DLH HOLDINGS CORP. 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 endedSeptember 30, 2021 , and in other reports we have subsequently filed with theSEC . This Quarterly Report on Form 10-Q contains certain statements that are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. Certain statements contained in this Management's Discussion and Analysis are forward-looking statements that involve risks and uncertainties. Any statements that refer to expectations, projections or other characterizations of future events or circumstances or that are not statements of historical fact (including without limitation statements to the effect that the Company or its management "believes", "expects", "anticipates", "plans", "intends" and similar expressions) should be considered forward looking statements that involve risks and uncertainties which could cause actual events or DLH's actual results to differ materially from those indicated by the forward-looking statements. Forward-looking statements in this report include, among others, statements regarding benefits of the acquisition, estimates of future revenues, operating income, earnings, earnings per share, backlog, and cash flows. These statements reflect our belief and assumptions as to future events that may not prove to be accurate. Our actual results may differ materially from such forward-looking statements made in this report due to a variety of factors, including: the ongoing impact of the novel coronavirus ("COVID-19") pandemic, including the measures to reduce its spread, and its impact on the economy and demand for our services, are uncertain, cannot be predicted, and may precipitate or exacerbate other risks and uncertainties; the risk that we will not realize the anticipated benefits of an acquisition; the challenges of managing larger and more widespread operations resulting from the acquisition; contract awards in connection with re-competes for present business and/or competition for new business; compliance with new bank financial and other covenants; changes in client budgetary priorities; government contract procurement (such as bid and award protests, small business set asides, loss of work due to organizational conflicts of interest, etc.) and termination risks; the ability to successfully integrate the operations of future acquisitions; and other risks described in ourSEC filings. For a discussion of such risks and uncertainties which could cause actual results to differ from those contained in the forward-looking statements, see "Risk Factors" in the Company's periodic reports filed with theSEC , including our Annual Report on Form 10-K for the fiscal year endedSeptember 30, 2021 , as well as interim quarterly filings thereafter. The forward-looking statements contained herein are not historical facts, but rather are based on current expectations, estimates, assumptions and projections about our industry and business. Such forward-looking statements are made as of the date hereof and may become outdated over time. The Company does not assume any responsibility for updating forward-looking statements. Business and Markets OverviewDLH Holdings Corp. is a provider of technology-enabled business process outsourcing and program management solutions, and public health research and analytics offerings. We are primarily focused on improving and better deploying large-scale federal health and human service initiatives. The Company derives 99% of its revenue from agencies of the Federal government, providing services to several agencies including theDepartment of Veteran Affairs ("VA"),Department of Health and Human Services ("HHS"), and theDepartment of Defense ("DoD"). Incorporated inNew Jersey in 1969, the Company contracts with its government customers through its subsidiaries. In recent years, we have successfully completed acquisitions to increase future organic growth, diversify our customer base, and to expand into adjacent markets. OnJune 7, 2019 we acquiredSocial & Scientific Systems, Inc. ("S3") and onSeptember 30, 2020 , we acquiredIrving Burton Associates, LLC ("IBA").
Our business offerings are aligned to three market focus areas within the federal health services market space.
•Defense and Veteran Health Solutions;
•Human Services and Solutions;
•Public Health and Life Sciences;
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The following table summarizes the revenues by market for the three months ended
Three Months Ended
December 31,
2021 2020
Revenue Percent of total Revenue Percent of total
(in thousands) revenue revenue
Human Services and Solutions $ 99,349 65.0 % $ 7,439 12.9 %
Defense and Veteran Health Solutions 36,689 24.0 % 34,872 60.2 %
Public Health and Life Sciences 16,763 11.0 % 15,541 26.9 %
Total Revenue $ 152,801 100.0 % $ 57,852 100.0 %
Position and Distribution of
The markets in which we compete and the manner in which we are positioned within them are characterized by a number of features including, but not limited to:
•specialized credentials and licenses held by a substantial component of our employee base;
•prime contractor position in contracts representing 96% of our revenue for the
three months ended
•strong past performance record, as evidenced by ourVA customer scoring among the highest in overall satisfaction in the J.D. Power National Pharmacy Study over recent years; and
•targeted expansion in critical national priority markets with Federal budget stability and strong bipartisan support
We operate primarily through prime contracts awarded by the government through competitive bidding processes. We have a diverse mix of contract vehicles with various agencies of the United States Government, which supports our overall corporate growth strategy. Our revenue for the three months endedDecember 31, 2021 is distributed to time and materials contracts (87%), cost reimbursable contracts (7%) and firm fixed price contracts (6%). We provide services under Indefinite Duration, Indefinite Quantity ("IDIQ") and government wide acquisition contracts, such asGeneral Services Administration ("GSA") schedule contracts. The Company currently holds multiple GSA schedule contracts under which we provide services that constitute a significant percentage of our total revenue. These Federal contract schedules are renewed on a recurring basis for a multi-year period. Major Customers A major customer is defined as a customer from whom we derive at least 10% of our revenues. The following table summarizes the revenues by customer for the three months endedDecember 31, 2021 and 2020, respectively: Three Months Ended December 31, 2021 2020 Revenue Percent of total Revenue Percent of total (in thousands) revenue revenue Department of Homeland Security$ 91,328 59.8 %$ 172 0.3 % Department of Veterans Affairs 28,193 18.5 % 27,642 47.8 % Department of Health and Human Services 23,126 15.1 % 20,163 34.9 % Department of Defense 8,495 5.6 % 6,980 12.0 % Other customers with less than 10% share of total revenue 1,659 1.0 % 2,895 5.0 % Total Revenue$ 152,801 100.0 %$ 57,852 100.0 % 21
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Major Contracts
The revenue attributable to theVA was derived from 16 separate contracts covering the Company's performance of pharmacy and logistics services in support of theVA's Consolidated Mail Outpatient Pharmacy ("CMOP") program. Nine contracts for pharmacy services, which represent revenues of approximately$15.6 million and$15.9 million for the three months endedDecember 31, 2021 and 2020, are currently operating under a bridge contract throughOctober 2022 . As previously reported, a single renewal request for proposal ("RFP") had been issued for the nine (9) pharmacy contracts that required the prime contractor be a service-disabled veteran owned small business ("SDVOSB"), which would have precluded us from bidding on the RFP as a prime contractor. We had joined a SDVOSB team as a subcontractor to respond to this RFP. However, the government has canceled the previously issued RFP for these contracts. The government has neither indicated nor announced its future procurement strategy. Due to the time required to conduct a procurement process, we expect these contracts to be further extended. The remaining seven contracts for logistics services, which represent approximately$12.6 million and$11.8 million of revenues for the three months endedDecember 31, 2021 and 2020. InApril 2021 , we were awarded a follow-on contract to provide medical logistics to theVA's CMOP program. The contract award was protested and subsequently canceled during the third quarter of fiscal year 2021. The contract award was canceled in accordance with procurement requirements to allow the government sufficient time to address administrative concerns raised in the protest about the procurement process. Once the government completes this process, we expect to be awarded a new contract. In the interim, the existing contract under which we have been operating has been extended throughNovember 2022 .
The Company's contract with HHS in support of its
As previously announced, we were awarded two short-term task orders under aFEMA contract to provide support for states seeking temporary medical staffing support and COVID-19 related community testing, vaccination and therapy. Those contracts generated$91.1 million of revenue for the three months endedDecember 31, 2021 . The contract to support COVID-19 related community testing, vaccination and therapy completed performance ended onDecember 31, 2021 . The contract to provide temporary medical staffing support has been extended throughMarch 20, 2021 , though it is expected to generate substantially lower revenue in fiscal 2022 second quarter than in the first quarter. We remain dependent upon the continuation of our relationships with theVA and HHS. Our results of operations, cash flows, and financial condition would be materially adversely affected if we were unable to continue our relationship with either of these customers, if we were to lose any of our material current contracts, or if the amount of services we provide to them was to be materially reduced.
Backlog
Backlog represents total estimated contract value of predominantly multi-year
government contracts and will vary depending upon the timing of new/renewal
contract awards. Backlog is based upon customer commitments that the Company
believes to be firm over the remaining performance period of our contracts. The
value of multi-client, competitive Indefinite Delivery/Indefinite Quantity
("IDIQ") contract awards is included in backlog computation only when a task
order is awarded or if the contract is a single award IDIQ contract. While no
assurances can be given that existing contracts will result in earned revenue in
any future period, or at all, the Company's major customers have historically
exercised their contractual renewal options. At December 31, 2021 , our total
backlog was approximately $633.6 million compared to $651.5 million as of
September 30, 2021 of which approximately $30.0 million related to the task
order under a FEMA contract to provide medical staffing support to Alaska , which
is expected to be converted to revenue in the second quarter.
Backlog value is quantified from management's judgment and assumptions about the
volume of services based on past volume trends and current planning developed
with customers. Our backlog may consist of both funded and unfunded amounts
under existing contracts including option periods. At December 31, 2021 , our
funded backlog was approximately $132.4 million , and our unfunded backlog was
$501.2 million .
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Forward Looking Business Trends
Recent significant contract award activity
Three one month option periods have been exercised on a task order to supportAlaska with temporary medical staffing, which was awarded under aFEMA contract. The exercise of these options extend the period of performance toMarch 20, 2021 , and are expected to generate approximately$30 million of revenue in the second quarter of fiscal year 2022. We expect that our operating margin on these option periods will be approximately 5% of revenue. This task order provide for advance payments for the substantial staffing resources that are required to be deployed; therefore, we do not expect this task order to consume operating cash flow. COVID-19 impact We are exposed to and impacted by macroeconomic factors andU.S. government policies. Current general economic conditions continue to be highly volatile due to the COVID-19 pandemic, which has resulted in both market size contractions due to economic slowdowns and government restrictions on movement. While the rollout of vaccines has positively correlated to an improvement in macroeconomic indicators and a reduction of many restrictions on economic activity, there continues to be significant uncertainty as to the effects of the pandemic on the economy, which may continue to impact our results of operations or cash flows. We have seen continued demand for the services we provide under our current contract portfolio as the services we provide are largely deemed essential. Further, we have also been successful in winning new contracts tied to the need to support public health initiatives in response to the pandemic. The pandemic may cause reduced demand for certain services we provide, particularly if it results in a recessionary economic environment or the spending priorities of theU.S. government shift in ways adverse to our business focus. Our ability to continue to operate without any significant negative impacts will in part depend on our continued ability to protect our employees. We have endeavored to follow recommended actions of government and health authorities to protect our employees and have been able to broadly maintain our operations. Further, we have partnered with our clients to adopt particular measures to protect our employees at distribution centers, and we have been and expect to continue to execute on the remainder of our contracts through remote and teleworking arrangements. We continue to monitor the evolving situation related to the COVID-19 pandemic and intend to continue to work with government authorities and other stakeholders to assess further potential implications to us, continue with employee safety measures to ensure that we are able to continue our operations during the pandemic, and take other actions where appropriate to mitigate other adverse consequences. However, uncertainty resulting from the pandemic could result in an unforeseen disruption to our operations (for example a closure of a key distribution facility) that may not be fully mitigated. To date we have experienced continuity in the majority of our work for our government clients. While there have been postponements of events and challenges around some project work requiring travel, overall, our government clients have continued to require our services. We are unable to predict whether, and to what extent, this trend will continue. It would be reasonable to expect some restriction of certain client activities due to COVID-19. For the quarter endedDecember 31, 2021 , the COVID-19 pandemic had an effect on our operating results as we experienced significant revenue growth due to the new task orders awarded under aFEMA contract for which we assistedAlaska in its COVID-19 response efforts. Due to our ability to continue to perform on our contract portfolio and generate cash flow, we do not presently expect liquidity constraints related to COVID-19. We are presently in compliance with all covenants in our term loan and have access to a revolving line of credit to meet any short-term cash needs that cannot be funded by operations. As such, mandatory demands on our cash flow remain low. Further, we have not observed any material impairments of our assets or a significant change in the fair value of our assets due to the COVID-19 pandemic. 23 --------------------------------------------------------------------------------
Federal budget outlook for 2022
The President's budget proposal for fiscal year 2022 outlines many initiatives that include focusing on rebuilding and investing in our country's physical infrastructure; expand access to early childhood education; improve the affordability of child and healthcare; and enact broad tax reform. The budget also details additional proposals to expand economic opportunity, tackle the climate crisis, ensure strong national defense, and invest in public health infrastructure. Specifically, the investment in public health infrastructure involves improving the nation's readiness for future public health crises, expanding access to healthcare, and defeating diseases and epidemics such as, but not limited to, the opioid and HIV/AIDs epidemics. We continue to carefully follow federal budget, legislative and contracting trends and activities and evolve our strategies to take these into consideration. WhileCongress has not completed the final appropriation bills for the government's 2022 fiscal year, the Company continues to believe that its key programs benefit from bipartisan support and does not expect a material impact on its current business base from budget negotiations. If the appropriations bills are not timely enacted, government agencies operate under a continuing resolution ("CR"), which may negatively impact our business due to delays in new program starts, delays in contract award decisions, and other factors. OnDecember 2, 2021 ,Congress passed and, onDecember 3, 2021 , the President signed, a CR providing funds to the federal government throughFebruary 18, 2022 . When a CR expires, unless appropriations bills have been passed byCongress and signed by the President, or a new CR is passed and signed into law, the government must cease operations, or shutdown, except in certain emergency situations or when the law authorizes continued activity. We continuously review our operations in an attempt to identify programs potentially at risk from CRs so that we can consider appropriate contingency plans. Our customer's missions have received broad support from the legislative and executive branches of the federal government. As such, we do not anticipate or expect any significant changes to our operations.
Industry consolidation among federal government contractors
There has been active consolidation and a strong increase in merger and acquisition activity among federal government contractors over the past few years that we expect to continue, fueled by public companies leveraging strong balance sheets. Companies often look to acquisitions that augment core capabilities, contracts, customers, market differentiators, stability, cost synergies, and higher margin and revenue streams.
Potential impact of Federal Contractual set-aside Laws and Regulations:
The Federal government has an overall goal of 23% of prime contracts flowing through small businesses. As previously reported, various agencies within the federal government have policies that support small business goals, including the adoption of the "Rule of Two" by theVA , which provides that the agency shall award contracts by restricting competition for the contract to service-disabled or other veteran owned businesses. To restrict competition pursuant to this rule, the contracting officer must reasonably expect that at least two of these businesses, which are capable of delivering the services, will submit offers and that the award can be made at a fair and reasonable price that offers best value tothe United States . When two qualifying small businesses cannot be identified, theVA may proceed to award contracts following a full and open bid process. The Company believes that its past performance in this market and track record of success provide a competitive advantage. However, the effect of set-aside provisions may limit our ability to compete for prime contractor positions on programs that we recompete or that we have targeted for growth. In these cases, the Company may elect to join a team with an eligible contractor as prime in support of such small businesses for specific pursuits that align with our core markets and corporate growth strategy. 24 --------------------------------------------------------------------------------
Results of Operations for the three months ended
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:
Three Months Ended
December 31, 2021 December 31, 2020 Change
Revenue $ 152,801 100.0 % $ 57,852 100.0 % $ 94,949
Cost of operations:
Contract costs 132,686 86.9 % 46,005 79.5 % 86,681
General and administrative costs 6,911 4.5 % 6,150 10.6 % 761
Depreciation and amortization 1,985 1.3 % 2,062 3.6 % (77)
Total operating costs 141,582 92.7 % 54,217 93.7 % 87,365
Income from operations 11,219 7.3 % 3,635 6.3 % 7,584
Interest expense, net 672 0.4 % 1,080 1.9 % (408)
Income before income taxes 10,547 6.9 % 2,555 4.4 % 7,992
Income tax expense 2,743 1.8 % 741 1.3 % 2,002
Net income $ 7,804 5.1 % $ 1,814 3.1 % $ 5,990
Net income per share - basic $ 0.61 $ 0.15 $ 0.46
Net income per share - diluted $ 0.55 $ 0.13 $ 0.42
Revenue
Revenue for the three months ended December 31, 2021 was $152.8 million , an
increase of $94.9 million or 164.1% over the prior year period. The increase in
revenue is due primarily to the two task orders awarded under a FEMA contract to
support Alaska with its response to COVID-19. The revenue contribution from
those task orders was $91.1 million . The growth from the remaining contract
portfolio was due to additional contracts awarded in fiscal 2021 and increased
volume on existing contracts.
Cost of Operations
Contract costs primarily include the costs associated with providing services to
our customers. These costs are generally comprised of direct labor and
associated fringe benefit costs, subcontract cost, other direct costs, and the
related management and infrastructure costs. For the three months ended
December 31, 2021 , contract costs increased by approximately $86.7
million , principally due to the direct costs associated with the two task orders
awarded under a FEMA contract to support Alaska with its response to COVID-19.
General and administrative costs are for those employees not directly providing
services to our customers, to include but not limited to executive management,
bid and proposal, accounting, and human resources. These costs increased as
compared to the prior fiscal year period by $0.8 million , primarily due to
increased business development cost. As a percent of revenue, general and
administrative costs decreased from reflecting improved operating leverage
derived from an expanded business base.
For the three months ended
Interest Expense, net Interest expense, net, includes items such as interest expense and amortization of deferred financing costs on debt obligations. For the three months endedDecember 31, 2021 and 2020, interest expense was approximately$0.7 million and$1.1 million , respectively. The decrease in interest expense was primarily due to the decreased balance on our term loan. Income Tax Expense 25
-------------------------------------------------------------------------------- For the three months endedDecember 31, 2021 and 2020, DLH recorded a$2.7 million and$0.7 million provision for tax expense, respectively. The effective tax rate for the three months endedDecember 31, 2021 and 2020 was 26% and 29%, respectively.
Non-GAAP Financial Measures
The Company uses EBITDA as a supplemental non-GAAP measure of our performance.
DLH defines EBITDA as net income excluding (i) interest expense, (ii) provision
for or benefit from income taxes, if any, and (iii) depreciation and
amortization.
On a non-GAAP basis, Earnings Before Interest, Tax, Depreciation, and
Amortization ("EBITDA") for the three months ended December 31, 2021 and 2020
was approximately $13.2 million and $5.7 million , respectively. The increase of
approximately $7.5 million from the same period in the prior fiscal year was
principally due to the two task orders awarded under a FEMA contract to support
Alaska with its response to COVID-19. Those contracts contributed a significant
percentage of the growth we experienced for the period, reflecting stronger
margins than initially anticipated. The increased margins were achieved by
effectively staffing the projects with internal resources, rather than
subcontractors, where appropriate.
The Company is presenting additional non-GAAP measures to describe the impact
from two short-term FEMA task orders on its financial performance for the three
months ended December 31, 2021 . The measures presented are revenue, net income,
diluted earnings per share, and EBITDA for our enterprise contract portfolio
less the respective performance on the FEMA task orders. These resulting
measures present the remaining contract portfolio's quarterly financial
performance compared to results delivered in the prior year period. Definitions
of these additional non-GAAP measures are set forth in the footnotes to the
reconciliation table below.
These non-GAAP measures of our performance are used by management to conduct and
evaluate its business during its regular review of operating results for the
periods presented. Management and our Board utilize these non-GAAP measures to
make decisions about the use of our resources, analyze performance between
periods, develop internal projections and measure management's performance. We
believe that these non-GAAP measures are useful to investors in evaluating our
ongoing operating and financial results and understanding how such results
compare with our historical performance. By providing this non-GAAP measure as a
supplement to GAAP information, we believe this enhances investors understanding
of our business and results of operations.
Reconciliation of GAAP net income to EBITDA, a non-GAAP measure:
Three Months Ended
December 31,
(in thousands) 2021 2020 Change
Net income $ 7,804 $ 1,814 $ 5,990
(i) Interest expense, net 672 1,080 (408)
(ii) Provision for taxes 2,743 741 2,002
(iii) Depreciation and amortization 1,985 2,062 (77)
EBITDA $ 13,204 $ 5,697 $ 7,507
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Reconciliation of GAAP revenue, net income, diluted earnings per share and
non-GAAP EBITDA reported for the fiscal quarter to the same metrics for our
contract portfolio less the
Three Months Ended
December 31,
(in thousands) Ref 2021 2020 Change
Revenue
Total enterprise $ 152,801 $ 57,852 $ 94,949
Less: FEMA task orders to support Alaska (a) 91,125 - 91,125
Remaining contract portfolio (a) $ 61,676 $ 57,852 $ 3,824
Net income
Total enterprise $ 7,804 $ 1,814 $ 5,990
Less: FEMA task orders to support Alaska (b) 4,696 - 4,696
Remaining contract portfolio (b) $ 3,108 $ 1,814 $ 1,294
Diluted earnings per share
Total enterprise $ 0.55 $ 0.13 $ 0.42
Less: FEMA task orders to support Alaska (c) 0.33 - 0.33
Remaining contract portfolio (c) $ 0.22 $ 0.13 $ 0.09
EBITDA
Total enterprise $ 13,204 $ 5,697 $ 7,507
Less: FEMA task orders to support Alaska (d) 6,346 - 6,346
Remaining contract portfolio (d) $ 6,858 $ 5,697 $ 1,161
Ref (a): Revenue for the Company's remaining contract portfolio less the FEMA
task orders represents our consolidated revenues less the revenues generated
from the FEMA task orders.
Ref (b): Net income attributable to the remaining contract portfolio less the
FEMA task orders represents the Company's consolidated net income, determined in
accordance with GAAP, less the net income derived from the FEMA task orders. Net
income for the FEMA task orders is derived by subtracting from the revenue
attributable to such task orders during the three months ended December 31, 2021
of $91.1 million the following amounts: contract costs of $84.2 million , general
& administrative costs of $0.6 million , and income tax expense of $1.6 million .
Net income for the remaining contract portfolio for the three months ended
December 31, 2021 represents the Company's consolidated net income for such
period less the net income attributable to the FEMA task orders for such period.
Ref (c): Diluted earnings per share (diluted EPS) for the FEMA task orders is
calculated using the net income attributable to such task orders as opposed to
GAAP net income. Diluted EPS for the remaining contract portfolio (total
contract portfolio excluding the FEMA task orders) is calculated by subtracting
the diluted EPS for the FEMA task orders from the Company's total diluted EPS.
Ref (d): EBITDA attributable to the FEMA tasks orders of $6.3 million is derived
by adding income tax expense attributable to those task orders of $1.6 million
to the net income attributable to those task orders of $4.7 million . EBITDA for
the remaining contract portfolio is calculated by subtracting the EBITDA
attributable to the FEMA task orders from the Company's total EBITDA.
Liquidity and capital management
As ofDecember 31, 2021 , the Company's immediate sources of liquidity include cash generated from operations, accounts receivable, and access to its secured revolving line of credit facility. This credit facility provides us with access of up to$25 million , subject to certain conditions including eligible accounts receivable. As ofDecember 31, 2021 , we have$25.0 million of available borrowing capacity on the revolving line of credit and do not have an outstanding balance. 27 -------------------------------------------------------------------------------- The Company's present operating liabilities are largely predictable and consist of vendor and payroll related obligations. Our current investment and financing obligations are adequately covered by cash generated from profitable operations and planned operating cash flow should be sufficient to support the Company's operations for twelve months from issuance of these consolidated financial statements. A summary of the change in cash and cash equivalents is presented below (in thousands): Three Months EndedDecember 31, 2021 2020 Net cash used in operating activities $
(16,155)
Net cash used in investing activities -(53)
Net cash provided by (used in) financing activities (3,675) 7,584
Net change in cash and cash equivalents $
(19,830)
For the three months endedDecember 31, 2021 , the Company used$16.2 million in cash flows from operations. The decrease of operating cash was primarily a result of performance of the deferred contract obligations on theFEMA task orders, for which an advance payment was received in fiscal 2021. No capital assets were purchased during the three months endedDecember 31, 2021 . Cash used in financing activities was$3.7 million during the three months endedDecember 31, 2021 . We intend to resume using cash to make debt prepayments in future quarters subject to available cash.
Sources of cash and cash equivalents
As ofDecember 31, 2021 , our immediate sources of liquidity include cash and cash equivalents of approximately$4.2 million , accounts receivable, and access to our secured revolving line of credit facility. This credit facility provides us with access of up to$25.0 million , subject to certain conditions including eligible accounts receivable. As ofDecember 31, 2021 , we had unused borrowing capacity of$23.0 million , which is net of outstanding letters of credit. The Company's present operating liabilities are largely predictable and consist of vendor and payroll related obligations. We believe that our current investment and financing obligations are adequately covered by cash generated from profitable operations and that planned operating cash flow should be sufficient to support our operations for twelve months from the date of issuance of these consolidated financial statements.
Material Cash Requirements from Contractual Obligations
Credit Facility
A summary of our secured loan facility for the period endedDecember 31, 2021 is as follows: (in thousands) Arrangement Loan Balance Interest* Maturity Date Secured term loan$70 million (a)$ 42,875 LIBOR* + 2.5% September 30, 2025 Secured revolving line of credit$25 million $ - ceiling (b) LIBOR* + 2.5% September 30, 2025
*LIBOR rate as of
(a) Represents the principal amounts payable on our term loan, which is secured by liens on substantially all of the assets of the Company. The principal of the term loan is payable in quarterly installments with the remaining balance due onSeptember 30, 2025 . OnSeptember 30, 2019 , we executed a floating-to-fixed interest rate swap withFirst National Bank ("FNB") as counter party. The notional amount in the floating-to-fixed interest rate swap as ofDecember 31, 2021 is$22.8 million and matures in 2024. The remaining outstanding balance of our term loan is subject to interest rate fluctuations. (b) The secured revolving line of credit has a ceiling of up to$25.0 million and a maturity date ofSeptember 30, 2025 . The Company has accessed funds from the revolving credit facility during the quarter, but has no balance outstanding atDecember 31, 2021 . 28 --------------------------------------------------------------------------------
The Term Loan and Revolving Credit Facility are secured by liens on substantially all of the assets of the Company. The provisions of the Term Loan and Revolving Credit Facility are fully described in Note 8 to the consolidated financial statements.
Leases
As ofDecember 31, 2021 , our liabilities under our facility and equipment leases totaled$25.8 million and$0.2 million , respectively. These balances represent our contractual obligation to make future payments on our leases, discounted to reflect our cost of borrowing. The majority of these leases are for real estate. See Note 6 to the Consolidated Financial Statements for information regarding our leases as ofDecember 31, 2021 .
Tabular Summary of Contractual Obligations as of
Payments Due by Period
Next 12 2-3 4-5 More than 5
(in thousands) Total Months Years Years Years
Debt obligations $ 42,875 $ - $ 6,563 $ 36,312 $ -
Facility leases 25,850 3,270 6,231 6,136 10,213
Equipment operating leases 197 83 114 - -
Total Contractual Obligations $ 68,922 $ 3,353 $ 12,908 $ 42,448 $ 10,213 Off-Balance Sheet Arrangements
The Company did not have any material off-balance sheet arrangements subsequent to, or upon the filing of our consolidated financial statements in our Annual Report as defined underSEC rules.
Critical Accounting Policies and Estimates
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted inthe United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates include valuation of goodwill and intangible assets, interest rate swaps, stock-based compensation, right-of-use assets and lease liabilities, valuation allowances established against deferred tax assets, and measurement of loss development on workers' compensation claims. In addition, the Company estimates overhead charges and allocates such charges throughout the year. 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. For a detailed discussion on the application of these and other accounting policies, you should review the discussion under the caption
Significant Accounting Policies in Note 4 of the notes to our Consolidated Financial Statements contained elsewhere in this report on Form 10-Q.
Revenue Recognition
We recognize revenue over time when there is a continuous transfer of control to our customer. For ourU.S. government contracts, this continuous transfer of control to the customer is supported by clauses in the contract that allow theU.S. government to unilaterally terminate the contract for convenience, pay us for costs incurred plus a reasonable profit and take control of any work in process. When control is transferred over time, revenue is recognized based on the extent of progress towards completion of the performance obligation. For services contracts, we satisfy our performance obligations as services are rendered. We use cost-based input and time-based output methods to measure progress. 29 -------------------------------------------------------------------------------- For time-and-materials contracts, revenue is recognized to the extent of billable rates times hours delivered plus materials and other reimbursable costs incurred. Revenue for cost-reimbursable contracts is recorded as reimbursable costs are incurred, including an estimated share of the applicable contractual fees earned. For firm-fixed-price contracts, the consideration received for our performance is set at a predetermined price. Revenue for our firm-fixed-price contracts is recognized over time using a straight-line measure of progress or using the percentage-of-completion method whereby progress toward completion is based on a comparison of actual costs incurred to total estimated costs to be incurred over the contract term. Contract costs are expensed as incurred. Estimated losses are recognized when identified.
Refer to Note 5 of the accompanying notes to our Consolidated Financial Statements contained elsewhere in this report.
Long-lived Assets
Our long-lived assets include equipment and improvements, right-of-use assets, intangible assets, and goodwill. The Company continues to review its long-lived assets for possible impairment or loss of value at least annually or more frequently upon the occurrence of an event or when circumstances indicate that a reporting unit's carrying amount is greater than its fair value. Equipment and improvements are stated at cost. Depreciation and amortization are provided using the straight-line method over the estimated useful asset lives (3 to 7 years) and the shorter of the initial lease term or estimated useful life for leasehold improvements. Costs incurred to place the asset in service are capitalized and costs incurred after implementation are expensed. Amortization expense is recorded when the software is placed in service on a straight-line basis over the estimated useful life of the software. Right-of-use assets are measured at the present value of future minimum lease payments, including all probable renewals, plus lease payments made to the lessor before or at lease commencement and indirect costs, less incentives received. Our right-of-use assets include long-term leases for facilities and equipment and are amortized over their respective lease terms.
Intangible assets are originally recorded at fair value and amortized on a straight-line basis over their assessed useful lives. The assessed useful lives of the assets are 10 years.
Goodwill The Company 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. Based on the results of the work performed, the Company has concluded that no impairment loss was warranted, as no change in business conditions occurred which would have a material adverse effect on the valuation of goodwill. Our assessment incorporated effects of the COVID-19 pandemic, which did not have a meaningful impact on our financial results. Notwithstanding this evaluation, factors including non-renewal of a major contract or other substantial changes in business conditions could have a material adverse effect on the valuation of goodwill in future periods and the resulting charge could be material to future periods' results of operations.
Income Taxes
The Company accounts for income taxes in accordance with the liability method,
whereby deferred tax assets and liabilities are determined based on the
difference between the financial statement and tax bases of assets and
liabilities, using enacted tax rates in effect for the year in which the
differences are expected to reverse. Deferred tax assets are reflected on the
consolidated balance sheet when it is determined that it is more likely than not
that the asset will be realized. This guidance also requires that deferred tax
assets be reduced by a valuation allowance if it is more likely than not that
some or all of the deferred tax asset will not be realized. The Company believes
it has adequate sources of taxable income to fully utilize its net operating
loss carryforwards before their expiration. The Company recorded no valuation
allowance.
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Stock-based Compensation
The Company uses the fair value-based method for stock-based compensation. Options issued are designated as either an incentive stock or a non-statutory stock option. No option may be granted with a term of more than 10 years from the date of grant. Option awards may depend on achievement of certain performance measures determined by the Compensation Committee of our Board. Shares issued upon option exercise are newly issued common shares. All awards to employees and non-employees are recorded at fair value on the date of the grant and expensed over the period of vesting. The Company uses aMonte Carlo binomial and Black Scholes option pricing models to estimate the fair value of each stock option at the date of grant. Any consideration paid by the option holders to purchase shares is credited to capital stock.
New Accounting Pronouncements
A discussion of recently issued accounting pronouncements is described in Note 3 of the accompanying Notes to our Consolidated Financial Statements contained elsewhere in this report, and we incorporate such discussion by reference.
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