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EX-31.1 - EXHIBIT 31.1 - DLH Holdings Corp.ex311fy15q3.htm
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EX-32.1 - EXHIBIT 32.1 - DLH Holdings Corp.ex321fy15q3.htm
EX-10.2 - EXHIBIT 10.2 - DLH Holdings Corp.ex102zcpfy15q3.htm
EX-10.1 - EXHIBIT 10.1 - DLH Holdings Corp.ex101leasefy15q3.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
ý      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended June 30, 2015
 
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.
(Exact name of registrant as specified in its charter) 
New Jersey
 
22-1899798
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
1776 Peachtree Street, NW
 
 
Atlanta, Georgia
 
30309
(Address of principal executive offices)
 
(Zip Code)
(866) 952-1647
(Registrant’s telephone number, including area code)
 
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 of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ý  No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes ý   No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one): 
Large accelerated filer o
 
Accelerated filer o
 
 
 
Non-accelerated filer o
 
Smaller Reporting Company x
(Do not check if a smaller reporting company)
 
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No ý
 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:  9,550,536 shares of Common Stock, par value $.001 per share, were outstanding as of July 31, 2015.

1




DLH HOLDINGS CORP.
FORM 10-Q
For the Quarter Ended June 30, 2015
 
Table of Contents
 
 
Page No.
Part I — Financial Information
 
Item 1. Financial Statements
 

2




DLH HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands except per share amounts)


 


(unaudited)
 
(unaudited)


Three Months Ended
 
Nine Months Ended
 

June 30,
 
June 30,
 

2015

2014
 
2015
 
2014
Revenue

$
16,781


$
15,692

 
$
48,357

 
$
44,914

Direct expenses

13,743


13,384

 
40,055

 
38,295

Gross margin

3,038


2,308

 
8,302

 
6,619

General and administrative expenses

2,270


2,013

 
6,719

 
5,980

Depreciation and amortization

5


27

 
45

 
80

Income from operations

763


268

 
1,538

 
559

Other income (expense), net
 
(34
)
 
(17
)
 
(723
)
 
23

Income before income taxes

729


251

 
815

 
582

Income tax expense

292



 
326

 

Net income

$
437


$
251

 
$
489

 
$
582








 
 
 
 
 
 
 
 
 
 
 
 
 
Earnings per share - basic

$
0.05


$
0.03

 
$
0.05

 
$
0.06

Earnings per share - diluted
 
$
0.04

 
$
0.03

 
$
0.05

 
$
0.06

 
 
 
 
 
 
 
 
 
Weighted average common shares outstanding
 
 
 
 
 
 
 
 
Basic

9,552


9,602

 
9,580

 
9,566

Diluted

9,956


9,677

 
9,990

 
9,660

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

3




DLH HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands except par value of shares)
 


(unaudited)




June 30,
2015

September 30,
2014
ASSETS

 


 

Current assets:

 


 

Cash and cash equivalents

$
4,738


$
3,908

Accounts receivable, net

3,079


12,372

Deferred taxes, net
 
84

 
84

Other current assets

418


510

Total current assets

8,319


16,874

Equipment and improvements, net

187

 
63

Deferred taxes, net
 
4,187

 
4,513

Goodwill

8,595


8,595

Other long-term assets

43


27

Total assets

$
21,331


$
30,072

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 

 
 

Current liabilities:
 
 

 
 

Accrued payroll
 
$
2,109

 
$
11,465

Accounts payable, accrued expenses, and other current liabilities
 
4,642

 
4,746

Total current liabilities
 
6,751

 
16,211

Other long term liabilities
 
10

 
15

Total liabilities
 
6,761

 
16,226

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 9,551 at June 30, 2015 and 9,568 at September 30, 2014; outstanding 9,551 at June 30, 2015 and 9,566 at September 30, 2014
 
10

 
10

Additional paid-in capital
 
76,315

 
76,083

Accumulated deficit
 
(61,755
)
 
(62,244
)
Treasury stock, 0 shares at cost at June 30, 2015 and 3 shares at cost at September 30, 2014
 

 
(3
)
Total shareholders’ equity
 
14,570

 
13,846

Total liabilities and shareholders' equity
 
$
21,331

 
$
30,072

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














4




DLH HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
 
 
 
(unaudited)
 
 
Nine Months Ended
 
 
June 30,
 
 
2015
 
2014
Operating activities
 
 

 
 

Net income
 
$
489

 
$
582

Adjustments to reconcile net income to net cash provided by operating activities:
 
 

 
 

Depreciation and amortization including financing costs
 
45

 
89

Change in fair value of derivative financial instruments
 

 
(99
)
Stock based compensation expense
 
418

 
372

Deferred taxes, net
 
326

 

Settlement of retroactive payment claim, net
 
629

 

Changes in operating assets and liabilities
 
 

 
 

Accounts receivable
 
(13
)
 
(311
)
Other current assets
 
91

 
(35
)
Other assets
 

 
1,030

Accounts payable, accrued payroll, accrued expenses and other current liabilities
 
(782
)
 
(87
)
Other long term assets/liabilities
 
(21
)
 
(3
)
Net cash provided by operating activities
 
1,182

 
1,538

 
 
 
 
 
Investing activities
 
 

 
 

Purchase of equipment and improvements
 
(169
)
 
(13
)
Net cash used in investing activities
 
(169
)
 
(13
)
 
 
 
 
 
Financing activities
 
 

 
 

Net payments on bank loan payable
 

 
(951
)
Proceeds from stock purchase
 

 
52

Repayments of capital lease obligations
 

 
(22
)
Net repayment on convertible debentures
 

 
(140
)
Repurchased shares of common stock held as treasury stock
 

 
(10
)
Repurchased shares of common stock subsequently canceled
 
(183
)
 
(21
)
Net cash used in financing activities
 
(183
)
 
(1,092
)
 
 
 
 
 
Net increase in cash and cash equivalents
 
830

 
433

Cash and cash equivalents at beginning of period
 
3,908

 
3,408

Cash and cash equivalents at end of period
 
$
4,738

 
$
3,841

 
 
 
 
 
Supplemental disclosures of cash flow information
 
 

 
 

Cash paid during the period for interest
 
$
27

 
$
116

Cash paid during the period for income taxes
 
$

 
$


Supplemental disclosure for settlement of retroactive payment claim, net (See Note 5)
 
 
 
 
Reduction of accounts receivable related to retroactive payment claim
 
$
(9,306
)
 
$

Reduction of accrued payroll related to retroactive wage and benefit payments    
 
8,677

 


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

5




DLH HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2015 (Unaudited)
 
1. Basis of Presentation 

The accompanying unaudited consolidated financial statements include the accounts of DLH and its subsidiaries, all of which are wholly owned. All significant intercompany balances and transactions have been eliminated in consolidation. The accompanying financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, these statements do not include all of the information and footnotes required by generally accepted accounting principles ("GAAP") for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the quarter ended June 30, 2015 are not necessarily indicative of the results that may be expected for the year ending September 30, 2015. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Annual report on Form 10-K for the year ended September 30, 2014 filed on December 10, 2014.

2. Business Overview

For more than 25 years, DLH Holdings Corp. ("DLH"), has provided professional services to the U.S. Government. Headquartered in Atlanta, Georgia, DLH employs over 1,200 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 two broad integrated revenue streams: Healthcare Delivery Solutions and Logistics & Technical Services. Our customers, a majority of whom are within the Departments of Defense ("DoD") and Veterans Affairs ("DVA"), benefit from proven business process management processes, technical excellence and differentiation, 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.

DLH Holdings Corp. (together with its subsidiaries, "DLH" or the "Company" and also referred to as "we," "us" and "our") manages its operations from its principal executive offices at 1776 Peachtree Street, Atlanta, Georgia 30309.

Presently, the Company derives all of its revenue from agencies of the Federal government. A major customer is defined as a customer from whom the Company derives at least 10% of its revenues. In each of the fiscal quarters ended June 30, 2015 and 2014, revenue from the U.S. Government accounted, either directly or indirectly, for 100% of the Company’s total revenue. Within the U.S. Government, our largest customer continues to be the Department of Veterans Affairs (DVA), at 95% and 97% of revenue for the nine months ended June 30, 2015 and 2014, respectively. In addition, substantially all accounts receivable, including unbilled accounts receivable, are from agencies of the U.S. Government as of June 30, 2015 and 2014. We believe that the credit risk associated with our receivables is limited due to the creditworthiness of these customers. See Note 5, Supporting Financial Information-Accounts Receivable.

DLH remains dependent upon the continuation of its relationship with the DVA. As of June 30, 2015, awards from the DVA have anticipated periods of performance ranging from approximately one to up to three years. These agreements are subject to the Federal Acquisition Regulations. While there can be no assurance as to the actual amount of services that the Company will ultimately provide to the DVA under its current contracts, we believe that our strong working relationship and our effective service delivery support ongoing performance for the contract term. The Company's results of operations, cash flows and financial condition would be materially adversely affected in the event that we were unable to continue our relationship with the DVA.

3. New Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board ("FASB") issued guidance outlining a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers that supersedes most current revenue recognition guidance. This guidance requires an entity to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Additionally, this guidance expands related disclosure requirements. The effective date of these revisions is for reporting periods beginning after December 15, 2016, with early application not permitted. The Company is evaluating the impact of this guidance.


6




In June 2014, the FASB issued guidance related to accounting for share-based payments for certain performance stock awards. The effective date of this guidance is for annual periods and interim periods within those periods beginning after December 15, 2015, with early adoption permitted. The Company is evaluating the impact of this guidance.

In August 2014, the Financial Accounting Standards Board (FASB) issued guidance regarding management's going concern evaluations. The guidance requires management to evaluate, at each interim and annual reporting period, whether there are conditions or events that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date the financial statements are issued, and provide related disclosures. The guidance is effective for all entities for annual periods ending after December 15, 2016, and for annual and interim periods thereafter, and early adoption is permitted. We do not believe the standard will have a material impact on our financial statement disclosures.

In June 2015, the Financial Accounting Standards Board (FASB) issued guidance covering a wide range of topics in the codification to make minor corrections or minor improvements.   These changes are not expected to have a significant effect on current accounting practice or create a significant administrative cost.  The guidance is effective for all entities beginning after December 15, 2015, and for annual and interim periods thereafter, and early adoption is permitted. The adoption of this standard is not expected to have a material impact on the Company's consolidated financial statements.

4. Reclassifications

Certain reclassifications have been made to the prior period financial statements to conform to the current period presentation. Such reclassifications have no effect on previously reported results of operations or accumulated deficit.

5. Supporting Financial Information

Accounts Receivable
 
 
 
 
 
 
(in thousands)
 
 
 
 
 
 
June 30,
 
September 30,
 
 
 
Ref
 
 
2015
 
 
 
2014
 
Billed receivables
 
 
 
 
 
$
2,523

 
 
 
$
2,569

 
 
 
 
 
 
 
 
 
 
 
 
 
Unbilled receivables-retroactive payment claim
 
 
(a)
 
 

 
 
 
9,306

 
Unbilled receivables-other
 
 
 
 
 
556

 
 
 
497

 
Total unbilled receivables
 
 
 
 
 
556

 
 
 
9,803

 
 
 
 
 
 
 
 
 
 
 
 
 
Total accounts receivable
 
 
 
 
 
3,079

 
 
 
12,372

 
Less: Allowance for doubtful accounts
 
 
(b)
 
 

 
 
 

 
Accounts receivable, net
 
 
 
 
 
$
3,079

 
 
 
$
12,372

 

Ref (a): As previously reported, during the fiscal year ended September 30, 2008, DLH Holdings Corp. (the “Company”) accrued salaries and benefits of $10.1 million related to the estimated resolution of retroactive payment cases asserted by the Department of Labor (“DOL”). During the same period, the Company recognized revenues of $10.8 million related to expected recovery of these costs, plus estimated indirect costs, under contractual arrangements with the Department of Veterans Affairs (“DVA”). At September 30, 2014, 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, 2014.

In September 2014, we submitted a claim to the DVA seeking a final determination and resolution of this matter. During the quarter ended March 31, 2015, we were advised that the DOL would not take further action with respect to the retroactive payment cases and that it would not object to the DVA’s resolution of this matter with the Company. As a result, we had no obligation for the payment of these accrued salaries and benefits. Because no retroactive wage payments were required, we have no contractual recovery of costs from the DVA. Accordingly, in order to resolve this matter, on March 30, 2015, we entered into a mutual release of claims with the DVA, pursuant to which both parties agreed to fully release each other from any and all claims arising pursuant to this matter.

As a result of the closure of this issue, as a part of our reporting for the quarter ended March 31, 2015, we removed the accruals of estimated revenue and expense which were recorded in the year ended September 30, 2008. Further, we reported a reduction of $9.3 million in accounts receivable, a reduction of $8.7 million in accrued liabilities for salaries

7




to employees and related benefits, and a net charge to our earnings of approximately $629 thousand for the fiscal quarter ended March 31, 2015 relating to the resolution of this matter. The net expense related to this issue was non-cash and not related to income from current operations.

Ref (b): Accounts receivable are non-interest bearing, unsecured and carried at fair value, which is net of an allowance for doubtful accounts. We evaluate our receivables on a quarterly basis and determine whether an allowance is appropriate based on specific collection issues. Our allowance for doubtful accounts was zero at both June 30, 2015 and September 30, 2014.

Other Current Assets
 
 
 
 
 
 
(in thousands)
 
 
 
 
 
 
June 30,
 
September 30,
 
 
 
Ref
 
 
2015
 
 
 
2014
 
Workers’ compensation receivable
 
 
(a)
 
 
$
39

 
 
 
$
199

 
Prepaid insurance expense
 
 
 
 
 
214

 
 
 
176

 
Prepaid benefits
 
 
 
 
 
53

 
 
 

 
Other prepaid expenses
 
 
 
 
 
112

 
 
 
135

 
Other current assets
 
 
 
 
 
$
418

 
 
 
$
510

 

Ref (a): 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. DLH estimates that the remaining workers compensation receivable of approximately $39 thousand will be received within the next twelve months.

Equipment and improvements, net
 
 
 
 
 
 
(in thousands)
 
 
 
 
 
 
June 30,
 
September 30,
 
 
 
Ref
 
 
2015
 
 
 
2014
 
Furniture and equipment
 
 
 
 
 
$
139

 
 
 
$
139

 
Computer equipment
 
 
 
 
 
292

 
 
 
126

 
Computer software
 
 
 
 
 
433

 
 
 
430

 
Leasehold improvements
 
 
 
 
 
24

 
 
 
24

 
Total fixed assets
 
 
 
 
 
888

 
 
 
719

 
Less accumulated depreciation and amortization
 
 
 
(701
)
 
 
 
(656
)
 
Equipment and improvements, net
 
 
(a)
 
 
$
187

 
 
 
$
63

 

Ref (a): 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) and the shorter of the initial lease term or estimated useful life for leasehold improvements. Maintenance and repair costs are expensed as incurred.

Accrued Payroll
 
 
 
 
 
 
(in thousands)
 
 
 
 
 
 
June 30,
 
September 30,
 
 
 
Ref
 
 
2015
 
 
 
2014
 
Accrued payroll related to billed receivables
 
 
 
 
 
$
1,759

 
 
 
$
2,440

 
 
 
 
 
 
 
 
 
 
 
 
 
Accrued payroll related to retroactive payment claim
 
 
(a)
 
 

 
 
 
8,677

 
Accrued payroll related to unbilled accounts receivable
 
 
 
 
 
350

 
 
 
348

 
Total accrued payroll related to unbilled accounts receivable
 
 
 
 
350

 
 
 
9,025

 
 
 
 
 
 
 
 
 
 
 
 
 
Total accrued payroll
 
 
 
 
 
$
2,109

 
 
 
$
11,465

 

Ref (a): Related to retroactive payment claim described above in “Accounts Receivable”.

8





Accounts Payable, Accrued Expenses, and Other Current Liabilities
 
 
 
 
 
 
(in thousands)
 
 
 
 
 
 
June 30,
 
September 30,
 
Ref
 
 
2015
 
 
 
2014
 
Accounts payable
 
 
 
 
 
$
128

 
 
 
$
779

 
Accrued benefits
 
 
 
 
 
1,026

 
 
 
720

 
Accrued bonus and incentive compensation
 
 
 
 
558

 
 
 
693

 
Accrued workers compensation insurance
 
 
 
 
 
1,125

 
 
 
767

 
Other accrued expenses
 
 
 
 
 
312

 
 
 
339

 
Payroll tax accrual
 
 
(a)
 
 
1,493

 
 
 
1,448

 
Accounts payable, accrued expenses, and other current liabilities
 
 
 
 
 
$
4,642

 
 
 
$
4,746

 

Ref (a): From 2006 through 2009, DLH received notices from the Internal Revenue Service (“IRS”) claiming taxes, interest and penalties due related to payroll taxes. These notices are predominantly related to the former PEO operations which were sold in fiscal 2003. The liability includes estimated accrued penalties and interest totaling approximately $674 thousand.

Other Income (Expense)
 
 
 
(in thousands)
 
(in thousands)
 
 
 
Three Months Ended
 
Nine Months Ended
 
 
 
June 30,
 
June 30,
 
Ref
 
2015
 
2014
 
2015
 
2014
Interest expense, net
 
 
$
(23
)
 
$
(24
)
 
$
(72
)
 
$
(75
)
Amortization of deferred financing costs
 
 

 

 

 
(10
)
Change in value of financial instruments
(a)
 

 

 

 
99

Miscellaneous other income (expense), net
(b)
 
(11
)
 
7

 
(651
)
 
9

Other income (expense), net
 
 
(34
)
 
(17
)
 
(723
)
 
23


Ref (a): Represents the adjustment to fair value of embedded conversion feature and warrants related to the Company's convertible debentures. Such instruments did not meet the requirements for qualified hedge accounting under GAAP. See Note 12 regarding maturity and closure of the convertible debentures.

Ref (b): Current fiscal year activity reflects $629 thousand charge related to retroactive payment claim described above in “Accounts Receivable.”
  
6. Liquidity 

At June 30, 2015, the Company had cash and cash equivalents of approximately $4.7 million, net working capital of approximately $1.6 million, and an accumulated deficit of approximately $(62) million. For the nine months ended June 30, 2015, the Company realized operating income of approximately $1.5 million and net income of approximately $489 thousand, as compared to operating income and net income of $559 thousand and $582 thousand respectively for the nine months ended June 30, 2014.
 
The Company has a credit facility with a lending institution which provides a maximum amount of $6 million. The current term of the credit facility expires on July 29, 2016 and thereafter shall automatically renew on each anniversary date thereof for subsequent twelve month terms unless terminated by either party. Presently, the maximum availability under this loan facility is $3 million, subject to eligible accounts receivable.  The interest rate on both the Accounts Receivable and Unbilled Accounts portion of the loan was 4.0% at June 30, 2015, and September 30, 2014.  At June 30, 2015, our unused loan availability was approximately $2.5 million, comprised of a $1.4 million letter of credit reserve and $1.1 million of unused loan capacity. DLH required no borrowing on the credit facility during third quarter ended June 30, 2015.


9




Management believes, at present, that: (a) cash and cash equivalents of approximately $4.7 million as of June 30, 2015; (b) the amount available under its line of credit (which is limited to the amount of eligible assets); and (c) planned operating cash flow should be sufficient to support the Company's operations for twelve months from the date of these financial statements.

7. Significant Accounting Policies

Use of Estimates
 
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates include valuation of goodwill, valuation allowances established against accounts receivable and deferred tax assets, and measurement of loss development on workers’ compensation claims. Actual results could differ from those estimates. In particular, a material reduction in the fair value of goodwill would have a material adverse effect on the Company’s financial position and results of operations.

Revenue Recognition
 
DLH’s revenue is derived from professional and other specialized service offerings to US Government agencies through a variety of contracts, some of which are fixed-price in nature and/or sourced through Federal Supply Schedules administered by the General Services Administration (“GSA”) at fixed unit rates or hourly arrangements. 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. DLH recognizes and records revenue on government contracts when it is realized, or realizable, and earned. DLH considers these requirements met when: (a) persuasive evidence of an arrangement exists; (b) the services have been delivered to the customer; (c) the sales price is fixed or determinable and free of contingencies or significant uncertainties; and (d) collectibility is reasonably assured.

Goodwill
 
DLH continues to review its goodwill for possible impairment or loss of value at least annually or more frequently upon the occurrence of an event or when circumstances indicate that a reporting unit’s carrying amount is greater than its fair value. At September 30, 2014, we performed a goodwill impairment evaluation. We performed both a qualitative and quantitative assessment of factors to determine whether it was necessary to perform the goodwill impairment test. Based on the results of the work performed, the Company has concluded that no impairment loss was warranted at September 30, 2014. Factors including non-renewal of a major contract or other substantial changes in business conditions could have a material adverse effect on the valuation of goodwill in future periods and the resulting charge could be material to future periods’ results of operations. For the nine months ended June 30, 2015, the Company determined that no change in business conditions occurred which would have a material adverse effect on the valuation of goodwill.  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 Income. All remaining goodwill is attributable to the DLH Solutions operating subsidiary.

Income Taxes

DLH accounts for income taxes in accordance with the liability method, whereby deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities, using enacted tax rates in effect for the year in which the differences are expected to reverse. Deferred tax assets are reflected on the consolidated balance sheet when it is determined that it is more likely than not that the asset will be realized. This guidance also requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some or all of the deferred tax asset will not be realized. We account for uncertain tax positions by recognizing the financial statement effects of a tax position only when, based upon the technical merits, it is "more-likely-than-not" that the position will be sustained upon examination. We had no uncertain tax positions at either June 30, 2015 and 2014. We report interest and penalties as a component of income tax expense. In the fiscal quarters ending June 30, 2015 and 2014, we recognized no interest and no penalties related to income taxes.

The Company has adequate net operating loss carryforwards to offset against any taxable income in the current period. The Company has deferred tax assets before valuation allowance of $15.4 million and $15.7 million as of June 30, 2015 and September 30, 2014, respectively. We have recorded a valuation allowance of $11.1 million as of June 30, 2015 and $11.1 million on September 30, 2014. Tax years open for examination are 2011 and forward.


10




Cash and Cash Equivalents

We consider all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents. We maintain cash balances at financial institutions that are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000.  Deposits held with financial institutions may exceed the $250,000 limit.

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

Stock-based compensation expense
 
All grants of equity are presently made under the 2006 Long Term Incentive Plan. As of June 30, 2015, 0.9 million shares remained available for grant under the Plan. Options issued under the Plan are designated as either an incentive stock or a non-statutory stock option. No option may be granted with a term of more than 10 years from the date of grant. Exercisability of option awards may depend on achievement of certain performance measures determined by the Compensation Committee of our Board. Shares issued upon option exercise are newly issued shares.

Stock-based compensation expense, shown in the table below, is recorded in general and administrative expenses included in our statement of income:
 
 
 
(in thousands)
 
(in thousands)
 
 
 
Three Months Ended
 
Nine Months Ended
 
Ref
 
June 30,
 
June 30,
 
 
 
2015
 
2014
 
2015
 
2014
DLH employees

 
$
72

 
$
78

 
$
241

 
$
263

Non-employee directors
(a)
 

 

 
177

 
109

Total compensation expense
 
 
$
72

 
$
78

 
$
418

 
$
372


Ref (a): Equity grants of restricted stock, in accordance with DLH compensation policy for non-employee directors. The shares vested immediately and stock expense was recognized accordingly.  

Unrecognized stock-based compensation expense
 
 
 
(in thousands)
 
 
 
Nine Months Ended
 
 
 
June 30,
 
Ref
 
2015
 
2014
Unrecognized expense for DLH employees
(a)
 
$
105

 
$
196

Unrecognized expense for non-employee directors
(b)
 
125

 
150

Total unrecognized expense
 
 
$
230

 
$
346


Ref (a): Compensation expense for the portion of equity awards for which the requisite service has not been rendered is recognized as the requisite service is rendered. The compensation expense for that portion of awards has been based on the grant-date fair value of those awards as calculated for recognition purposes under applicable guidance.

Ref (b): Unrecognized stock expense related to prior years equity grants of restricted stock to non-employee directors, based on performance criteria, in accordance with DLH compensation policy for non-employee directors. The shares will vest and expense will be recorded upon future satisfaction of specified performance.
  
Stock option activity for the nine months ended June 30, 2015

The aggregate intrinsic value in the table below represents the total pretax intrinsic value (i.e., the difference between the Company’s closing stock price on the last trading day of the period and the exercise price, times the number of shares) that would have been received by the option holders had all option holders exercised their in the money options on those dates. This amount will change based on the fair market value of the Company’s stock.

11




 
 
 
 
 
 
 
(in years)
 
 
 
 
 
 
 
 
 
Weighted
 
 
 
 
 
 
 
Weighted
 
Average
 
(in thousands)
 
 
 
(in thousands)
 
Average
 
Remaining
 
Aggregate
 
 
 
Number of
 
Exercise
 
Contractual
 
Intrinsic
 
Ref
 
Shares
 
Price
 
Term
 
Value
Options outstanding, September 30, 2014
 
 
2,380

 
$1.40
 
7.81
 
$
1,589

Granted

 

 
 
 
 
 

Canceled
(a)
 
(44
)
 
$1.40
 
 
 
 

Options outstanding, June 30 2015
 
 
2,336

 
$1.40
 
7.05
 
$
3,128


Ref (a): Shares canceled upon termination of employment or expiration of period to complete performance conditions.
  
Stock options shares outstanding, vested and unvested for the period ended
 
 
 
(in thousands)
 
 
 
Number of Shares
 
 
 
June 30,
 
Ref
 
2015
 
2014
Vested and exercisable
 
 
968

 
463

Unvested
(a)
 
1,368

 
1,692

Options outstanding
 
 
2,336

 
2,155


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

9. Fair Value of Financial Instruments
 
The Company has financial instruments, including accounts receivable, accounts payable, loan payable, notes payable, and accrued expense. Due to the short term nature of these instruments, DLH estimates that the fair value of all financial instruments at June 30, 2015 and September 30, 2014 does not differ materially from the aggregate carrying values of these financial instruments recorded in the accompanying consolidated balance sheets. 

10. Earnings Per Share
 
Basic earnings per share is calculated by dividing income available to common shareholders by the weighted average number of common shares outstanding and restricted stock grants that vested or are likely to vest during the period. Diluted earnings per share is calculated by dividing income available to common shareholders by the weighted average number of basic common shares outstanding, adjusted to reflect potentially dilutive securities. Diluted earnings per share is calculated using the treasury stock method.

12




 
 
(in thousands)
 
 
Three Months Ended
 
Nine Months Ended
 
 
June 30,
 
June 30,
 
 
2015
 
2014
 
2015
 
2014
Numerator:
 
 
 
 
 
 
 
 
Net income
 
$
437

 
$
251

 
$
489

 
$
582

Denominator:
 
 
 
 
 
 
 
 
Denominator for basic net income per share - weighted-average outstanding shares
 
9,552

 
9,602

 
9,580

 
9,566

Effect of dilutive securities:
 
 
 
 
 
 
 
 
Stock options and restricted stock
 
404

 
75

 
410

 
94

Denominator for diluted net income per share - weighted-average outstanding shares
 
9,956

 
9,677

 
9,990

 
9,660

 
 
 
 
 
 
 
 
 
Earnings per share - basic
 
$
0.05

 
$
0.03

 
$
0.05

 
$
0.06

Earnings per share - diluted
 
$
0.04

 
$
0.03

 
$
0.05

 
$
0.06


11. Commitments and Contingencies
 
Contractual Obligations
 
 
 
 
Payments Due By Period
 
 
Obligations
 
 
 
Less than
 
1-3
 
4-5
 
More than 5
(Amounts in thousands)
 
Total
 
1 Year
 
Years
 
Years
 
Years
Loan Payable (1)
 
$

 
$

 
$

 
$

 

Operating Leases (2)
 
2,333

 
130

 
530

 
547

 
1,126

Total Obligations
 
$
2,333

 
$
130

 
$
530

 
$
547

 
$
1,126

 
(1) Represents the amounts recorded in respect of the loan payable due to Presidential Financial Corporation in accordance with the loan agreement. As of June 30, 2015 there were no outstanding amounts.

(2) On April 27, 2015, as part of its facilities consolidation effort, the Company entered into a lease agreement (the “Lease”) with Piedmont Center, 1-4 LLC (the “Landlord”) for the premises known as Suite 700 at Three Piedmont Center, 3565 Piedmont Road, N.E. Atlanta, Georgia 30305. The rentable floor area of the demised premises is 12,275 square feet. The Lease expires 8.7 years following the “Rental Commencement Date”. The Rental Commencement Date will occur when the Landlord has substantially completed the build-out of the demised premises, including any tenant improvements. The Company currently expects the Rent Commencement Date to occur, and occupation of the demised premises to begin, during September 2015.

Upon occupancy, the Company will pay base rental payments for the demised premises in the amount of $20,970 per month during the first year of the lease. The base rent due under the Lease shall increase yearly based on an agreed-upon annual rate of increase and in the final year of the Lease, the base rental payment will be $25,552 per month.

Upon occupancy and conditioned upon the Company’s compliance with its obligations under the Lease, the Landlord will excuse a total of $120 thousand in rent due during the initial eight (8) months of the Lease term. Additionally, approximately 4,000 square feet of the leased premises will not be occupied, and rent will not be due, during the initial two years of the Lease term.   The monthly rent payments under the Lease include budgeted operating expenses and real estate taxes, as such terms are defined in the Lease. However, the Company will make an additional payment each year if actual operating expenses exceed the budget.

The Company has a right, at its option and subject to the terms of the Lease, to extend the term of the Lease for one (1) five year period at a market rate. In addition, the Landlord has agreed to provide the Company with a right of first refusal to lease additional space if the Landlord desires to lease a portion of certain adjacent premises.

Workers Compensation


13




We accrue workers compensation expense based on claims submitted, applying actuarial loss development factors to estimate the costs incurred but not yet recorded. Our accrued liability for claims development for the periods ended June 30, 2015 and September 30, 2014 was $1.1 million and $0.8 million, respectively.

Legal Proceedings
 
As a commercial enterprise and employer, the Company is subject to various claims and legal actions in the ordinary course of business. These matters can include professional liability, employment-relations issues, workers’ compensation, tax, payroll and employee-related matters, other commercial disputes arising in the course of its business, and inquiries and investigations by governmental agencies regarding our employment practices or other matters. The Company is not aware of any pending or threatened litigation that it believes is reasonably likely to have a material adverse effect on its results of operations, financial position or cash flows.

Collective Bargaining Agreement

Union representation has been certified for non-management employees at our Chicago location. The Company and the union have entered into collective bargaining discussions.  Management does not expect this agreement to materially impact results of operations in the future.

12.   Equity and Convertible Debentures Financing
 
Repurchases of Securities

On September 18, 2013, the Company announced that our Board of Directors authorized a stock repurchase program (the Program) under which we could repurchase up to $350 thousand of shares of our common stock through open market transactions in compliance with Securities and Exchange Commission Rule 10b-18, privately negotiated transactions, or other means. This repurchase program does not have an expiration date.

The following table provides certain information with respect to the status of our publicly announced stock repurchase program as of third quarter ended June 30, 2015:
Period
 
Total Number
of Shares
Purchased
 
Average Price
Paid Per Share
 
Total Number of
Shares Purchased As Part of Publicly
Announced Programs
 
($ in thousands) Value of Shares that May Yet Be Purchased Under the Plan or Program
First quarter total
 
1,353

 
$
1.98

 
 
1,353

 
 
 
$
256

 
Second quarter total
 
76,600

 
$
2.25

 
 
76,600

 
 
 
$
85

 
April 2015
 
3,907

 
$
2.03

 
 
3,907

 
 
 
$
77

 
May 2015
 

 

 
 

 
 
 
$
77

 
June 2015
 

 

 
 

 
 
 
$
77

 
Third quarter total
 
3,907

 
$
2.03

 
 
3,907

 
 
 
$
77

 


Convertible Debentures Financing

As has been previously disclosed, certain entities affiliated with Wynnefield Capital, Inc., the Company’s largest stockholder, owned convertible debentures in an aggregate principal amount of $350 thousand and warrants to purchase an aggregate of 53,846 shares of common stock. These instruments were issued pursuant to a debenture purchase agreement in June 2011. The warrants were exercisable at a price of $0.96 until June 2016 and the conversion rate of the convertible debentures was $1.25.

Upon maturity on October 28, 2013, the principal amount of $210 thousand of convertible debentures was converted into $168 thousand shares of common stock and the principal amount of $140 thousand on the remaining debenture was repaid in full. In addition, in October 2013, the holders of the Warrants exercised such Warrants in full for 53,846 shares of common stock. A gain of $119 thousand was recognized, which represented the change in the fair value of the derivative immediately prior to

14




conversion. Additionally, expense of $20 thousand was recorded in the three months ended December 31, 2013, related to fair valuation of the warrants. The accrued liability of $61 thousand with respect to the fair value of the warrants was reflected as additional paid in capital upon their exercise. The shares of the Company’s common stock issued upon conversion of the debentures were issued in reliance on the exemption from registration provided by Section 3(a)(9) of the Securities Act of 1933, as amended. The shares of the Company’s common stock issued upon exercise of the warrants were issued in reliance on the exemption from registration provided by Section 4(a)(2) of the Securities Act of 1933, as amended.

13. Subsequent Events:

Management has evaluated subsequent events through the date that the Company's financial statements were issued. Based on this evaluation, the Company has determined that no subsequent events have occurred which require disclosure through the date that these financial statements were issued.


ITEM 2:  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
Forward Looking and Cautionary Statements
 
You should read the following discussion in conjunction with the Consolidated Financial Statements and the notes to those statements included elsewhere in this Quarterly Report on Form 10-Q, as well as our Annual Report on Form 10-K for the year ended September 30, 2014. This Quarterly Report on Form 10-Q contains certain statements that are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. Certain statements contained in this Management’s Discussion and Analysis are forward-looking statements that involve risks and uncertainties. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances are forward-looking statements. The forward-looking statements are not historical facts, but rather are based on current expectations, estimates, assumptions and projections about our industry and business. Our actual results could differ materially from the results contemplated by these forward-looking statements due to a number of factors, including those discussed in other sections of this Quarterly Report on Form 10-Q and in our 2014 Annual Report on Form 10-K.
 
Forward Looking Strategic Overview

DLH’s strategic plan is to expand our proven health services and solutions within the growing Federal health field. Primary growth markets include mission-critical agency requirements (including, but not limited to, those of DoD and VA), such as:
 
behavioral health;
telehealth services;
medication therapy management;
health IT solutions;
process management;
case management;
clinical systems support; and
healthcare delivery.

Our business expansion capture initiatives include:

DLH differentiators: Leverage our differentiation tools and technology to deliver high-value performance in partnership with and in support of customers, teams, and end-users including:

DLH ePRAT™ – a web-based, open-architecture, secure system to manage expert delivery and resourcing of the “continuum of care requirements” for combatants, veterans, and retirees. Designed to meet HIPAA, CCAC, CARF, FISMA, NIST requirements

DLH SPOT-m™ – a unique approach to integration of people, processes, and technology tools to measure, manage and optimize our performance at project or enterprise levels.

New contract vehicles: Expand our indefinite delivery/indefinite quantity (IDIQ) contract vehicles with the Federal government to capture an increased share of Federal health spending. For example, DLH submitted a team-based bid on the opportunity to participate in the next generation of the Department of Veterans Affairs’ Transformation Twenty-

15




One Total Technology Program (T4NG). The T4NG IDIQ contract is focused mainly on management of the VA’s IT systems, health IT and telecoms. Multiple vendors are expected to share in the contract award, with a five-year base and optional five-year add-on. Winning a place on this contract would enable our team to bid on specific task orders as they are released by the DVA under the T4NG contract. The final award announcements are slated for December 2015, with period of performance expected to begin in July 2016.

Organic growth: Continue expansion through organic growth as a prime contractor by delivering quality services and cost effective solutions to our existing customers.

organic growth contributed to an 11% compound annual growth rate (CAGR) over the past two years, from $49.2 million for fiscal year 2012 to $60.5 million for fiscal 2014.

organic revenue growth continued during the first nine months of FY2015, increasing nearly 8.0% over the same prior year nine-month period.

Business development team: Continue to enhance our industry knowledge and expertise by adding resources with deep health industry experience. This point of focus includes nominations to our Board, our business development leadership team, and our strategic advisers.

Teaming partners: Expand our footprint in the key strategic health field by teaming with bid partners to leverage our expertise and processes to meet the growing need for treatment of service veterans and their families

Transformative growth: A longer-term initiative to selectively review and position ourselves for potential joint ventures or a strategic acquisition.

Business Overview

DLH provides services and solutions within two broad US Government markets: healthcare and logistics. Our offerings are segregated into two revenue streams: Healthcare Delivery Solutions and Logistics & Technical Services. Our services are provided to government agencies including the Department of Veteran Affairs, the Department of Defense, and other government clients.

The approximate percentage of revenue derived from our services and solutions are shown in the following table:

 
 
Nine Months Ended
 
Nine Months Ended
Revenue Stream
 
June 30, 2015
 
June 30, 2014
Healthcare Delivery Solutions
 
53%
 
52%
Medical Logistics & Technical Services
 
47%
 
48%

Healthcare Delivery Solutions

Healthcare Delivery Solutions provide a broad continuum of care for our nation's servicemen/women and veterans in various settings and facilities. These include Military Treatment Facilities (MTFs), Medical Centers, Community-based Outpatient Clinics (CBOCs), and Pharmacy Distribution Centers (including VA Consolidated Mail-order Outpatient Pharmacy). Key solutions offerings include medication therapy management, access to care for behavioral health and medication therapies, case management tools and services, and clinical device research and development. 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. As more and more federal and DoD programs increase their performance-based requirements, our workforce profile of medical talent and credentials will help us 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. 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.

Medical Logistics & Technical Services


16




Medical Logistics & Technical Services 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 our project personnel is diverse from operational unit level to systems and program office experience. Our core competencies include supply chain management, lifecycle management of medical devices, analytics and decision support systems and research studies and services. In addition, we provide program and project management, systems engineering and applicable information technology services, integrated logistics support (including operational systems), and readiness assessments.

Through competitively awarded contracts and task orders (including its LOGWORLD contract) DLH 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.

Forward Looking Business Trends
 
Our strategic business capture initiatives emphasize military and veterans requirements for telehealth services, behavioral healthcare, medication therapy management, health IT solutions, process management, clinical systems support, and healthcare delivery. We believe these business development priorities allow us to expand within what we consider to be top national priority programs and budget areas. We will continue to target programs and agencies that we believe are likely to maintain a large addressable long-term market, in line with the following business trends:

Federal health insurance spending: According to the U.S. Department of Health & Human Services (HHS.gov), Centers for Medicare & Medicaid Services (CMS.gov), national health insurance spending is expected to reach $5.16 trillion and comprise 19.3% of Gross Domestic Product (GDP) by 2023. The Federal health expenditure projections are expected to reach $1.65 trillion by 2023, growing at a 5.0% compound annual growth rate (CAGR) from an estimated $0.9 trillion in 2014.

Telehealth trends: In April, 2015, REACH Health, Inc. released their "2015 U.S. Telemedicine Industry Benchmark Survey" conducted during late 2014 and early 2015. Among the two hundred and thirty three healthcare executives, physicians, nurses and other professionals who participated in the survey, they found that: "With a growing population of aging and unhealthy individuals, coupled with increasing shortages of specialist physicians, telemedicine is evolving from a specialty offering to a mainstream service. Nearly 60 percent of survey participants noted telemedicine as their top priority or one of their highest priorities for their healthcare organizations."

Prescription drugs spending: The IMS Institute November 2014 study “Global Outlook for Medicines Through 2018”, states that global spending on medicines is forecast to reach nearly $1.3 trillion by 2018, an increase of about 30% over the 2013 level, driven by population growth, an aging population, and improved access in emerging markets. Of developed markets, the study indicates that the U.S. will see the largest per capita spending increase from 2013 to 2018.

Department of Veterans Affairs health spending trends: DLH continues to see critical need for expanded care within our sector of the federal government market. According to recent news releases, the number of veterans on wait lists to be treated is 50 percent higher than at the same time last year, attributed to increased demand from veterans for medical services, brought on by the opening of new centers and a combination of aging Vietnam veterans seeking care and the return of younger veterans from Iraq and Afghanistan.

As a result of rapidly expanding needs, the VA and Congress took measures in late July to redistribute budget allocations to assure adequate funding remains available to deliver key health services to veterans. While these actions are outside of the programs in which the Company is currently active, they indicate strong ongoing bipartisan support for VA operations.

Previously, the President of the United States and Congress implemented other measures further supporting VA funding initiatives, including:

In March 2015, the President of the United States proposed a 2016 Federal budget that includes:

$169 billion for the Department of Veterans Affairs
$73.5 billion in discretionary funding, largely for healthcare
increase of $5.2 billion, or 7.5% above 2015 enacted level
$1.2 billion to expand telehealth services


17




In December 2014 Congress approved and the President signed the "Budget of the United States Government, Fiscal Year 2015." Funding for the Department of Veterans Affairs (DVA) includes:

$65.3 billion in discretionary funding to provide needed care and other benefits to veterans and their families. In addition, the Budget includes $3.1 billion in estimated medical care collections, for a total budget authority of approximately $68.4 billion;

an additional $400 million investment in high priority capital projects to address critical safety issues, improve services, and meet increased demand for veterans’ services; and

addressing the VA claims backlog and improving the Department’s efficiency by investing $138.7 million in the Veterans Claims Intake Program, continuing to implement the paperless claims system, and undertaking additional efforts to provide faster and more accurate benefits claims processing and improve veterans’ access to benefits information.

This follows the Veterans Access, Choice, and Accountability Act of 2014 that was passed by both houses of Congress, and signed into law by President Obama on August 7, 2014. According to the Congressional Budget Office, the bill would result in net spending of roughly $10 billion from 2014 through 2024. Portions of the bill cover our addressable market of providing services to facilitate access to and quality of care for veterans.

DLH is encouraged by recent bipartisan and Pentagon support for our strategic addressable markets within the DoD and Department of Veterans Affairs. The DVA fiscal year 2014 - 2020 Strategic Plan includes the goal to enhance and develop trusted partnerships with the DoD and the private sector, among others. We believe that our operational efficiency and expertise is well aligned with the DVA strategic goals to manage and improve VA operations to deliver seamless and integrated support.

While there have been bipartisan calls to increase defense spending in 2015 and beyond, it remains likely that government discretionary spending will be constrained for several years to come. As with other companies operating in the federal government market, the possibility remains that one or more of our targeted programs could be cut back or terminated as a result of:

federal government budget deficits and the growing U.S. national debt increasing pressure on the U.S. government to reduce federal spending across all federal agencies together with associated uncertainty about the size and timing of those reductions;

cost cutting and efficiency initiatives, current and future budget reductions, continued implementation of Congressionally mandated automatic spending cuts, and other efforts to reduce U.S. government spending, which could cause clients to reduce or delay funding for orders for services;

shift to greater use of lowest priced technically acceptable contracting award approaches by governmental agencies resulting in greater pressure on margins; and

changes in the relative mix of overall U.S. government spending and areas of spending growth, with lower spending on homeland security, intelligence and defense-related programs as overseas operations end, and continued increased spending on cyber-security, advanced analytics, technology integration and healthcare.

Results for the three months ended June 30, 2015 and June 30, 2014
 
The following table summarizes, for the periods indicated, consolidated statements of income data expressed in dollars in thousands except for per share amounts, and as a percentage of revenue:

18




 
 
Three Months Ended
Consolidated Statement of Income:
 
June 30, 2015
 
June 30, 2014
 
Change
Revenue
 
$16,781
 
100.0
 %
 
15,692

 
100.0
 %
 
$
1,089

 
 %
Direct expenses
 
13,743

 
81.9
 %
 
13,384

 
85.3
 %
 
359

 
(3.4
)%
Gross margin
 
3,038

 
18.1
 %
 
2,308

 
14.7
 %
 
730

 
3.4
 %
General and administrative expenses
 
2,270

 
13.5
 %
 
2,013

 
12.8
 %
 
257

 
0.7
 %
Depreciation and amortization
 
5

 
 %
 
27

 
0.2
 %
 
(22
)
 
(0.2
)%
Income from operations
 
763

 
4.5
 %
 
268

 
1.7
 %
 
495

 
2.8
 %
Other income (expense), net
 
(34
)
 
(0.2
)%
 
(17
)
 
(0.1
)%
 
(17
)
 
(0.1
)%
Income before income taxes
 
729

 
4.3
 %
 
251

 
1.6
 %
 
478

 
2.7
 %
Income tax expense
 
292

 
1.7
 %
 

 
 %
 
292

 
1.7
 %
Net income
 
$
437

 
2.6
 %
 
$
251

 
1.6
 %
 
$
186

 
1.0
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
Earnings per share - basic
 
$
0.05

 
 
 
$
0.03

 
 
 
$
0.02

 
 
Earnings per share - diluted
 
$
0.04

 
 
 
$
0.03

 
 
 
$
0.01

 
 

Revenue
 
Fiscal year 2015 third quarter revenue was $16.8 million, an increase of $1.1 million or 6.9% over prior year third quarter. The increase in revenue is due primarily to contracts awarded in 2014 and expansion on existing contracts.
 
Direct Expenses
 
Direct expenses are generally comprised of direct labor (including benefits), taxes and insurance, workers compensation expense, and other direct costs. Fiscal year 2015 third quarter direct expenses increased $0.4 million, or 2.7% over prior year third quarter on higher revenue. As a percentage of revenue, direct expenses decreased (3.4)% due to improved contract performance.
  
Gross Margin
 
Fiscal year 2015 third quarter gross margin increased by $0.7 million, or 31.6%, over prior year. As a percentage of revenue, our gross margin rate of 18.1% improved 3.4% over prior year third quarter. Favorable margin results are due principally to improved contract performance and higher margins on new business.
  
General and Administrative Expenses
 
General and administrative (“G&A”) expenses primarily relate to functions such as operations overhead, corporate management, legal, finance, accounting, contracts administration, human resources, management information systems, and business development. Fiscal year 2015 third quarter G&A expenses increased $0.3 million over prior year third quarter, due principally to planned expenses related to managing and growing our contract base. As a percent of revenue, G&A expenses increased by 0.7% over prior year third quarter, and were within planned levels required to manage and continue to grow our contract base.

Depreciation and Amortization
 
As a professional services organization, DLH has not required significant expenditures on capital equipment and other fixed assets.

Income from Operations
 
Fiscal year 2015 third quarter income from operations of approximately $0.8 million increased approximately $0.5 million over the prior year period due to improved gross margin of $0.7 million offset by $0.3 million expenses as described above.
 
Other Income (Expense)
 

19




Fiscal year 2015 third quarter other expense of approximately $(34.0) thousand was principally due to interest expense and represents a variance of approximately $(17.0) thousand over the prior year period.

Income Tax Expense

The Company recognized tax benefit in the current period at its projected annual effective tax rate. Taxes payable related to current income have been offset by a portion of the deferred tax benefit derived from net operating losses carried forward.

Net Income
 
Fiscal year 2015 third quarter net income was approximately $0.4 million, or $0.05 per basic share and $0.04 per diluted share, compared to net income of $0.3 million or $0.03 per basic and diluted share in the prior year period due principally to improved gross margin, offset in part by additional administrative expenses needed to grow and operate the business.

Results for the nine months ended June 30, 2015 and June 30, 2014
 
The following table summarizes, for the periods indicated, consolidated statements of income data expressed in dollars in thousands except for per share amounts, and as a percentage of revenue:
 
 
Nine Months Ended
Consolidated Statement of Income:
 
June 30, 2015
 
June 30, 2014
 
Change
Revenue
 
$48,357
 
100.0
%
 
$
44,914

 
100.0
%
 
$
3,443

 
 %
Direct expenses
 
40,055

 
82.8
%
 
38,295

 
85.3
%
 
1,760

 
(2.5
)%
Gross margin
 
8,302

 
17.2
%
 
6,619

 
14.7
%
 
1,683

 
2.5
 %
General and administrative expenses
 
6,719

 
13.9
%
 
5,980

 
13.3
%
 
739

 
0.6
 %
Depreciation and amortization
 
45

 
0.1
%
 
80

 
0.2
%
 
(35
)
 
(0.1
)%
Income from operations
 
1,538

 
3.2
%
 
559

 
1.2
%
 
979

 
2.0
 %
Other income (expense), net
 
(723
)
 
%
 
23

 
0.1
%
 
(746
)
 
(0.1
)%
Income before income taxes
 
815

 
1.7
%
 
582

 
1.3
%
 
233

 
0.4
 %
Income tax expense
 
326

 
0.7
%
 

 
%
 
326

 
0.7
 %
Net income
 
$
489

 
1.0
%
 
$
582

 
1.3
%
 
$
(93
)
 
(0.3
)%
 
 
 
 
 
 
 
 
 
 
 
 
 
Earnings per share - basic
 
$
0.05

 
 
 
$
0.06

 
 
 
$
(0.01
)
 
 
Earnings per share - diluted
 
$
0.05

 
 
 
$
0.06

 
 
 
$
(0.01
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pro forma EPS without retroactive settlement*
 
 
 
 
 
 
 
 
 
 
 
 
Earnings per share - basic
 
$
0.09

 
 
 
$
0.06

 
 
 
$
0.03

 
 
Earnings per share - diluted
 
$
0.09

 
 
 
$
0.06

 
 
 
$
0.03

 
 
* Adjusted to reflect impact of settlement of retroactive payments. See reconciliation to GAAP EPS below.

Revenue
 
Fiscal year 2015 revenue for the nine months ended June 30, 2015 was $48.4 million, an increase of $3.4 million or 7.7% over prior year period. The increase in revenue is due primarily to contracts awarded in 2014 and expansion on existing contracts.
 
Direct Expenses
 
Direct expenses are generally comprised of direct labor (including benefits), taxes and insurance, workers compensation expense, and other direct costs. Fiscal year 2015 direct expenses for the nine months ended June 30, 2015 were $40.1 million, an increase of $1.8 million, or 4.6% over prior year on higher revenue. As a percentage of revenue, direct expenses decreased by (2.5)% due to improved contract performance.
  
Gross Margin

20




 
Gross margin for the nine months ended June 30, 2015 was approximately $8.3 million, an increase of $1.7 million, or 25.4%, over prior year. As a percentage of revenue, our gross margin rate of 17.2% for the nine months ended June 30, 2015 improved by 2.5% over prior year period. Favorable margin results are due principally to improved contract performance and higher margins on new business.
  
General and Administrative Expenses
 
General and administrative (“G&A”) expenses primarily relate to functions such as operations overhead, corporate management, legal, finance, accounting, contracts administration, human resources, management information systems, and business development. Fiscal year 2015 G&A expenses for the nine months ended June 30, 2015 were approximately $6.7 million, an increase of $0.7 million over prior year period, due principally to planned expenses related to managing and growing our contract base. As a percent of revenue, G&A expenses increased by 0.6% over prior year period, and were within planned levels required to manage and continue to grow our contract base.

Depreciation and Amortization
 
As a professional services organization, DLH has not required significant expenditures on capital equipment and other fixed assets.

Income from Operations
 
Income from operations for the nine months ended June 30, 2015 was approximately $1.5 million, an increase of approximately $1.0 million over the prior year period due to improved gross margin of $1.7 million offset by $0.7 million increased G&A expenses as described above.
 
Other Income (Expense)
 
For the nine months ended June 30, 2015, other expense of approximately $(0.7) million was principally due to the settlement of the retroactive payment claim and represents a variance of approximately $(0.7) million over the prior year period. For further information see "Retroactive Payment Claim" below.

Income Tax

The Company recognized tax expense in the current period at its projected annual effective tax rate. Taxes payable related to current income have been offset by a portion of the deferred tax benefit derived from net operating losses carried forward.

Net Income
 
Net income for the nine months ended June 30, 2015 was approximately $0.5 million, or $0.05 per basic and diluted share, compared to $0.6 million or $0.06 per basic and diluted share in the prior year period, due principally to the other expense in fiscal year 2015 third quarter. Excluding the non-cash, non-operating charge of $0.6 million ($0.4 million after-tax) related to the settlement of the retroactive payment claim, the nine months ended June 30, 2015 generated net income of $0.9 million, compared to net income of $0.6 million in the prior year period.

Reconciliation of GAAP Net Income and EPS to Pro Forma Net Income and EPS:

Resolution of the retroactive payment claim resulted in a non-cash, non-operating charge that reduced our accounts receivables by $9.3 million and our accounts payable by $8.7 million for a net charge to earnings of approximately $0.6 million ($0.4 million after-tax) for the nine months ended June 30, 2015. Management believes that showing net income and earnings per share (EPS) before the impact of the settlement of the retroactive payment claim allows for a consistent comparison of the Company’s operating performance between periods. A reconciliation of pro forma net income (in thousands) and pro forma EPS with GAAP net income (in thousands) and EPS is as follows:

21




 
 
Three Months Ended
 
Nine Months Ended
 
 
 
June 30,
 
June 30,
 
 
 
2015
 
2014
 
2015
 
2014
 
Net Income
 
$
437

 
$
251

 
$
489

 
$
582

 
Adjustment for retroactive payment claim, net
 

 

 
377

 

 
Pro Forma Net Income
 
$
437

 
$
251

 
$
866

 
$
582

 
 
 
 
 
 
 
 
 
 
 
EPS, fully diluted
 
$
0.04

 
$
0.03

 
$
0.05

 
$
0.06

 
Adjustment for retroactive payment claim, net
 
$

 
$

 
$
0.04

 
$

 
 Pro forma EPS, fully diluted
 
$
0.04

 
$
0.03

 
$
0.09

 
$
0.06

 

Other Data
 
We use Earnings Before Interest Tax Depreciation and Amortization (“EBITDA”) adjusted for other non-cash charges (“Adjusted EBITDA”), as a supplemental non-GAAP measure of our performance. We define Adjusted EBITDA as net income plus (i) interest and other expenses, net, (ii) provision for or benefit from income taxes, if any, (iii) depreciation and amortization, and (iv) G&A expenses — equity grants. This non-GAAP measure of our performance is used by management to conduct and evaluate its business during its regular review of operating results for the periods presented. Management and the Company’s Board utilize this non-GAAP measure to make decisions about the use of the Company’s resources, analyze performance between periods, develop internal projections and measure management performance. We believe that this non-GAAP measure is useful to investors in evaluating the Company’s ongoing operating and financial results and understanding how such results compare with the Company’s historical performance. By providing this non-GAAP measure, as a supplement to GAAP information, we believe we are enhancing investors’ understanding of our business and our results of operations. This non-GAAP financial measure is limited in its usefulness and should be considered in addition to, and not in lieu of, US GAAP financial measures. Further, this non-GAAP measure may be unique to the Company, as it may be different from the definition of non-GAAP measures used by other companies. A reconciliation of Adjusted EBITDA with net income is as follows, shown in dollars in thousands: 
 
 
Three Months Ended
 
Nine Months Ended
 
 
 
June 30,
 
June 30,
 
 
 
2015
 
2014
 
Change
 
2015
 
2014
 
Change
 
Net income
 
$
437

 
$
251

 
$
186

 
$
489

 
$
582

 
$
(93
)
 
(i) Interest and other (income) expenses (net)
 
34

 
17

 
17

 
723

 
(23
)
 
746

 
(ii) Provision for taxes
 
292

 

 
292

 
326

 

 
326

 
(iii) Depreciation and amortization
 
5

 
27

 
(22
)
 
45

 
80

 
(35
)
 
(iv) G&A expenses - equity grants
 
72

 
78

 
(6
)
 
418

 
372

 
46

 
 EBITDA adjusted for other non-cash charges
 
$
840

 
$
373

 
$
467

 
$
2,001

 
$
1,011

 
$
990

 

EBITDA adjusted for other non-cash charges for the three and nine months ended June 30, 2015 was approximately $0.8 million and $2.0 million, respectively, an increase of approximately $0.5 million and $1.0 million over the prior year three and nine months period, respectively. This increase is due principally to increased revenue and gross margin as described in the preceding paragraphs.  

Liquidity and Capital Resources

Economic dependency 

Presently, the Company derives all of its revenue from agencies of the federal government. A major customer is defined as a customer from whom the Company derives at least 10% of its revenues. In each of the fiscal quarters ended June 30, 2015 and 2014, revenue from the U.S. Government accounted, either directly or indirectly, for 100% of the Company’s total revenue. Within the U.S. Government, our largest customer continues to be the Department of Veterans Affairs (DVA), at 95% and 97% of revenue for the nine months ended June 30, 2015 and 2014, respectively.


22




DLH remains dependent upon the continuation of its relationship with the DVA. As of June 30, 2015, awards from the DVA have anticipated periods of performance ranging from approximately one to up to three years. These agreements are subject to the Federal Acquisition Regulations. While there can be no assurance as to the actual amount of services that the Company will ultimately provide to the DVA under its current contract, we believe that our strong working relationship and our effective service delivery support ongoing performance for the contract term. The Company's results of operations, cash flows and financial condition would be materially adversely affected in the event that we were unable to continue our relationships with the DVA.

Cash position at June 30, 2015

For the nine months ended June 30, 2015, the Company generated operating income of $1,538 thousand and net income of approximately $489 thousand.

Our cash position has significantly improved during the nine months ended June 30, 2015. Selected sources and uses of cash are shown in the table below, (amounts in millions):
 
 
 
Nine Months Ended
 
Ref
 
06/30/15
Cash and cash equivalents
(a)
 
$4.7
Borrowing on line of credit
(b)
 
$0.0
Line of credit availability
(c)
 
$2.5
Adjusted EBITDA
(d)
 
$0.8
Cash flows from operating activities
(e)
 
$1.2
Cash flows used in investing activities
(f)
 
$(0.2)
Working capital (current assets minus current liabilities)
(g)
 
$1.6

Ref (a): At June 30, 2015, the Company had cash deposits on hand of approximately $4.7 million.

Ref (b): The Company had no borrowing on our line of credit during the third quarter ended June 30, 2015.

Ref (c): At June 30, 2015, our available loan reserves were approximately $2.5 million, comprised of approximately $1.4 million in stand by letter of credit reserve and $1.1 million of unused loan capacity.

Ref (d): Adjusted EBITDA of approximately $0.8 million represents income from operations before reductions for non-cash operating expenses and depreciation.

Ref (e): Cash flows from operating activities increased $1.2 million in third quarter 2015 due principally to adjusted EBITDA results.

Ref (f): Cash flows used in investing activities was approximately $(169) thousand for the nine months ended June 30, 2015, due principally to investments in IT infrastructure.

Ref (g): We had approximately $1.6 million in working capital at June 30, 2015, an improvement of $0.9 million for the nine months ended June 30, 2015 due principally to profitable operations.

Sources of cash and cash equivalents

The Company's immediate sources of liquidity include cash and cash equivalents, accounts receivable, and access to its asset-based credit facility. As described in greater detail below, presently, this credit facility provides us with access of up to $3 million, with provisions to increase to $6 million, subject to certain conditions. The Company's present operating liabilities are largely predictable and consist of vendor and payroll related obligations. The Company's operations may require working capital to fund the future growth of its business model with cash required to commence new contracts, expanded business development efforts, and planned capital expenditures to support a larger customer base. In recent years, the Company has sought to finance its growing operations and capital expenditures through the sale of equity securities, convertible notes, and a rights offering. Such measures may be considered in the future if needed to fund business growth initiatives.

23





Management's assessment of cash and cash equivalents at June 30, 2015

Management believes, at present, that: (a) cash and cash equivalents of approximately $4.7 million as of June 30, 2015; (b) the amount available under its line of credit (which is limited to the amount of eligible assets); and (c) planned operating cash flow should be sufficient to support the Company's operations for twelve months from the date of these financial statements.

Loan Facility

On July 29, 2010, DLH Solutions entered into a Loan and Security Agreement (the “Loan Agreement”), as amended, with Presidential Financial Corporation (the “Lender”). Under the Loan Agreement, the Lender agreed to provide an initial two (2) year secured loan facility with renewal options to DLH Solutions. The current term of the Loan Agreement expires on July 29, 2016 and thereafter shall automatically renew on each anniversary date thereof for subsequent twelve month terms unless terminated by either party. The current available line of credit maximum amount is $6 million, with an unbilled accounts facility of the Loan Agreement currently set at a maximum of $1 million. Presently, the maximum availability under this loan facility is $3 million, subject to eligible accounts receivable. The Company’s ability to borrow against the increased available credit, however, is subject to the satisfaction of certain conditions, including (i) the Company's (a) demonstrated need for the increase and (b) compliance with the Loan Agreement, and (ii) the Lender’s consent, in its sole discretion, to increase the Initial Sublimit.

In December 2013, the Loan Agreement was further modified to permit letters of credit to be issued under the overall credit facility, subject to availability provided by eligible billed and unbilled accounts receivable and further subject to a limit of $1.03 million. This limit was increased to $1.35 million effective May 15, 2014, with an expiration date of May 15, 2015 that will automatically extend for additional one-year periods unless either party provides written notice of non-renewal within 60 days of the annual expiration date. At June 30, 2015, available loan reserves were $2.5 million and there was no loan amount outstanding.

In March 2014, the Company further amended the Loan Agreement (the “Sixth Amendment”) pursuant to which the Lender agreed to reduce the interest rate and certain of the service fees and reduce the scope of the early termination fee.

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 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. Unbilled accounts receivable are subject to a sub-facility limit of $1 million and an advance rate of 75%. The loan is secured by a security 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 foregoing (including proceeds of any insurance policies and claims against third parties for loss of any of the foregoing) and all books and records related thereto. 

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) incur debt or enter into transactions 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) pay or declare any dividends or other distributions; or (vii) redeem, retire or purchase any of our equity interests exceeding $50,000 or repay other outstanding indebtedness. Either party may terminate the Loan Agreement at any time upon 60 days written notice and the Loan Agreement provides for customary events of default following which the Lender may, at its option, immediately terminate the loan agreement and accelerate the repayment of any amount outstanding. At present, the Company has not experienced, and the financial institution has not declared, an event of default.

Payroll Taxes
 
From 2006 through 2009, DLH received notices from the Internal Revenue Service (“IRS”) claiming taxes, interest and penalties due related to payroll taxes. These notices are predominantly related to the former PEO operations which were sold in fiscal 2003. DLH 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

24




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. DLH has also received notices from the Social Security Administration claiming variances in wage reporting compared to IRS transcripts. DLH believes the notices from the Social Security Administration are directly related to the IRS notices received. DLH 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. The remaining liability (approximately $1.5 million at June 30, 2015 and September 30, 2014) has been recorded in accrued expenses and other current liabilities and includes estimated accrued penalties and interest totaling approximately $0.7 million.

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 may 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 estimate what, if any, additional amount(s) may be claimed in the future, given the uncertain timing and nature of any future settlement negotiations. No payments were made in fiscal 2015 and 2014. 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. The Company's intention is that it will in due course seek to negotiate a mutually satisfactory payment plan with the IRS, but there is no assurance that it would be successful in doing so and the Company's future cash flows and liquidity could therefore be materially affected by this matter.

Retroactive Payment Claim

As previously reported, during the fiscal year ended September 30, 2008, DLH Holdings Corp. (the “Company”) accrued salaries and benefits of $10.1 million related to the estimated resolution of retroactive payment cases asserted by the Department of Labor (“DOL”). During the same period, the Company recognized revenues of $10.8 million related to expected recovery of these costs, plus estimated indirect costs, under contractual arrangements with the Department of Veterans Affairs (“DVA”). At September 30, 2014, 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, 2014.
 
In September 2014, we submitted a claim to the DVA seeking a final determination and resolution of this matter. During the current quarter, we were advised that the DOL would not take further action with respect to the retroactive payment cases and that it would not object to the DVA’s resolution of this matter with the Company. As a result, we will not have any obligation for the payment of these accrued salaries and benefits. Because no retroactive wage payments will be required, we will not have any contractual recovery of costs from the DVA. Accordingly, in order to resolve this matter, on March 30, 2015, we entered into a mutual release of claims with the DVA, pursuant to which both parties agreed to fully release each other from any and all claims arising pursuant to this matter.

As a result of the closure of this issue, as a part of our reporting for the quarter ended March 31, 2015, we removed the accruals of estimated revenue and expense which were recorded in the year ended September 30, 2008. Further, as shown in the table below, we reported a net charge to our earnings of approximately $629 thousand relating to the net expense resulting from the resolution of this matter. The net expense related to this issue was non-cash and not related to income from current operations. The pre-tax impact of these adjustments to our Consolidated Statement of Income is summarized as:
 
 
(in thousands)


Reduction of accounts receivable related to retroactive payment claim
 
$
(9,306
)
Reduction of accrued payroll related to retroactive wage and benefit payments    
 
8,677

Net other (expense)
 
$
(629
)

The unaudited pro forma financial information below reflects the impact of this event to our Consolidated Balance Sheet as of September 30, 2014, the comparable period for balance sheets in the current fiscal year reporting periods.


25





DLH HOLDINGS CORP. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED BALANCE SHEET
(Amounts in thousands except par value of shares)
 
 
 
As Filed
 
 
 
Pro forma
 
 
September 30,
2014
 
Current Report
 
September 30,
2014
ASSETS
 
 
 
 
 
 

Current assets:
 
 
 
 
 
 

Cash and cash equivalents
 
$
3,908

 
 
 
$
3,908

Accounts receivable, net
 
12,372

 
$
(9,306
)
 
3,066

Deferred taxes, net
 
84

 
 
 
84

Other current assets
 
510

 
 
 
510

Total current assets
 
16,874

 
(9,306
)
 
7,568

Equipment and improvements, net
 
63

 
 
 
63

Deferred taxes, net
 
4,513

 
 
 
4,513

Goodwill
 
8,595

 
 
 
8,595

Other long-term assets
 
27

 
 
 
27

Total assets
 
$
30,072

 
$
(9,306
)
 
$
20,766

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
 
 

Current liabilities:
 
 
 
 
 
 

Accrued payroll
 
$
11,465

 
$
(8,677
)
 
$
2,788

Accounts payable, accrued expenses, and other current liabilities
 
4,746

 
 
 
4,746

Total current liabilities
 
16,211

 
(8,677
)
 
7,534

Other long term liabilities
 
15

 
 
 
15

Total liabilities
 
16,226

 
(8,677
)
 
7,549

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 9,568 and outstanding 9,566 at September 30, 2014
 
10

 
 
 
10

Additional paid-in capital
 
76,083

 
 
 
76,083

Accumulated deficit
 
(62,244
)
 
(629
)
 
(62,873
)
Treasury stock, 2 shares at cost at September 30, 2014
 
(3
)
 
 
 
(3
)
Total shareholders’ equity
 
13,846

 
(629
)
 
13,217