DLH Holdings Corp. — FY 2012 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended September 30, 2012, with comparison to FY 2011. DLH provides healthcare, logistics and technical, and contingency/staff augmentation services to U.S. government agencies, primarily the Department of Veterans Affairs (DVA) and Department of Defense. The company changed its name from TeamStaff, Inc. to DLH Holdings Corp. in June 2012. The filing also presents quarterly results, including FY 2012 Q4.
Financial performance and position
| Metric | FY 2012 / year-end | FY 2011 / comparison |
|---|---|---|
| Revenue | $49.2 million | $41.9 million; up 17.4% |
| Gross profit / margin | $5.6 million / 11.4% | $5.9 million / 14.1% |
| Operating loss | $2.2 million | $4.2 million |
| Net loss | $2.0 million; $0.29 per share | $4.3 million; $0.79 per share |
| Adjusted EBITDA | $(1.7) million | $(1.1) million |
| Cash from operations | $(2.8) million | $(1.0) million |
| Cash and cash equivalents | $3.1 million at year-end | $0.8 million |
| Net working capital | $(1.5) million | Not clearly stated in the filing text |
| Bank borrowing | $2.36 million outstanding; $344,000 unused availability | $0.74 million outstanding |
| Total liabilities / equity | $18.7 million / $7.8 million | $16.4 million / $5.6 million |
Revenue growth reflected new awards and increased work on existing contracts, particularly in healthcare. Direct expenses rose faster than revenue, compressing gross margin by 2.7 percentage points; management attributed this mainly to lower average unit pricing in a competitive market. G&A expense was $7.36 million, broadly similar to the prior year excluding FY 2011’s $2.6 million trademark impairment. FY 2012 results also included a $486,000 gain from settling a note payable. FY 2011 included a $270,000 discontinued-operation gain and the non-cash $2.6 million impairment charge.
FY 2012 Q4 revenue was $12.5 million, gross profit $1.1 million, operating loss $752,000, and net loss $354,000. The quarter’s net result included the settlement gain.
Material changes and financing
- Revenue increased 17.4%, but gross profit declined 5.1% and adjusted EBITDA losses widened, indicating that growth did not translate into stronger underlying profitability.
- Cash used in operations increased to $2.8 million, principally due to higher receivables and other assets. Financing activities provided $5.2 million, including approximately $4.2 million gross proceeds from a June 2012 rights offering and increased revolver borrowings.
- The rights offering issued 3.23 million shares at $1.30 per share, increasing outstanding shares from about 6.0 million to 9.3 million and diluting existing holders. Wynnefield-affiliated entities purchased 2.84 million shares.
- The lender agreed to a facility maximum of $6 million, but access to the higher amount was conditional; the effective borrowing sublimit was $3 million at year-end and availability depended on eligible receivables and lender requirements. The facility is secured by substantially all DLH Solutions assets and has restrictive covenants.
- Backlog was approximately $153 million, down from $160 million a year earlier, including $65 million funded and $88 million unfunded. Backlog is not guaranteed revenue and depends on funding, orders, and options.
Outlook, risks, contingencies, and unusual items
- Outlook: The filing provides no quantified revenue or earnings guidance. Management said it believed available cash, forecast operating cash flow, conditional credit availability, cost initiatives, and expected collections could fund operations for the next 12 months. That assessment depended in part on the non-payment or non-cash settlement of certain contested or guaranteed liabilities; management warned that failure of assumptions could require further cost cuts or capital raising.
- Customer concentration: All revenue came directly or indirectly from the U.S. Government; the DVA represented 95% of FY 2012 revenue. One DVA agreement with a ceiling of up to $145 million represented about 51% of revenue; other DVA work representing approximately 44% had order coverage through September 2013. Contract ceilings and backlog do not ensure orders or funding.
- Federal budget and competition: Management cited award and funding delays, continuing-resolution uncertainty, possible sequestration, constrained discretionary spending, increased low-price/technically-acceptable procurement, and pressure on contract margins. It did not expect cancellation of major programs but acknowledged possible reductions or terminations.
- Liquidity and collections: The company used cash in operations and had only $344,000 of unused revolver availability at year-end. A $9.3 million unbilled DVA receivable related to prior-period wage adjustments remained outstanding, with $8.7 million of related accrued salary and benefits. Management expected billing and collection during FY 2013, but timing was not assured.
- Legal and tax matters: The company was reviewing a U.S. Attorney allegation of Service Contract Act prevailing-wage underpayments for 2003–2010 and could not determine the merits or potential impact. It also recorded a $1.3 million liability for disputed historical payroll-tax notices, including approximately $500,000 of estimated interest and penalties; no payments had been made in FY 2012 or FY 2011.
- Other exposures: Goodwill was $8.6 million, with no impairment recorded in FY 2012; future contract losses or adverse business changes could trigger a material write-off. The company reported a $67.4 million accumulated deficit and a full valuation allowance against deferred tax assets. The $350,000 convertible debentures bear 10% interest and mature in FY 2014; their conversion feature and warrants create dilution and fair-value volatility.
- Controls and audit: Management concluded disclosure controls and internal control over financial reporting were effective at September 30, 2012. The independent auditor gave an unqualified opinion on the financial statements; no auditor attestation of internal controls was included, as permitted for a smaller reporting company.
Important facts for investors to verify
- Whether the $9.3 million unbilled DVA receivable was approved, billed, and collected, and whether the associated employee liabilities were paid.
- Renewal, funding, and task-order activity for DVA work—especially contracts representing approximately 95% of FY 2012 revenue—and the conversion of unfunded backlog into funded work.
- Current revolver availability, covenant compliance, lender renewal or termination rights, and the status of conditions required to access increased borrowing capacity.
- Resolution and cash cost of the Service Contract Act wage claim and historical payroll-tax assessments.
- Whether margins, operating cash flow, and profitability improved after FY 2012, and whether the reported 12-month liquidity assumptions were realized.
- Share dilution from the rights offering, options, warrants, and convertible debentures, as well as any subsequent changes in controlling shareholder ownership.