IRS, management reduced its estimated liability by $0.7 million in 2008. Such amount, accounted for as a change in estimate, is included as a component of other income (expense) in the accompanying 2008 statement of operations.2012. Management believes that the ultimate resolution of these remaining payroll tax matters will not have a significant adverse effect on its financial position or future results of operations.
We have a substantial amount of goodwill on our balance sheet. Future write-offs of goodwill may have the effect of decreasing our earnings or increasing our losses.
We have previously obtained growth through acquisitions of other companies and businesses. Under existing accounting standards, we are required to periodically review goodwill and indefinite life intangible assets for possible impairment. In the event that we are required to write down the value of any assets under these pronouncements, it may materially and adversely affect our earnings. See the more detailed discussion appearing as part of our Management’sManagement's Discussion and Analysis of Financial Condition and Results of Operations in Item 7 herein.
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At September 30, 2012, we had net operating losses, or NOLs, of approximately $40.2 million and $28.2 million for U.S. and state tax return purposes, respectively, and unutilized tax credits approximate $1.1 million. Under Section 382 of the Internal Revenue Code, following an "ownership change," special limitations apply to the use by a "loss corporation" of its: (i) NOL carry forwards arising before the ownership change; and (ii) net unrealized built-in losses (if such losses existed immediately before the ownership change and exceed a statutory threshold amount) recognized during the five years following the ownership change. As a result of previous business combinations and changes in ownership, there is a substantial amount of U.S. NOLs that are subject to annual limitations on utilization. Our U.S. NOLs begin to expire in 2021 and continue to expire through 2032. These net operating losses are fully offset by valuation allowances as of September 30, 2012.
Our credit facility is secured by a lien on substantially all of our assets and if we are unable to make the scheduled principal and interest payments on the facility or maintain compliance with other debt covenants, we may default on the facility.
On July 29, 2010, DLH Solutions entered into a $3.0Loan and Security Agreement (the "Loan Agreement") with Presidential Financial Corporation (the "Lender"). Under the Loan Agreement, the Lender agreed to provide a two (2) year secured loan facility to DLH Solutions in an aggregate amount of up to $1.5 million, revolving credit facility by Sovereign Business Capital (formerly known as Business Alliance Capital Company), a division of Sovereign Bank, effective on March 28, 2008. Revolving credit advances bear interest atupon the per annum rate of Prime Rate plus 25 basis points, but not less than 5.5% per annum. The facility has a three-year lifefurther terms and contains term and line of credit borrowing options. In connection withsubject to the dispositionconditions of the assetsLoan Agreement. In November, 2010, the Lender agreed by means of our TeamStaff Rx subsidiary, we were requiredan amendment to obtain the consent of the lender under our Loan Agreement Sovereign. On January 12, 2010 we were granted such consent. As a condition to such consent, however, Sovereign reducedincrease the maximum amount available under such loanthe facility from $3.0$1.5 million to $2.0 million. As of September 30, 2009, there was no debt outstanding under$2.5 million and on February 9, 2011, we entered into a further amendment to the Loan Agreement and unused availability (as defined) totaled $1.7 million, net of required collateral reserves perpursuant to which the Loan Agreement for certain payroll and tax liabilities. As of September 30, 2009, we had working capital of $0.9 million. Accordingly, management does not believe that the reduction in theLender agreed to further increase our maximum availability under the Loan Agreement from $2.5 million to $3.0 million and to provide an unbilled receivable facility within the limits of the Loan Agreement. The February 2011 amendment also extended the term of the Loan Agreement by 12 months, to July 29, 2013, and will haveautomatically renew annually unless terminated by either party.
In May 2012, the Company entered into a material adverse impact on our operationsfurther amendment to the Loan Agreement (the "Fifth Amendment") pursuant to which the Lender agreed to increase the available line of credit from $3,000,000 to a maximum amount of $6,000,000 and financial condition.
An interest rate premium of 2% is payable in respect of any advances secured by unbilled accounts receivable, which are subject to a sub-facility limit of $500,000 and an advance rate of 75%. The loan is secured by a security interest and lien on substantially all of our assets. Due to these covenantsDLH Solutions' cash accounts, account deposits, letters of credit and restrictions, our operations may be affected in several ways. For instance, a portion of our cash flow from operations will be dedicated to the paymentinvestment property, chattel paper, furniture, fixtures and equipment, instruments, investment property, general intangibles, deposit accounts, inventory, other property, all proceeds and products of the principalforegoing (including proceeds of any insurance policies and interest on our indebtednessclaims against third parties for loss of any of the foregoing) and as referenced above, ourall books and records related thereto. DLH Solutions' ability to enter into certain transactions, incur additional indebtedness and dispose of certain assets may be limited. The facilityrequest loan advances under the Loan Agreement is subject to acceleration upon non-payment or various other standard default clauses. Material increases(i) computation of DLH Solutions' advance availability limit based on "eligible accounts receivables" (as defined in the Loan Agreement) multiplied by the "Accounts Advance Rate" established by the Lender which initially shall be 85% and may be increased or decreased by the Lender in exercise of its discretion; and (ii) compliance with the covenants and conditions of the loan.
Under the Loan and Security Agreement, interest accrues at the greater of (a) 3.25% or (b) (i) 1.95% above the Wall Street Journal Prime rate could haveon the accounts receivable portion of the credit line and (ii) 3.95% above the Wall Street Journal Prime rate on the unbilled accounts portion. In addition, DLH Solutions will pay certain other related fees and expense reimbursements including a monthly service charge of 0.65% based on the average daily loan balance which shall accrue daily and be due and payable on the last day of each month so long as the Loan Agreement is outstanding and a monthly collateral monitoring fee. The interest rate in effect at September 30, 2012 and 2011 was 5.2%. At September 30, 2012, based on current eligible accounts receivable, the amount of the unused availability under the line was $344,000. The amount outstanding as of September 30, 2012 was $2,363,000.
The Loan Agreement requires compliance with customary covenants and contains restrictions on the Company's ability to engage in certain transactions. Among other matters, under the loan agreement we may not, without consent of the Lender, (i) merge or consolidate with another entity, form any new subsidiary or acquire any interest in a third party; (ii) acquire any assets except in the ordinary course of business; (iii) enter into any transaction outside the ordinary course of business; (iv) sell or transfer collateral; (v) make any loans to, or investments in, any affiliate or enter into any transaction with an affiliate other than on an arms-length basis; (vi) incur any debt outside the ordinary course of business; (vii) pay or declare any dividends or other distributions; or (viii) redeem, retire or purchase any of our equity interests exceeding $50,000. Further, without the consent of the Lender, the Company is also restricted from making any payments in respect of other outstanding indebtedness. The Lender agreed to eliminate the tangible net worth covenant as part of the Fifth Amendment. The Lender may terminate the Loan Agreement at any time upon 60 days written notice after December 31, 2012 and the Loan Agreement provides for customary events of default following which the Lender may, at its option, terminate the loan agreement and accelerate the repayment of any amount outstanding. The defined events of default include, among other things, a material adverse effect on our results of operations,change in the statusCompany's circumstances, or if the Lender deems itself insecure in the ability of the revolving credit facility, as well as interest costs. Failure to pay revolving credit advances or any failure to comply with applicable restrictive covenants would have a material adverse effect on our business in that we could be requiredCompany to repay its obligations, or as to the outstanding balance in advance or sell assets in ordersufficiency of the collateral.
The Company has concurrently executed a Corporate Guaranty Agreement with Lender pursuant to repaywhich it has guaranteed all of the outstanding amount. In addition, the Lender could seize the collateral securing the loan facility.
Availability of funds under the Presidential Financial line of credit is directly related to the successful assignment of certain accounts receivable. Certain government accounts of TeamStaff GSDLH Solutions are required to execute “Acknowledgements"Acknowledgements of Assignment.”" There can be no assurance that every TeamStaff GSDLH Solutions government account will execute the documentation to effectuate the assignment and secure availability. The failure of government third partiescustomers to sign the required documentation could result in a decrease in availability under the existing line of credit,credit.
Our customers make payments directly to a bank account controlled by our Lender.
Our customers make payments directly to a bank account controlled by our Lender over which would materially affectwe have no control and which is used to pay down our loans. As a result, our access to cash resources is substantially at the Company’s business.
Risks Relating To Our Stock
There is limited trading volumeOur stock price may be volatile and your investment in our common stock and you may find it difficult to dispose of your shares of common stock; it is possible that our stock may be delisted from The Nasdaq Global Market.suffer a decline in value.
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Since we have not paid dividends on our common stock, you cannot expect dividend income from an investment in our common stock.
We have not paid any dividends on our common stock since our inception and do not contemplate or anticipate paying any dividends on our common stock in the foreseeable future. Future potential lenders may prohibit us from paying dividends without its prior consent. Therefore, holders of our common stock may not receive any dividends on their investment in us. Earnings, if any, will be retained and used to finance the development and expansion of our business.
The exercise of our outstanding options and warrants, or conversion of our outstanding debentures may depress our stock price and dilute your ownership of the company.
As of September 30, 2012, the following options and warrants were outstanding:
exercise price of the outstanding stock options is $1.19 per share. These stock options are employee, non employee and non-executive director options.
In addition, July 2011, we sold an aggregate amount of $350,000 of convertible debentures to entities affiliated with Wynnefield Capital, Inc. (the "Purchasers") pursuant to a standby commitment (the "Commitment").The convertible debentures will mature on the 27-month anniversary of issuance and bear interest at the rate of the greater of the prime rate plus 5%, or 10% per annum, payable at maturity or upon redemption. The convertible debentures are convertible into shares of the Company's common stock at an initial conversion price of $1.30 per share, which was adjusted to $1.25 following the rights offering in accordance with the weighted-average anti-dilution provision. The conversion rate is also subject to adjustment to account for certain customary events. The Company can redeem the outstanding convertible debentures at any time at 120% of the remaining principal amount, plus accrued but unpaid interest. Presently, the convertible debentures are convertible into a total of 280,682 shares of our common stock.
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Our certificate of incorporation authorizes the issuance of “blank check”"blank check" preferred stock with such 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. Accordingly, our board of directors is empowered, without stockholder approval, to issue preferred stock with dividend, liquidation, conversion, voting or other rights, which would adversely affect the voting power or other rights of the holders of our common stock. In the event of issuance, the preferred stock could be utilized, under certain circumstances, as a method of discouraging, delaying or preventing a change in control of our Company, which could have the effect of discouraging bids for our Company and thereby prevent stockholders from receiving the maximum value for their shares. Although we have no present intention to issue any shares of our preferred stock, in order to discourage or delay a change of control of our Company, we may do so in the future. In addition, we may determine to issue preferred stock in connection with capital raising efforts and the terms of the stock so issued could have special voting rights or rights related to the composition of our Board.
Anti-takeover provisions in our Articles of Incorporation make a change in control of our Company more difficult.
The provisions of our Articles of Incorporation and the New Jersey Business Corporation Act, together or separately, could discourage potential acquisition proposals, delay or prevent a change in control and limit the price that certain investors might be willing to pay in the future for our common stock. Among other things, these provisions:
Pursuant to our articles of incorporation, the board of directors has authority to issue up to 5,000,000 preferred shares without further shareholder approval. Such preferred shares could have dividend, liquidation, conversion, voting and other rights and privileges that are superior or senior to our common stock. Issuance of preferred shares could result in the dilution of the voting power of our common stock, adversely affecting holders of our common stock in the event of its liquidation or delay, and defer or prevent a change in control. In certain circumstances, such issuance could have the effect of decreasing the market price of our common stock. In addition, the New Jersey Business Corporation Act contains provisions that, under certain conditions, prohibit business combinations with 10% shareholders and any New Jersey corporation for a period of five years from the time of acquisition of shares by the 10% shareholder. The New Jersey Business Corporation Act also contains provisions that restrict certain business combinations and other transactions between a New Jersey corporation and 10% shareholders.
Our executive officers, directors and significant stockholders will be able to influence matters requiring stockholder approval
Our executive officers, directors and largest shareholder (Wynnefield Capital, Inc. and its affiliates) possess beneficial ownership of over 50% of our common stock. Within this amount, Wynnefield Capital, Inc. and its affiliates own approximately 44% of our outstanding common stock. This concentration of ownership may have the effect of delaying, preventing or deterring a change in control of our company, could deprive our stockholders of an opportunity to receive a premium for their common stock as part of a sale or merger of our company and may negatively affect the market price of our common stock. These transactions might include proxy contests, tender offers, mergers or other purchases of common stock that could give our stockholders the opportunity to realize a premium over the then-prevailing market price for shares of our common stock.
In addition, an employee of Wynnefield Capital, Inc. currently serves on our Board of Directors. As a result of this share ownership and representation on our Board of Directors, our largest stockholder will be able to influence all affairs and actions of our company, including matters requiring stockholder approval such as the election of directors and approval of significant corporate transactions. The interests of our principal stockholders may differ from the interests of the other stockholders.
You may not be able to rely on forward-looking statements.
The information contained in this report or in documents that we incorporate by reference or in statements made by our management includes some forward-looking statements that involve a number of risks and uncertainties. A number of factors, including but not limited to those outlined in the Risk Factors, could cause our actual results, performance, achievements, or industry results to be very different from the results, performance or achievements expressed or implied by these forward-looking statements.
may not be correct or precise and involve known or unknown risks, uncertainties and other factors. Accordingly, a forward-looking statement in this report is not a prediction of future events or circumstances and those future events or circumstances may not occur. Given these uncertainties and risks, you are warned not to rely on the forward-looking statements. A forward-looking statement is usually identified by our use of certain terminology including “believes,” “expects,” “may,” “will,” “should,” “seeks,” “pro"believes," "expects," "may," "will," "should," "seeks," "pro forma,” “anticipates”" "anticipates" or “intends,”"intends," or by discussions of strategies or intentions. We are not undertaking any obligation to update these factors or to publicly announce the results of any changes to our forward-looking statements due to future events or developments.
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Effective October 23, 2007, TeamStaff’sAugust 2, 2011, DLH's corporate headquarters is locatedwas relocated to 1776 Peachtree Street, NW, Suite 300S, in Atlanta, Georgia. The Company has vacated the former headquarters facility in Somerset, New Jersey. Previously, the Company’s corporate headquarters was locatedThe Company also has leased office space in Atlanta, Georgia. TeamStaff leases its 2,670 square foot corporate headquarters in Somerset, New Jersey, as well as offices in Atlanta, Georgia; Clearwater, Florida; Memphis, Tennessee; and Loganville, Georgia. The facilities provide sufficient capacity to meet demands for the foreseeable future. In the fiscal year ended September 30, 2009, TeamStaff’s2012, DLH's total lease expense for continuing operations was approximately $422,000.
The following is summary information on TeamStaff’sDLH's facilities as of September 30, 2009:2012:
LOCATION | APPROXIMATE SQUARE FEET | EXPIRATION DATE | |||||
|---|---|---|---|---|---|---|---|
Corporate Headquarters | 3,925 | 7/31/2017 | |||||
3525 Highway 81 South | 6,200 | 5/31/2015 | |||||
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Not applicable.
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Principal Market
Our common stock is currently traded in the over-the-counter market and included on theThe Nasdaq Capital Market under the symbol “TSTF”"DLHC". TeamStaff started trading on The Capital Market in November 25, 2009. Previously, TeamStaff’sPrior to June 27, 2012, our common stock was listed for tradingtraded on The Nasdaq Global Market. As previously announced, on September 15, 2009, we received a letter from the Nasdaq Stock Market advising that we had not maintained a minimum market value of publicly held shares of common stock of $5,000,000, as required by the continued listing requirements of the Nasdaq Global Market set forth in Nasdaq Listing Rule 5450(b)(1)(C). Subsequently, the Company elected to apply to transfer the listing of its common stock to the Nasdaq Capital Market. On November 23, 2009, Nasdaq approved the transfer application.
Market Information
The range of high and low sales prices for TeamStaff’sthe Company's common stock for the periods indicated below are:
Common Stock
| FISCAL YEAR 2009 | HIGH | LOW | |||||||||||||
FISCAL YEAR 2012 | LOW | HIGH | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 1st Quarter | $ | 2.57 | $ | 1.64 | $ | 1.32 | $ | 2.92 | |||||||
2nd Quarter | $ | 2.25 | $ | 1.03 | |||||||||||
2nd Quarter | $ | 0.83 | $ | 2.22 | |||||||||||
| 3rd Quarter | $ | 2.65 | $ | 1.23 | $ | 1.16 | $ | 2.04 | |||||||
| 4th Quarter | $ | 1.98 | $ | 1.32 | $ | 0.72 | $ | 1.49 | |||||||
| FISCAL YEAR 2008 | HIGH | LOW | |||||||||||||
FISCAL YEAR 2011 | LOW | HIGH | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 1st Quarter | $ | 4.16 | $ | 2.36 | $ | 0.48 | $ | 0.77 | |||||||
| 2nd Quarter | $ | 3.24 | $ | 2.40 | $ | 0.36 | $ | 0.63 | |||||||
| 3rd Quarter | $ | 2.80 | $ | 1.83 | $ | 0.46 | $ | 1.60 | |||||||
| 4th Quarter | $ | 3.30 | $ | 1.85 | $ | 0.99 | $ | 3.27 | |||||||
The above quotations reported by Nasdaq, represent prices between dealers and do not include retail mark-ups, markdowns or commissions. Such quotations do not necessarily represent actual transactions. On December 31, 2009, TeamStaff’sSeptember 30, 2012, the Company's common stock had a closing price of $0.80$1.06 per share.
Dividends
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Approximate Number of Equity Security Holders
As of December 31, 2009, not all of the BrightLane shareholders had submitted their capital stock for exchange into shares of common stock; however such shares are classified as outstanding.
Sales of Unregistered Securities
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 herein. Following the end our 2009 fiscal year, on October 13, 2009, we granted an aggregate
Securities Authorized for Issuance Under Equity Compensation Plans
DLH presently utilizes one shareholder-approved equity compensation plans, all ofplan under which were approved by its Board of Directorsit makes equity compensation awards available to officers, directors, employees and its shareholders.consultants. The table set forth below discloses outstanding and available awards under our equity compensation plans as of September 30, 2009. The Company has no2012. All grants of equity compensation plans that have not been approved by security holders. All option grantssecurities made to executive officers and directors, including those to the Chief Executive Officer under employment agreements, are presently made under the plans referenced below. All grants of restricted stock made to executive officers are made under the plan referenced below.
| Equity Compensation Plan Information(*) | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
Plan Category | (a) Number of Securities to be issued upon exercise of outstanding options, warrants and rights | (b) Weighted Average exercise price of outstanding options, warrants and rights (or fair value at date of grant) | (c) Number of securities remaining available for future issuances under equity compensation plans (excluding securities reflected in column (a)) | |||||||
Equity Compensation Plans Approved by Security Holders: | ||||||||||
2006 Long Term Incentive Plan | 1,362,500 | $ | 1.19 | 1,079,847 | ||||||
Equity Compensation Plans Not Approved by Stockholders | 20,000 | (1) | $ | 2.28 | — | |||||
| Equity Compensation Plan Information (*) | ||||||||||||
| (b) | ||||||||||||
| Weighted | ||||||||||||
| Average | (c) | |||||||||||
| (a) | exercise price of | Number of securities | ||||||||||
| Number of Securities | outstanding | remaining available for | ||||||||||
| to be issued upon | options, warrants | future issuances under | ||||||||||
| exercise of | and rights (or fair | equity compensation plans | ||||||||||
| outstanding options, | value at date of | (excluding securities reflected in | ||||||||||
| Plan Category | warrants and rights | grant) | column (a)) | |||||||||
| Equity Compensation Plans Approved by Security Holders: | ||||||||||||
| 2000 Employee Stock Option Plan | 4,500 | $ | 7.84 | 1,706,187 | ||||||||
| 2000 Non-Executive Director Stock Option Plan (1) | 10,625 | $ | 5.35 | — | ||||||||
| 2006 Long Term Incentive Plan | 391,250 | $ | 1.96 | 4,454,222 | ||||||||
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The following table provides certain information with respect to our purchases of its securitiesshares of our common stock during the two prior fiscal yearsthree months ended September 30, 2009.2012:
Period | Total Number of Shares Purchased | Average Price Paid Per Share | Total Number of Shares Purchased As Part of Publicly Announced Programs | Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs(1) | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
July 2012 | — | $ | — | — | — | ||||||||
August 2012 | — | — | — | — | |||||||||
September 2012 | 40,000 | 1.00 | — | — | |||||||||
Total | 40,000 | $ | 1.00 | — | — | ||||||||
We are a “smaller"smaller reporting company”company" as defined by Regulation S-K and as such, are not required to provide the information contained in this item pursuant to Regulation S-K.
Forward Looking and Cautionary Statements
This Annual Report on Form 10-K contains “forward-looking statements”"forward-looking statements" within the meaning of the 1995 Reform Act, Section 27A of the Securities Act and Section 21E of the Exchange Act. TeamStaff DLH
desires to avail itself of certain “safe harbor”"safe harbor" provisions of the 1995 Reform Act and is therefore including this special note to enable TeamStaffDLH to do so. Forward-looking statements are identified by words such as “believe,” “anticipate,” “expect,” “intend,” “plan,” “will,” “may”"believe," "anticipate," "expect," "intend," "plan," "will," "may" and other similar expressions. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances are forward-looking statements. Forward-looking statements included in this report involve known and unknown risks, uncertainties and other factors which could cause TeamStaff’sDLH's actual results, performance (financial or operating) or achievements to differ from the future results, performance (financial or operating) or achievements expressed or implied by such forward-looking statements. We based these forward-looking statements on our current expectations and best estimates and projections about future events. Our actual results could differ materially from those discussed in, or implied by, these forward-looking statements. The following factors (among others) could cause our actual results to differ materially from those implied by the forward-looking statements in this Annual Report on Form 10-K: our ability to continue to recruit qualifiedsecure contract and permanent healthcare professionals and administrative staff at reasonable costs; ourawards, including the ability to retain qualified contract healthcare professionals and administrative staff for multiple assignments at reasonable costs; our ability to attract and retain sales and operational personnel;secure renewals of contracts under which we currently provide services; our ability to enter into contracts with United States Government facilities and agencies on terms attractive to us and to secure orders related to those contracts; changes in the timing of orders for and our placement of contract and permanent healthcare professionals and administrative staff; the overall level of demand for the services offered by contract and permanent healthcare staffing providers;we provide; the variation in pricing of the healthcare facility contracts under which we place contract and permanent healthcare professionals; our ability to manage growth effectively; the performance of our management information and communication systems; the effect of existing or future government legislation and regulation; changes in government and customer priorities and requirements (including changes to respond to the priorities of Congress and the Administration, budgetary constraints, and cost-cutting initiatives); economic, business and political conditions domestically; the impact of medical malpractice and other claims asserted against us; the disruption or adverse impact to our business as a result of a terrorist attack; our ability to carry out our business strategy; the loss of key officers, and management personnel that could adversely affectpersonnel; the competitive environment for our ability to remain competitive;services; the effect of recognition by us of an impairment to goodwill and intangible assets;goodwill; other tax and regulatory issues and developments; and the effect of adjustments by us to accruals for self-insured retentions.
retentions; our ability to obtain any needed financing; our ability to attract and retain sales and operational personnel; and the effect of other events and important factors disclosed previously and from time-to-time in DLH's filings with the U.S. Securities Exchange Commission. 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. In light of the significant risks and uncertainties inherent in the forward-looking statements included herein, the inclusion of such statements should not be regarded as a representation by the company or any other person that the objectives and plans of the Company will be achieved. The forward-looking statements contained in this report in Form 10-K are made as of the date hereof and may become outdated over time. The Company does not assume any responsibility for updating any forward-looking statements.
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DLH believes the accounting policies below represent its critical accounting policies due to the significance or estimation process involved in each. See Note 2 of TeamStaff’s 2009DLH's 2012 Consolidated Financial Statements contained in this Annual Report on Form 10-K as well as “Critical"Critical Accounting Policies”Policies" contained therein for a detailed discussion on the application of these and other accounting policies.
Our discussion and analysis of our financial condition and results of operations is based upon our Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States and the rules of the SEC. The preparation of our Consolidated Financial Statements and related notes in accordance with generally accepted accounting principles requires us to make estimates, which include judgments and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses, and related disclosure of contingent assets and liabilities. We have based our estimates on historical experience and on various assumptions that we
believe to be reasonable under the circumstances. We evaluate our estimates on a regular basis and make changes accordingly. Actual results may differ from these estimates under different assumptions or conditions. To the extent that there are material differences between these estimates and actual results, our financial condition, results of operations and cash flow will be affected.
A critical accounting estimate is based on judgments and assumptions about matters that are uncertain at the time the estimate is made. Different estimates that reasonably could have been used or changes in accounting estimates could materially impact our financial statements. We believe that the policies described below represent our critical accounting policies, as they have the greatest potential impact on our Consolidated Financial Statements. However, you should also review ourSummary of Significant Accounting Policiesbeginning on page F-8 of the notes to our Consolidated Financial Statements contained elsewhere in this Annual Report on Form 10-K.
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 accordance with ACS 605-45,Reporting Revenues Grossnature and/or sourced through Federal Supply Schedules administered by the General Services Administration ("GSA") at fixed unit rates or hourly arrangements. We generally operate as a Principal Versus Netprime contractor, but have also entered into contracts as an Agent,a subcontractor. The recognition of revenue from fixed rates is based upon objective criteria that generally do not require significant estimates that may change over time. Other types of US Government contracts may include cost reimbursable contracts, fixed price or flexibly priced contracts requiring estimates based on percentage-of-completion methods of recognizing revenue and SAB 104, Revenue Recognition. TeamStaff recognizes all amounts billed to its contract staffing customers as gross revenue because, among other things, TeamStaff is the primary obligor in the contract staffing arrangement; TeamStaff has pricing latitude; TeamStaff selects contract employees for a given assignment from a broad pool of individuals; TeamStaff isprofit. These contracting vehicles do not, at risk for the payment of its direct costs; and TeamStaff assumesthis time, represent a significant amountportion of other risksour revenue nor require estimating techniques that would materially impact our revenue reported herein. DLH recognizes and liabilities asrecords revenue on government contracts when it is realized, or realizable, and earned. DLH considers these requirements met when: (a) persuasive evidence of an employer of its contract employees, and therefore, is deemed to be a principal in regard to these services. TeamStaff also recognizes as gross revenue and as unbilled receivables, on an accrual basis, any such amounts that relate toarrangement exists; (b) the services performed by contract employees which have not yet been billeddelivered to the customer ascustomer; (c) the sales price is fixed or determinable and free of the end of the accounting period.
Revenues related to retroactive billings in 2008 (see Note 10 to the Consolidated Financial Statements) from an agency of the Federal government were recognized when: (1) the Company developed and calculated an amount for such prior period services and hashad a contractual right to bill for such amounts under its arrangements, (2) there were no remaining unfulfilled conditions for approval of such billings and (3) collectability is reasonably assured based on historical practices with the DVA. The related direct costs, principally comprised of salaries and benefits, are recognizedwere accrued to match the recognized reimbursements from the Federal agency; upon approval, wages will be processed for payment to the employees.
During the year ended September 30, 2008, TeamStaffDLH recognized revenues of $10.8 million and direct costs of $10.1 million related to these non-recurring arrangements. At September 30, 2009,2012 and September 30, 2011, the amount of the remaining accounts receivable with the DVA approximatesapproximated $9.3 million and accrued liabilities for salaries to employees and related benefits totaled $8.7 million. The $9.3 million in accounts receivable was unbilled to the DVA at September 30, 2009. At2012 and September 30, 2011. Although the timing cannot be guaranteed, at present the Company expects to bill and collect such amounts by the end of the second quarter ofduring fiscal 20102013, based on current discussions with the DVA and collection efforts.
As described in greater detail in Note 9 to the Consolidated Financial Statements, DLH has accrued the revenue and costs associated with certain government contracts covered by the Service Contract Act. These adjustments were due to changes in the contracted wage determination rates for certain employees. A wage determination is recognizedthe listing of wage rates and fringe benefit rates for each classification of laborers whom the Administrator of the Wage and Hour Division of the U.S. Department of Labor ("DOL") has determined to be prevailing in a given locality. An audit by the
DOL in 2008 at one of the facilities revealed that notification, as service is rendered. TeamStaff bills its clients basedrequired by contract, was not provided to DLH Solutions in order to effectuate the wage increases in a timely manner. Wages for contract employees on anassignment at the time have been adjusted prospectively to the prevailing rate and hourly rate.billing rates to the DVA have been increased accordingly.
In April 2012, the Company received formal contract modifications from the DVA, dated April 16, 2012, concerning the retroactive billing matter. The hourly rate is intendedcontract modifications from the DVA incorporate relevant wage determinations covering largely 2006 and 2007 applying to the Company's historical contracts with DVA during those periods. These government modifications initiate the procedures whereby the Company may invoice the DVA in accordance with the modified wage determinations and subsequently make timely retroactive payments to employees (active and inactive) covering work performed at the certain locations. The Company expects to follow the same process implemented as directed by and in conjunction with the Department of Labor and the DVA when similar wage determination-related contract modifications were made to cover TeamStaff’s direct labor costsother sites (also for the periods of 2006 and 2007) in 2008.
The Company continues to support the Government's review of the contract employees, plusdetailed supporting calculations for the retroactive billings and to negotiate an estimateincremental final amount related to indirect costs and fees applied to these retroactive billings. As such, there may be additional revenues recognized in future periods once the final approval for overhead expensessuch additional amounts is obtained. The additional indirect costs and a profit margin. Additionally, commissions from permanent placementsfees are included in revenue as placements are made. Commissions from permanent placements result from the successful placement of a medical staffing employeeestimated to a customer’s workforce as a permanent employee.be between $0.4 million and $0.6 million. The Company also reviewshas developed these estimates under the status of such placementssame contractual provisions applied to assess the Company’s future performance obligations under such contracts.
Goodwill
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Factors including non-renewal of a major contract (see Note 2—Liquidity and Note 13) 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. If an impairment write off of all the goodwill became necessary in future periods, a charge of up to $8.6 million would be expensed in the Consolidated Statement of Operations. All remaining goodwill is attributable to the DLH Solutions operating subsidiary.
Intangible Assets
As required by applicable accounting standards, DLH did not amortize its tradenames, an indefinite life intangible asset. DLH reviewed its indefinite life intangible assets for possible impairment or loss of value at least annually or more frequently upon the occurrence of an event or when circumstances indicated that an asset's carrying amount was greater than its fair value. On September 15, 2011, the Board of Directors of DLH approved the change of the corporate name of TeamStaff GS reporting unit. If an impairment write offto DLH Solutions and also approved a plan to change the corporate name of all the trade names became necessary, a charge
Company to $3.9 million would be expensed in the Consolidated Statement of Operations. During 2009, inDLH Holdings Corp. In connection with these actions, the Company’s decision to exitCompany ceased further use of the TeamStaff Rx business, antrademark and implemented new marketing and branding initiatives associated with the new corporate identity being adopted by the Company. As a result of the corporate name change, abandoning the use of the TeamStaff name and associated rebranding efforts being implemented by the Company, the Company concluded that it was required to record a non-cash impairment losscharge with respect to the value of $1.6the "TeamStaff" trademark of $2.6 million was recognized to reducefully write-off the carrying value of this business’ goodwill to net realizable value and an impairment loss of $0.7 million was recognized to reduce the carrying valuetrademark.
Prepaid Workers' Compensation
As part of the trade nameCompany's discontinued PEO operations, DLH had a workers' compensation program with Zurich American Insurance Company ("Zurich") which covered the period from March 22, 2002 through November 16, 2003, inclusive. Payments for the policy were made to net realizable value. TeamStaff has concluded,a trust monthly based on projected claims for the policy period. Interest on all assets held in the trust is credited to DLH. Payments for claims and claims expenses are made from the trust. From time-to-time, trust assets have been refunded to the Company based on Zurich's and managers' overall assessment of claims experience and historical and projected settlements. The final amount of trust funds that could be refunded to the Company is subject to a number of uncertainties (e.g. claim settlements and experience, health care costs, the extended statutory filing periods for such claims); however, based on a third party's study of claims experience, DLH estimates that at present, that thereSeptember 30, 2012, the remaining prepaid asset of $0.3 million will be received within the next twelve to thirty-six months. This amount is not anyreflected on DLH's balance sheet as of September 30, 2012 as a current asset, in addition to approximately $0.2 million related to other required write off of goodwill or its tradename.
Prepaid Workers’Workers' Compensation Insurance
From November 17, 2003 through April 14, 2009, inclusive, TeamStaff’s workers’DLH's workers' compensation insurance program was provided by Zurich American Insurance Company (“Zurich”).Zurich. This program covered TeamStaff’sDLH's temporary, contract and corporate employees. This program was a fully insured, guaranteed cost program that contained no deductible or retention feature. The premium for the program was paid monthly based upon actual payroll and is subject to a policy year-end audit. Effective April 15, 2009, TeamStaffDLH entered into a partially self-funded workers’workers' compensation insurance program with a national insurance carrier for the premium year April 15, 2009 through April 14, 2010.2010 and has been renewed through April 14, 2013. The Company will paypays a base premium plus actual losses incurred, not to exceed certain stop-loss limits. The Company is insured for losses above these limits, both per occurrence and in the aggregate.
As of September 30, 20092012 and 2011, the adequacy of the workers’workers' compensation reserves (which(including those periods' amounts that are offset against the trust fund balances in prepaid assets) was determined, in management’smanagement's opinion, to be reasonable. In determining our reserves, we rely in part upon information regarding loss data received from our workers’workers' compensation insurance carriers that may include loss data for claims incurred during prior policy periods. In addition, these reserves are for claims that have not been sufficiently developed and such variables as timing of payments and investment returns thereon are uncertain or unknown,unknown; therefore, actual results may vary from current estimates. TeamStaffDLH will continue to monitor the development of these reserves, the actual payments made against the claims incurred, the timing of these payments, the interest accumulated in TeamStaff’sDLH's prepayments and adjust the related reserves as deemed appropriate.
Fair Value
DLH has financial instruments, principally accounts receivable, accounts payable, loan payable, notes payable and accrued expenses. DLH estimates that the fair value of these financial instruments at September 30, 2012 and 2011 does not differ materially from the aggregate carrying values of these financial instruments recorded in the accompanying consolidated balance sheets. However, because the
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TeamStaff accounts for income taxes in accordance with the “liability” method. Under this"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.
The Financial Accounting Standards Board ("FASB") has issued authoritative guidance that clarifies the accounting for uncertainty in income taxes recognized in an entity's financial statements and prescribes a recognition threshold of more-likely-than-not to be considered more likely than not. Accordingly, forsustained upon examination. Measurement of the fiscal years ended September 30, 2009, 2008tax uncertainty occurs if the recognition threshold has been met. This interpretation also provides guidance on de-recognition, classification, interest and 2007,penalties, accounting in interim periods and disclosures. The Company conducts business solely in the Company did not recordU.S. and, as a tax benefit for NOLs.
Allowance for Doubtful Accounts
Accounts receivable are unsecured and carried at fair value, which is net of an allowance for doubtful accounts. The allowance for doubtful accounts for estimated losses resulting fromis determined based on a specific identification methodology. Generally an account receivable is deemed uncollectible based upon the inabilityaging of its customers to pay. However, if the financial conditionreceivable and/or specific identification. Interest is not typically charged on past due accounts and the specific identification method takes into account the Company's assessment of TeamStaff’s customers were to deteriorate rapidly, resulting in nonpayment, TeamStaff’s accounts receivable balances could grow and TeamStaff could be required to provide for additional allowances, which would decrease net incomethe default risk based upon recent events in the periodcustomer's business, economic status and changes in credit status. With respect to receivables owed by agencies of the U.S. Government, the Company believes that such determination was made. For example, TeamStaff currently maintains an allowancethe risk of less than 1%loss on these accounts is minimal (See Note 13).
Before accounts are deemed uncollectible, demand letters are sent and, if that does not result in payment, the receivable is placed for collection with a collection agency. The Company's last attempt at collection would be legal action, depending upon the customer's financial situation. If the Company is unsuccessful at collection after these steps, the receivable is written-off.
Table of billed accounts receivable due to the fact that a significant portion of accounts receivable are from the Federal Government which historically have had little, if any, write-offs for non-payment.
Overview
Business Description
DLH, Holdings Corp., incorporated in New Jersey, provides healthcare logistical, information technologydelivery solutions, logistics & technical services, and office administration staffing provider which has been serving the Federal Government for over a decade. TeamStaff GS’s primary client has been the United States Government and its various agencies. TeamStaff GS is committed to providing on-time delivery of multi-disciplined employees who possess the necessary experience, expertise, and dedication required to meet contract specifications. The staffing services offered by TeamStaff GS are provided through independent FSS contracts through the GSA. The provision of logistical and administrative personnel is accomplished through the Logistics Worldwide Schedule and medical personnel are supplied through the Professional and Allied Healthcare Staffing Services Schedule. TeamStaff also provides its staffingcontingency/staff augmentation services to federal government agencies through competitively bid contracts and has a GSA schedule contract to provide information technology professional services. TeamStaff provides these services toincluding the DVA,Department of Veteran Affairs, the US Department of Defense, and other US governmental agenciesclients. The Company principally operates through its wholly-owned subsidiary DLH Solutions, Inc. ("DLH Solutions") and placed contract employees at over 40 facilities duringis headquartered in Atlanta, Georgia.
Name Change
In February 2012, the 2009 fiscal year.
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Business Units
As part of our overall strategic planning process, the Company realigned its business into three broad integrated business areas: Healthcare Delivery Solutions, Logistics & Technical Services, and Contingency/Staff Augmentation. This structure enables us to leverage our core competencies and drive towards profitable growth within our focused target markets. We recognize that some business units may grow faster than others as a result of acquisitions or disposition of business. In either case, we intend to enhance our delivery of quality products and services.
Healthcare Delivery Solutions
The Healthcare Delivery Solutions business unit, provides a broad continuum of care for our nation's servicemen/women and veterans in various settings and facilities. These include Combat Trauma Centers (CTCs), Military Treatment Facilities (MTFs), Medical Centers, Community-based Outpatient Clinics (CBOCs), and Pharmacy Distribution Centers (including VA Consolidated Mail-order Outpatient Pharmacy). We leverage our network of over 400 active clinicians and other healthcare workers throughout selected regions in the US, applying differentiating tools, databases and technology (including e-PRAT and SPOT-m) to deliver these services. For over a decade, DLH Solutions has been serving the DVA and DoD in providing travel nursequalified medical and alliedother professionals in a variety of positions. Healthcare Delivery Solutions is one of our strategic focus areas for growth and a major business area that DLH Solutions services. As more and more Federal and DoD programs increase their performance-based requirements, DLH Solutions' workforce profile of medical talent and credentials (as described above) will help it to compete and differentiate itself in the market place. Our healthcare professionalsand medical service new business pipeline adds important credentials strategically linked to diversifying and profitably growing our Healthcare Delivery Solutions business base. Professional services have included case management, health and injury assessment, critical care, medical/surgical, emergency room/trauma center, counseling, behavioral health and traumic brain injury management, medical systems analysis, and medical logistics. While the DVA is its largest customer in this business unit, the Company has focused on leveraging that experience in adjacent healthcare markets within
DoD and other federal agencies. In fiscal 2012, approximately 54% of our revenue was derived from the Healthcare Delivery Solutions business unit.
Logistics & Technical Services
The Logistics & Technical Services business unit draws heavily upon our proven logistics expertise and processes. DLH resources possess expertise covering a wide range of logistics, readiness and project engineering. The experience of DLH Solutions' project personnel is diverse from operational unit level to systems and program office experience. Our core competencies include; supply chain management, performance-based logistics, distribution center and inventory management, statistical process control, packaging/handling/storage & transportation, configuration management, readiness planning, and supply support operations. In addition, we provide program and project management, systems engineering and applicable information technology services, integrated logistics support (including operational systems), readiness assessments, training, equipment maintenance, hazardous material management, facilities and shipyard support services and more. DLH Solutions also provides professional staff to the federal government specializing in logistics, office administration, IT, and facilities/warehouse management.
Through competitively awarded contracts and task orders (including its LOGWORLD contract) DLH Solutions has developed a strong portfolio of logistics processes, personnel and tools to help its clients achieve nationally recognized awards for temporary assignmentscustomer satisfaction. While the DVA is its largest customer in this area, the Company has taken steps to Advantage RN.expand in adjacent logistics markets within DoD and other federal agencies. In fiscal 2012, over 45% of our revenue was derived from the Logistics & Technical Services business unit.
Contingency/Staff Augmentation
The closingContingency/Staff Augmentation business unit provides disaster and emergency response services and civilian workforce augmentation services. General staffing and selective recruitment process outsourcing are key components of this transaction occurredservice area. Less than 1% of fiscal 2012 revenue was derived from the Contingency/Staff Augmentation line of service.
Recent Business Trends
The Federal Government continues to experience delays in awarding new contracts and committing new funds while Congress and the Administration continue to debate means to reduce the national debt and stimulate the economy. The Administration is attempting to balance decisions regarding defense, homeland security, and other federal spending priorities in a greatly constrained fiscal environment imposed by the enactment of the Budget Control Act of 2011 (Budget Act), which reduces defense spending by $487 billion over a ten-year period starting in fiscal 2012. Currently, the federal government is operating under a continuing resolution, scheduled to expire on March 31, 2013. If Congress and the Administration remain unable to reach a debt reduction consensus by the end of calendar year 2012, significant and equal reductions in both security and non-security spending will be automatically triggered and will take effect in January 4, 2010. The Asset Purchase Agreement provides2013 through a process referred to as sequestration. While it is unclear whether sequestration will occur and what the exact impact of it would be, we are continuously reviewing our operations in an attempt to identify those programs that could be at risk so that we can make appropriate contingency plans. While we may experience reduced funding on some of our programs, we do not expect the purchased assets were acquired by Advantage RNcancellation of any of our major programs.
From an overall budget perspective, it is likely that government discretionary spending will be constrained for a purchase price of upseveral years to $425,000, of which (i) $350,000 in cash was paid at the closing, and (ii) $75,000 iscome. Though specific funding priorities are subject to an escrowed holdback as describedchange from year to year, we believe that our strategic business alignment around DoD and Veterans healthcare and logistics sustainment services allows us to remain well-placed to address what we consider are top
national priority budget areas (along with cyberspace and intelligence). As with other companies operating in the Asset Purchase Agreement. Additionally, Advantage RN will make rent subsidy payments to TeamStaff Rx totaling $125,000, consistingFederal government market, the possibility remains, however, that one or more of (i) $25,000 payable at closing, and (ii) an additional $100,000 payable in 10 equal monthly installments beginning on March 1, 2010.
The DVA continues to Advantage RN, which will include an estimated charge of $0.2 million for severancebe our largest customer followed by the DoD. Prior to certain TeamStaff Rx employees. Although there are certain conditions on the collection of amounts that are held in escrow, the Company expects to settle such matters in the second quarter of the fiscal year ending September 30, 2010. In addition, management estimates that the Company will incur a loss on the disposal of TeamStaff Rx approximating $0.3 million principally from recognition2011 over 90% of the remaining unfunded operating lease payments.Company's marketing, sales and discretionary resources were directed toward the commercial nursing and temporary staffing business while DLH Solutions did not bid on large government services contracts to complement its work with DVA and increase its backlog. As such, its business base over the recent 5 years remained relatively flat when adjusted for DVA business anomalies (such as overtime policy changes, preparation for anticipated epidemic, government in-sourcing, etc.).
The measurement date for recording this liability is December 31, 2009. These amounts are preliminaryCompany's strategic plan first addressed creating the financial stability and subjectrunway to change based on future events;support implementation of new infrastructure and business development requirements. As such, significant cost reduction and containment initiatives were put into action in the ultimate amount could significantly differ from these current estimates.
Though our nation's economy continues to create headwinds for all markets, management has found that many government services industry analysts project a favorable market outlook particularly in select segments. The Company's strategic decision to build upon its healthcare delivery solutions competencies and business aligns its growth prospects with some of the stronger budget areas on both Capitol Hill and within the Pentagon. Based on current administration, there will not beresearch and market analysis, management believes that the federal government's healthcare budget including the Military Healthcare Systems and veterans' healthcare remain a reduction in government spending supporting social programs that benefit military personnel and veterans.top priority.
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Fiscal Year 20092012 as Compared to Fiscal Year 20082011
The following table summarizes, for the periods indicated, selected consolidated statements of operations data expressed as a percentage of revenue:
| Fiscal Year | Fiscal Year | |||||||
| Ended | Ended | |||||||
| September 30, | September 30, | |||||||
| 2009 | 2008 | |||||||
Condensed Consolidated Statement of Operations: | ||||||||
| Revenues | 100.0 | % | 100.0 | % | ||||
| Direct Expenses | 84.8 | % | 84.7 | % | ||||
| Gross Profit | 15.2 | % | 15.3 | % | ||||
| Selling, general and administrative | 14.1 | % | 10.1 | % | ||||
| Depreciation and amortization expense | 0.3 | % | 0.3 | % | ||||
| Income from operations | 0.8 | % | 4.9 | % | ||||
| Other income (expense) | -0.1 | % | 0.7 | % | ||||
| Income from continuing operations before taxes | 0.7 | % | 5.6 | % | ||||
| Income tax (expense) benefit | 0.1 | % | -0.1 | % | ||||
| Income from continuing operations | 0.8 | % | 5.5 | % | ||||
| Loss from discontinued operations | -10.3 | % | -3.5 | % | ||||
| Net income | -9.5 | % | 2.0 | % | ||||
| | Fiscal year ended | ||||||
|---|---|---|---|---|---|---|---|
| | September 30, 2012 | September 30, 2011 | |||||
Condensed Consolidated Statement of Operations: | |||||||
Revenues | 100.0 | % | 100.0 | % | |||
Direct expenses | 88.6 | % | 85.9 | % | |||
Gross profit | 11.4 | % | 14.1 | % | |||
General and administrative | 15.0 | % | 17.7 | % | |||
Severance | 0.5 | % | 0.0 | % | |||
Impairment charge-intangible assets | 0.0 | % | 6.2 | % | |||
Depreciation and amortization expense | 0.2 | % | 0.3 | % | |||
Loss from operations | -4.3 | % | -10.1 | % | |||
Other income (expense) | 0.3 | % | -0.9 | % | |||
Loss from continuing operations before tax | -4.0 | % | -11.0 | % | |||
Income tax expense | 0.0 | % | 0.0 | % | |||
Loss from continuing operations | -4.0 | % | -11.0 | % | |||
Gain from discontinued operation | 0.0 | % | 0.6 | % | |||
Net loss | -4.0 | % | -10.4 | % | |||
Revenues
Revenues from TeamStaff’sDLH's continuing operations for the fiscal years ended September 30, 20092012 and 20082011 were $46.0$49.2 million and $47.7$41.9 million, respectively, which represents a decreasean increase of $1.7$7.3 million or 3.6%17.4% over the prior fiscal year.year despite extended government delays in major awards. The decreaseincrease in operating revenues from continuing operations is due primarily to the impact of reduced overtimenew business awards and net reductions in headcount at certain Government facilities. TeamStaff’s total revenues for the fiscal years ended September 30, 2009 and 2008 were $46.0 million and $58.5 million, respectively, which represents a decrease of $12.5 million or 21.4% over the prior fiscal year. Included in revenues for the fiscal year ended September 30, 2008 is $10.8 million in non-recurring retroactive billings to the DVA.
Direct Expenses
Direct expenses are generally comprised of wage ratesdirect labor (including benefits), subcontracts, and fringe benefit rates for each classification of laborers whom the Administrator of the Wage and Hour Division of the U.S. Department of Labor (“DOL”) has determined to be prevailing in a given locality. Contractors performing services for the Federal government under certain contracts are required to pay service employees in various classes no less than the wage rates and fringe benefits found prevailing in these localities. An audit by the DOL at one of the facilities revealed that notification, as required by contract, was not provided to TeamStaff GS in order to effectuate the wage increases in a timely manner. Wages for contract employees currently on assignment have been adjusted prospectively to the prevailing rate and hourly billing rates to the DVA have been increased accordingly. During the fiscal year ended September 30, 2008, TeamStaff recognized nonrecurring revenues of $10.8 million andother direct costs of $10.1 million, based on amounts that are contractually due under its arrangements with the Federal agencies. At September 30, 2009, the amount of the remaining accounts receivable with the DVA approximates $9.3 million. The Company has been and continues to be in discussions with representatives of the DVA regarding the matter and anticipates resolution during fiscal 2010. In addition, TeamStaff is in the process of negotiating a final amount related to gross profit on these adjustments. As such, there may be additional revenues recognized in future periods once the approval for such additional amounts is obtained. The ranges of additional revenue and gross profit are estimated to be between $0.4 million and $0.6 million. At present, the Company expects to collect such amounts during fiscal 2010 based on current discussions and collection efforts. Because these amounts are subject to government review, no assurances can be given that we will receive any additional billings from our government contracts or that if additional amounts are received, that the amount will be within the range specified above.
Gross Profit
Gross profit for the fiscal years ended September 30, 2012 and 2011 was $5.6 million and $5.9 million, respectively, which represents a decrease of $0.5$0.3 million or 1.2%5.1% over the prior fiscal year. Gross profit from continuing operations, as a percentage of revenue, was 11.4% and 14.1%, for the fiscal years ended September 30, 2012 and 2011, respectively. While gross profit benefited from the additional volume of revenue, the average unit price of hours delivered decreased year over year. This
decrease isreflects the competitive marketplace which yields lower gross margins overall, as a percent of revenue.
General and Administrative Expenses
General and administrative ("G&A") primarily relates to functions such as corporate and functional management, legal, finance, accounting, contracts, administration, human resources, management information systems, and business development. Exclusive of a result of lower revenues. Total direct$2.6 million impairment charge taken in 2011, G&A expenses for the fiscal years ended September 30, 20092012 and 20082011 were $39.0$7.6 million and $49.6$7.4 million, respectively. IncludedSignificant additional G&A costs in direct expenses for the year ended September 30, 2008 is $10.12012 included severance charges of approximately $0.3 million, investment in major business proposal initiatives of $0.7 million, and startup costs related to new contracts of $0.2 million. Significant incremental G&A costs in 2011 included approximately $0.6 million related to non-recurring retroactive billingsconfirmation of a new contract award.
Distribution of G&A costs in 2012 reflects the Company having continued to the DVA. As a percentage of operating revenue from continuing operations, operating direct expenses were 84.8% and 82.7%, respectively, for the years ended September 30, 2009 and 2008. As a percentage of total revenue, direct expenses were 84.8% and 84.7%, respectively, for the years ended September 30, 2009 and 2008.
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Impairment Charge—Intangible Assets
There were no impairment charges for the fiscal year ended September 30, 2012. As a result of its rebranding initiative, the Company wrote off the carrying value of the tradename related to TeamStaff of $2.6 million in the fiscal year ended September 30, 2011.
Depreciation and Amortization
Depreciation and amortization expense on tangible assets was approximately $111,000 and $150,000$0.1 million for both of the fiscal years ended September 30, 20092012 and 2008, respectively.
Loss from Operations
Loss from operations for the fiscal year ended September 30, 20092012 was $0.4$2.2 million as compared to incomeloss from operations for the fiscal year ended September 30, 20082011 of $2.9$4.2 million. This represents a declinean improvement of $2.5$2.0 million in results from operations from fiscal 20082012 to 2009.2011. The decreaseimprovement is due primarily due to lower operatingthe aforementioned impairment charge in the prior year, offset by the pressure on gross profit earnedand severance charges of $0.3 million in the fiscal 2009 as a result of increased health benefit expenses, lower overtime at certain government facilities and lower turnover among our government contract employees resulting in higher vacation expense, higher SG&A expenses, as well as $0.7 million profit reported in fiscal 2008 related to the non-recurring retroactive billings to the DVA.
Other Expense
Other income was $0.2$0.1 million and $0.8as compared to other expense of $0.4 million, for the fiscal years ended September 30, 20092012 and 2008,2011, respectively. In fiscal 2009, the Company received a notification from the state of Florida regarding a refund of $151,000 for various taxes. Such amount has been recognized in the related periods’ statement of operations as a change in estimate. In fiscal 2008, based on an assessment of periods settled and the status of open periods under review by the IRS regarding notices the Company received related predominantly to its former PEO operations, the Company reduced its estimated liability for payroll tax contingencies by $0.7 million and recorded such adjustment as a component of other income.
The subpoena requested production of certain documents dating back to 1997. The Company acquired RS Staffing effective as of June 2005. These expenses are classified as non-operating expenses because the subpoena relates to activity prior to the acquisition.
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all positive and negative evidence, including scheduled reversals of deferred tax liabilities, prudent and feasible tax planning strategies and recent financial performance. In the fiscal yearyears ended September 30, 2009,2012 and 2011, the Company recognized ano tax benefit of $28,000 related to a refundexpense.
Loss from a state. For fiscal 2008, the Company did not record a Federal tax provision or benefit but recorded tax expense of $60,000 related to certain estimated states’ taxes due.
Loss from continuing operations for the fiscal year ended September 30, 20092012 was $0.4$2.0 million, or $0.08$0.29 per basic share and $0.07 per diluted share, as compared to incomeloss from continuing operations of $3.2$4.6 million, or $0.66$0.84 per basic and diluted share, for the fiscal year ended September 30, 2008.
Discontinued Operation
A non-recurring gain from discontinued operations, net of tax,operation for the fiscal years ended September 30, 2009 was $4.7 million, or ($0.97) per basic share and ($0.93) per diluted share. This includes a loss of $2.4 million from the operating results of the discontinued TeamStaff Rx business and the write-down to fair value of TeamStaff Rx intangible assets of $2.3 million. Loss from discontinued operations for the fiscal year ended September 30, 20082011 was $2.0 million,recognized of $270,000 or ($0.42)$0.05 per basic and diluted share.
Net Loss
Net loss for the fiscal year ended September 30, 20092012 was $4.4$2.0 million, or ($0.89)0.29) per basic share and ($0.86) per diluted share, as compared to net incomeloss of $1.1$4.3 million, or $0.24($0.79) per basic and diluted share, for the fiscal year ended September 30, 2008. This represents a decline2011, due primarily to the aforementioned impairment charge in the prior year, offset by the pressure on gross profit and severance charges of $5.5$0.3 million in the fiscal year ended September 30, 2012.
Other Data
Earnings (Loss) Before Interest Tax Depreciation and Amortization ("EBITDA") adjusted for other non-cash charges ("Adjusted EBITDA"(1)) for the year ended September 30, 2012 was ($1.7 million) as compared to ($1.1 million) for the year ended September 30, 2011. The additional loss is attributable to the softening gross profit and to increased G&A expense described above.
used by other companies. A reconciliation of Adjusted EBITDA with net loss from continuing operations is as follows:
| | For the Year Ended September 30, | ||||||
|---|---|---|---|---|---|---|---|
| | 2012 | 2011 | |||||
Net loss from continuing operations | $ | (2,026 | ) | $ | (4,590 | ) | |
(i) Interest and other expenses (net) | (125 | ) | 367 | ||||
(ii) provision for taxes | — | — | |||||
(iii) amortization and depreciation, | 121 | 113 | |||||
(iv) G&A expenses—equity grants | 352 | 444 | |||||
(v) impairment charges | — | 2,583 | |||||
EBITDA adjusted for other non-cash charges | $ | (1,678 | ) | $ | (1,083 | ) | |
Liquidity and Capital Resources; Commitments
In recent years, the Company has sought to finance its operations and capital expenditures through the sale of equity securities, convertible notes and more recently, through the proceeds from a rights offering. The Company's immediate sources of liquidity include cash and cash equivalents, accounts receivable, unbilled receivables and access to its asset-based credit facility with Presidential Financial Corporation. The Company's operating liabilities are largely predictable and consist of vendor and payroll related obligations. The Company's operations require substantial working capital to fund ourthe future growth of its business model with expanded business development efforts, and planned capital expenditures to support a larger customer base.
At September 30, 2012, the Company had a net working capital needsdeficit of approximately $1.5 million and an accumulated deficit of approximately $67.4 million. For the year ended September 30, 2012, the Company incurred an operating loss and a net loss of approximately $2.0 million and $2.0 million, respectively. At September 30, 2012, the Company had $3.1 million in available cash and cash equivalents. The Company anticipates that it will also rely on operating cash flow and periodic funding, to the extent available, from its line of credit, to sustain the operations of the Company.
In fiscal 2011 the Company completed measures to enhance its liquidity by approximately $1,000,000 as a result of increasing the maximum availability of its credit facility and receiving funding of and/or commitments for additional equity and/or debt financing. In that regard, our largest shareholder, Wynnefield Capital, Inc., and certain of our directors and executive officers collectively provided a total of $500,000 of additional capital to the Company. As described in Note 10, $150,000 of such capital was provided through equity investments on March 31, 2011 and $350,000 of such capital was provided in July 2011 by Wynnefield Capital through the sale of convertible debentures. In addition, as described in Note 6, on February 9, 2011, the Company entered into an amendment of its Loan and Security Agreement with Presidential Financial Corporation, pursuant to which they agreed to increase the maximum availability under the Loan and Security Agreement by an additional $500,000 and provide an unbilled receivable facility within the limits of the Loan and Security Agreement.
In fiscal 2012, the Company continued its efforts to improve and stabilize its financial position and further amended its secured credit facility with Presidential Financial Corporation and completed a rights offering in which it received $4.2 million in gross proceeds. In May 2012, the Company entered into another amendment to the Loan Agreement pursuant to which the Lender agreed to increase the available line of credit from $3,000,000 to a maximum amount of $6,000,000 and to increase the maximum amount available under the unbilled accounts facility of the Loan Agreement from $500,000 to $1,000,000. However, as described in greater detail in Note 6 below, the Company's ability to borrow against the increased available credit is subject to the satisfaction of a number of conditions, and
presently, the maximum availability under this loan facility is $3,000,000, subject to eligible accounts receivable. At September 30, 2012, the amount of unused availability was $344,000 and the amount outstanding on the loan facility was $2,363,000.
On March 16, 2012, the Company filed a registration statement on Form S-1 with the Securities and Exchange Commission for a rights offering in which its existing stockholders received non-transferable rights to purchase $4.2 million of additional shares of the Company's common stock. Under the terms of the rights offering, the Company distributed to the holders of its common stock non- transferable subscription rights for each share of common stock owned on the record date. Each subscription right entitled the holder to purchase 0.532 shares of the Company's common stock at a price of $1.30 per share. In connection with the rights offering, on May 2, 2012, the Company entered into a standby purchase agreement with Wynnefield Capital, which owned, prior to the rights offering, approximately 21% of the Company's common stock (excluding common stock warrants and a convertible note) through certain affiliated entities. Pursuant to the standby purchase agreement, Wynnefield Capital (or affiliated assignees) agreed to acquire from the Company in the rights offering, subject to the satisfactions of specified conditions, the shares of common stock that related to any rights that remained unexercised at the expiration of the rights offering. The closing of the rights offering occurred on June 15, 2012 and the Company raised gross proceeds of $4.2 million from the sale of 3,230,769 shares of common stock.
Management believes, at present, that: (a) cash and cash equivalents of approximately $3.1 million as of September 30, 2012; (b) the amounts available under its line of credit (which, in turn, is limited by a portion of the amount of eligible assets); (c) forecasted operating cash flow; (d) the ultimate non-payment of certain liabilities and recorded guarantees currently contested by the Company or not expected to be settled in cash (see Note 6 to the accompanying consolidated financial statements) (classified as current at September 30, 2012) in fiscal 2013; and (e) effects of cost reduction programs and initiatives should be sufficient to support the Company's operations for twelve months from the date of these financial statements. However, should any of the above- referenced factors not occur substantially as currently expected, there could be a material adverse effect on the Company's ability to access the level of liquidity necessary for it to sustain operations at current levels for the next twelve months. In such an event, management may be forced to make further reductions in spending or seek additional sources of capital to support our operations. If the Company raises additional funds by selling shares of common stock or convertible securities, the ownership of its existing shareholders would be diluted.
Presently, the Company derives all of its revenue from agencies of the Federal government and the Company has derived a substantial portion of its revenues through various contracts awarded by the DVA. The Company currently provides services to the DVA under a single source Blanket Purchase Agreement awarded in fiscal 2011 that has a ceiling value of up to $145,000,000 and is scheduled to expire on October 31, 2016. The agreement is subject to the Federal Acquisition Regulations, and there can be no assurance as to the actual amount of services that the Company will ultimately provide under the agreement. This agreement represented approximately 51% of its revenue in the fiscal year ended September 30, 2012. In addition, the Company also holds contractual order cover through September 30, 2013 in respect of DVA contracts that generated close to a further 44% of its revenue in the fiscal year ended September 30, 2012, which are not currently the subject of requests for proposals and may in due course be further extended by the DVA on a sole source basis, although no assurances can be given that this will occur. The Company's results of operations, cash generatedflows and financial condition would be materially adversely affected in the event that we are unable to continue our relationships with the DVA or suffer a significant diminution in the quantity of services that they procure from operating activities and borrowings under our revolving credit facility.the Company.
Net cash used in operating activities for the year ended September 30, 2012 was $2.8 million as compared to $1.0 million for fiscal year ended September 30, 20092011. The increase in the cash used from 2011 to 2012 is principally due to growth in accounts receivable and other assets, partially offset by a growth in accounts payable, accrued payroll and accrued expenses.
Cash from investing activities
Net cash used in investing activities in 2012 and fiscal 2011 were $68,000 and $37,000, respectively, principally due to capital expenditures.
Cash from financing activities
Net cash provided by financing activities for the year ended September 30, 2012 was $2.1$5.2 million as compared to net cash provided by operating activities of $4.6$0.6 million for the fiscal year ended September 30, 2008. This decrease in net cash2011. The increase is fiscal 2012 was primarily driven by the loss from operations of the discontinued TeamStaff Rx business of $2.3 million, a net decrease in accounts payable of $1.0 million, of which $1.1 million was for payments made to the IRS for previously recorded payroll tax liabilities, offset by a decrease in days sales outstanding (“DSO”) from approximately 17 days to 13 days during fiscal 2009 as a result of improved payment processing by the government. Net cash provided by operating activities for the fiscal year ended September 30, 2008 was primarily driven by a decrease in DSO from approximately 40 days to 17 days during fiscal 2008 due to an enhanced and more efficient payment processing system implemented by the government. This decrease in DSOs increased our cash position by approximately $3 million. Also contributing to net cash provided by operating activities is net income of $1.1 million and $0.35 million in cash received from Zurich related to the reduction in collateral requirements on outstanding workers’ compensation claims.
long-standing RS Staffing note.
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On March 28, 2008, TeamStaff and its wholly-owned subsidiaries, TeamStaff Rx and TeamStaff GSJuly 29, 2010, DLH Solutions entered into an Amended and Restateda Loan and Security Agreement dated as of March 28, 2008 (the “Loan Agreement”"Loan Agreement") with Business Alliance Capital Company, a division of Sovereign Bank. Pursuant to the Loan Agreement, the Lender (i) acquired by assignment from the Company’s prior lender, PNC Bank, National Association, all right, title and interest of PNC under the $8.0 million PNC Credit Facility, the PNC note and related loan documentation, and (ii) restructured the PNC Credit Facility into a $3.0 million revolving credit facility with a three year term. Effective April 1, 2008, BACC changed its name to Sovereign Business Capital. The outstanding principal and interest balance under the PNC Credit Facility, related fees and certain expenses related to the execution and closing of the Loan Agreement were paid in full with $0.6 million in proceeds drawn from the Loan Agreement on April 2, 2008. Fees associated with this facility approximate $150,000, which are amortized over the life of the Loan Agreement.
In May 2012, the Company entered into a further amendment to the Loan Agreement (the "Fifth Amendment") pursuant to which the Lender agreed to increase the available line of credit from $3,000,000 to a maximum amount of $6,000,000 and to increase the maximum amount available under the unbilled accounts facility of the Loan Agreement from $500,000 to $1,000,000. The Company's ability to borrow against the increased available credit, however, is subject to the satisfaction of certain conditions. The Fifth Amendment provides for an initial sublimit under the maximum loan amount of $3,000,000 (the "Initial Sublimit") and an adjusted sublimit of $4,000,000 (the "Adjusted Sublimit"). The Initial Sublimit of $3,000,000 will remain in effect until the satisfaction of the following conditions: (i) the repayment of the $500,000 over-advance accommodation agreed to by Lender as of May 9, 2012, (ii) the Company's demonstration of the need for the increase, (iii) the Company's continued compliance with the Loan Agreement, and (iv) Lender, in its sole discretion, agrees to increase the Initial Sublimit. In the event that the foregoing conditions are satisfied, the credit available to under the Loan Agreement shall remain subject to the Adjusted Sublimit until the parties receive any required waivers or consents from the holders of the Company's subordinated Convertible Debentures issued as of July 28, 2011 and Lender, in its sole discretion, agrees to such further increase. In addition, the increased availability under the unbilled accounts facility of the Loan Agreement is subject to the satisfaction of the same conditions that are applicable to Initial Sublimit. Accordingly, until these conditions are satisfied, the current borrowing limits remain in effect.
An interest rate premium of 2% is payable in respect of any advances secured by unbilled accounts receivable, which are subject to a sub-facility limit of $500,000 and an advance rate of 75%. The loan is secured by a first prioritysecurity interest and lien on all of the Company’s assets. There is currently no debt outstanding under the Loan Agreement. In connection with the dispositionDLH Solutions' cash accounts, account deposits, letters of credit and investment property, chattel paper, furniture, fixtures and equipment, instruments, investment property, general intangibles, deposit accounts, inventory, other property, all proceeds and products of the operating assetsforegoing (including proceeds of our TeamStaff Rx subsidiary, we were required to obtainany insurance policies and claims against third parties for loss of any of the consent of Sovereign. On January 12, 2010 we were granted such consent. As a condition to such consent, however, Sovereign reduced the maximum amount available under such loan facility from $3.0 million to $2.0 million. As of September 30, 2009, there was no debt outstanding under the Loan Agreementforegoing) and unused availability (as defined) totaled $1.7 million, net of required collateral reserves per the Loan Agreement for certain payrollall books and tax liabilities. The average daily outstanding balance on the facility for fiscal 2009 was $0.3 million. As of September 30, 2009, we had working capital of $0.9 million. Accordingly, management does not believe that the reduction in the availability under the Loan Agreement will have a material adverse impact on our operations and financial condition.
Under the Loan and Security Agreement, interest accrues at the greater of 36 months and matures on March 31, 2011. Interest on advances accrues(a) 3.25% or (b) (i) 1.95% above the Wall Street Journal Prime rate on the daily unpaid balanceaccounts receivable portion of the loan advances at a per annum rate of one-quarter (.25%) percentage pointscredit line and (ii) 3.95% above the Wall Street Journal Prime Rate in effect from time to time, but not less than fiverate on the unbilled accounts portion. In addition, DLH Solutions will pay certain other related fees and one-half percent (5.5%) per annum.expense reimbursements including a monthly service charge of 0.65% based on the average daily loan balance which shall accrue daily and be due and payable on the last day of each month so long as the Loan Agreement is outstanding. The interest rate on the facilityin effect at September 30, 20092012 and 2011 was 5.5%5.2%.
The Loan Agreement requires compliance with certain customary covenants including a debt service coverage ratio and imposescontains restrictions on the Company’sCompany's ability to among other things, dispose of certain assets, engage in certain transactions,transactions. Among other matters, under the loan agreement we may not, without consent of the Lender, (i) merge or consolidate with another entity, form any new subsidiary or acquire any interest in a third party; (ii) acquire any assets except in the ordinary course of business; (iii) enter into any transaction outside the ordinary course of business; (iv) sell or transfer collateral; (v) make any loans to, or investments in, any affiliate or enter into any transaction with an affiliate other than on an arms-length basis; (vi) incur indebtedness andany debt outside the ordinary course of business; (vii) pay dividends.or declare any dividends or other distributions; or (viii) redeem, retire or purchase any of our equity interests exceeding $50,000. Further, without the consent of the Lender, the Company is also restricted from making any payments in respect of other outstanding indebtedness. The Lender agreed to eliminate the tangible net worth covenant as part of the Fifth Amendment. The Lender may terminate the Loan Agreement alsoat any time upon 60 days written notice after December 31, 2012 and the Loan Agreement provides for customary events of default following which Sovereignthe Lender may, at its option, terminate the loan agreement and accelerate the repayment of any amount outstanding. The defined events of default include, among other things, a material adverse change in the Company's circumstances, or if the Lender deems itself insecure in the ability of the Company to repay its obligations, or as to the sufficiency of the collateral. At present, the Company has not experienced, and the financial institution has not declared, an event of default. On May 9, 2012, Presidential Financial Corporation agreed to allow the Company to borrow up to $500,000 under its facility with the Company in excess of the eligible collateral, but subject to the maximum loan amount of $3,000,000. This arrangement expired with the closing of the rights offering on June 15, 2012. There were no advances against this facility.
In consideration of the Lender entering into the Fifth Amendment, we agreed to pay a monthly collateral monitoring fee, a documentation fee and at the time that we may borrow amounts outstandingin excess of the Initial Sublimit, an origination fee of 1% of the increased availability.
The Company has concurrently executed a Corporate Guaranty Agreement with Lender pursuant to which it has guaranteed all of the obligations of DLH Solutions under the Loan Agreement.
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DLH has received notices from IRSthe Internal Revenue Service ("IRS") claiming taxes, interest and penalties due related to payroll taxes predominantly from its former PEO operations which were sold in fiscal 2003. TeamStaffDLH has also received notices from the IRS reporting overpayments of taxes. Management believes that these notices are predominantly the result of misapplication of payroll tax payments between its legal entities. If not resolved favorably, the Company may incur interest and penalties. Until the sale of certain assets related to the former PEO operations, DLH operated through 17 subsidiaries, and management believes that the IRS has not correctly identified payments made through certain of the different entities, therefore leading to the notices. To date, TeamStaffDLH has been working with the IRS to resolve these discrepancies and has had certain interest and penalty claims abated. TeamStaffDLH has also received notices from the Social Security Administration claiming variances in wage reporting compared to IRS transcripts. TeamStaffDLH believes the notices from the Social Security Administration are directly related to the IRS notices received. TeamStaffDLH believes that after the IRS applies all the funds correctly, any significant interest and penalties will be abated; however, there can be no assurance that each of these matters will be resolved favorably. In settling various years for specific subsidiaries with the IRS, the Company has received refunds for those specific periods; however, as the process of settling and concluding on other periods and subsidiaries is not yet completed, and the potential exists for related penalties and interest, theinterest. The remaining liability ($1.11.3 million at September 30, 2009)2012) has been recorded in accounts payable. In fiscal 2009,payable and includes estimated accrued penalties and interest totaling approximately $500,000.
The Company believes it has accrued for the entire estimated remaining liability, inclusive of interest and penalties through the date of the financial statements. The Company paid $1.1 million, relatedmay incur additional interest and may incur possible additional penalties through the future date that this obligation is settled, however, it is not currently possible to this matter. Based on an assessment of periods settled and the status of open periods under review by the IRS, management reduced its estimated liability by $0.7 million in 2008. Such amount, accounted for as a change in estimate is included as a component of other income (expense)what, if any, additional amount(s) may be claimed in the accompanying 2008 statementfuture, given the uncertain timing and nature of operations.any future settlement negotiations. No payments were made in fiscal 2011 or fiscal 2012. Management believes that the ultimate resolution of these remaining payroll tax matters will not have a significant adverse effect on its financial position or future results of operations.
Contractual Obligations
| | | Payments Due By Period | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Obligations (Amounts in thousands) | Total | Less than 1 Year | 2 - 3 Years | 4 - 5 Years | |||||||||
Loan Payable(1) | $ | 2,363 | $ | 2,363 | $ | — | $ | — | |||||
Operating Leases(2) | 642 | 163 | 312 | 167 | |||||||||
Convertible Debentures | 350 | — | 350 | — | |||||||||
Total Obligations | $ | 3,355 | $ | 2,526 | $ | 662 | $ | 167 | |||||
| Payments Due By Period | ||||||||||||||||
| Obligations | Less than | 1-3 | 4-5 | |||||||||||||
| (Amounts in thousands) | Total | 1 Year | Years | Years | ||||||||||||
| Long Term Debt (1) | $ | 1,630 | $ | 1,564 | $ | 66 | $ | — | ||||||||
| Operating Leases (2) | 1,124 | 474 | 502 | 148 | ||||||||||||
| Severence Liabilities (3) | 108 | 108 | — | — | ||||||||||||
| Total Obligations | $ | 2,862 | $ | 2,146 | $ | 568 | $ | 148 | ||||||||
Settlement Agreement
DLH and DLH Solutions entered into a settlement agreement dated as of July 22, 2011 (the "Agreement") with Roger Staggs and E. Barry Durham, the former principals of RS Staffing Services, Inc. (together, the "Sellers"). The Sellers were the holders of certain promissory notes issued by DLH in greater detailthe aggregate principal amount of $1,500,000 (the "Notes"). The claims resolved by the Settlement Agreement concerned DLH's claim of indemnification of approximately $1,800,000 arising out of the acquisition by DLH of RS Staffing Services, Inc. in June 2005 and certain counterclaims by the Sellers against DLH, including payment under the caption “Executive CompensationNotes. Pursuant to the Agreement, the Company paid $200,000 in cash to the Sellers, and Related Information – Employment Agreementsissued them an aggregate of 300,000 shares of common stock of DLH, valued at $795,000, the fair value of the stock at July 22, 2011. The Company also agreed to permit the Sellers to resell an aggregate of 201,724 other shares of common stock of DLH presently held by them, against which the Company had previously placed a stop order to prevent their resale. The Sellers agreed to orderly sale limitations with Named Executive Officers”respect to their ability to resell all their shares of common stock of DLH In addition, DLH provided guarantees to the Sellers that the net proceeds to be received by them from the resale of all of the shares of common stock of DLH sold by them pursuant to the Agreement would not be less than certain minimum guarantees. With respect to the shares of common stock of DLH owned by them prior to the effective date of the Agreement (the "Old DLH Shares"), DLH guaranteed to each Seller net proceeds of $100,000, and with respect to the shares of common stock of DLH issued under the Agreement (the "New DLH Shares"), DLH guaranteed net proceeds of $375,000 to each.
The payments of all amounts under the Agreement were secured by the Notes. In addition, the parties agreed to release each other from any further claims that either may have against the other, except to enforce the Agreement. The guarantees in respect of the Old DLH Shares were satisfied in full as of September 30, 2011 and the guarantees in respect of the New DLH Shares were satisfied in full as of September 30, 2012. At September 27, 2012, the guarantees and the remaining value of the Notes have been satisfied through a combination of the repurchase of certain of the shares of the Company's common stock owned by one of the note holders and the expiration of the guarantee period under the Agreement. Following the completion of the sale of 100,000 shares of common stock of the Company by this holder to members of DLH's management team, the Company's retirement of 40,000 shares of its common stock against the payment of an additional $40,000 and the payment by the Company of $225,000, the Company fully satisfied its minimum guarantee obligations related to the Notes. Accordingly, the Company recorded a gain of approximately $486,000 in the fiscal fourth quarter ending September 30, 2012.
The Company recognized expenses related to legal representation and costs incurred in connection with the investigation and settlement in the amount of $0 and $96,000 during fiscal 2008, we entered into employment agreements with our Chief Executive Officer2012 and Chief Financial Officer and during fiscal 2009, we entered into employment agreements with our President2011, respectively, as a component of TeamStaff GS and with our President of TeamStaff Rx. Subsequent to September 30, 2009, we have entered into new employment agreements with our Chief Executive Officer and Chief Financial Officer. The material terms and conditions of each of these employment agreements are summarized in greater detail under the caption “Executive Compensation and Related Information – Employment Agreements with Other Executive Officers”other income (expense). The summaries of each of the foregoing agreements are incorporated herein by reference.
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We have not created, and are not party to, any special-purpose or off-balance sheet entities for the purpose of raising capital, incurring debt or operating parts of our business that are not consolidated into our financial statements. We do not have any arrangements or relationships with entities that are not consolidated into our financial statements that are reasonably likely to materially affect our liquidity or the availability of our capital resources. We have entered into various agreements by which we may be obligated to indemnify the other party with respect to certain matters. Generally, these indemnification provisions are included in contracts arising in the normal course of business under which we customarily agree to hold the indemnified party harmless against losses arising from a breach of representations related to such matters as intellectual property rights. Payments by us under such indemnification clauses are generally conditioned on the other party making a claim. Such claims are generally subject to challenge by us and to dispute resolution procedures specified in the particular
contract. Further, our obligations under these arrangements may be limited in terms of time and/or amount and, in some instances, we may have recourse against third parties for certain payments made by us. It is not possible to predict the maximum potential amount of future payments under these indemnification agreements due to the conditional nature of our obligations and the unique facts of each particular agreement. Historically, we have not made any payments under these agreements that have been material individually or in the aggregate. As of our most recent fiscal year end we were not aware of any obligations under such indemnification agreements that would require material payments.
Effects of Inflation
Inflation and changing prices have not had a material effect on TeamStaff’sDLH's net revenues and results of operations, as TeamStaffDLH has been able to modify its prices and cost structure to respond to inflation and changing prices.
Recently Issued Accounting Pronouncements Affecting the Company
In June 2006,May 2011, the Financial Accounting Standards Board (“FASB”) issued authoritativeFASB amended existing guidance that clarifies the accounting for uncertainty in income taxes recognized in an entity’s financial statementson fair value measurements to clarify certain disclosure requirements and prescribes a recognition threshold of more-likely-than-notimprove consistency with international reporting standards. This amendment is to be sustained upon examination. Measurement ofapplied prospectively and is effective for the tax uncertainty occurs if the recognition threshold has been met. This Interpretation also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. TeamStaff conducts business solely in the U.S. and, as a result, files income tax returns for U.S., New Jersey and various other states and jurisdictions. In the normal course of business the Company is subject to examination by taxing authorities.Company's fiscal quarter ending March 31, 2012. The Company’s tax returns for years subsequent to fiscal 2005 are open, by statute, for review by authorities. However, at present, there are no ongoing income tax audits or unresolved disputes with the various tax authorities that the Company currently files or has filed with. Given the Company’s substantial net operating loss carryforwards, which are subject to a full valuation allowance, as well as the historical operating losses in prior periods, the adoption of this guidance on October 1, 2007 did not have anya material effect on ourprospective financial position, resultsstatements.
The FASB amended existing guidance on reporting comprehensive income in June 2011 to require entities to present the total of operationscomprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or cash flows asin two separate but consecutive statements. The amendment does not change the items that must be reported in other comprehensive income or when an item of the adoption date or for subsequent periods.
In August 2011, the FASB approved a revised accounting standard to simplify the testing of goodwill for impairment. The guidance permits an entity to first assess defined qualitative factors in determining whether it is necessary to perform the goodwill impairment test. The guidance is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after NovemberDecember 15, 2007,2011, with earlier application encouraged. Any amounts recognized uponearly adoption as a cumulative effect adjustment will be recordedpermitted. The Company has elected to adopt this guidance for the opening balance of retained earningsfiscal year ended September 30, 2012.
In December 2011, the FASB amended disclosure concerning offsetting assets and liabilities. The amendments in the yearupdate requires an entity to disclose information about offsetting and related arrangements to enable users of adoption. In February 2008,its financial statements to understand the FASB issued supplemental guidanceeffect of those arrangements on its financial position, including the effect or potential effect of rights of setoff associated with certain financial instruments and derivative instruments. Entities are required to disclose both gross information and net information about both instruments and transactions eligible for offset in the formstatement of financial position and instruments and transactions subject to an agreement similar to a staff position, which delayed themaster netting arrangement. This scope would include derivatives, sale and repurchase agreements and reverse sale and repurchase agreements, and securities borrowing and securities lending arrangements. The amendment is effective date of the initial standard for all nonfinancial assets and nonfinancial liabilities, except those that are recognizedannual reporting periods beginning on or disclosed at fair value in the financial statements on a recurring basis (at least annually), until fiscal years beginning after November 15, 2008,January 1, 2013, and interim periods within those fiscal years.annual periods. An entity should provide the disclosures required by those amendments retrospectively for all comparative periods presented. The Company adoptedis currently evaluating the prospective effects, if any, of adopting this standard on October 1, 2008 with no effect on its financial position, results of operations and cash flows.
In February 2007,July 2012, the FASB issuedfurther amended existing guidance on testing indefinite lived intangible assets for impairment. The amendments are intended to reduce the cost and complexity of performing
an impairment test for indefinite-lived intangible assets by simplifying how an entity tests those assets for impairment and to improve consistency in impairment testing guidance among long-lived asset categories. The amendments permit an entity first to assess qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired as a standardbasis for determining whether it is necessary to perform the quantitative impairment test in accordance with Subtopic 350-30. The more-likely-than-not threshold is defined as having a likelihood of more than 50 percent. This update applies to all entities, both public and nonpublic, that permits entities to choose to measure, on an item-by-item basis, specified financial instruments and certainhave indefinite-lived intangible assets, other items at fair value. Unrealized gains and losses on items for which the fair value option has been elected are required to bethan goodwill, reported in earnings at each reporting date. This standard wastheir financial statements. The amendments are effective for annual and interim impairment tests performed for fiscal years beginning after NovemberSeptember 15, 2007,2012. Early adoption is permitted, including for annual and interim impairment tests performed as of a date before July 27, 2012, if a public entity's financial statements for the provisions of which are required to be applied prospectively.most recent annual or interim period have not yet been issued. The Company adoptedis currently evaluating the prospective effects, if any, of adopting this standard on October 1, 2008 with no effect on its financial position, results of operations and cash flows.
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In June 2009,October 2012, the FASB issued a standardtechnical corrections and improvements, which stipulatedinclude revisions to prior guidance on numerous topics, including Convertible Debentures. The effective date of these revisions is for fiscal years beginning after December 15, 2012. The Company is currently evaluating theFASB Accounting Standards Codification™ is the source prospective effects, if any, of authoritative U.S. GAAP recognized by the FASB to be applied by nongovernmental entities. This standard is effective for financial statements issued for interim and annual periods ended after September 15, 2009. The implementation ofadopting this standard did not have a material impact on the Company’s financial position, results of operations and cash flows.
DLH does not undertake 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. TeamStaffDLH is not materially subject to fluctuations in foreign exchange rates, commodity prices or other market rates or prices from market sensitive instruments. TeamStaff hasinstruments other than potentially in future periods in regard to certain derivative instruments or embedded features required to be accounted for as derivative instruments as discussed in Note 6 to the accompanying financial statements. DLH believes it does not have a material interest rate risk with respect to our prior workers’workers' compensation programs. In connection with TeamStaff’sDLH's prior workers’workers' compensation programs, prepayments of future claims were deposited into trust funds for possible future payments of these claims in accordance with the policies. The interest income resulting from these prepayments is for the benefit of TeamStaff,DLH, and is used to offset workers’workers' compensation expense. If interestInterest rates inpayable on these periods decrease, TeamStaff’s workers’ compensation expensefunds have been relatively static and at a level where any further downward rate adjustments would increase because TeamStaff wouldnot be entitledexpected to less interest income on the deposited funds. Further, and as discussed elsewhereresult in this filing, TeamStaff, Inc. has, effective in January 2010, a $2.0 million revolving credit facility by Sovereign Business Capital. Revolving credit advances bear interest at the Prime Rate plus 25 basis points. The facility has a three-year life and contains term and line of credit borrowing options. The facility is subject to certain restrictive covenants, including a fixed charge coverage ratio. The facility is subject to acceleration upon non-payment or various other standard default clauses. Material increases in the Prime rate could have a material adverse effectimpact on our resultsthe Company's exposure to workers' compensation expense. DLH does not believe the level of operations,exposure to interest rate fluctuations on its debt instruments is material given the statusamount of debt subject to variable interest rates and the revolving credit facility as well asprime rate interest costs.
See attached Consolidated Financial Statements beginning on page F-1 attached to this Report on Form 10-K.
Not applicable.
Our Chief Executive OfficerCEO 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, havehas 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’sSEC's rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive OfficerCEO and President and Chief Financial Officer, to allow timely decisions regarding required disclosure. Management does not view the Company’s inability to timely file its annual report on Form 10-K as evidence that the Company’s disclosure controls and procedures were not effective as the delay experienced by the Company in completing its annual report was caused by the timing of the closing of the Company’s disposition of the assets of its TeamStaff Rx business. Due to the timing of this transaction, the Company’s management was not able to complete its preparation of this annual report prior to the required filing date.
34
Management's Report on Internal Control over Financial Reporting
Our management, under the supervision of our Chief Executive Officer and Chief Financial Officer, is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended). Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The company’sCompany's internal control over financial reporting includes those policies and procedures that:
(i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;
(ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the companyCompany are being made only in accordance with authorizations of management and directors of the company; and
(iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’sCompany's assets that could have a material effect on the financial statements.
Management, including our Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of our internal control over financial reporting as of September 30, 2009.2012. In making this evaluation, management used the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on our evaluation under the framework in Internal Control—Integrated Framework, our management has concluded that our internal control over financial reporting was effective as of September 30, 2009.2012.
This annual report does not include an attestation report of our independent registered public accounting firm regarding our internal control over financial reporting. Management’sManagement's report was not subject to attestation by our independent registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit us to provide only management’smanagement's report in this annual report.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Changes in Internal Control over Financial Reporting
There was no change in our system of internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the fourth fiscal quarter of our fiscal year ended September 30, 20092012 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Effective as of November 15, 2012, the Company granted an aggregate of 52,500 shares of restricted stock to its non-executive directors consistent with its compensation policy for non-executive directors. These shares were issued pursuant to the exemption from registration provided by Section 4(2) of the Securities Act of 1933, as amended. There is no other information required to be disclosed that has materially affected, or is reasonably likely to materially affect, our results of operations, financial position or cash flows.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this item with respect to our executive officers is provided under the caption entitled "Executive Officers of the Company" in Part I of this Annual Report on Form 10-K and is incorporated by reference herein. The information required by this item with respect to our directors, board committees, and corporate governance matters will be set forth in our definitive Proxy Statement under the captions "Election of Directors," "Section 16(a) Beneficial Ownership Reporting Compliance" and "Corporate Governance" of the Proxy Statement, to be filed within 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K, and is incorporated herein by reference to our Proxy Statement.
We have adopted a written code of business conduct and ethics, which applies to our principal executive officer, principal financial or accounting officer or person serving similar functions and all of our other employees and members of our board of directors. We did not waive any provisions of the code of business ethics during the year ended September 30, 2012. If we amend, or grant a waiver under, our code of business ethics that applies to our principal executive officer, principal financial or accounting officer, or persons performing similar functions, we intend to post information about such amendment or waiver on our website.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item will be set forth in our definitive Proxy Statement, to be filed within 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K, and is incorporated herein by reference to our Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by this Item will be set forth in our definitive Proxy Statement, to be filed within 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K, and is incorporated herein by reference to our Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this Item will be set forth in our definitive Proxy Statement, to be filed within 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K, and is incorporated herein by reference to our Proxy Statement.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this Item will be set forth in our definitive Proxy Statement under the caption "Independent Registered Public Accounting Firm", to be filed within 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K, and is incorporated herein by reference to our Proxy Statement.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The financial statements and schedules of DLH are included in Part II, Item 8 of this report beginning on page F-1.
All schedules have been omitted since the required information is not applicable or because the information required is included in the Consolidated Financial Statements or the notes thereto.
The exhibits designated with an asterisk (*) are filed herewith. All other exhibits have been previously filed with the Commission and, pursuant to 17 C.F.R. Secs. 20l.24 and 240.12b-32, are incorporated by reference to the document referenced in brackets following the descriptions of such exhibits. The exhibits designated with a number sign (#) indicate a management contract or compensation plan or arrangement.
35
| Name | Age | Positions | Class | |||||||
| Frederick G. Wasserman | 55 | Chairman of the Board of Directors | 2 | |||||||
| Karl W. Dieckmann | 81 | Vice Chairman | 2 | |||||||
| William H. Alderman | 47 | Director | 2 | |||||||
| Peter Black | 37 | Director | 1 | |||||||
| Martin Delaney | 66 | Director | 3 | |||||||
| Rick J. Filippelli | 53 | President, Chief Executive Officer and Director | 3 | |||||||
| T. Stephen Johnson | 59 | Director | 1 | |||||||
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| Change in Pension | ||||||||||||||||||||||||||||
| Value and | ||||||||||||||||||||||||||||
| Nonqualified Deferred | ||||||||||||||||||||||||||||
| Stock | Compensation | All Other | ||||||||||||||||||||||||||
| Name and Principal | Salary | Bonus | Awards | Earnings | Compensation | |||||||||||||||||||||||
| Position | Year | ($)(1) | ($)(2) | ($)(3) | ($) | ($)(4) | Total ($) | |||||||||||||||||||||
| Rick J. Filippelli, President and Chief Executive Officer | 2009 | $ | 290,000 | $ | — | $ | 44,625 | $ | — | $ | 4,169 | $ | 338,794 | |||||||||||||||
| 2008 | $ | 280,000 | $ | 196,000 | $ | 100,796 | $ | — | $ | 4,495 | $ | 581,291 | ||||||||||||||||
| Cheryl Presuto, Chief Financial Officer | 2009 | $ | 181,000 | $ | — | $ | 25,500 | $ | — | $ | 2,501 | $ | 209,001 | |||||||||||||||
| 2008 | $ | 175,000 | $ | 87,500 | $ | 57,433 | $ | — | $ | 3,394 | $ | 323,327 | ||||||||||||||||
| Dale West, President, TeamStaff Rx (5) | 2009 | $ | 200,000 | $ | — | $ | 50,500 | $ | — | $ | 990 | $ | 251,490 | |||||||||||||||
| Kevin Wilson, President, TeamStaff GS | 2009 | $ | 200,000 | $ | — | $ | 25,500 | $ | — | $ | — | $ | 225,500 | |||||||||||||||
41
| Option Awards | Stock Awards | |||||||||||||||||||||||||||||||
| (a) | (b) | (c) | (d) | (e) | (f) | (g) | (h) | (i) | ||||||||||||||||||||||||
| Equity Incentive | ||||||||||||||||||||||||||||||||
| Equity Incentive | Plan Awards: | |||||||||||||||||||||||||||||||
| Number | Market | Plan Awards: | Market or | |||||||||||||||||||||||||||||
| Number of | Number of | of Shares | Value of | Number of | Payout Value of | |||||||||||||||||||||||||||
| Securities | Securities | or Units | Shares or | Unearned | Unearned | |||||||||||||||||||||||||||
| Underlying | Underlying | of Stock | Units of | Shares, Units or | Shares, Units or | |||||||||||||||||||||||||||
| Unexercised | Unexercised | Option | That | Stock That | Other Rights | Other Rights | ||||||||||||||||||||||||||
| Options | Options | Exercise | Option | Have Not | Have Not | That Have Not | That Have Not | |||||||||||||||||||||||||
| (#) | (#) | Price | Expiration | Vested | Vested | Vested | Vested | |||||||||||||||||||||||||
| Name | Exercisable | Unexercisable | ($) | Date | (#)(1) | ($)(2) | (#)(3) | ($)(2) | ||||||||||||||||||||||||
| Rick Filippelli | — | — | — | — | ||||||||||||||||||||||||||||
| 70,000 | $ | 105,000 | ||||||||||||||||||||||||||||||
| 13,750 | $ | 20,625 | ||||||||||||||||||||||||||||||
| Cheryl Presuto | 4,500 | — | $ | 7.84 | 11/04/09 | |||||||||||||||||||||||||||
| 40,000 | $ | 60,000 | ||||||||||||||||||||||||||||||
| 10,000 | $ | 15,000 | ||||||||||||||||||||||||||||||
| Dale West | — | — | — | — | ||||||||||||||||||||||||||||
| 40,000 | $ | 60,000 | ||||||||||||||||||||||||||||||
| 30,000 | $ | 45,000 | ||||||||||||||||||||||||||||||
| Kevin Wilson | — | — | — | — | ||||||||||||||||||||||||||||
| 40,000 | $ | 60,000 | ||||||||||||||||||||||||||||||
| 20,000 | $ | 30,000 | ||||||||||||||||||||||||||||||
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45
46
47
48
49
50
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| Change in | ||||||||||||||||||||||||||||
| Pension Value | ||||||||||||||||||||||||||||
| and Nonqualified | ||||||||||||||||||||||||||||
| Fees Earned | Non-Equity | Deferred | ||||||||||||||||||||||||||
| or Paid in | Stock | Option | Incentive Plan | Compensation | All Other | |||||||||||||||||||||||
| Cash | Awards | Awards | Compensation | Earnings | Compensation | Total | ||||||||||||||||||||||
| Name (1) (3) (4) | ($) | ($) (2) | ($) | ($) | ($) | ($) | ($) | |||||||||||||||||||||
T. Stephen Johnson | $ | 21,250 | $ | 8,375 | $ | — | $ | 29,625 | ||||||||||||||||||||
Karl W. Dieckmann | $ | 20,833 | $ | 11,725 | $ | 1,557 | $ | 34,115 | ||||||||||||||||||||
William H. Alderman | $ | 20,833 | $ | 8,375 | $ | 1,762 | $ | 30,970 | ||||||||||||||||||||
Peter Black | $ | 20,833 | $ | 10,050 | $ | — | $ | 30,883 | ||||||||||||||||||||
Martin J. Delaney | $ | 18,333 | $ | 8,375 | $ | 698 | $ | 27,406 | ||||||||||||||||||||
Frederick G. Wasserman | $ | 22,417 | $ | 10,050 | $ | — | $ | 32,467 | ||||||||||||||||||||
52
| Number of Shares | Percent of Company’s | |||||||
| Name | Currently Owned (1) | Outstanding Stock | ||||||
| William H. Alderman (2) | 11,938 | * | ||||||
| c/o TeamStaff, Inc. 1 Executive Drive Somerset, NJ 08873 | ||||||||
| Peter Black (3)(12) | 22,000 | * | ||||||
| c/o TeamStaff, Inc. 1 Executive Drive Somerset, NJ 08873 | ||||||||
| Martin J. Delaney (4) | 22,432 | * | ||||||
| c/o TeamStaff, Inc. 1 Executive Drive Somerset, NJ 08873 | ||||||||
| Karl W. Dieckmann (5) | 42,731 | * | ||||||
| c/o TeamStaff, Inc. 1 Executive Drive Somerset, NJ 08873 | ||||||||
| Rick J. Filippelli (6) | 147,500 | 2.89 | % | |||||
| c/o TeamStaff, Inc. 1 Executive Drive Somerset, NJ 08873 | ||||||||
| T. Stephen Johnson (7) | 82,877 | 1.64 | % | |||||
| c/o TeamStaff, Inc. 1 Executive Drive Somerset, NJ 08873 | ||||||||
| Frederick G. Wasserman (8) | 16,563 | * | ||||||
| c/o TeamStaff, Inc. 1 Executive Drive Somerset, NJ 08873 | ||||||||
| Cheryl Presuto (9) | 45,000 | * | ||||||
| c/o TeamStaff, Inc. 1 Executive Drive Somerset, NJ 08873 | ||||||||
| Kevin Wilson (10) | 30,000 | * | ||||||
| c/o TeamStaff, Inc. 1 Executive Drive Somerset, NJ 08873 | ||||||||
| Bernard J. Korman (11) | 729,146 | 14.48 | % | |||||
| 2129 Chestnut Street Philadelphia, PA 19103 | ||||||||
| Wynnefield Partners Small Cap Value LP (12)(13) | 332,097 | 6.59 | % | |||||
| 450 Seventh Ave New York, NY 10123 | ||||||||
| Wynnefield Partners Small Cap Value LP I (12)(14) | 428,850 | 8.52 | % | |||||
| 450 Seventh Ave New York, NY 10123 | ||||||||
| Wynnefield Partners Small Cap Value Offshore Fund, Ltd. (12)(15) | 428,072 | 8.5 | % | |||||
| 450 Seventh Ave New York, NY 10123 | ||||||||
53
| Number of Shares | Percent of Company’s | |||||||
| Name | Currently Owned (1) | Outstanding Stock | ||||||
| Wynnefield Capital Profit Sharing Plan (12)(16) | 92,563 | 1.84 | % | |||||
| 450 Seventh Ave New York NY 10123 | ||||||||
| Channel Partnership II, LP (12)(17) | 12,500 | * | ||||||
| 450 Seventh Ave New York NY 10123 | ||||||||
| Hummingbird Value Fund (11) | 145,060 | 2.88 | % | |||||
460 Park Avenue, 12th Flr. New York NY 10022 | ||||||||
| Hummingbird Microcap Value Fund (11) | 129,340 | 2.57 | % | |||||
460 Park Avenue, 12th Flr. New York NY 10022 | ||||||||
| All officers and directors as a group (9) persons (2, 3, 4, 5, 6, 7, 8, 9, 10, 12) | 1,715,123 | 33.45 | % | |||||
54
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| Fiscal Years Ended September 30, | ||||||||
| 2009 | 2008 | |||||||
| Audit Fees (1) | $ | 175,000 | $ | 170,000 | ||||
| Audit-Related Fees (2) | — | — | ||||||
| Tax Fees (3) | 103,000 | 106,000 | ||||||
| All Other Fees (4) | 15,500 | 13,000 | ||||||
| Total | $ | 293,500 | $ | 289,000 | ||||
56
| Exhibit No. | Description | |||||||
|---|---|---|---|---|---|---|---|---|
| 2.1 | Agreement and Plan of Merger by and among TeamStaff, Inc., TeamSub, Inc and BrightLane.com, Inc., dated as of March 6, 2001, as amended by Amendment No. 1 dated as of March 21, 2001 and Amendment No. 2 dated as of April 6, 2001 (filed as Appendix A to the Proxy Statement/prospectus filed on August 7, 2001, SEC File no. 333-61730, as part of | |||||||
2.2.1 | ||||||||
Form of Asset Purchase Agreement between TeamStaff, Inc and Gevity HR, Inc. dated as of November 14, 2003 (filed as Exhibit 2 to Form 8-K dated November 14, 2003). | ||||||||
2.3 | ||||||||
Asset Purchase Agreement, dated as of January 29, 2008, by and among Temps, Inc., TeamStaff, Inc. and TeamStaff Rx, Inc. (previously filed as Exhibit 2.1 to the Current Report on Form 8-K filed by the Company on February 5, 2008). | ||||||||
2.4 | ||||||||
Asset Purchase Agreement, dated as of December 28, 2009, by and among Advantage RN, LLC, TeamStaff, Inc. and TeamStaff Rx, Inc. (previously filed as Exhibit 2.1 to the Current Report on Form 8-K filed by the Company on December 30, 2009). | ||||||||
3.1 | ||||||||
Amended and Restated Certificate of Incorporation (filed as Exhibit A to Definitive Proxy Statement dated May 1, 2000 as filed with the Securities and Exchange Commission). | ||||||||
3.2 | ||||||||
Amended By-Laws of Registrant adopted as of May 15, 2001 (filed as Exhibit 3.4 to the Registration Statement on Form S-4 File No. 333-61730). | ||||||||
3.3 | ||||||||
Amended and restated By-Laws of Registrant adopted as of August 29, 2001 (filed as Exhibit 3.5 to the | ||||||||
3.4 | ||||||||
Amendment to By-Laws of Registrant adopted November 8, 2007 (filed as Exhibit 3.1 to the | ||||||||
57
3.5 | ||||
Amendment to Amended and Restated Certificate of Incorporation of the Company (filed as Exhibit B to Definitive Proxy Statement dated March 13, 2008 as filed with the Securities and Exchange Commission). | ||||
3.6 | Amendment to Amended and Restated Certificate of Incorporation of the Company filed June 25, 2012 (filed as Exhibit 3.1 to Current Report on Form 8-K filed on June 26, 2012). |
| Exhibit No. | Description | |||
|---|---|---|---|---|
| 4.1 | Convertible Debenture issued to Wynnefield Small Cap Value, LP I (filed as Exhibit 4.1 to Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2011). | |||
4.2 | Convertible Debenture issued to Wynnefield Small Cap Value, LP (filed as Exhibit 4.2 to Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2011). | |||
4.3 | Common Stock Purchase Warrant issued to Wynnefield Small Cap Value, LP I (filed as Exhibit 4.3 to Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2011). | |||
4.4 | Common Stock Purchase Warrant issued to Wynnefield Small Cap Value, LP (filed as Exhibit 4.4 to Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2011). | |||
4.5 | Form of Warrant Issued in October 2011 (filed as Exhibit 4.1 to Quarterly Report on Form 10-Q for the fiscal quarter ended December 31, 2011). | |||
4.6 | Form of Subscription Rights Certificate (filed as Exhibit 4.5 to Registration Statement on Form S-1/A filed on April 26, 2012). | |||
4.7 | Form of Subscription Agent Agreement by and between Teamstaff, Inc. and Continental Stock Transfer & Trust Company (filed as Exhibit 4.6 to Registration Statement on Form S-1 filed on March 16, 2012). | |||
10.1 | # | 2000 Employee Stock Option Plan (filed as Exhibit B to the Proxy Statement dated as of March 8, 2000 with respect to the Annual meeting of Shareholders held on April 13, 2000). | ||
10.2 | # | |||
2000 Non-Executive Director Stock Option Plan (filed as Exhibit B to the Proxy Statement dated as of March 8, 2000 with respect to the Annual meeting of Shareholders held on April 13, 2000). | ||||
10.3 | ||||
Form of Stock Purchase Agreement dated as of April 6, 2001 between TeamStaff, Inc. and BrightLane.com, Inc. with respect to purchase of Series A Preferred Stock (filed as Exhibit 10.1 to Form 8-K dated April 6, 2001). | ||||
10.4 | ||||
Form of Escrow Agreement between TeamStaff, Inc. and BrightLane Shareholders with respect to the placement of 150,000 shares into escrow by the BrightLane shareholders (filed as Appendix B to the proxy statement/prospectus filed on August 7, 2001 SEC File No. 333.61730). | ||||
10.5 | # | |||
Form of Employee Incentive Stock Option Certificate and Agreement (filed as Exhibit 10.13 to the Form 10-K filed on December 23, 2004). | ||||
10.6 | # | |||
Form of Employee Non-Qualified Stock Option Certificate and Agreement (filed as Exhibit 10.14 to the Form 10-K filed on December 23, 2004). | ||||
10.7 | # | |||
Form of 2000 Director Plan Non-Qualified Stock Option Agreement (filed as Exhibit 10.15 to the Form 10-K filed on December 23, 2004). | ||||
10.8 | ||||
Form of Stock Purchase Agreement among TeamStaff, Inc. and the Shareholders of RS Staffing Services, Inc. dated as of May 26, 2005 (filed as Exhibit 10.1 to Form 8-K dated June 8, 2005). | ||||
10.9.1 | ||||
Form of Note dated June 8, 2005 issued by TeamStaff, Inc. to Roger Staggs (filed as Exhibit 10.2 to the Form 10-Q filed on August 12, 2005). | ||||
10.9.2 | ||||
Form of Note dated June 8, 2005 issued by Team Staff, Inc. to Barry Durham (filed as Exhibit 10.2 to the Form 10-Q filed on August 12, 2005). | ||||
58
| Exhibit No. | Description | |||||||
|---|---|---|---|---|---|---|---|---|
| # | ||||||||
| Form Notice of Restricted Stock Bonus Award and Restricted Stock Agreement (filed as Exhibit 10.2 to the Form 10-Q filed on May 15, 2006). | ||||||||
10.11 | # | |||||||
Form of Director Stock Option Agreement for options granted September 1, 2006. (filed as Exhibit 10.26 to the | ||||||||
10.12 | # | |||||||
59
| Employment Agreement between the Company and | ||||
10.13 | # | Form of Stock Option Award under 2006 Long Term Incentive Plan (filed as Exhibit 10.6 to Quarterly Report on Form 10-Q filed on February 16, 2010). | ||
10.14 | † | Loan and Security Agreement, | ||
10.15 | Secured Promissory Note, dated July 29, 2010, executed by TeamStaff Government Solutions, Inc.(filed as Exhibit 10.2 to Quarterly Report on Form 10-Q filed on August 16, 2010). | |||
10.16 | Corporate Guaranty Agreement, dated July 29, 2010, executed by TeamStaff, Inc. (filed as Exhibit 10.3 to Quarterly Report on Form 10-Q filed on August 16, 2010). | |||
10.17 | Amendment to Secured Promissory Note and Loan and Security Agreement with Presidential Financial Corporation (filed as Exhibit 10.1 to Current Report on Form 8-K, filed on August | |||
10.18 | ||||
Second Amendment to Secured Promissory Note and Loan and Security Agreement | ||||
10.19 | # | |||
Employment Agreement between the Company and | ||||
10.20 | # | Employment Agreement between the Company and John F. Armstrong, dated February 7, 2011 (filed as Exhibit 10.34 to Annual Report on Form 10-K for the fiscal year ended September 30, 2010). | ||
10.21 | Third Amendment to Secured Promissory Note and Loan and Security Agreement with Presidential Financial Corporation, dated February 9, 2011 (filed as Exhibit 10.35 to Annual Report on Form 10-K for the fiscal year ended September 30, 2010). | |||
10.22 | Form of Subscription Agreement (filed as Exhibit 10.3 to Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2011). | |||
10.23 | Form of Subscription Agreement (filed as Exhibit 10.4 to Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2011). | |||
10.24 | Form of Settlement Agreement dated as of July 22, 2011 (filed as Exhibit 10.1 to Current Report on Form 8-K dated July 28, 2011). | |||
10.25 | # | 2006 Long Term Incentive Plan, as amended (filed as Exhibit A to the Proxy Statement dated July 18, 2011) with respect to the Annual Meeting of Shareholders held on August 18, 2011). | ||
10.26 | Debenture Purchase Agreement dated as of June 1, 2011 (filed as Exhibit 10.1 to Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2011). | |||
| Exhibit No. | Description | |||
|---|---|---|---|---|
| 10.27 | Amendment to Employment Agreement between the Company and Zachary C. Parker (filed as Exhibit 10.2 to Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2011). | |||
10.28 | Amendment to Employment Agreement between the Company and John E. Kahn (filed as Exhibit 10.3 to Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2011). | |||
10.29 | Amendment to Employment Agreement between the Company and John F. Armstrong (filed as Exhibit 10.4 to Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2011). | |||
10.30 | Creditor Subordination Agreement by TeamStaff Government Solutions, Inc., TeamStaff, Inc., Presidential Financial Corporation and Wynnefield Partners SmallCap Value LP (filed as Exhibit 10.5 to Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2011). | |||
10.31 | Creditor Subordination Agreement by TeamStaff Government Solutions, Inc., TeamStaff, Inc., Presidential Financial Corporation and Wynnefield Partners SmallCap Value LP I (filed as Exhibit 10.6 to Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2011). | |||
10.32 | # | Employment Agreement between the Company and Kevin Wilson (filed as Exhibit 10.1 to Current Report on Form 8-K dated October 4, 2011). | ||
10.33 | Fourth Amendment to Secured Promissory Note and Loan and Security Agreement with Presidential Financial Corporation dated November 30, 2011 (filed as Exhibit 10.44 to Annual Report on Form 10-K for the fiscal year ended September 30, 2011). | |||
10.34 | Standby Purchase Agreement dated May 2, 2012 (filed as Exhibit 10.1 to Current Report on Form 8-K filed | |||
10.35 | Form of Registration Rights Agreement, dated May 2, 2012 (filed as Exhibit 10.2 to Current Report on Form 8-K filed May 3, 2012). | |||
10.36 | Amendment to Secured Promissory Note and | |||
10.37 | # | Employment Agreement with Kathryn M. JohnBull (filed as Exhibit 10.1 to Current Report on Form 8-K filed June 29, 2012). | ||
10.38 | # | Separation Agreement with John E. Kahn dated | ||
10.39 | # | Amendment to Employment Agreement with Zachary C. Parker (filed as Exhibit 10.1 to Current Report on Form 8-k filed November 12, 2013). | ||
14 | Code of Ethics (Exhibit 14.1 to Annual Report on Form 10-K for the fiscal year ended September 30, 2003). | |||
21 | * | |||
Subsidiaries of Registrants. | ||||
23.1 | * | |||
Consent of WithumSmith+Brown, PC | ||||
31.1 | * | |||
Certification of Chief Executive Officer pursuant to Section 17 CFR 240.13a-14(a) or 17 CFR 240.15d-14(a). | ||||
| Exhibit No. | Description | |||||||
|---|---|---|---|---|---|---|---|---|
| 31.2 | * | Certification of Chief Financial Officer pursuant to Section 17 CFR 240.13a-14(a) or 17 CFR 240.15d-14(a). | ||||||
32.1 | * | |||||||
Certification of Chief Executive Officer and Chief Financial Officer pursuant to 17 CFR 240.13a-14(b) or 17 CFR 240.15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code. | ||||||||
101 | ## | The following financial information from the DLH Holdings Corp. Annual Report on Form 10-K for the fiscal year ended September 30, 2012, formatted in XBRL (eXtensible Business Reporting Language) and furnished electronically herewith: (i) the Consolidated Balance Sheets; (ii) the Consolidated Statements of Operations; (iii) the Consolidated Statements of Cash Flows; (iv) the Consolidated Statements Of Shareholders' Equity and, (v) the Notes to the Consolidated Financial Statements. | ||||||
60
| DLH HOLDINGS CORP. | ||||
By: | ||||
/s/ ZACHARY C. PARKER Zachary C. Parker Chief Executive Officer (Principal Executive Officer) | ||||
Dated: January 19, 2010
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
Signature | Capacity | Date | ||
|---|---|---|---|---|
/s/ FREDERICK G. WASSERMAN Frederick G. Wasserman | Chairman of the Board | |||
/s/ T. T. Stephen Johnson | Director | December 13, 2012 | ||
/s/ PETER BLACK Peter Black | Director | December 13, 2012 | ||
/s/ | ||||
Martin J. Delaney | Director | December 13, 2012 | ||
/s/ WILLIAM H. ALDERMAN William H. Alderman | Director | December 13, 2012 | ||
/s/ AUSTIN J. YERKS III Austin J. Yerks III | Director | December 13, 2012 | ||
/s/ Zachary C. Parker | Chief Executive Officer, President and Director | December 13, 2012 | ||
/s/ Kathryn M. Johnbull | Chief Financial Officer and Principal Accounting Officer | December 13, 2012 |
61
| Page | |||||||||
|---|---|---|---|---|---|---|---|---|---|
| F-2 | |||||||||
| 2011 | F-3 | ||||||||
| 2011 | F-5 | ||||||||
| 2011 | |||||||||
Consolidated | |||||||||
| 2011 | |||||||||
Notes To Consolidated Financial Statements | |||||||||
| F-8 | |||||||||
Schedules have been omitted as they are either not required or because the related information has been included in the notes to consolidated financial statements
F-1
To the Board of Directors and Shareholders of TeamStaff, Inc.
We have audited the accompanying consolidated balance sheets of TeamStaff, Inc.DLH Holdings Corp. and Subsidiaries as of September 30, 20092012 and 2008,2011, and the related consolidated statements of operations, and comprehensive income (loss), shareholders’shareholders' equity and cash flows for each of the years then ended. Our audits also included the consolidated financial statement schedule as listed in the index. These financial statements and schedule are the responsibility of the Company’sCompany's management. Our responsibility is to express an opinion on these consolidated financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of TeamStaff,DLH Holdings Corp., Inc. and Subsidiaries as of September 30, 20092012 and 2008,2011, and the consolidated results of its operations and its cash flows for each of the years then ended, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the consolidated financial statement schedule referred to above, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
/s/ WithumSmith+Brown,WITHUMSMITH+BROWN, PC
| September 30, | September 30, | ||||||||||||||
| 2009 | 2008 | ||||||||||||||
ASSETS | September 30, 2012 | September 30, 2011 | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
CURRENT ASSETS: | |||||||||||||||
| Cash and cash equivalents | $ | 2,992 | $ | 5,213 | $ | 3,089 | $ | 763 | |||||||
| Accounts receivable, net of allowance for doubtful accounts of $0 as of September 30, 2009 and 2008 | 11,427 | 11,881 | |||||||||||||
| Prepaid workers’ compensation | 517 | 562 | |||||||||||||
Accounts receivable, net of allowance for doubtful accounts of $0 as of September 30, 2012 and September 30, 2011 | 13,028 | 11,112 | |||||||||||||
Prepaid workers' compensation | 516 | 513 | |||||||||||||
| Other current assets | 257 | 505 | 133 | 184 | |||||||||||
| Assets from discontinued operations | 1,418 | 3,878 | |||||||||||||
Total current assets | 16,611 | 22,039 | 16,766 | 12,572 | |||||||||||
EQUIPMENT AND IMPROVEMENTS: | |||||||||||||||
| Furniture and equipment | 2,262 | 2,262 | 139 | 177 | |||||||||||
| Computer equipment | 255 | 249 | 126 | 102 | |||||||||||
| Computer software | 788 | 725 | 408 | 260 | |||||||||||
| Leasehold improvements | 9 | 9 | 24 | 21 | |||||||||||
| 3,314 | 3,245 | 697 | 560 | ||||||||||||
| Less accumulated depreciation and amortization | (3,054 | ) | (2,945 | ) | (429 | ) | (346 | ) | |||||||
Equipment and improvements, net | 260 | 300 | 268 | 214 | |||||||||||
GOODWILL | 8,595 | 8,595 | |||||||||||||
OTHER ASSETS | |||||||||||||||
Deferred financing costs, net | 9 | 26 | |||||||||||||
Other assets | 784 | 510 | |||||||||||||
TRADENAME | 3,924 | 3,924 | |||||||||||||
GOODWILL | 8,595 | 8,595 | |||||||||||||
OTHER ASSETS | 267 | 136 | |||||||||||||
Total other assets | 793 | 536 | |||||||||||||
TOTAL ASSETS | $ | 29,657 | $ | 34,994 | $ | 26,422 | $ | 21,917 | |||||||
The accompanying notes are an integral part of these consolidated financial statements.
DLH HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS EXCEPT PAR VALUE OF SHARES)
LIABILITIES AND SHAREHOLDERS' EQUITY | September 30, 2012 | September 30, 2011 | |||||
|---|---|---|---|---|---|---|---|
CURRENT LIABILITIES: | |||||||
Bank loan payable | $ | 2,363 | $ | 740 | |||
Notes payable | — | 711 | |||||
Current portion of capital lease obligations | 51 | 8 | |||||
Accrued payroll | 10,555 | 10,318 | |||||
Accounts payable | 2,296 | 1,983 | |||||
Accrued expenses and other current liabilities | 2,817 | 2,134 | |||||
Liabilities from discontinued operation | 185 | 235 | |||||
Total current liabilities | 18,267 | 16,129 | |||||
LONG TERM LIABILITIES | |||||||
Convertible debenture, net | 202 | 46 | |||||
Derivative financial instruments, at fair value | 119 | 182 | |||||
Other long term liability | 84 | 6 | |||||
Total long term liabilities | 405 | 234 | |||||
Total liabilities | 18,672 | 16,363 | |||||
COMMITMENTS AND CONTINGENCIES | |||||||
SHAREHOLDERS' EQUITY: | |||||||
Preferred stock, $.10 par value; authorized 5,000 shares; none issued and outstanding | — | — | |||||
Common stock, $.001 par value; authorized 40,000 shares; issued 9,266 at September 30, 2012 and 6,023 at September 30, 2011, outstanding 9,264 at September 30, 2012 and 6,021 at September 30, 2011 | 9 | 6 | |||||
Additional paid-in capital | 75,207 | 70,988 | |||||
Accumulated deficit | (67,442 | ) | (65,416 | ) | |||
Treasury stock, 2 shares at cost at September 30, 2012 and 2 shares at September 30, 2011 | (24 | ) | (24 | ) | |||
Total shareholders' equity | 7,750 | 5,554 | |||||
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY | $ | 26,422 | $ | 21,917 | |||
The accompanying notes are an integral part of these consolidated financial statements.
DLH HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
| | For the Year Ended | ||||||
|---|---|---|---|---|---|---|---|
| | September 30, 2012 | September 30, 2011 | |||||
REVENUES | $ | 49,193 | $ | 41,923 | |||
DIRECT EXPENSES | 43,596 | 36,025 | |||||
GROSS PROFIT | 5,597 | 5,898 | |||||
GENERAL AND ADMINISTRATIVE EXPENSES | 7,361 | 7,425 | |||||
SEVERANCE | 267 | — | |||||
IMPAIRMENT CHARGE—INTANGIBLE ASSETS | — | 2,583 | |||||
DEPRECIATION AND AMORTIZATION | 120 | 113 | |||||
Loss from operations | (2,151 | ) | (4,223 | ) | |||
OTHER INCOME (EXPENSE) | |||||||
Interest income | 13 | 8 | |||||
Interest expense | (298 | ) | (291 | ) | |||
Amortization of deferred financing costs | (195 | ) | (56 | ) | |||
Change in fair value of financial instruments | 105 | 107 | |||||
Loss on retirement of assets | (2 | ) | (45 | ) | |||
Settlement of note payable | 486 | ||||||
Other income, net | 16 | 6 | |||||
Legal expense related to pre-acquisition activity of acquired company | — | (96 | ) | ||||
| 125 | (367 | ) | |||||
Loss from continuing operations before income taxes | (2,026 | ) | (4,590 | ) | |||
INCOME TAX EXPENSE | — | — | |||||
Loss from continuing operations | (2,026 | ) | (4,590 | ) | |||
GAIN FROM DISCONTINUED OPERATION | — | 270 | |||||
NET LOSS | $ | (2,026 | ) | $ | (4,320 | ) | |
NET GAIN (LOSS) PER SHARE—BASIC AND DILUTED | |||||||
Loss from continuing operations | $ | (0.29 | ) | $ | (0.84 | ) | |
Gain from discontinued operation | — | 0.05 | |||||
Net loss per share | $ | (0.29 | ) | $ | (0.79 | ) | |
WEIGHTED AVERAGE BASIC AND DILUTED SHARES OUTSTANDING | 7,026 | 5,460 | |||||
The accompanying notes are an integral part of these consolidated financial statements.
DLH HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
| | For the Year Ended | ||||||
|---|---|---|---|---|---|---|---|
| | September 30, 2012 | September 30, 2011 | |||||
CASH FLOWS FROM OPERATING ACTIVITIES | |||||||
Net loss | $ | (2,026 | ) | $ | (4,320 | ) | |
Adjustments to reconcile net loss to net cash used in operating activities, net of divested business: | |||||||
Depreciation and amortization including debt costs | 275 | 146 | |||||
Impairment charge | 2,583 | ||||||
Change in fair value of derivative financial instruments | (105 | ) | (107 | ) | |||
Compensation expense related to employee stock option grants | 179 | 398 | |||||
Compensation expense related to employee restricted stock grants | 50 | 14 | |||||
Compensation expense related to director restricted stock grants | 123 | 20 | |||||
Share based expense on non employee options | 25 | — | |||||
Warrants issued to consultants | 12 | — | |||||
Other non cash compensation | 6 | 12 | |||||
Loss on retirement of equipment | 2 | 45 | |||||
Gain on settlement of notes payable | (486 | ) | — | ||||
Changes in operating assets and liabilities, net of divested business: | |||||||
Accounts receivable | (1,916 | ) | 212 | ||||
Other current assets | 48 | 160 | |||||
Other assets | (258 | ) | (150 | ) | |||
Accounts payable, accrued payroll, accrued expenses and other current liabilities | 1,233 | (1 | ) | ||||
Other long term liabilities | 56 | 1 | |||||
Net cash used in operating activities | (2,782 | ) | (987 | ) | |||
CASH FLOWS FROM INVESTING ACTIVITIES | |||||||
Purchase of equipment, leasehold improvements and software | (68 | ) | (37 | ) | |||
Net cash used in investing activities | (68 | ) | (37 | ) | |||
CASH FLOWS FROM FINANCING ACTIVITIES | |||||||
Net advances on revolving line of credit | 1,623 | 378 | |||||
Settlement of notes payable | (225 | ) | (200 | ) | |||
Rights offering proceeds | 4,197 | — | |||||
Rights offering expenses | (335 | ) | — | ||||
Payments on capital lease obligations | (37 | ) | (18 | ) | |||
Issuance of convertible debentures, net of direct costs $32 | — | 318 | |||||
Proceeds from exercise of stock options | — | 30 | |||||
Proceeds from sale of common stock, net | 3 | 146 | |||||
Cash flows from discontinued operation | (50 | ) | (54 | ) | |||
Net cash provided by financing activities | 5,176 | 600 | |||||
Net increase/(decrease) in cash and cash equivalents | 2,326 | (424 | ) | ||||
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD | 763 | 1,187 | |||||
CASH AND CASH EQUIVALENTS AT END OF PERIOD | $ | 3,089 | $ | 763 | |||
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | |||||||
Cash paid during the period for interest | $ | 298 | $ | 229 | |||
Cash paid during the period for income taxes | $ | 11 | $ | 17 | |||
NON CASH FINANCING ACTIVITIES | |||||||
Equipment acquired under capital lease | $ | 102 | $ | — | |||
The accompanying notes are an integral part of these consolidated financial statements.
DLH HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the year ended September 30, 2012
(AMOUNTS IN THOUSANDS)
| | Common Stock | | | Treasury Stock | | |||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | Additional Paid-In Capital | Accumulated Deficit | Total Shareholders' Equity | |||||||||||||||||||
| | Shares | Amount | Shares | Amount | ||||||||||||||||||
BALANCE, September 30, 2010 | 5,103 | $ | 5 | $ | 69,503 | $ | (61,096 | ) | 2 | $ | (24 | ) | $ | 8,388 | ||||||||
Director restricted stock grants | 35 | 20 | 20 | |||||||||||||||||||
Exercise of stock options | 30 | 30 | 30 | |||||||||||||||||||
Proceeds of non cash considerations from sale of common stock | 459 | 1 | 161 | 162 | ||||||||||||||||||
Issuance of shares for services | 51 | 25 | 25 | |||||||||||||||||||
Expense related to employee stock option grants | 398 | 398 | ||||||||||||||||||||
Issuance of common shares in settlement of note payable | 300 | 795 | 795 | |||||||||||||||||||
Warrants issued on convertible debentures | 42 | 42 | ||||||||||||||||||||
Expense related to employee restricted stock grants | 43 | 14 | 14 | |||||||||||||||||||
Net loss | (4,320 | ) | (4,320 | ) | ||||||||||||||||||
BALANCE, September 30, 2011 | 6,021 | $ | 6 | $ | 70,988 | $ | (65,416 | ) | 2 | $ | (24 | ) | $ | 5,554 | ||||||||
Director restricted stock grants | 54 | 123 | 123 | |||||||||||||||||||
Proceeds from sale of commons stock | — | |||||||||||||||||||||
Issuance of shares for services | 12 | 12 | ||||||||||||||||||||
Expense related to employee stock option grants | 179 | 179 | ||||||||||||||||||||
Fees related to rights offering | (292 | ) | (292 | ) | ||||||||||||||||||
Non-employee options | 25 | 25 | ||||||||||||||||||||
Warrants issued on convertible debentures | (34 | ) | (34 | ) | ||||||||||||||||||
Expense related to employee restricted stock grants | 50 | 50 | ||||||||||||||||||||
Rights offering | 3,231 | 3 | 4,196 | 4,199 | ||||||||||||||||||
Purchase of common stock | (40 | ) | (40 | ) | (40 | ) | ||||||||||||||||
Net loss | (2,026 | ) | (2,026 | ) | ||||||||||||||||||
BALANCE, September 30, 2012 | 9,266 | $ | 9 | $ | 75,207 | $ | (67,442 | ) | 2 | $ | (24 | ) | $ | 7,750 | ||||||||
The accompanying notes are an integral part of these consolidated financial statements
F-3
| September 30, | September 30, | |||||||
| 2009 | 2008 | |||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
CURRENT LIABILITIES: | ||||||||
| Notes payable | $ | 1,500 | $ | 1,500 | ||||
| Current portion of capital lease obligations | 20 | 29 | ||||||
| Accrued payroll | 10,694 | 10,408 | ||||||
| Accrued pension liability | — | 70 | ||||||
| Accounts payable | 1,890 | 2,578 | ||||||
| Accrued expenses and other current liabilities | 1,241 | 1,910 | ||||||
| Liabilities from discontinued operations | 392 | 381 | ||||||
Total current liabilities | 15,737 | 16,876 | ||||||
CAPITAL LEASE OBLIGATIONS, net of current portion | 27 | 45 | ||||||
OTHER LONG TERM LIABILITY, net of current portion | 13 | 14 | ||||||
LONG TERM LIABILITIES FROM DISCONTINUED OPERATIONS | 64 | 173 | ||||||
Total Liabilities | 15,841 | 17,108 | ||||||
COMMITMENTS AND CONTINGENCIES | ||||||||
SHAREHOLDERS’ EQUITY: | ||||||||
| Preferred stock, $.10 par value; authorized 5,000 shares; none issued and outstanding | — | — | ||||||
| Common Stock, $.001 par value; authorized 40,000 shares; issued 4,900 at September 30, 2009 and 4,874 at September 30, 2008, respectively; outstanding 4,898 at September 30, 2009 and 4,843 at September 30, 2008, respectively | 5 | 5 | ||||||
| Additional paid-in capital | 69,124 | 68,844 | ||||||
| Accumulated deficit | (55,289 | ) | (50,934 | ) | ||||
| Accumulated comprehensive loss | — | (5 | ) | |||||
| Treasury stock, 2 shares at cost at September 30, 2009 and September 30, 2008 | (24 | ) | (24 | ) | ||||
| Total shareholders’ equity | 13,816 | 17,886 | ||||||
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | $ | 29,657 | $ | 34,994 | ||||
F-4
| For the Year Ended | ||||||||
| September 30, | September 30, | |||||||
| 2009 | 2008 | |||||||
REVENUES | ||||||||
| Operating revenues | $ | 46,021 | $ | 47,747 | ||||
| Non-recurring retroactive billings | — | 10,772 | ||||||
| Total revenue | 46,021 | 58,519 | ||||||
DIRECT EXPENSES | ||||||||
| Operating direct expense | 39,019 | 39,495 | ||||||
| Non-recurring retroactive billings | — | 10,080 | ||||||
| Total direct expense | 39,019 | 49,575 | ||||||
GROSS PROFIT | ||||||||
| Operating gross profit | 7,002 | 8,252 | ||||||
| Non-recurring retroactive billings | — | 692 | ||||||
| Total gross profit | 7,002 | 8,944 | ||||||
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES | 6,505 | 5,930 | ||||||
DEPRECIATION AND AMORTIZATION | 111 | 150 | ||||||
Income from operations | 386 | 2,864 | ||||||
OTHER INCOME (EXPENSE) | ||||||||
| Interest income | 45 | 40 | ||||||
| Interest expense | (222 | ) | (147 | ) | ||||
| Settlement of prior periods’ payroll tax contingencies | — | 716 | ||||||
| Other income, net | 160 | — | ||||||
| Legal expense related to pre-acquisition activity of acquired company | (21 | ) | (218 | ) | ||||
| (38 | ) | 391 | ||||||
Income from continuing operations before taxes | 348 | 3,255 | ||||||
INCOME TAX BENEFIT (EXPENSE) | 28 | (60 | ) | |||||
Income from continuing operations | 376 | 3,195 | ||||||
LOSS FROM DISCONTINUED OPERATIONS | ||||||||
| Loss from operations | (4,731 | ) | (2,049 | ) | ||||
Loss from discontinued operations | (4,731 | ) | (2,049 | ) | ||||
NET (LOSS) INCOME | (4,355 | ) | 1,146 | |||||
OTHER COMPREHENSIVE INCOME | ||||||||
| Pension liability adjustment | 5 | 28 | ||||||
COMPREHENSIVE (LOSS) INCOME | $ | (4,350 | ) | $ | 1,174 | |||
| �� | ||||||||
(LOSS) EARNINGS PER SHARE — BASIC | ||||||||
| Income from continuing operations | $ | 0.08 | $ | 0.66 | ||||
| Loss from discontinued operations | (0.97 | ) | (0.42 | ) | ||||
| Net (loss) earnings per share | $ | (0.89 | ) | $ | 0.24 | |||
(LOSS) EARNINGS PER SHARE — DILUTED | ||||||||
| Income from continuing operations | $ | 0.07 | $ | 0.66 | ||||
| Loss from discontinued operations | (0.93 | ) | (0.42 | ) | ||||
| Net (loss) earnings per share | $ | (0.86 | ) | $ | 0.24 | |||
WEIGHTED AVERAGE BASIC SHARES OUTSTANDING | 4,900 | 4,866 | ||||||
WEIGHTED AVERAGE DILUTED SHARES OUTSTANDING | 5,085 | 4,875 | ||||||
F-5
| Additional | Other | Total | ||||||||||||||||||||||||||||||
| Common Stock | Paid-In | Accumulated | Treasury Stock | Comprehensive | Shareholders’ | |||||||||||||||||||||||||||
| Shares | Amount | Capital | Deficit | Shares | Amount | Loss | Equity | |||||||||||||||||||||||||
BALANCE, September 30, 2007 | 4,823 | $ | 5 | $ | 68,726 | $ | (52,080 | ) | 2 | $ | (24 | ) | $ | (33 | ) | $ | 16,594 | |||||||||||||||
| Pension liability adjustment | 28 | 28 | ||||||||||||||||||||||||||||||
| Return of shares related to settlement | (41 | ) | (41 | ) | ||||||||||||||||||||||||||||
| Expense related to director restricted stock grants | 30 | 30 | ||||||||||||||||||||||||||||||
| Expense related to employee restricted stock grants | 21 | 129 | 129 | |||||||||||||||||||||||||||||
| Fractional shares related to reverse stock split | (1 | ) | — | |||||||||||||||||||||||||||||
| Net income | 1,146 | 1,146 | ||||||||||||||||||||||||||||||
BALANCE, September 30, 2008 | 4,843 | 5 | 68,844 | (50,934 | ) | 2 | (24 | ) | (5 | ) | 17,886 | |||||||||||||||||||||
| Pension liability adjustment | 5 | 5 | ||||||||||||||||||||||||||||||
| Return of shares related to settlement | (38 | ) | — | |||||||||||||||||||||||||||||
| Director restricted stock grants | 14 | — | ||||||||||||||||||||||||||||||
| Expense related to employee restricted stock grants | 79 | 280 | 280 | |||||||||||||||||||||||||||||
| Net income | (4,355 | ) | (4,355 | ) | ||||||||||||||||||||||||||||
BALANCE, September 30, 2009 | 4,898 | $ | 5 | $ | 69,124 | $ | (55,289 | ) | 2 | $ | (24 | ) | $ | 0 | $ | 13,816 | ||||||||||||||||
F-6
| For the Twelve Months Ended | ||||||||
| September 30, | September 30, | |||||||
| 2009 | 2008 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
| Net (loss) income | $ | (4,355 | ) | $ | 1,146 | |||
| Adjustments to reconcile net income to net cash (used in) provided by operating activities, net of divested businesses: | ||||||||
| Depreciation and amortization | 111 | 150 | ||||||
| Settlement of prior periods’ payroll tax contingencies | — | (716 | ) | |||||
| Compensation expense related to director restricted stock grants | — | 30 | ||||||
| Compensation expense related to employee restricted stock grants | 221 | 188 | ||||||
| Recovery of doubtful accounts | — | (6 | ) | |||||
| Loss on retirement of equipment | — | 8 | ||||||
| Changes in operating assets and liabilities, net of divested businesses: | ||||||||
| Accounts receivable | 454 | (5,949 | ) | |||||
| Other current assets | 293 | (137 | ) | |||||
| Other assets | (131 | ) | 69 | |||||
| Accounts payable, accrued payroll, accrued expenses and other current liabilities | (1,012 | ) | 8,876 | |||||
| Other long term liabilities | (1 | ) | (18 | ) | ||||
| Pension liability | (70 | ) | (276 | ) | ||||
| Cash flow from discontinued operations | 2,400 | 1,237 | ||||||
| Net cash (used in) provided by operating activities | (2,090 | ) | 4,602 | |||||
CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
| Purchase of equipment, leasehold improvements and software | (69 | ) | (140 | ) | ||||
| Cash flow from discontinued operations | — | 357 | ||||||
| Net cash (used in) provided by investing activities | (69 | ) | 217 | |||||
CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
| Repayments on capital lease obligations | (27 | ) | (27 | ) | ||||
| Loan fees | — | (146 | ) | |||||
| Net comprehensive income on pension | 5 | 28 | ||||||
| Cash flows from discontinued operations | (40 | ) | (22 | ) | ||||
| Net cash used in financing activities | (62 | ) | (167 | ) | ||||
| Net (decrease) increase in cash and cash equivalents | (2,221 | ) | 4,652 | |||||
| CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD | 5,213 | 561 | ||||||
| CASH AND CASH EQUIVALENTS AT END OF PERIOD | $ | 2,992 | $ | 5,213 | ||||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | ||||||||
| Cash paid during the period for interest | $ | 50 | $ | 159 | ||||
| Cash paid during the period for income taxes | $ | 124 | $ | 86 | ||||
F-7
(1) ORGANIZATION AND BUSINESS:
For more than 25 years, DLH Holdings Corp. ("DLH" formerly TeamStaff Inc.), has provided professional services to the U.S. Government. Headquartered in Atlanta, Georgia, DLH employs approximately 1,100 skilled technicians, logisticians, engineers, healthcare and support personnel at more than 25 locations around the United States. DLH's operating subsidiary, DLH Solutions, Inc. is organized into three broad integrated business areas: Healthcare Delivery Solutions, Logistics and Technical Services, and Contingency / Staff Augmentation Services. Our customers, a majority of whom are within the Departments of Defense ("DoD") and Veterans Affairs ("DVA"), benefit from proven leadership processes, technical excellence, and cost management. The remaining portion of DLH's business is comprised of customers within the Center for Disease Control and Prevention, Departments of Justice, Agriculture, Interior and Federal Emergency Management Agency, at locations throughout the United States.
In February 2012, the Company's shareholders approved a proposal to change its corporate name to DLH Holdings Corp. On June 25, 2012 the Company filed an amendment to its certificate of incorporation to implement the change in its corporate name to DLH Holdings Corp. (together with its subsidiaries, (“TeamStaff”"DLH" or the “Company”,"Company" and also referred to as “we,” “us”"we," "us" and “our”"our"), provide staffing services to the United States Department of Veterans Affairs (“DVA”) and other US governmental entities. TeamStaff’s. DLH's primary operations are located inmanaged from Loganville, Georgia and its principal executive office isoffices are located at 1 Executive Drive, Suite 130, Somerset,1776 Peachtree Street, Atlanta, Georgia 30309.
Corporate History
DLH Holdings Corp. was originally incorporated in New Jersey 08873 where its telephone number is (877) 523-9897. TeamStaff, Inc., a New Jersey corporation, was founded in 1969 as a payroll service companystaffing company. Through several strategic transactions over recent decades, the Company has evolved considerably and evolved into a national provider of contract and permanent medical and administrative staffing services. Its principal operations are conducted throughin early 2010, made the strategic decision to build the Company around its subsidiary,government services entity, DLH Solutions, Inc. (formerly, TeamStaff Government Solutions, (“TeamStaff GS”Inc.), The Company is now completely focused on government services both as a prime contractor as well as a partner with other government contractors. The Company's other wholly-owned subsidiary of TeamStaff, Inc. TeamStaff GS changedsubsidiaries are not actively operating.
(2) LIQUIDITY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Liquidity
In recent years, the Company has sought to finance its name from RS Staffing Services, Inc on February 12, 2008 to reflect the subsidiary’s expanding service offerings.
At September 30, 2012, the Company had a net working capital deficit of approximately $1.5 million and an accumulated deficit of approximately $67.4 million. For the year ended September 30, 2012, the Company incurred an operating loss and a net loss of approximately $2.0 million and $2.0 million, respectively.
DLH HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SEPTEMBER 30, 2012 AND 2011
(2) LIQUIDITY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (Continued)
In fiscal 2011 the Company completed measures to enhance its liquidity by approximately $1,000,000 as a result of increasing the maximum availability of its credit facility and receiving funding of and/or commitments for additional equity and/or debt financing. In that regard, our largest shareholder, Wynnefield Capital, Inc., and certain of our directors and executive officers collectively provided a total of $500,000 of additional capital to the Company. As described in Note 10, $150,000 of such capital was provided through equity investments on March 31, 2011 and $350,000 of such capital was provided in July 2011 by Wynnefield Capital through the sale of convertible debentures. In addition, as described in Note 6, on February 9, 2011, the Company entered into an amendment of its Loan and Security Agreement with Presidential Financial Corporation, pursuant to which they agreed to increase the maximum availability under the Loan and Security Agreement by an additional $500,000 and provide an unbilled receivable facility within the limits of the operating assetsLoan and Security Agreement. Further, in May 2012, the Company entered into another amendment to the Loan Agreement pursuant to which the Lender agreed to increase the available line of TeamStaff Rx relatedcredit from $3,000,000 to TeamStaff Rx’s businessa maximum amount of providing travel nurse$6,000,000 and allied healthcare professionals for temporary assignments to Advantage RN. The closingincrease the maximum amount available under the unbilled accounts facility of this transaction occurred on January 4, 2010. The Asset Purchasethe Loan Agreement provides thatfrom $500,000 to $1,000,000. However, as described in greater detail in Note 6 below, the purchased assets were acquired by Advantage RN for a purchase price of upCompany's ability to $425,000, of which: (i) $350,000 in cash was paid atborrow against the closing, and (ii) $75,000increased available credit is subject to an escrowed holdbackthe satisfaction of a number of conditions, and presently, the maximum availability under this loan facility is $3,000,000; subject to eligible accounts receivable.
At September 30, 2012, the amount of unused availability was $344,000. The amount outstanding on the loan facility as describedof September 30, 2012 was $2,363,000.
On March 16, 2012, the Company filed a registration statement on Form S-1 with the Securities and Exchange Commission for a rights offering in which its existing stockholders received non-transferable rights to purchase $4.2 million of additional shares of the Asset Purchase Agreement. Additionally, Advantage RN will make rent subsidy payments to TeamStaff Rx totaling $125,000, consisting of (i) $25,000 paid at closing, and (ii) an additional $100,000 payable in 10 equal monthly installments beginning on March 1, 2010.Company's common stock. Under the terms of the Assetrights offering, the Company distributed to the holders of its common stock non- transferable subscription rights for each share of common stock owned on the record date. Each subscription right entitled the holder to purchase 0.532 shares of the Company's common stock at a price of $1.30 per share. In connection with the rights offering, on May 2, 2012, the Company entered into a standby purchase agreement with Wynnefield Capital, Inc. ("Wynnefield Capital"), which owned, prior to the rights offering, approximately 21% of the Company's common stock (excluding common stock warrants and a convertible note) through certain affiliated entities. Pursuant to the standby purchase agreement, Wynnefield Capital (or affiliated assignees) agreed to acquire from the Company in the rights offering, subject to the satisfactions of specified conditions, the shares of common stock that related to any rights that remained unexercised at the expiration of the rights offering. The closing of the rights offering occurred on June 15, 2012 and the Company raised gross proceeds of $4.2 million from the sale of 3,230,769 shares of common stock.
Management believes, at present, that: (a) cash and cash equivalents of approximately $3.1 million as of September 30, 2012; (b) the amounts available under its line of credit (which, in turn, is limited by a portion of the amount of eligible assets); (c) forecasted operating cash flow; (d) the ultimate non-payment of certain liabilities and recorded guarantees currently contested by the Company or not expected to be settled in cash (see Note 6 to the accompanying consolidated financial statements) (classified as current at September 30, 2012) in fiscal 2013; and (e) effects of cost reduction programs and initiatives should be sufficient to support the Company's operations for twelve months from the
DLH HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SEPTEMBER 30, 2012 AND 2011
(2) LIQUIDITY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (Continued)
date of these financial statements. However, should any of the above- referenced factors not occur substantially as currently expected, there could be a material adverse effect on the Company's ability to access the level of liquidity necessary for it to sustain operations at current levels for the next twelve months. In such an event, management may be forced to make further reductions in spending or seek additional sources of capital to support our operations. If the Company raises additional funds by selling shares of common stock or convertible securities, the ownership of its existing shareholders would be diluted.
Presently, the Company derives all of its revenue from agencies of the Federal government and the Company has derived a substantial portion of its revenues through various contracts awarded by the DVA. The Company currently provides services to the DVA under a single source Blanket Purchase Agreement Advantage RN didawarded in fiscal 2011 that has a ceiling value of approximately $145,000,000 and is scheduled to expire on October 31, 2016. The agreement is subject to the Federal Acquisition Regulations, and there can be no assurance as to the actual amount of services that the Company will ultimately provide under the agreement. This agreement represented approximately 51% of its revenue in the fiscal year ended September 30, 2012. In addition, the Company also holds contractual order cover through September 30, 2013 in respect of DVA contracts that generated an additional 44% of its revenue in the fiscal year ended September 30, 2012, which are not assume any debts, obligations or liabilitiescurrently the subject of TeamStaff Rx nor did it purchase any accounts receivable outstanding as ofrequests for proposals and may in due course be further extended by the closing date. As described in note 4 to these consolidated financial statements, theDVA on a sole source basis, although no assurances can be given that this will occur. The Company's results of operations, cash flows and related assets and liabilities of TeamStaff Rx have been reclassifiedfinancial condition would be materially adversely affected in the accompanying consolidated financial statements from those of continuing businesses for all periods presented.
Basis of Presentation and Principles of Consolidation
The accompanying consolidated financial statements include the accounts of TeamStaff, Inc.DLH and its subsidiaries, all of which are wholly owned. All significant intercompany balances and transactions have been eliminated in the consolidated financial statements.
consolidation.
F-8
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 other intangible assets, expected settlement amounts of accounts receivable, measurement of prepaid workers’workers' compensation, valuation allowances established against accounts receivable and deferred tax assets and measurement of payroll tax contingencies, accounts payable, workers’workers' compensation claims and accrued expenses.expenses and the valuation of financial instruments associated with debt agreements. Actual results could differ from those estimates. As disclosedIn particular, a material reduction in Note 10, the Company reduced liabilities established for certain prior period payroll tax contingenciesfair value of goodwill would have a material adverse effect on the Company's financial position and results of operations.
DLH HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SEPTEMBER 30, 2012 AND 2011
(2) LIQUIDITY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (Continued)
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 $0.7 million in fiscal 2008the General Services Administration ("GSA") at fixed unit rates or hourly arrangements. We generally operate as a prime contractor, but have also entered into contracts as a subcontractor. The recognition of revenue from fixed rates is based upon objective criteria that generally do not require significant estimates that may change over time. Other types of US Government contracts may include cost reimbursable contracts, fixed price or flexibly priced contracts requiring estimates based on resolutionpercentage-of-completion methods of such matters with the Internal Revenue Service.
Revenues related to retroactive billings in 2008 (see Note 10 to the Consolidated Financial Statements) from an agency of the Federal government were recognized when: (1) the Company developed and calculated an amount for such prior period services and had a contractual right to bill for such amounts under its arrangements, (2) there were no remaining unfulfilled conditions for approval of such billings and (3) collectability is reasonably assured based on historical practices with the DVA. The related direct costs, principally comprised of salaries and benefits, are recognizedwere accrued to match the recognized reimbursements from the Federal agency; upon approval, wages will be processed for payment to the employees.
During the year ended September 30, 2008, TeamStaffDLH recognized revenues of $10.8 million and direct costs of $10.1 million related to these non-recurring arrangements. At September 30, 20092012 and 2008,September 30, 2011, the amount of the remaining accounts receivable with the DVA approximated $9.3 million and accrued liabilities for salaries to employees and related benefits totaled $8.7 million. The $9.3 million in accounts receivable was unbilled to the DVA at September 30, 20092012 and 2008. AtSeptember 30, 2011. Although the timing cannot be guaranteed, at present the Company expects to bill and collect such amounts by the end of the second quarter ofduring fiscal 20102013, based on current discussions with the DVA and collection efforts.
In April 2012, the Company received formal contract modifications from the DVA, dated April 16, 2012, concerning the retroactive billing matter. The contract modifications from the DVA incorporate relevant wage determinations covering largely 2006 and 2007 applying to the Company's historical contracts with DVA during those periods. These government modifications initiate the procedures whereby the Company may invoice the DVA in accordance with the modified wage determinations and subsequently make timely retroactive payments to employees (active and inactive) covering work performed at the certain locations. The Company expects to follow the same process implemented as service is rendered. TeamStaff bills its clients based on an hourly rate. The hourly rate is intendeddirected by and in conjunction with the Department of Labor and the DVA when similar wage determination-related contract modifications were made to cover TeamStaff’s direct labor costsother sites (also for the periods of 2006 and 2007) in 2008.
DLH HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SEPTEMBER 30, 2012 AND 2011
(2) LIQUIDITY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (Continued)
The Company continues to support the Government's review of the contract employees, plusdetailed supporting calculations for the retroactive billings and to negotiate an estimateincremental final amount related to indirect costs and fees applied to these retroactive billings. As such, there may be additional revenues recognized in future periods once the final approval for overhead expensessuch additional amounts is obtained. The additional indirect costs and a profit margin. Additionally, commissions from permanent placements (principally TeamStaff Rx)fees are included in revenue as placements are made. Commissions from permanent placements result from the successful placement of a medical staffing employeeestimated to a customer’s workforce as a permanent employee.be between $0.4 million and $0.6 million. The Company also reviewshas developed these estimates under the status of such placementssame contractual provisions applied to assess the Company’s future performance obligations under such contracts.
Concentrations of Credit Risks
Financial instruments that potentially subject TeamStaffDLH to concentrations of credit risk consist principally of cash and accounts receivable. TeamStaffDLH maintains substantially all its cash balances in a limited number of financial institutions. The balances are insured by the Federal Deposit Insurance Corporation up to $250,000 (effectivein respect of interest bearing accounts and without limit for other accounts through December 31, 2013).2012. At times the deposits in banks may exceed the amount of insurance provided on such deposits. TeamStaffDLH monitors the financial health of these banking institutions. At September 30, 2009,2012, the Company’sCompany's uninsured cash balances approximated $1.2$0.3 million. Historically, the Company has not experienced any losses on deposits.
DLH provides staffing services to the DVA, the US Department of Defense and other US governmental agencies and placed contract employeesoperated at over 40 facilities during the 2009 fiscal 2011 year. Substantially all of the business of TeamStaff GSDLH Solutions is accomplished through FSSFederal Supply Schedule contracts with the GSA and DVA. Credit, when given, is generally granted on an unsecured basis.
The Company's policy is to maintain an allowance for doubtful accounts, if any, for estimated losses resulting from the inability of its customers to pay. However, if the financial condition of TeamStaff’sDLH's customers were to deteriorate rapidly, resulting in nonpayment, TeamStaffDLH could be required to provide for additional allowances, which would decrease operating results in the period that such determination was made.
F-9
For purposes of the Consolidated Statements of Cash Flows, TeamStaffDLH considers all liquid investments purchased with a maturity of three months or less to be cash equivalents.
Allowance for Doubtful Accounts
Accounts receivable are unsecured and carried at fair value, which is net of an allowance for doubtful accounts. The allowance for doubtful accounts is determined based on a specific identification methodology. Generally an account receivable is deemed uncollectible based upon the aging of the receivable and/or specific identification. Interest is not typically charged on past due accounts and the specific identification method takes into account the Company’sCompany's assessment of the default risk based upon recent events in the customer’scustomer's business, economic status and changes in credit status. With respect to receivables owed by agencies of the U.S. Government, the Company believes that the risk of loss on these accounts is minimal (See Note 14)13).
DLH HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SEPTEMBER 30, 2012 AND 2011
(2) LIQUIDITY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (Continued)
Before accounts are deemed uncollectible, demand letters are sent and, if that does not result in payment, the receivable is placed for collection with a collection agency. The Company’sCompany's last attempt at collection would be legal action, depending upon the customer’scustomer's financial situation. If the Company is unsuccessful at collection after these steps, the receivable is written-off.
Fair Value
DLH has financial instruments, principally accounts receivable, accounts payable, loan payable, notes payable and accrued expenses. TeamStaffDLH estimates that the fair value of allthese financial instruments at September 30, 20092012 and 20082011 does not differ materially from the aggregate carrying values of these financial instruments recorded in the accompanying consolidated balance sheets. However, because the Company presents certain common stock warrants and embedded conversion features (associated with Convertible Debentures—See Note 6) and accounts for such derivative financial instruments at fair value, such derivatives are materially impacted by the market value of the Company's stock and therefore subject to a high degree of volatility. The Company's future results may be materially impacted by changes in the Company's closing stock price as of the date it prepares future periodic financial statements.
In accordance with authoritative guidance the Company categorized its assets and liabilities based on the priority of the inputs to the valuation technique into a three-level fair value hierarchy as set forth below. The three levels of the hierarchy are defined as follows:
Level 1—Unadjusted quoted prices in active markets for identical assets or liabilities. The Company currently does not have any Level 1 financial assets or liabilities.
Level 2—Observable inputs other than quoted prices included in Level 1. Level 2 inputs include quoted prices for identical assets or liabilities in non-active markets, quoted prices for similar assets or liabilities in active markets, and inputs other than quoted prices that are observable for substantially the full term of the asset or liability. The Company currently does not have any Level 2 financial assets or liabilities.
Level 3—Unobservable inputs reflecting management's own assumptions about the input used in pricing the asset or liability.
The following table presents the Company's September 30, 2012 and 2011 assets and liabilities that are measured at fair value on a recurring basis and are categorized using the fair value hierarchy (all Level 3):
| | September 30, | ||||||
|---|---|---|---|---|---|---|---|
| | 2012 | 2011 | |||||
Asset: | |||||||
Tradenames | $ | 0 | $ | 0 | |||
Liability: | |||||||
Derivative financial instruments | $ | 119 | $ | 182 | |||
DLH HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SEPTEMBER 30, 2012 AND 2011
(2) LIQUIDITY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (Continued)
The following is a summary of activity as of and for the years ended September 30, 2012 and 2011 for these assets and liabilities measured at fair value on a recurring basis:
Asset: Tradenames | ||||
Balance, September 30, 2010 | $ | 2,583 | ||
Impairment loss included in results of operations | (2,583 | ) | ||
Balance, September 30, 2011 | — | |||
Impairment loss included in results of operations | — | |||
Balance, September 30, 2012 | $ | — | ||
Liability: Fair Value of Derivative Financial Instruments | ||||
Balance, September 30, 2010 | $ | — | ||
Fair value of warrants | (289 | ) | ||
Change in fair value included in results of operations | 107 | |||
Balance, September 30, 2011 | $ | (182 | ) | |
Fair value of warrants | (42 | ) | ||
Change in fair value included in results of operations | 105 | |||
Balance, September 30, 2012 | $ | (119 | ) | |
The major assumptions used in determining the associated fair values using level 3 inputs (unobservable) are discussed in Notes 2 and 6. The aforementioned impairment losses included in the results of operations are discussed below.
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 5 years) and the shorter of the initial lease term or estimated useful life for leasehold improvements. During 2008, the Company retired fixed assets with a carrying value of $20,000Maintenance and accumulated depreciation of $12,000 that resulted in a loss of $8,000 (included in other income, net).
Advertising Costs
The Company’sCompany's advertising expenses consist primarily of online advertising, health care professional trade magazines and various other various print media, promotional material and direct mail marketing. The Company expenses advertising costs as they are incurred. Total advertising costs for continuing operations were $0.2 million$19 and $0.1 million$5 for the fiscal years ended September 30, 20092012 and 2008,2011, respectively.
Occupancy Lease Commitments
The Company has occupancy leases with various payment terms to include a fixed payment schedule over the lease term, variable payment schedule over the lease term, or a lease that may have rent escalations, an abatement or “rent holiday”"rent holiday" periods. The Company records occupancy expense using the straight-line method over the lease term, regardless of actual payment terms.
DLH HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SEPTEMBER 30, 2012 AND 2011
(2) LIQUIDITY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (Continued)
Goodwill
In accordance with applicable accounting standards, DLH does not be recoverable. If such events or changes in circumstances are present, a loss is recognizedamortize goodwill. DLH continues to the extent that the carrying value of the asset is in excess of the sum of the undiscounted cash flows expected to result from the use of the asset and its eventual disposition.
F-10
Factors including non-renewal of a major contract (see Note 2—Liquidity and Note 13) 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. If an impairment write off of all the goodwill became necessary in future periods, a charge of up to $8.6 million would be expensed in the Consolidated Statement of Operations. All remaining goodwill is attributable to continuing staffing services reporting units. Goodwillthe DLH Solutions operating subsidiary.
Intangible Assets
As required by applicable accounting standards, DLH did not amortize its tradenames, an indefinite life intangible asset. DLH reviewed its indefinite life intangible assets for possible impairment or loss of $1.6value at least annually or more frequently upon the occurrence of an event or when circumstances indicated that an asset's carrying amount was greater than its fair value. On September 15, 2011, the Board of Directors of DLH approved the change of the corporate name of TeamStaff GS to DLH Solutions and also approved a plan to change the corporate name of the Company to DLH Holdings Corp. In connection with these actions, the Company ceased further use of the TeamStaff trademark and implemented new marketing and branding initiatives associated with the new corporate identity being adopted by the Company. As a result of the corporate name change, abandoning the use of the TeamStaff name and associated rebranding efforts being implemented by the Company, the Company concluded that it was required to record a non-cash impairment charge with respect to the value of the "TeamStaff" trademark of $2.6 million related to TeamStaff RX has been reclassified to “Assets from Discontinued Operations” for all periods presented.
Income Taxes
TeamStaff accounts for income taxes in accordance with the “liability”"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. At September 30, 20092012 and 2008,2011, the Company recorded a 100% valuation allowance against its net deferred tax assets (See Note 5).
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SEPTEMBER 30, 2012 AND 2011
(2) LIQUIDITY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (Continued)
The Financial Accounting Standards Board ("FASB") has issued authoritative guidance that clarifies the accounting for uncertainty in income taxes recognized in an entity's financial statements and prescribes a recognition threshold of more-likely-than-not to be sustained upon examination. Measurement of the tax uncertainty occurs if the recognition threshold has been met. This interpretation also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods and disclosures. The Company conducts business solely in the U.S. and, as a result, also files income taxes in various states and other jurisdictions. Given the substantial net operating losses and the related valuation allowance established against such amounts, the Company has concluded that it does not have any uncertain tax positions. There have been madeno income tax related interest or penalties for the periods presented in these consolidated financial statements. In the normal course of business, the Company and its subsidiaries are subject to prior years’ amountsexamination by Federal and state taxing authorities. The Company's income tax returns for years subsequent to conform to the current year presentationfiscal 2008 are currently open, by statute, for review by authorities. However, there are no examinations currently in progress and the effectsCompany is not aware of the reverse stock split. As discussed in Note 4, the TeamStaff Rx operations were reclassified in 2009 and 2008 as discontinued operations.
Stock-Based Compensation
Compensation costs for the portion of equity awards (for which the requisite service has not been rendered) that are outstanding are recognized as the requisite service is rendered. The compensation cost for that portion of awards shall be based on the grant-date fair value of those awards as calculated for recognition purposes under applicable guidance. There was no share-based compensation expense for options for the years ended September 30, 2009 and 2008. As of September 30, 2009,2012, there was nois $0.2 million remaining unrecognized compensation expense related to non-vested stock optionbased awards to be recognized in future periods.
For options that vest based on the Company's common stock achieving and maintaining defined market prices, the Company values these awards with a binomial model that utilizes various probability factors and other criterion in establishing fair value of the grant. The related compensation cost is recognized over the derived service period determined in the valuation.
From time to time, the Company grants restricted stock awards to non-employee directors and employees under existing plans. The Company recognizes non cash compensation expense over the various vesting periods.
Stock compensation expense totaled $0.2 million in each of fiscal 2009for all awards for the year ended September 30, 2012, and 2008.totaled $0.4 million for all awards for the year ended September 30, 2011. Certain awards vest upon satisfaction of certain performance criteria. As permitted, the Company will not recognize expense on the performance based shares until it is probable that these conditions will be achieved. Such charges could be material in future periods.
Warrants are issued from time-to-time to non-employee third parties in order to induce then to enter in certain transactions with the Company. The Company recognizes non-cash expense related to such activity over the estimated period of performance.
Earnings (Loss) Per Share
Basic earnings (loss) per share is calculated by dividing income (loss) available to common shareholders by the weighted average number of common shares outstanding and restricted stock
DLH HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SEPTEMBER 30, 2012 AND 2011
(2) LIQUIDITY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (Continued)
grants that vested or are likely to vest during the period. Diluted earnings (loss) 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.
F-11
| 2009 | 2008 | |||||||
| Basic: | ||||||||
| Income from continuing operations | 4,900 | 4,866 | ||||||
| Loss from Discontinued operations | 4,900 | 4,866 | ||||||
| Diluted: | ||||||||
| Income from continuing operations | 5,085 | 4,875 | ||||||
| Loss from Discontinued operations | 5,085 | 4,875 | ||||||
| | 2012 | 2011 | |||||
|---|---|---|---|---|---|---|---|
Basic and Diluted: | |||||||
Loss from continuing operations | 7,026 | 5,460 | |||||
Gain (loss) from discontinued operation | N/A | 5,460 | |||||
The effects of common stock equivalents of 1,436,346 are anti-dilutive for determining earnings (loss) per share, thefiscal 2012. The effects of common stock equivalents of approximately 185,0001,643,846 are anti-dilutive for fiscal 2011.
(3) RECENT ACCOUNTING STANDARDS:
In May 2011, the FASB amended existing guidance on fair value measurements to clarify certain disclosure requirements and 9,000, are included (even though the shares are anti dilutive) for 2009 and 2008, in the calculation of loss per share for discontinued operations.
The FASB amended existing guidance on reporting comprehensive income in June 2011 to require entities to present the total of operationscomprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or cash flows asin two separate but consecutive statements. The amendment does not change the items that must be reported in other comprehensive income or when an item of the adoption date or for subsequent periods.
In June 2009,August 2011, the FASB approved a revised accounting standard to simplify the testing of goodwill for impairment. The guidance permits an entity to first assess defined qualitative factors in determining whether it is necessary to perform the goodwill impairment test. The guidance is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011, with early adoption permitted. The Company has elected to adopt this guidance for the fiscal year ended September 30, 2012.
In December 2011, the FASB amended disclosure concerning offsetting assets and liabilities. The amendments in the update requires an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position, including the effect or potential effect of rights of setoff associated with certain financial instruments and derivative instruments. Entities are required to disclose both gross information and net information about both instruments and transactions eligible for offset in the statement of financial position and instruments and transactions subject to an agreement similar to a master netting arrangement. This scope would include derivatives, sale and repurchase agreements and reverse sale and repurchase agreements, and securities borrowing and securities lending arrangements.
DLH HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SEPTEMBER 30, 2012 AND 2011
(3) RECENT ACCOUNTING STANDARDS: (Continued)
The amendment is effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. An entity should provide the disclosures required by those amendments retrospectively for all comparative periods presented. The Company is currently evaluating the prospective effects, if any, of adopting this guidance.
In July 2012, the FASB further amended existing guidance on testing indefinite lived intangible assets for impairment. The amendments are intended to reduce the cost and complexity of performing an impairment test for indefinite-lived intangible assets by simplifying how an entity tests those assets for impairment and to improve consistency in impairment testing guidance among long-lived asset categories. The amendments permit an entity first to assess qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired as a basis for determining whether it is necessary to perform the quantitative impairment test in accordance with Subtopic 350-30. The more-likely-than-not threshold is defined as having a likelihood of more than 50 percent. This update applies to all entities, both public and nonpublic, that have indefinite-lived intangible assets, other than goodwill, reported in their financial statements. The amendments are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted, including for annual and interim impairment tests performed as of a date before July 27, 2012, if a public entity's financial statements for the most recent annual or interim period have not yet been issued. The Company is currently evaluating the prospective effects, if any, of adopting this guidance.
In August 2012, the FASB issued a standard which stipulated theFASB Accounting Standards Codification™ is the source of authoritative U.S. GAAP recognized by the FASBtechnical amendments and corrections to be applied by nongovernmental entities. This standard isSEC sections, effective for financial statements issued for interim and annual periods ending afterthe period ended September 15, 2009.30, 2012. The implementationadoption of this standardguidance did not have a material impacteffect on the Company’s financial position, resultsstatements.
In October 2012, the FASB issued technical corrections and improvements, which include revisions to prior guidance on numerous topics, including Convertible Debentures. The effective date of these revisions is for fiscal years beginning after December 15, 2012. The Company is currently evaluating the prospective effects, if any, of adopting this guidance.
(4) DISCONTINUED OPERATION:
Non-Recurring Gain
There were no non-recurring gains from discontinued operations for the fiscal year ended September 30, 2012. The Company recognized a non-recurring gain from discontinued operations for fiscal year ended September 30, 2011 of $270,000, related to escheated funds refunded by the State of Florida. The Company's right to the funds arose in connection with the Company's former PEO operations that were accounted for as a discontinued operation in fiscal 2003 and, cash flows.
F-12
Table of substantially all of the operating assets of TeamStaff Rx related to TeamStaff Rx’s business of providing travel nurse and allied healthcare professionals for temporary assignments to Advantage RN. The closing of this transaction occurred on January 4, 2010. The Asset Purchase Agreement provides that the purchased assets were acquired by Advantage RN for a purchase price of up to $425,000, of which (i) $350,000 in cash was paid at the closing, and (ii) $75,000 is subject to an escrowed holdback as described in the Asset Purchase Agreement. Additionally, Advantage RN will make rent subsidy payments to TeamStaff Rx totaling $125,000, consisting of: (i) $25,000 paid at closing, and (ii) an additional $100,000 payable in 10 equal monthly installments beginning on March 1, 2010. Under the terms of the Asset Purchase Agreement, Advantage RN will not assume any debts, obligations or liabilities of TeamStaff Rx nor will it purchase any accounts receivable outstanding as of the closing date.
DLH HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SEPTEMBER 30, 2012 AND 2011
(4) DISCONTINUED OPERATION: (Continued)
Condensed Financial Information
Condensed financial statement information and results of the discontinued operationsoperation are as follows:
| For the Fiscal Years Ended | ||||||||
| September 30, | September 30, | |||||||
| (amounts in thousands) | 2009 | 2008 | ||||||
| Revenues | $ | 8,342 | $ | 14,766 | ||||
| Direct expenses | 6,537 | 11,649 | ||||||
| Selling, general and administrative expenses | 4,152 | 5,142 | ||||||
| Impairment charge-intangible assets | 2,305 | — | ||||||
| Other expense, net | 79 | 24 | ||||||
| Net loss | $ | (4,731 | ) | $ | (2,049 | ) | ||
| | Year Ended | ||||||
|---|---|---|---|---|---|---|---|
| (amounts in thousands) | September 30, 2012 | September 30, 2011 | |||||
Revenues | $ | — | $ | — | |||
Direct expenses | — | — | |||||
General and administrative expenses | — | — | |||||
Other expense, net | — | — | |||||
Loss from operations | — | — | |||||
Loss from disposal | — | — | |||||
Other income | 0 | 270 | |||||
Net gain (loss) | $ | 0 | $ | 270 | |||
F-13
| September 30, | September 30, | |||||||
| 2009 | 2008 | |||||||
| ASSETS | ||||||||
| Cash | $ | 245 | $ | — | ||||
| Accounts receivable | 674 | 1,011 | ||||||
| Other current assets | 124 | 102 | ||||||
| Total current assets | 1,043 | 1,113 | ||||||
| Fixed assets | 1,878 | 1,859 | ||||||
| Accumulated depreciation | (1,602 | ) | (1,464 | ) | ||||
| Net fixed assets | 276 | 395 | ||||||
| Goodwill and intangibles | 99 | 2,355 | ||||||
| Other assets | — | 15 | ||||||
| Total assets | $ | 1,418 | $ | 3,878 | ||||
| Liabilities | ||||||||
| Current portion capital leases | $ | 44 | $ | 40 | ||||
| Accrued payroll | 237 | 177 | ||||||
| Accrued expenses and other current liabilities | 111 | 164 | ||||||
| Total current liabilities | 392 | 381 | ||||||
| Long term capital leases | 39 | 83 | ||||||
| Other long term liabilities | 25 | 90 | ||||||
| Total liabilities | $ | 456 | $ | 554 | ||||
Liabilities | September 30, 2012 | September 30, 2011 | |||||
|---|---|---|---|---|---|---|---|
Accrued expenses and other current liabilities | $ | 185 | $ | 235 | |||
Total liabilities | $ | 185 | $ | 235 | |||
The fiscal 2012 decrease in the liabilities of discontinued operations is as follows:
| September 30, | Expensed | Paid This | September 30, | |||||||||||||
| 2007 Balance | This Period | Period | 2008 Balance | |||||||||||||
| Current portion capital leases | $ | 45 | $ | 4 | $ | (9 | ) | $ | 40 | |||||||
| Accrued payroll | 279 | (102 | ) | 177 | ||||||||||||
| Accrued expenses and other current liabilities | 228 | 135 | (199 | ) | 164 | |||||||||||
| Capital leases | 140 | — | (57 | ) | 83 | |||||||||||
| Other long term liabilities | 123 | (33 | ) | 90 | ||||||||||||
| Total | $ | 815 | $ | 139 | $ | (400 | ) | $ | 554 | |||||||
| September 30, | Expensed | Paid This | September 30, | |||||||||||||
| 2008 Balance | This Period | Period | 2009 Balance | |||||||||||||
| Current portion capital leases | $ | 40 | $ | 4 | $ | — | $ | 44 | ||||||||
| Accrued payroll | 177 | 60 | — | 237 | ||||||||||||
| Accrued expenses and other current liabilities | 164 | 2 | (55 | ) | 111 | |||||||||||
| Capital leases | 83 | — | (44 | ) | 39 | |||||||||||
| Other long term liabilities | 90 | — | (65 | ) | 25 | |||||||||||
| Total | $ | 554 | $ | 66 | $ | (164 | ) | $ | 456 | |||||||
(5) INCOME TAXES:
F-14
After an assessment of all available evidence (including historical and forecasted operating results), management has concluded that realization of the Company’sCompany's net operating loss carryforwards (which includesincluded those amounts acquired in previous years’years' business combinations, collectively “NOLs”"NOLs"), tax credits and other deferred tax assets, could not be considered more likely than not. Accordingly, for the fiscal years ended September 30, 2009, 20082012 and 2007,2011, the Company did not record a tax benefit for NOLs.NOLs and other deferred tax assets.
DLH HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SEPTEMBER 30, 2012 AND 2011
(5) INCOME TAXES: (Continued)
Based on similar assessments, the Company increased (decreased) the valuation allowance established on deferred tax assets by approximately $1.8$0.8 million and $(0.5)$1.0 million in 20092012 and 2008,2011, respectively. The increase in the valuation allowance is primarily due to increased Federal and state NOLs and stock based compensation expense (not currently deductible) for the fiscal yearyears ended September 30, 2009 was principally due to the Federal NOL and the asset impairment charge while the net decrease of $0.5 in 2008 related to the Federal NOL, offset by a decrease of approximately $1.1 representing adjustments to state NOLs and other fully reserved deferred tax assets. The primary reason for the NOL generated in 2008 relates to the realized tax loss (unrealized in 2007) on the sale of the Nursing Innovations discontinued operation’s assets (see Note 4).
In prospective periods, there may be reductions to the valuation allowance to the extent that the Company concludes that it is more likely thatthan not that all or a portion of the deferred tax assets can be utilized (subject to annual limitations and prior to the expiration of such NOLs), to offset future periods’periods' taxable income.
In the fiscal yearyears ended September 30, 2009,2012 and 2011, the Company recognizeddid not recognize a tax benefit of $28,000 related to a refund from a state. In the fiscal year ended September 30, 2008 the Company recorded tax expense of $60,000 related to certain estimated state taxes due which could not be offset by an NOL from those specific states.
At September 30, 20092012 the Company had net operating losses of approximately $30.4 million, $15.1$ 40.2 million and $.7$28.2 million for U.S., New Jersey and other states’state tax return purposes, respectively, and unutilized tax credits approximateof approximately $1.1 million. As a result of previous business combinations and changes in its ownership, there is a substantial amount of U.S. NOLs that are subject to annual limitations on utilization. The U.S. NOLs begin to expire in 2021 and continue to expire through 2029.
An analysis of TeamStaff’sDLH's deferred tax asset and liability (including those related to TeamStaff Rx) is as follows (Amounts(amounts in thousands):
| Years Ended September 30, | Years Ended September 30, | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2009 | 2008 | 2012 | 2011 | ||||||||||||
| Deferred income tax asset: | |||||||||||||||
Deferred income tax asset (liability): | |||||||||||||||
| Net operating loss carry forwards and tax credits | $ | 12,977 | $ | 12,102 | $ | 16,459 | $ | 15,669 | |||||||
| Workers’ compensation reserves | (115 | ) | (160 | ) | |||||||||||
| Occupancy leases | — | 55 | |||||||||||||
| Pension | — | 28 | |||||||||||||
Prepaid workers' compensation | 111 | 55 | |||||||||||||
| Deferred rent | 35 | 37 | 3 | 4 | |||||||||||
| Accrued liabilities | 335 | 235 | 474 | 445 | |||||||||||
| Stock based compensation | 133 | 68 | 424 | 372 | |||||||||||
| Fixed and intangible assets | (252 | ) | (997 | ) | (1,460 | ) | (1,276 | ) | |||||||
| Other items, net | 7 | 1 | 12 | (11 | ) | ||||||||||
| Valuation allowance | (13,120 | ) | (11,369 | ) | (16,023 | ) | (15,258 | ) | |||||||
| $ | — | $ | — | $ | — | $ | — | ||||||||
F-15
| Years Ended September 30, | ||||||||
| (Amounts in thousands) | 2009 | 2008 | ||||||
| Current expense (benefit) | $ | (28 | ) | $ | 60 | |||
| Deferred expense (benefit) | — | — | ||||||
| Total expense (benefit) | $ | (28 | ) | $ | 60 | |||
| Years Ended September 30, | |||||||
|---|---|---|---|---|---|---|---|
(amounts in thousands) | 2012 | 2011 | |||||
Current expense (benefit) | $ | — | $ | — | |||
Deferred expense (benefit) | — | — | |||||
Total expense (benefit) | $ | — | $ | — | |||
DLH HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SEPTEMBER 30, 2012 AND 2011
(5) INCOME TAXES: (Continued)
The following table indicates the significant differences between the Federal statutory ratesrate and TeamStaff’sDLH's effective tax rate for continuing operations-operations:
| Years Ended September 30, | Years Ended September 30, | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (Amounts in thousands) | 2009 | 2008 | |||||||||||||
(amounts in thousands) | 2012 | 2011 | |||||||||||||
| Federal statutory rate | $ | 157 | $ | 1,139 | $ | (689 | ) | $ | (1,561 | ) | |||||
| State taxes, net | (28 | ) | 60 | — | — | ||||||||||
Tradename impairment | 878 | ||||||||||||||
Other permanent items | 13 | 18 | |||||||||||||
| Valuation allowance | (157 | ) | (1,139 | ) | 676 | 665 | |||||||||
| $ | (28 | ) | $ | 60 | $ | — | $ | — | |||||||
(6) DEBT:
Current Bank Loan Facility (See Note 9—Government Assignments of Contracts)
On March 28, 2008, weJuly 29, 2010, DLH Solutions entered into an Amended and Restateda Loan and Security Agreement dated as of March 28, 2008 (the “Loan Agreement”"Loan Agreement") with Business Alliance Capital Company (“BACC”), a division of Sovereign Bank (“Sovereign” or “Lender”Presidential Financial Corporation (the "Lender"). Effective April 1, 2008, BACC changed its name to Sovereign Business Capital. Under the Loan Agreement, the Lender agreed to provide a revolving credittwo (2) year secured loan facility to the CompanyDLH Solutions in an aggregate amount of up to $3,000,000, subject to$1.5 million, upon the further terms and subject to the conditions of the Loan Agreement. In November, 2010, the Lender agreed by means of an amendment to the Loan Agreement to increase the maximum amount available under the facility from $1.5 million to $2.5 million and on February 9, 2011, we entered into a further amendment to the Loan Agreement pursuant to which the Lender agreed to further increase our maximum availability under the Loan Agreement from $2.5 million to $3.0 million and to provide an unbilled receivable facility within the limits of the Loan Agreement. The February 2011 amendment also extended the initial term of the Loan Agreement by 12 months, to July 29, 2013, and will automatically renew annually unless terminated by either party.
In May 2012, the Company entered into a further amendment to the Loan Agreement (the "Fifth Amendment") pursuant to which the Lender agreed to increase the available line of credit from $3,000,000 to a maximum amount of $6,000,000 and to increase the maximum amount available under the unbilled accounts facility of the Loan Agreement from $500,000 to $1,000,000. The Company's ability to borrow against the increased available credit, however, is subject to the satisfaction of certain conditions. The Fifth Amendment provides for an initial sublimit under the maximum loan amount of $3,000,000 (the "Initial Sublimit") and an adjusted sublimit of $4,000,000 (the "Adjusted Sublimit"). The Initial Sublimit of $3,000,000 will remain in effect until the satisfaction of the following conditions: (i) the repayment of the $500,000 over-advance accommodation agreed to by Lender as of May 9, 2012, (ii) the Company's demonstration of the need for the increase, (iii) the Company's continued compliance with the Loan Agreement, and (iv) Lender, in its sole discretion, agrees to increase the Initial Sublimit. In the event that the foregoing conditions are satisfied, the credit available to under the Loan Agreement shall remain subject to the Adjusted Sublimit until the parties receive any required waivers or consents from the holders of the Company's subordinated Convertible Debentures issued as of July 28, 2011 and Lender, in its sole discretion, agrees to such further increase. In addition,
DLH HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SEPTEMBER 30, 2012 AND 2011
(6) DEBT AND CAPITAL LEASES: (Continued)
the increased availability under the unbilled accounts facility of the Loan Agreement is subject to the satisfaction of the same conditions that are applicable to Initial Sublimit. Accordingly, until these conditions are satisfied, the current borrowing limits remain in effect.
An interest rate premium of 2% is payable in respect of any advances secured by unbilled accounts receivable, which are subject to a sub-facility limit of $500,000 and an advance rate of 75%. The loan is secured by a first prioritysecurity interest and lien on all of DLH Solutions' cash accounts, account deposits, letters of credit and investment property, chattel paper, furniture, fixtures and equipment, instruments, investment property, general intangibles, deposit accounts, inventory, other property, all proceeds and products of the Company’s assets. Previously in 2005,foregoing (including proceeds of any insurance policies and claims against third parties for loss of any of the Companyforegoing) and PNC Bank, National Association (“PNC”) had entered into an $8,000,000 revolving credit facility (“PNC Loan Facility”). Pursuant to the Loan Agreement, the Lender (i) acquired by assignment from PNC all right, titlebooks and interest of PNC under the PNC Loan Facility, the PNC note andrecords related loan documentation, and (ii) restructured the PNC Loan Facility into a $3,000,000 revolving credit facility with a 3 year term. The Company’sthereto. DLH Solutions' ability to request loan advances under the Loan Agreement is subject to (i) computation of DLH Solutions' advance availability limit based on "eligible accounts receivables" (as defined in the Company’s advance limitLoan Agreement) multiplied by the "Accounts Advance Rate" established by the Lender which initially shall be 85% and may be increased or decreased by the Lender in exercise of its discretion; and (ii) compliance with the covenants and conditions of the loan. The facility is for a term
Under the Loan and Security Agreement, interest accrues at the greater of 36 months and matures on March 31, 2011. Interest on amounts due accrue(a) 3.25% or (b) (i) 1.95% above the Wall Street Journal Prime rate on the daily unpaid balanceaccounts receivable portion of the loan advances at a per annum rate of 0.25% percentage pointcredit line and (ii) 3.95% above the Wall Street Journal Prime Raterate on the unbilled accounts portion. In addition, DLH Solutions will pay certain other related fees and expense reimbursements including a monthly service charge of 0.65% based on the average daily loan balance which shall accrue daily and be due and payable on the last day of each month so long as the Loan Agreement is outstanding. The interest rate in effect from time to time, but not less than 5.5% per annum.
The Loan Agreement requires compliance with customary covenants including minimum debt service coverage ratio and contains restrictions on the Company’sCompany's ability to among other things, dispose of certain assets, engage in certain transactions,transactions. Among other matters, under the loan agreement we may not, without consent of the Lender, (i) merge or consolidate with another entity, form any new subsidiary or acquire any interest in a third party; (ii) acquire any assets except in the ordinary course of business; (iii) enter into any transaction outside the ordinary course of business; (iv) sell or transfer collateral; (v) make any loans to, or investments in, any affiliate or enter into any transaction with an affiliate other than on an arms-length basis; (vi) incur indebtedness andany debt outside the ordinary course of business; (vii) pay dividends.or declare any dividends or other distributions; or (viii) redeem, retire or purchase any of our equity interests exceeding $50,000. Further, without the consent of the Lender, the Company is also restricted from making any payments in respect of other outstanding indebtedness. The Lender agreed to eliminate the tangible net worth covenant as part of the Fifth Amendment. The Lender may terminate the Loan Agreement alsoat any time upon 60 days written notice after December 31, 2012 and the Loan Agreement provides for customary events of default following which the Lender may, at its option, terminate the loan agreement and accelerate the repayment of any amount outstanding. The defined events of default include, among other things, a material adverse change in the Company's circumstances, or if the Lender deems itself insecure in the ability of the Company to repay its obligations, or as to the sufficiency of the collateral.
DLH HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SEPTEMBER 30, 2012 AND 2011
(6) DEBT AND CAPITAL LEASES: (Continued)
On May 9, 2012, Presidential Financial Corporation agreed to allow the Company to borrow up to $500,000 under its facility with the Company in excess of the eligible collateral, but subject to the maximum loan amount of $3,000,000. This arrangement expired with the closing of the rights offering on June 15, 2012. There were no advances against this facility.
In consideration of the Lender entering into the Fifth Amendment, we agreed to pay a monthly collateral monitoring fee, a documentation fee and at the time that we may borrow amounts outstandingin excess of the Initial Sublimit, an origination fee of 1% of the increased availability.
The Company has concurrently executed a Corporate Guaranty Agreement with Lender pursuant to which it has guaranteed all of the obligations of DLH Solutions under the Loan Agreement.
Notes Payable
DLH and DLH Solutions entered into a settlement agreement dated as of July 22, 2011 (the "Agreement") with Roger Staggs and E. Barry Durham, the former principals of RS Staffing Services, Inc. (together, the "Sellers"). The Sellers were the holders of certain promissory notes issued by DLH in the aggregate principal amount of $1,500,000 (the "Notes"). The claims resolved by the Settlement Agreement concerned DLH's claim of indemnification of approximately $1,800,000 arising out of the acquisition by DLH of RS Staffing Services, Inc. in June 2005 and certain counterclaims by the Sellers against DLH, including payment under the Notes. Pursuant to the Agreement, the Company paid $200,000 in cash to the Sellers, and issued them an aggregate of 300,000 shares of common stock of DLH, valued at $795,000, the fair value of the stock at July 22, 2011. The Company also agreed to permit the Sellers to resell an aggregate of 201,724 other shares of common stock of DLH presently held by them, against which the Company had previously placed a stop order to prevent their resale. The Sellers agreed to orderly sale limitations with respect to their ability to resell all their shares of common stock of DLH In addition, DLH provided guarantees to the Sellers that the net proceeds to be received by them from the resale of all of the shares of common stock of DLH sold by them pursuant to the Agreement would not be less than certain minimum guarantees. With respect to the shares of common stock of DLH owned by them prior to the effective date of the Agreement (the "Old DLH Shares"), DLH guaranteed to each Seller net proceeds of $100,000, and with respect to the shares of common stock of DLH issued under the Agreement (the "New DLH Shares"), DLH guaranteed net proceeds of $375,000 to each. The payments of all amounts under the Agreement were secured by the Notes. In addition, the parties agreed to release each other from any further claims that either may have against the other, except to enforce the Agreement. The guarantees in respect of the Old DLH Shares were satisfied in full as of September 30, 2011. The guarantees in respect of the New DLH Shares were satisfied in full as of September 30, 2012.
At September 27, 2012, the guarantees and the remaining value of the Notes have been satisfied through a combination of the repurchase of certain of the shares of the Company's common stock owned by one of the note holders and the expiration of the guarantee period under the Agreement. Following the completion of the sale of 100,000 shares of common stock of the Company by this holder to members of DLH's management team, the Company's retirement of 40,000 shares of its common stock against the payment of an additional $40,000 and the payment by the Company of $225,000, the Company fully satisfied its minimum guarantee obligations related to the Notes. Accordingly, the
DLH HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SEPTEMBER 30, 2012 AND 2011
(6) DEBT AND CAPITAL LEASES: (Continued)
Company recorded a gain of approximately $486,000 in the fiscal fourth quarter ending September 30, 2012.
The Company recognized expenses related to legal representation and costs incurred in connection with the investigation and settlement in the amount of $0 and $96,000 during fiscal 2012 and 2011, respectively, as a component of other income (expense).
Convertible Debentures
On June 1, 2011, the Company entered into a debenture purchase agreement (the "Debenture Purchase Agreement") with entities affiliated with Wynnefield Capital, Inc. (the "Debenture Purchasers"), providing for a standby commitment pursuant to which the Debenture Purchasers agreed to purchase convertible debentures (the "Convertible Debentures") in an aggregate principal amount of up to $350,000 (the "Total Commitment Amount"). In addition, the Company issued the Debenture Purchasers warrants to purchase an aggregate of 53,846 shares of common stock (the "Warrants") in consideration of their agreement to provide the Total Commitment Amount. On July 28, 2011, the Company drew down the entire amount of the Total Commitment amount available under the Debenture Purchase Agreement, of which $200,000 was used for the initial payments under the Debenture Purchase Agreement relating to the settlement with the former owners of RS Staffing, and on such date the Company issued the Convertible Debentures in the aggregate principal amount of $350,000 to the Debenture Purchasers, and received such funds.
The Convertible Debentures will mature on the 27-month anniversary of issuance and bear interest at the rate of the greater of the prime rate plus 5%, or 10% per annum, payable at maturity or upon redemption of such Convertible Debentures. The interest rate at September 30, 2012 and September 30, 2011 was 10%. The Convertible Debentures are convertible into shares of the Company's common stock at an initial conversion price of $1.30 per share, and a post rights offering conversion price of $1.25 per share, which was in excess of the fair market value of the Company's common stock at that date. The conversion rate is subject to adjustment to account for certain customary events and also includes weighted-average anti-dilution protection for future issuances by the Company, subject to certain exclusions. The Company can also redeem the outstanding Convertible Debentures at any time at 120% of the remaining principal amount, plus accrued but unpaid interest. The Warrants will be exercisable for five years at an initial exercise price equal to $1.00, and a post rights offering exercise price of $0.96. The exercise price of the Warrants is subject to adjustment for certain customary events and includes weighted average anti-dilution protection for future issuances by the Company, subject to certain exclusions. In connection with the dispositionparties' entry into the Debenture Purchase Agreement, the Company, DLH Solutions, the Debenture Purchasers and Presidential Financial Corporation entered into subordination agreements concerning the terms of the assetssubordination of our TeamStaff Rx subsidiary, we were requiredthe Convertible Debentures to obtain the consent of Sovereign. On January 12, 2010 we were granted such consent. As a condition to such consent, however, Sovereign reduced the maximum amount available under suchsecured loan facility provided by Presidential Financial Corporation. Under the subordination agreements, the Company may not make payments to the Debenture Purchasers under the Convertible Debentures unless before and following such payments, no "Event of Default" exists under the secured loan facility.
The Debenture Purchasers are entities affiliated with Wynnefield Capital, Inc., the Company's largest shareholder. Mr. Peter Black, a member of the Company's Board of Directors, is an employee of Wynnefield Capital. Direct costs associated with the Debenture Purchase Agreement totaled $32,000.
DLH HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SEPTEMBER 30, 2012 AND 2011
(6) DEBT AND CAPITAL LEASES: (Continued)
These costs have been and will be capitalized as deferred financing costs and amortized over the period that such debentures are outstanding or the Debenture Agreement is effective. In addition, an initial value of $42,000 was ascribed to the warrants and it was determined that at July 28, 2011, because of appreciation in the Company's stock price, the embedded conversion feature included in the Convertible Debentures had a fair value of $289,000 at the time of issuance of the Convertible Debentures; such amount is also being expensed over the life of the Convertible Debentures and the unamortized amounts have been deducted from $3.0 million to $2.0 million. Asthe value of the Convertible Debentures as noted below. The value of the convertible debenture and warrants at September 30, 20092012, were $87,000 and 2008,$32,000, respectively.
At September 30, 2012, there was no debtwere 53,846 warrants outstanding and the Debenture Purchasers have the right to convert the principal amount of the Convertible Debentures into 269,230 shares of common stock based on initial conversion rates, 280,682 shares of common stock based on post rights offering conversion rates, under the Loan Agreementterms of the conversion feature embedded in the Convertible Debentures. Because the warrants and unused availability (as defined) totaled $1.7 million and $1.8 million, respectively, netthe conversion feature embedded in the Convertible Debenture have a weighted average anti-dilution feature that in certain circumstances could provide the holders with protection against changes in the market value of the Company's common stock, they are required collateral reserves per the Loan Agreement for certain payroll and tax liabilities.
Assumptions used in compliancevaluing the warrants and the embedded conversion features at September 30, 2012 included the following:
| | Warrants | Embedded Conversions Features | ||
|---|---|---|---|---|
Risk free interest rate | 0.62% | 0.23% | ||
Contractual term | 5 years | 27 months | ||
Dividend yield | 0% | 0% | ||
Expected lives | 5 years | 27 months | ||
Expected volatility | 70.3% | 70.3% | ||
Fair value per warrants per share or per $1.25 of debt | $0.23 | $0.05 |
DLH HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SEPTEMBER 30, 2012 AND 2011
(6) DEBT AND CAPITAL LEASES: (Continued)
Assumptions used in valuing the warrants and the embedded conversion features at September 30, 2011 included the following:
| | Warrants | Embedded Conversions Features | ||
|---|---|---|---|---|
Risk free interest rate | 1.60% | 0.42% | ||
Contractual term | 5 years | 27 months | ||
Dividend yield | 0% | 0% | ||
Expected lives | 5 years | 27 months | ||
Expected volatility | 70.9% | 71.8% | ||
Fair value per warrants per share or per $1.30 of debt | $1.01 | $0.63 |
At September 30, 2012, the carrying value of the Convertible Debentures is as follows (amounts in thousands):
| | September 30, | ||||||
|---|---|---|---|---|---|---|---|
| | 2012 | 2011 | |||||
Principal amount of Convertible Debentures | $ | 350 | $ | 350 | |||
Less: | |||||||
Value of financial instruments to Convertible Debentures purchasers | (131 | ) | (268 | ) | |||
Value of warrants issued to Convertible Debentures purchasers | (17 | ) | (36 | ) | |||
Carrying Value | $ | 202 | $ | 46 | |||
The payment of the entire $350,000 principal amount of the Convertible Debentures is contractually due in the fiscal year ending September 30, 2014. The Company has evaluated the likelihood of satisfying the liability associated with the debt service coverage ratio covenantfinancial instruments in fiscal 2013 and has concluded that the classification of the Loan Agreement. The Loan Agreement provides that following an event of default, Sovereign may, among other remedies provided for in the Loan Agreement, accelerate the amounts outstanding under the Loan Agreement, take such actions as it deems necessary to protect its security interest in the collateral, and terminate the Loan Agreement. In connection with its consent to the sale of the TeamStaff Rx assets and loan modification, Sovereign waived such non-compliance for the period endedthis liability is non- current at September 30, 2009. Sovereign, however, reserved its rights under the Loan Agreement with respect to any future non-compliance with the debt service coverage ratio for any future period or any other provision of the Loan Agreement.
Capital Leases:
F-16
The Company's remaining lease obligation of $77,000 is payable through February 2014. Principal payments at Septemberof $51,000 and $26,000 are due in 2013 and 2014, respectively.
DLH HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SEPTEMBER 30, 2009 are as follows (amounts in thousands):
| Years Ending September 30, | ||||
| 2010 | $ | 24 | ||
| 2011 | 20 | |||
| 2012 | 9 | |||
| Total minimum lease payments | 53 | |||
| Amounts representing interest | (6 | ) | ||
| 47 | ||||
| Less current portion | (20 | ) | ||
| Long term portion | $ | 27 | ||
(7) OTHER CURRENT ASSETS:
Other current assets at September 30, 20092012 and 20082011 consist of the following (amounts in thousands):
| 2009 | 2008 | 2012 | 2011 | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Miscellaneous receivables | $ | 87 | $ | 381 | $ | 43 | $ | 77 | |||||||
| Prepaid insurance | 57 | 66 | 51 | 48 | |||||||||||
| Miscellaneous prepaid expense | 34 | 20 | 39 | 59 | |||||||||||
| Security deposits | 4 | 5 | |||||||||||||
| Prepaid income taxes | 43 | — | |||||||||||||
| Other | 32 | 33 | |||||||||||||
| $ | 257 | $ | 505 | $ | 133 | $ | 184 | ||||||||
(8) ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES:
Accrued expenses and other current liabilities at September 30, 20092012 and 20082011 consist of the following (amounts in thousands):
| 2009 | 2008 | 2012 | 2011 | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Accrued benefits and incentives | $ | 406 | $ | 482 | $ | 1,326 | $ | 523 | |||||||
| Accrued bonus | 50 | 588 | 236 | 357 | |||||||||||
| Accrued interest | 75 | 75 | |||||||||||||
| Accrued occupancy | 50 | 72 | — | ||||||||||||
| Accrued payroll taxes | 70 | 66 | |||||||||||||
Accrued workers compensation | 569 | 429 | |||||||||||||
| Accrued professional fees | 487 | 297 | 217 | 439 | |||||||||||
| Other | 103 | 330 | 469 | 386 | |||||||||||
| $ | 1,241 | $ | 1,910 | $ | 2,817 | $ | 2,134 | ||||||||
(9) COMMITMENTS AND CONTINGENCIES (See Also Note 13):
:
DLH has accrued revenue and costs associated with certain government contracts at which it has employees staffed on contract assignments.covered by the Service Contract Act. These adjustments are due to changes in the contracted wage determination rates for these contractcertain employees. A wage determination is the listing of wage rates and fringe benefit rates for each classification of laborers whom the Administrator of the Wage and Hour Division of the U.S. Department of Labor (“DOL”("DOL") has determined to be prevailing in a given locality. Contractors performing services for the Federal government under certain contracts are required to pay service employees in various classes no less than the wage rates and fringe benefits founddetermined to be prevailing in these localities. An audit by the DOL in fiscal 2008 at one of the facilities revealed that notification, as required by contract, was not provided to TeamStaff GSDLH Solutions in order to effectuate the wage increases in a timely manner. Wages for contract employees currently on assignment at the time have been adjusted prospectively to the prevailing rate and hourly billing rates to the DVA have been increased accordingly. During the fiscal year ended September 30, 2008, TeamStaffDLH recognized nonrecurring revenues of $10.8 million and direct costs of $10.1 million, based on amounts that are contractually due under its arrangements with the Federal agencies. At September 30, 2009,2012, the amount of the remaining accounts receivable with the DVA approximates $9.3 million.
In April 2012, the Company received formal contract modifications from the DVA, dated April 16, 2012, concerning the retroactive billing matter. The contract modifications from the DVA incorporate
DLH HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SEPTEMBER 30, 2012 AND 2011
(9) COMMITMENTS AND CONTINGENCIES (See Also Note 13): (Continued)
relevant wage determinations covering largely 2006 and 2007 applying to the Company's historical contracts with DVA during those periods. These government modifications initiate the procedures whereby the Company may invoice the DVA in accordance with the modified wage determinations and subsequently make timely retroactive payments to employees (active and inactive) covering work performed at the certain locations. The Company has beenexpects to follow the same process implemented as directed by and in conjunction with the Department of Labor and the DVA when similar wage determination-related contract modifications were made to cover other sites (also for the periods of 2006 and 2007) in 2008.
The Company continues to be in discussions with representativessupport the Government's review of the DVA regardingdetailed supporting calculations for the matterretroactive billings and anticipates resolution during the second quarter of fiscal 2010. TeamStaff is currently in the process of negotiating ato negotiate an incremental final amount related to gross profit onindirect costs and fees applied to these adjustments.retroactive billings. As such, there may be additional revenues recognized in future periods once the final approval for such additional amounts is obtained. The ranges of additional revenueindirect costs and gross profitfees are estimated to be between $0.4 million and $0.6 million. At present,The Company has developed these estimates under the Company expectssame contractual provisions applied to collect such amounts during fiscal 2010. Becausethe sites that were settled in 2008. However, because these amounts areremain subject to government review, no assurances can be given that any amounts that we willmay receive any additional billings from our government contracts or that if additional amounts are received, that the amount will be within the range specified above.
Leases
F-17
| Years Ending September 30, | | |||||||
|---|---|---|---|---|---|---|---|---|
| 2010 | $ | 474 | ||||||
| 2011 | 285 | |||||||
| 2012 | 132 | |||||||
| 2013 | 85 | $ | 163 | |||||
| 2014 | 88 | 169 | ||||||
| 2015 | 60 | 143 | ||||||
2016 | 86 | |||||||
2017 | 81 | |||||||
| $ | 1,124 | $ | 642 | |||||
Rent expense, net of sublease income, under all operating leases in fiscal year ended September 30, 2009,2012, was $483,000, of which $148,000 is attributed to continuing operations and $335,000 is attributed to discontinued operations.$173,000. Rent expense, net of sublease income, under all operating leases in fiscal year ended September 30, 2008,2011, was $542,000, of which $167,000 is attributed to continuing operations and $375,000 is attributed to discontinued operations. At September 30, 2009 there is one remaining occupancy sublease.
As discussed in Note 4, as part of the sale of TeamStaff Rx, Advantage RN will havehad the right to use, through February 28, 2011, the premises located in Clearwater, Florida that was used by TeamStaff Rx for its principal executive offices. In connection with such use, Advantage RN willwas obligated to make rent subsidy payments to TeamStaff Rx totaling $125,000, consisting of (i) $25,000 payable at the closing and (ii) an additional $100,000 payable in 10 equal monthly installments of $10,000 payable on the first day of each calendar month beginning on March 1, 2010 until December 1, 2010. In addition,Advantage RN has since vacated the premises and ceased making installment payments. The Company is pursuing a claim against Advantage RN for all amounts owed. The Company has provided an allowance of $50,000 for their estimate of uncollectible sub-lease funding.
DLH HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SEPTEMBER 30, 2012 AND 2011
(9) COMMITMENTS AND CONTINGENCIES (See Also Note 13): (Continued)
Prepaid Workers' Compensation
As part of the Company's discontinued PEO operations, DLH had a workers' compensation program with Zurich American Insurance Company ("Zurich") which covered the period from March 22, 2002 through November 16, 2003, inclusive. Payments for the policy were made to a trust monthly based on projected claims for the policy period. Interest on all assets held in the trust is credited to DLH. Payments for claims and claims expenses are made from the trust. From time-to-time, trust assets have been refunded to the Company anticipates incurringbased on Zurich's and managers' overall assessment of claims experience and historical and projected settlements. The final amount of trust funds that could be refunded to the Company is subject to a lossnumber of uncertainties (e.g. claim settlements and experience, health care costs, the extended statutory filing periods for such claims); however, based on the disposala third party's study of TeamStaff Rx principally from recognition ofclaims experience, DLH estimates that at September 30, 2012, the remaining unfunded operating lease payments at this facility. The measurement date for recording this liabilityprepaid asset of $0.3 million will be received within the next twelve to thirty-six months. This amount is December 31, 2009.
Prepaid Workers’Workers' Compensation Insurance
From November 17, 2003 through April 14, 2009, inclusive, TeamStaff’s workers’DLH's workers' compensation insurance program was provided by Zurich American Insurance Company (“Zurich”).Zurich. This program covered TeamStaff’sDLH's temporary, contract and corporate employees. This program was a fully insured, guaranteed cost program that contained no deductible or retention feature. The premium for the program was paid monthly based upon actual payroll and is subject to a policy year-end audit. Effective April 15, 2009, TeamStaffDLH entered into a partially self-funded workers’workers' compensation insurance program with a national insurance carrier for the premium year April 15, 2009 through April 14, 2010.2010 and has been renewed through April 14, 2013. The Company will paypays a base premium plus actual losses incurred, not to exceed certain stop-loss limits. The Company is insured for losses above these limits, both per occurrence and in the aggregate. The Company accrues for estimated claims incurred based on data provided by its insurance carrier.
As of September 30, 20092012 and 2011, the adequacy of the workers’workers' compensation reserves (which(including those periods' amounts that are offset against the trust fund balances in prepaid assets) was determined, in management’smanagement's opinion, to be reasonable. In determining our reserves, we rely in part upon information regarding loss data received from our workers’workers' compensation insurance carriers that may include loss data for claims incurred during prior policy periods. In addition, these reserves are for claims that have not been sufficiently developed and such variables as timing of payments and investment returns thereon are uncertain or unknown,unknown; therefore, actual results may vary from current estimates. TeamStaffDLH will continue to monitor the development of these reserves, the actual payments made against the claims incurred, the timing of these payments, the interest accumulated in TeamStaff’sDLH's prepayments and adjust the related reserves as deemed appropriate.
F-18
DLH has received notices from the Internal Revenue Service (“IRS”("IRS") claiming taxes, interest and penalties due related to payroll taxes predominantly from its former PEO operations which were sold in fiscal 2003. TeamStaffDLH has also received notices from the IRS reporting overpayments of taxes. Management believes that these notices are predominantly the result of misapplication of payroll tax payments between its legal entities. If not resolved favorably, the Company may incur interest and penalties. Until the sale of certain assets related to the former PEO operations, TeamStaffDLH operated through
DLH HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SEPTEMBER 30, 2012 AND 2011
(9) COMMITMENTS AND CONTINGENCIES (See Also Note 13): (Continued)
17 subsidiaries, and management believes that the IRS has not correctly identified payments made through certain of the different entities, therefore leading to the notices. To date, TeamStaffDLH has been working with the IRS to resolve these discrepancies and has had certain interest and penalty claims abated. TeamStaffDLH has also received notices from the Social Security Administration claiming variances in wage reporting compared to IRS transcripts. TeamStaffDLH believes the notices from the Social Security Administration are directly related to the IRS notices received. TeamStaff had retained the services of Ernst & Young LLP as a consultant to assist in resolving certain of these matters with the IRS and Social Security Administration. TeamStaffDLH believes that after the IRS applies all the funds correctly, any significant interest and penalties will be abated; however, there can be no assurance that each of these matters will be resolved favorably. In settling various years for specific subsidiaries with the IRS, the Company has received refunds for those specific periods; however, as the process of settling and concluding on other periods and subsidiaries is not yet completed, the potential exists for related penalties and interest. Based upon the most recent correspondence from the IRS and an assessment of open periods, we believe that ourThe remaining liability of $1.1($1.3 million at September 30, 2009 (recorded2012) has been recorded in accounts payable) is fairly stated. Interest expense would accrue on such amountspayable and includes estimated accrued penalties and interest totaling approximately $500,000.
The Company believes it has accrued for the entire estimated remaining liability, inclusive of interest and penalties through the ultimate payment date unless waived byof the IRS. In fiscal 2009,financial statements. The Company may incur additional interest and may incur possible additional penalties through the Company paid $1.1 million, relatedfuture date that this obligation is settled, however, it is not currently possible to this matter.
Legal Proceedings
F-19
DLH HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SEPTEMBER 30, 2012 AND 2011
(9) COMMITMENTS AND CONTINGENCIES (See Also Note 13): (Continued)
can be no assurance that such insurance will be adequate to cover all potential claims.
DLH is engaged in no other litigation, the effect of which would be anticipatedis expected to have a material adverse impact on TeamStaff’sDLH's results of operations, financial position or cash flows.
Employment Agreements
From time-to-time, we enter into employment agreements with certain key executives which provide for fixed compensation, criterion for earning bonuses and other incentives and, in certain instances, issuance of share based equity grants. These agreements generally continue until terminated by the employee or the Board of Directors or, upon the occurrence of defined certain events or circumstances (including a defined change in control), and provide for salary continuance for specified periods of generally no more than a year.
During the fiscal year ended September 30, 2009, the Company terminated certain management and staff personnel, and as a result, incurred severance related expenses of approximately $169,000, of which $165,000 is included in results of discontinued operations; at September 30, 2009 the remaining liability from these arrangements was approximately $108,000, which is included in accrued expenses.
Government Assignment of Contracts
Availability of funds under the SovereignPresidential Financial line of credit is directly related to the successful assignment of certain accounts receivable. Certain government accounts of TeamStaff GSDLH Solutions are required to execute “Acknowledgements"Acknowledgements of Assignment.”" There can be no assurance that every TeamStaff GSDLH Solutions government account will execute the documentation to effectuate the assignment and secure availability. The failure of government third parties to sign the required documentation could result in a decrease in availability under the existing line of credit.
(10) SHAREHOLDERS' EQUITY:
On March 31, 2011, the Company entered into a Securities Purchase Agreement (the "Purchase Agreement") with a limited number of accredited investors pursuant to which the Company sold for $225,000 an aggregate of 459,181 shares of its Common Stock Warrants
F-20
DLH HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SEPTEMBER 30, 2012 AND 2011
(10) SHAREHOLDERS' EQUITY: (Continued)
aggregate amount of such options shall be ISOs or Non-ISOs, subjectcredits totaled $75,000 and were fully exercised during 2012. The Company has used these cash proceeds for general working capital. The value ascribed to applicable law; the periods during which each option will be exercisable; and the number of shares subject to each option. The Compensation Committee has full authority to interpret the 2000 Plan and to establish and amend rules and regulations relating thereto.
On June 1, 2011, the exercise or cancellationCompany entered into a debenture purchase agreement (the "Debenture Purchase Agreement") with entities affiliated with Wynnefield Capital, Inc. (the "Debenture Purchasers"), providing for a standby commitment pursuant to which the Debenture Purchasers agreed to purchase convertible debentures (the "Convertible Debentures") in an aggregate principal amount of up to $350,000 (the "Total Commitment Amount"). In addition, the Company issued the Debenture Purchasers warrants to purchase an option. The Compensation Committee can also permitaggregate of 53,846 shares of common stock (the "Warrants") in consideration of their agreement to provide the paymentTotal Commitment Amount. On July 28, 2011, the Company drew down the entire amount of the exercise priceTotal Commitment amount available under the Debenture Purchase Agreement, of which $200,000 was used for the initial payments under the Debenture Purchase Agreement relating to the settlement with the former owners of RS Staffing, and on such date the Company issued the Convertible Debentures in the aggregate principal amount of $350,000 to the Debenture Purchasers, and received such funds.
The Convertible Debentures will mature on the 27-month anniversary of issuance and bear interest at the rate of the greater of the prime rate plus 5%, or 10% per annum, payable at maturity or upon redemption of such Convertible Debentures. The interest rate at June 30, 2012 was 10%. The Convertible Debentures were initially convertible into shares of the Company's common stock of the Company held by the optionee for at least six months prior to exercise.
As a result of the rights offering, the conversion rate of the Convertible Debentures was adjusted to $1.25 and the exercise price of options granted under the 2000 Director Plan mustWarrants was adjusted from $1.00 to $0.96 per share.
The Debenture Purchasers are entities affiliated with Wynnefield Capital, Inc., the Company's largest shareholder. Mr. Peter Black, a member of the Company's Board of Directors, is an employee of Wynnefield Capital.
DLH HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SEPTEMBER 30, 2012 AND 2011
(10) SHAREHOLDERS' EQUITY: (Continued)
Direct costs associated with the Debenture Purchase Agreement totaled $31,000. These costs have been and will be paidcapitalized as deferred financing costs and amortized over the period that such debentures are outstanding or the Debenture Agreement is effective. In addition, an initial value of $42,000 was ascribed to the warrants and it was determined that at July 28, 2011, because of appreciation in the Company's stock price, the embedded conversion feature included in the Convertible Debentures had a fair value of $289,000 at the time of exercise, eitherissuance of the Convertible Debentures; such amount is also being expensed over the life of the Convertible Debentures and the unamortized amounts have been deducted from the value of the Convertible Debentures as noted below. As a result of the rights offering the initial value of the warrants were revalued with minimal change and the value of the Convertible Debenture of $289,000 was revalued at $307,000.
At September 30, 2012, there were 53,846 warrants outstanding and the principal amount of the Convertible Debentures is convertible into 280,682 shares of common stock under the terms of the conversion feature embedded in cash, by deliverythe Convertible Debentures. The amount of shares of common stock of TeamStaff or by a combination of each. The term of each option commences onunder the date it is granted and unless terminated sooner as providedconversion feature embedded in the 2000 Director Plan, expires five (5) yearsConvertible Debenture was revalued from the date269,230 shares to 280,682 as a result of grant. The Compensation Committee has no discretion to determine which non-executive director will receive options or the number of shares subjectadjustment to the option,conversion price due to the term ofrights offering. Because the option orwarrants and the exercisability of the option. However, the Compensation Committee will make all determinations of the interpretation of the 2000 Director Plan. Options granted under the 2000 Director Plan are not qualified for incentive stock option treatment.
F-21
| Weighted | ||||||||||||||||
| Average | Aggregate | |||||||||||||||
| Weighted | Remaining | Pretax | ||||||||||||||
| Number of | Average | Contractual | Intrinsic | |||||||||||||
| Shares | Exercise Price | Term | Value | |||||||||||||
| Options outstanding, September 30, 2007 | 59,125 | $ | 8.80 | 2.2 | $ | 0 | ||||||||||
| Granted | — | — | ||||||||||||||
| Exercised | — | — | ||||||||||||||
| Cancelled | (26,500 | ) | $ | 9.47 | ||||||||||||
| Options outstanding, September 30, 2008 | 32,625 | $ | 8.09 | 1.8 | $ | 0 | ||||||||||
| Granted | — | — | ||||||||||||||
| Exercised | — | — | ||||||||||||||
| Cancelled | (17,500 | ) | $ | 9.12 | ||||||||||||
| Options outstanding, September 30, 2009 | 15,125 | $ | 6.30 | 1.6 | $ | 0 | ||||||||||
The payment of the entire $350,000 principal amount of the Convertible Debentures is contractually due in the fiscal year ending September 30, 2014. The Company has evaluated the likelihood of satisfying the liability associated with the financial instruments in fiscal 2012 and has concluded that the classification of this liability is non-current at September 30, 2012
On March 16, 2012, the Company filed a registration statement on Form S-1 with the Securities and Exchange Commission for a rights offering in which existing stockholders of the Company will receive non-transferable rights to purchase $4.2 million of additional shares of its common stock. Under the terms of the rights offering, the Company distributed, at no charge to the holders of its common stock as of the record date of April 10, 2012, non- transferable subscription rights for each share of common stock owned on the record date. Each subscription right entitled the holder to purchase 0.532 shares of the Company's common stock at a price of $1.30 per share. The rights offering also includes an over-subscription privilege, which entitled a holder who exercises its basic subscription privilege in full the right to purchase additional shares of common stock that remain unsubscribed at the expiration of the rights offering, subject to the availability andpro rata allocation of shares among persons exercising this over-subscription right.
DLH HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SEPTEMBER 30, 2012 AND 2011
(10) SHAREHOLDERS' EQUITY: (Continued)
In connection with the rights offering, on April 30, 2012, the Company entered into a standby purchase agreement with Wynnefield Capital, Inc. ("Wynnefield Capital"), which owned, prior to the rights offering, approximately 21% of the Company's Common Stock through certain affiliated entities. Pursuant to the standby purchase agreement, Wynnefield Capital (or affiliated assignees) agreed to acquire from us in the rights offering, subject to the satisfactions of specified conditions, the shares of common stock that relate to any rights that remain unexercised at the expiration of the rights offering. Mr. Peter Black, a member of our board of directors, is an employee of Wynnefield Capital. We entered into a registration rights agreement with Wynnefield Capital whereby we will, at our cost and expense, register for resale under the Securities Act of 1933, all shares of common stock beneficially owned by Wynnefield Capital, including shares purchased by Wynnefield Capital in the rights offering. We have agreed to file a registration statement with the SEC within 90 days of closing of the rights offering.
The Company completed the closing of the rights offering on June 15, 2012 and raised gross proceeds of $4.2 million from the sale of 3,230,769 shares of its common stock. As a result, the total number of shares of the Company's common stock outstanding increased to 9,265,702 shares. Officers and directors purchased an aggregate of 137,678 shares in the rights offering and entities affiliated with Wynnefield Capital purchased a total of 2,840,251 shares of our common stock.
Stock Option Plans
2006 Long Term Incentive Plan (“("2006 Plan”Plan")
The Board of Directors adopted the 2006 Plan on January 17, 2006. The shareholders approved the 2006 Plan at the annual meeting on April 27, 2006. The2006 and the Company initially reserved an aggregate of 5,000,0001,250,000 shares of common stock for issuance under the 2006 Plan. In August 2011, the Company's shareholders approved amendments to the 2006 Plan pursuant to which the maximum number of shares eligible for issuance pursuant to awards granted under the 2006 Plan was increased to an initial reserve of 3,001,625 shares of common stock. The maximum number of shares of common stock that may be delivered to participants under the 2006 Plan as amended equals the sum of: (a) 5,000,0002,750,000 shares of common stock;stock under the 2006 Plan; (b) any251,625 shares subject to awards granted under the predecessor 2000 Plan and the 2000 Director Plan (collectively, the “2000 Plans”"2000 Plans"), which arewere forfeited, expired, canceled or settled in cash without delivery of such shares to the participant or otherwise is terminated without a share issuance; (c) any shares tendered by participants or withheld in payment of the exercise price of options or to satisfy withholding taxes under the 2000 Plans; and (d) any shares repurchased with the proceeds of options exercised under the 2000 Plans.
Administration Administration.. The 2006 Plan is administered by the Management Resources and Compensation Committee.Committee of the Board of Directors (the "Compensation Committee"). The 2006 Plan authorizes the Compensation Committee to select those participants to whom awards may be granted, to determine whether and to what extent awards are granted, to determine the number of shares of common stock
DLH HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SEPTEMBER 30, 2012 AND 2011
(10) SHAREHOLDERS' EQUITY: (Continued)
or other considerations to be covered by each award, to determine the terms and conditions of awards, to amend the terms of outstanding awards, and to take any other action consistent with the terms of the 2006 Plan as the Compensation Committee deems appropriate.
Terms and Conditions of AwardsAwards.. The Compensation Committee is authorized to make any type of award to a participant that is consistent with the provisions of the Plan. Awards may consist of options, stock appreciation rights, restricted stock, restricted stock units, performance shares, cash awards or any combination of these types of awards.
Subject to the terms of the 2006 Plan, the Compensation Committee determines the provisions, terms and conditions of each award. The Compensation Committee may grant awards subject to vesting schedules or restrictions and contingencies in the company’sCompany's favor. However, the awards may be subject to acceleration such that they become fully vested, exercisable and released from any restrictions or contingencies upon the occurrence of a change of control (as defined in the 2006 Plan). The Compensation Committee may provide that stock-based awards earn dividends or dividend equivalents, which may be paid in cash or shares or may be credited to an account designated in the name of the participants. Participants may also be required or permitted to defer the issuance of shares or cash settlements under awards including under other deferred compensation arrangements of the company.Company. Each option granted under the 2006 Plan will be designated as either an incentive stock option or a non-statutory stock option. No option or stock appreciation right may be granted with a term of more than 10 years from the date of grant.
Performance shares or cash awards will depend on achievement of performance goals based on one or more performance measures determined by the Compensation Committee over a performance period as prescribed by the Compensation Committee of not less than one year and not more than five years. Performance goals may be established on a corporate-wide basis or as to one or more business units, divisions or subsidiaries, and may be in either absolute terms or relative to the performance of one or more comparable companies on an index covering multiple companies. “Performance measures”"Performance measures" means criteria established by the Compensation Committee from time to time prior to granting the performance shares or cash awards.
F-22
Option Repricing ProhibitedProhibited.. The exercise price for any outstanding option or stock appreciation right may not be decreased after the date of grant, nor may any outstanding option or stock
DLH HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SEPTEMBER 30, 2012 AND 2011
(10) SHAREHOLDERS' EQUITY: (Continued)
appreciation right be surrendered as consideration for the grant of a new option or stock appreciation right with a lower exercise price.
Duration, Amendment and Termination. The 2006 Plan became effective upon its approval by the Company's shareholders in April 2006 and will terminate on the tenth anniversary of its effective date, unless sooner terminated by the Board of Directors. In addition to the power to terminate the 2006 Plan at any time, the Board of Directors also has the power to amend the 2006 Plan; provided, no amendment to the 2006 Plan may be made without stockholder approval if such approval is required by law or agreement, or if such change would: (i) expand the classes of persons to whom awards may be made under the 2006 Plan; (ii) increase the number of shares of Common Stock authorized for grant under the 2006 Plan; (iii) increase the number of shares which may be granted under awards to any one participant under the 2006 Plan; (iv) allow the creation of additional types of awards; or (v) decrease performance award criteria except to the extent permitted under the 2006 Plan.
Eligibility. The 2006 Plan, as amended, provides that awards may be granted to employees, non-employee directors and consultants of the Company as the Compensation Committee may determine.
Option Activity Table
The following table summarizes the activity in DLH's various stock option plans for the years ended September 30, 2012 and 2011:
| | Number of Shares | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term | Aggregate Pretax Intrinsic Value | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Options outstanding, September 30, 2010 | 722,500 | $ | 1.13 | 9.4 | $ | 0 | |||||||
Granted | 850,000 | $ | 1.42 | ||||||||||
Exercised | (30,000 | ) | 1.00 | ||||||||||
Cancelled | (5,000 | ) | $ | 5.16 | |||||||||
Options outstanding, September 30, 2011 | 1,537,500 | $ | 1.19 | 9.3 | $ | 743,745 | |||||||
Granted | 275,000 | $ | 1.39 | ||||||||||
Exercised | 0 | — | |||||||||||
Cancelled | (450,000 | ) | $ | 1.34 | |||||||||
Options outstanding, September 30, 2012 | 1,362,500 | $ | 1.19 | 8.6 | $ | 140,000 | |||||||
As of September 30, 2012, a total of 387,500 options outstanding were vested and 975,000 options were unvested. As of September 30, 2011, a total of 662,500 options outstanding were vested and 875,000 options were unvested. As of September 30, 2010, 172,500 options outstanding had vested and 550,000 options were unvested. As of September 30, 2012, approximately $186,000 of unrecognized compensation costs related to non-vested option awards are expected to be recognized in future periods.
DLH HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SEPTEMBER 30, 2012 AND 2011
(10) SHAREHOLDERS' EQUITY: (Continued)
The aggregate intrinsic value in the table above represents the total pretax intrinsic value (i.e., the difference between the Company's closing stock price on the last trading day of the fiscal year 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 changes based on the fair market value of the Company's stock.
During fiscal 2012 and fiscal 2011, the Company issued 200,000 and 472,000 options, respectively, that vest to the recipients when the market value of the Company's stock achieves and maintains defined levels. The Company used a binomial valuation model and various probability factors in establishing the fair value of the options.
Weighted average assumptions used in the valuation of all option awards were as follows:
| | 2012 | 2011 | ||
|---|---|---|---|---|
Risk free interest rate | .62% | .95% | ||
Contractual lives | 10 years | 10 years | ||
Dividend yield | 0% | 0% | ||
Expected lives (in years) | 10 years | 10 years | ||
Expected volatility | 70.3% | 70.9% | ||
Fair Value per Option | $0.17 | $.56 |
Stock compensation related to option grants totaled $180,000 and $398,000 in 2012 and 2011, respectively; such amounts are included in General and Administrative expenses.
Pre-Vesting Forfeitures. Estimates of pre-vesting option forfeitures are based on Company experience. The Company will adjust its estimate of forfeitures over the requisite service period based on the extent to which actual forfeitures differ, or are expected to differ, from such estimates. Changes in estimated forfeitures will be recognized through a cumulative catch-up adjustment in the period of change and will also impact the amount of compensation expense to be recognized in future periods.
DLH HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SEPTEMBER 30, 2012 AND 2011
(10) SHAREHOLDERS' EQUITY: (Continued)
Restricted Stock Grants
A summary of activity in restricted stock is as follows:
| Weighted | Number Of Shares | Weighted Average Fair Value Grant-Date | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Number Of | Average Grant- | ||||||||||||||
| Shares | Date Fair Value | ||||||||||||||
| Restricted stock outstanding, September 30, 2007 | 55,000 | $ | 5.32 | ||||||||||||
Restricted stock outstanding, September 30, 2010 | 95,000 | $ | 2.42 | ||||||||||||
| Granted | 147,500 | $ | 2.58 | 35,000 | 0.56 | ||||||||||
| Issued | (21,250 | ) | $ | 3.32 | (77,500 | ) | 1.29 | ||||||||
| Cancelled | (28,334 | ) | $ | 4.58 | — | ||||||||||
| Restricted stock outstanding, September 30, 2008 | 152,916 | $ | 3.09 | ||||||||||||
Restricted stock outstanding, September 30, 2011 | 52,500 | 2.85 | |||||||||||||
| Granted | 341,612 | $ | 1.76 | 53,750 | 2.28 | ||||||||||
| Issued | (93,278 | ) | $ | 3.11 | (53,750 | ) | 2.28 | ||||||||
| Cancelled | (10,000 | ) | $ | 1.70 | — | ||||||||||
| Restricted stock outstanding, September 30, 2009 | 391,250 | $ | 1.96 | ||||||||||||
Restricted stock outstanding, September 30, 2012 | 52,500 | 2.85 | |||||||||||||
During the year ended September 30, 2009, TeamStaff2012, DLH granted awards of restricted stock under its 2006 Plan. Anan aggregate of 341,61253,750 restricted shares were awarded to employees and non-employee directors at the closing price on the award dates.date. Of this award, 16,61253,750 shares vested immediately, resulting in a charge of $25,000; 10,000 shares were cancelled; and 315,000 shares will vest upon satisfaction of certain performance criteria. In addition, $196,000 related to current and prior periods’ grants was recognized as an expense. The Company will not recognize expense on 315,000 shares of these awards until it is probable that these performance conditions will be achieved. Such charges could be material in future periods. During the fiscal year ended September 30, 2009, 10,000 unvested shares were cancelled. As of September 30, 2009, approximately $282,000$122,500. Approximately $186,000 of unrecognized compensation costs related to non-vested non-performance based restricted stock awards is expected to be recognized in future periods.
During the year ended September 30, 2008, TeamStaff2011, DLH granted awards of restricted stock under its 2006 Plan. Anan aggregate of 147,50035,000 restricted shares were awarded to employees and non-employee directors at the closing price on the award dates.date. Of this award, 47,50035,000 shares vested immediately, resulting in a charge of $115,000; 23,750 shares vested at September 30, 2008 based upon satisfaction of certain performance criteria, resulting in a charge of $59,000 (included in accrued expenses at that date); and 76,250 shares will vest upon satisfaction of certain performance criteria.approximately $20,000. In addition, $44,000$14,000 related to prior periods’periods' grants to employees was recognized as an expense. Of the restricted shares awarded in fiscal 2008, 30,000 shares were awarded to the Company’s non-employee directors and are subject to vesting as follows: fifty percent of all such shares of restricted stock shall vest when the volume-weighted average share price of the Company’s common stock over any twenty consecutive trading days exceeds the price on the date of grant by 20%, with the remaining fifty percent vesting one year thereafter. As permitted, the Company will not recognize expense on 76,250 shares of these awards until it is probable that these performance conditions will be achieved. Such charges could be material in future periods. During the fiscal year ended September 30, 2008, 28,334 unvested shares were cancelled. As of September 30, 2008, approximately $23,000 of unrecognized compensation costs related to non-vested non-performance based restricted stock awards is expected to be recognized during fiscal 2009.
At September 30, 20092012 and 20082011 the number of unvested shares under this program totaled 391,250 and 82,084, respectively.52,500 for both years. At September 30, 20092012, the Company had reserved 6,160,4091,079,847 shares of common stock for issuance under various option, shares and warrant plans and arrangements.
F-23
(12)
DLH HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SEPTEMBER 30, 2012 AND 2011
(11) QUARTERLY FINANCIAL DATA (UNAUDITED):
| (Amounts in thousands, except per share data) | First Quarter | Second Quarter | Third Quarter | Fourth Quarter | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Fiscal Year 2012 | |||||||||||||
Net revenues | $ | 11,495 | $ | 12,619 | $ | 12,618 | $ | 12,461 | |||||
Gross profit | 1,567 | 1,298 | 1,590 | 1,142 | |||||||||
Loss from operations | (210 | ) | (564 | ) | (625 | ) | (752 | ) | |||||
Loss from continuing operations(1) | (389 | ) | (715 | ) | (568 | ) | (354 | ) | |||||
Loss from discontinued operations | — | — | — | — | |||||||||
Net loss | (389 | ) | (715 | ) | (568 | ) | (354 | ) | |||||
Basic and diluted loss per share from continuing operations(2) | $ | (0.06 | ) | $ | (0.12 | ) | $ | (0.09 | ) | $ | (0.04 | ) | |
Net loss per share—Basic and diluted(2) | $ | (0.06 | ) | $ | (0.12 | ) | $ | (0.09 | ) | $ | (0.04 | ) | |
| | First Quarter | Second Quarter | Third Quarter | Fourth Quarter | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Fiscal Year 2011 | |||||||||||||
Net revenues | $ | 10,575 | $ | 10,444 | $ | 10,579 | $ | 10,325 | |||||
Gross profit | 1,318 | 1,508 | 1,513 | 1,559 | |||||||||
Loss from operations(3)(4) | (275 | ) | (81 | ) | (275 | ) | (3,592 | ) | |||||
Loss from continuing operations(3)(4) | (337 | ) | (183 | ) | (410 | ) | (3,660 | ) | |||||
Gain from discontinued operations | — | — | 270 | — | |||||||||
Net loss | (337 | ) | (183 | ) | (140 | ) | (3,660 | ) | |||||
Basic and diluted loss per share from continuing operations(2) | $ | (0.07 | ) | $ | (0.04 | ) | $ | (0.07 | ) | $ | (0.62 | ) | |
Net loss per share—Basic and diluted(2) | $ | (0.07 | ) | $ | (0.04 | ) | $ | (0.02 | ) | $ | (0.62 | ) | |
| First Quarter | Second Quarter | Third Quarter | Fourth Quarter | |||||||||||||
| Fiscal Year 2009 | ||||||||||||||||
| Net revenues | $ | 12,013 | $ | 11,472 | $ | 11,344 | $ | 11,192 | ||||||||
| Gross profit | 2,122 | 1,715 | 1,719 | 1,446 | ||||||||||||
| Income (loss) from operations | 587 | 72 | (42 | ) | (231 | ) | ||||||||||
| Income (loss) from continuing operations | 569 | 53 | 126 | (372 | ) | |||||||||||
| Loss from discontinued operations (1) | (521 | ) | (612 | ) | (659 | ) | (2,939 | ) | ||||||||
| Net income (loss) | 48 | (559 | ) | (533 | ) | (3,311 | ) | |||||||||
| Earnings (loss) per share from continuing operations — Basic | $ | 0.12 | $ | 0.01 | $ | 0.03 | $ | (0.08 | ) | |||||||
| Net earnings (loss) per share — Basic | $ | 0.01 | $ | (0.11 | ) | $ | (0.11 | ) | $ | (0.68 | ) | |||||
| First Quarter | Second Quarter | Third Quarter | Fourth Quarter | |||||||||||||
| Fiscal Year 2008 | ||||||||||||||||
| Net revenues (2) | $ | 10,465 | $ | 13,666 | $ | 14,634 | $ | 19,754 | ||||||||
| Gross profit | 1,700 | 2,195 | 2,648 | 2,401 | ||||||||||||
| Income from operations | 469 | 735 | 929 | 731 | ||||||||||||
| Income from continuing operations | 347 | 641 | 1,184 | 1,023 | ||||||||||||
| Loss from discontinued operations | (312 | ) | (577 | ) | (643 | ) | (517 | ) | ||||||||
| Net income | 35 | 64 | 541 | 506 | ||||||||||||
| Earnings per share from continuing operations — Basic and Diluted | $ | 0.07 | $ | 0.13 | $ | 0.25 | $ | 0.21 | ||||||||
| Net earnings per share — Basic and Diluted | $ | 0.01 | $ | 0.01 | $ | 0.11 | $ | 0.11 | ||||||||
(12) EMPLOYEE BENEFIT PLANS:
As of September 30, 2009, TeamStaff2012, DLH and its subsidiaries currently maintain a defined contribution and a supplemental pension plan.
As of January 1, 2004, TeamStaffDLH adopted the TeamStaffDLH 401(k) Plan (the “401(k) Plan”"401(k) Plan") for the benefit of its eligible employees. Any TeamStaffDLH corporate (non worksite) employee is immediately eligible upon hire
DLH HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SEPTEMBER 30, 2012 AND 2011
(12) EMPLOYEE BENEFIT PLANS: (Continued)
for participation in the 401(k) Plan. TeamStaffDLH may provide a discretionary matching contribution of 25% of each of the first 4% of a participant’sparticipant's elective contributions under the 401 (k) Plan. TeamStaffDLH recorded related expense of $13,000 and $18,000 respectively,$54 in fiscal 20092012 and 2008.$7 in fiscal year 2011. A participant is always fully vested in his or her elective contributions and vestvests in Company matching contributions over a four year period.
F-24
| Fiscal Year | ||||||||
| (Amounts in thousands) | 2009 | 2008 | ||||||
| Change in benefit obligation | ||||||||
| Benefit obligation at beginning of year | $ | 70 | $ | 346 | ||||
| Service cost | — | — | ||||||
| Interest Cost | — | 4 | ||||||
| Benefits paid | (70 | ) | (280 | ) | ||||
| Actuarial loss | — | — | ||||||
| Benefit obligation at end of year | $ | 0 | $ | 70 | ||||
| Change in plan assets | ||||||||
| Company contribution | $ | 70 | $ | 280 | ||||
| Benefits paid | (70 | ) | (280 | ) | ||||
| Fair value of plan assets at end of year | $ | — | $ | — | ||||
| Reconciliation of funded status | ||||||||
| Funded status | $ | — | $ | (70 | ) | |||
| Unrecognized net actuarial (gain)/loss | 5 | 28 | ||||||
| Net amount recognized | $ | 5 | $ | (42 | ) | |||
| Amounts recognized in the consolidated balance sheets consist of: | ||||||||
| Accrued benefit liability | $ | — | $ | (70 | ) | |||
| Accumulated other comprehensive income | 5 | 28 | ||||||
| Net amount recognized | $ | 5 | $ | (42 | ) | |||
| Discount rate used to determine benefit cost and obligations: | 3.00 | % | 3.00 | % | ||||
F-25
| 2009 | 2008 | |||||||
| Components of net periodic benefit cost are as follows: | ||||||||
| Interest cost | $ | — | $ | 4 | ||||
| Recognized actuarial loss | — | 9 | ||||||
| Net periodic benefit cost | — | 13 | ||||||
| Settlement charges | 8 | 38 | ||||||
| Total benefit cost | $ | 8 | $ | 51 | ||||
| Other disclosure items at end of year: | ||||||||
| Projected benefit obligation | $ | — | $ | 70 | ||||
| Fair value of plan assets | — | — | ||||||
| Increase in pension liability included in other comprehensive income | $ | (8 | ) | $ | (46 | ) | ||
A major customer is defined as a customer from which the Company derives at least 10% of its revenues. ForIn each of the fiscal yearyears ended September 30, 2009, Teamstaff GS generated2012 and 2011, revenue from the U.S. Government accounted, either directly or in-directly, for 100% of total revenue. Our largest service line is healthcare, which accounted for approximately 98.2%54% and 45% of revenue in fiscal 2012 and 2011, respectively. Within the U.S. Government, our largest customer in fiscal 2012 continued to be the DVA, accounting for 95% of revenue in fiscal 2012 and 94% in fiscal 2011, with whom the Company held over a dozen contracts and/or task orders for logistics, pharmaceutical, and medical services, all subject to the Federal Acquisition Regulations. As further discussed below, during fiscal 2011, the Company was awarded work of up to $145 million (unaudited) for pharmaceutical and other medical services during a period of up to five years which will both retain and expand its business with the DVA. Accordingly, DLH Solutions remains particularly dependent on the continuation of its relationship with the DVA.
The largest component of the Company’s overall consolidated revenues from agenciesawards discussed above comprised the award in May 2011 to DLH Solutions of the United States Government. Through its FSS contracts primarilya competitively bid Blanket Purchase Agreement contract with the DVA for pharmaceutical services which retains and expands work that accounted for approximately 45% of revenues for fiscal 2011. Work under the new contract began on November 1, 2011 and is expected to continue for up to 5 years and generate revenue of up to $145 million (unaudited). The Company also was awarded a contract in September 2011 to provide other medical services to the DVA of approximately $10 million (unaudited) over five years. In addition, the Company had four specific customers who totaled 31%, 23%, 12% and 11% of the Company’s overall consolidated revenues. We anticipate thatalso provides further services to the DVA may release new requestsunder contracts which accounted for approximately 50% of revenues for fiscal 2012, which currently expire on September 30, 2013, in respect of which no request for proposals related to staffing services with these four customer facilities in 2010. In such an event,have yet been invited. Accordingly, the Company intends to submit a proposal to address any such solicitation. Althoughhas in the past, and anticipates in the future, receiving sole source extensions of this work for an additional period of time. While the Company believes it is well positioned to continue its relationship with the DVA, no assurances can be given that in the event the DVA issues such a solicitation,would further extend our current orders for the provision of services, that any purchase orderswe would be awardedsuccessful in any bid for new contracts to the Companyprovide such services or that if it iswe are granted subsequent orders, that such orders would be of a scope comparable to the services that the Company haswe have provided to date.
Accounts receivable from agencies of the United States Government totaled $11.4$13.0 million and $11.9$11.1 million at September 30, 20092012 and 2008, respectively.2011, respectively, of which $9.3 and $10.5 million was unbilled at September 30, 2012 and 2011, respectively, including $9.3 million for each period associated with potential contractual billings adjustments. As discussed in Note 10,9, included in revenue derived
DLH HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SEPTEMBER 30, 2012 AND 2011
(13) ECONOMIC DEPENDENCY: (Continued)
from the Federal government in 2008 arewere retroactive adjustments that totaled $10.8 million.million; $9.3 million of this amount is included in accounts receivable (unbilled)at September 30, 2009.2012 and 2011. Such revenue is not expected to recur in future periods.
(14) MANAGEMENT TRANSITION:
On June 25, 2012, the Company has determined that no subsequent events have occurred which require disclosure through January 19, 2010, which is the date that these financial statements are issued.
F-26
The following is a description of the Company's employment agreement with Ms. JohnBull, which is qualified in its entirety by reference to the full text of such agreement.
The employment agreement is for an initial term of three years from its commencement date of June 25, 2012. Under the employment agreement, Ms. JohnBull will receive a base salary of $225,000 per annum and may receive an annual bonus of up to 50% of base salary based on performance targets and other key objectives established by the Management Resources and Compensation Committee of the board of directors; however, $31,000 of the annual bonus for her initial year of employment is guaranteed. The Company granted Ms. JohnBull options to purchase 250,000 shares of common stock under its 2006 Long Term Incentive Plan, as amended, subject to vesting.. In the event of the termination of employment by us without "cause" or by her for "good reason", she will be entitled to a severance payment of 12 months of base salary and will be entitled to a payment equal to 12 months of base salary if her employment is terminated in connection with a change in control of the Company.
(15) SUBSEQUENT EVENTS:
Effective as of November 15, 2012, the Company granted an aggregate of 52,500 shares of restricted stock to its non-executive directors, consistent with its compensation policy for non-executive directors. These shares were issued pursuant to the exemption from registration provided by Section 4(2) of the Securities Act of 1933, as amended.
Effective as of November 20, 2012, the Board of Directors (the "Board") of the Company elected Austin J. Yerks III to serve as a director of the Company. Mr. Filippelli,Yerks was elected as a Class 2 director and will serve for an initial term expiring at the materialCompany's annual meeting of stockholders to be held in 2013 and until his successor shall have been duly elected and qualified. Mr. Yerks also was appointed to the Audit Committee and Strategic Planning Committee of the Board.
On November 21, 2012, the Company entered into an agreement to amend certain of the terms and conditions of its existing employment agreement with its chief executive officer, Zachary C. Parker, the terms of which are summarized below. As used in the following summary, the term “Executive” shall refer to Mr. Filippelli. The following description of this employmentthe amendment agreement is qualified in its entirety by reference to the full text of such agreement. The newamendment provides for increases in Mr. Parker's base salary upon the achievement of certain performance conditions regarding the Company's operations and also extends the term of his current employment agreement supersedesto September 30, 2015. Pursuant to the Amendment, in the event the Company reports positive net income for a fiscal quarter ending prior to the expiration date of the amended term of the employment
DLH HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
SEPTEMBER 30, 2012 AND 2011
(15) SUBSEQUENT EVENTS: (Continued)
agreement, as determined in accordance with generally accepted accounting principles, Mr. Parker shall receive a 5% increase in his base salary. Further, in the event that the Company subsequently continues to report positive net income on a quarterly basis (as determined in accordance with generally accepted accounting principles) for two sequential quarterly periods, Mr. Parker's base salary shall be increased by an additional 5%. In addition, under the amendment, the Company and replacesMr. Parker have a mutual option, to be exercised prior to the new expiration date, to further extend the term of the employment agreement thatfor an additional one year period. If the Company entered into with Mr. Filippelli on April 17, 2008.
F-27
In addition, the Company entered into a new employment agreement with Ms. Presuto, the terms of which are summarized below. The following description of our new employment agreement with Ms. Presuto is qualified in its entirety by reference to the full text of such agreement.
Management has evaluated subsequent events through the date of execution of the employment agreement.
F-28
F-29
| (c) | ||||||||||||||||
| Additions | ||||||||||||||||
| (b) | Charged to | (e) | ||||||||||||||
| Balance at | (reversed from) | (d) | Balance at | |||||||||||||
| (a) | Beginning of | Costs and | Deductions – | End of | ||||||||||||
| Description | Year | Expenses | Net Adjustments | Year | ||||||||||||
Year Ended September 30, 2009 | ||||||||||||||||
| Allowance for doubtful accounts on trade receivables | $ | — | $ | — | $ | — | $ | — | ||||||||
| Deferred tax valuation allowance | $ | 11,369 | $ | 1,751 | $ | — | $ | 13,120 | ||||||||
Year Ended September 30, 2008 | ||||||||||||||||
| Allowance for doubtful accounts on trade receivables (1) | $ | 6 | $ | 4 | $ | (10 | ) | $ | — | |||||||
| Deferred tax valuation allowance | $ | 11,843 | $ | — | $ | (474 | ) | $ | 11,369 | |||||||
S-1