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Item 1A. Risk Factors

2020-12-07 compared with 2019-12-11 · 132 added, 97 removed, 204 unchanged (53% of the section changed)

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In assessing these risks, you should also refer to the other information contained or incorporated by reference in this Annual Report on Form 10-K, including our consolidated financial statements and related notes.

Risks Relating to Our Business and Our Industry

Risks Relating to Our Business and the Industry in which we Compete

We depend on contracts with the Federal government for virtually all of our revenue and our business could be seriously harmed if the Federal government decreased or ceased doing business with us.

At present, the Company derives 99% of its revenue from agencies of the Federal government, primarily as a prime contractor but also as a subcontractor to other Federal prime contractors.

At present, we derive 98% of our revenue from agencies of the Federal government, primarily as a prime contractor but also as a subcontractor to other Federal prime contractors.

In addition, substantially all accounts receivable, including unbilled accounts receivable, are from agencies of the U.S.

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We believe that the credit risk associated with our receivables is limited due to the creditworthiness of these customers.

In general, if we were suspended or debarred from contracting with the federal government or if the government otherwise ceased doing business with us or significantly decreased the amount of business it does with us, our business, financial condition and operating results would be materially and adversely affected.

A significant portion of our revenue is concentrated in a small number of contracts and we could be seriously harmed if we were unsuccessful in our recompete efforts on these contracts.

In general, if we were suspended or

debarred from contracting with the federal government or if the government otherwise ceased doing business with us or significantly decreased the amount of business it does with us, our business, financial condition and operating results would be materially and adversely affected.

A significant portion of our revenue is concentrated in a small number of contracts and we could be seriously harmed if we were unable to continue providing services under, or unsuccessful in our recompete efforts on, these contracts.

We remain dependent upon the continuation of our relationships with the VA and HHS as a significant portion of our revenue is concentrated in a small number of contracts with these customers.

There can be no assurance as to the actual amount of services that the Company will ultimately provide to VA and HHS under its current contracts, or that the Company will be successful in recompete efforts.

As described in greater detail above in "Item 1 - Business - Major Contracts", these contracts are currently subject to renewal solicitations, or expected to be in fiscal 2020.

There can be no assurance as to the actual amount of services that we will ultimately provide to VA and HHS under our current contracts, or that we will be successful in recompete efforts.

As described in greater detail above in "Item 1 - Business - Major Contracts", our contracts with the VA for the provision of services to its CMOP operations are currently subject to renewal solicitations.

We believe that our strong working relationships and effective service delivery support ongoing performance for the terms of the contracts and recompete efforts as a prime or subcontractor.

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 were to lose any of our material current contracts, or if the amount of services we provide to them materially reduced.

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 were to lose any of our material current contracts, or if the amount of services we provide to them materially reduced.

government may prefer veteran-owned, minority-owned, small and small disadvantaged businesses;

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If we were to lose one or more of these contracts or other contracting vehicles, we could lose a significant revenue source and our operating results and financial condition could be materially and adversely affected.

We may experience fluctuations in our revenues and operating results from period to period.

Our revenue and operating results may fluctuate significantly and unpredictably in the future.

We have expended, and will continue to expend, substantial resources to enhance our health services offerings and expansion into the Federal health market.

We may incur growth expenses before new business revenue is realized, thus showing lower profitability in a particular period or consecutive periods.

We may be unable to achieve desired levels of revenue growth due to circumstances that are beyond our control, as already expressed regarding competition, government budgets, and the procurement process in general.

Also, some aspects of this work can be seasonal with regard to resources and funding and it is difficult to predict the timing of when those resources will be expended.

Although we continue to manage our operating costs and expenses, there is no guarantee that we will significantly increase future revenue and profit in any particular future period.

Revenue levels achieved from our customers, the mix of solutions that we offer and our performance on future contracts will affect our financial results.

Future legislative or government budgetary and spending changes could negatively impact our business.

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Our growth into government markets may be impacted by measures in place since March 2013, when the federal government began operating under sequestration required by the Budget Control Act of 2011 (BCA).

Under sequestration, reductions in both defense and civil agency expenditures have taken place in each of the government’s fiscal years since 2013 and, unless the

BCA is amended or repealed, will continue through the government’s Fiscal Year 2021.

Under sequestration, reductions in

both defense and civil agency expenditures have taken place in each of the government’s fiscal years since 2013 and, unless the BCA is amended or repealed, will continue through the government’s Fiscal Year 2021.

In February 2018, the Bipartisan Budget Act of 2018 (the “2018 Budget Act”) was signed into law, which increased the caps on defense and non-defense discretionary spending for the government’s 2018 and 2019 fiscal years.

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On August 2, 2019, the President signed the measure into law.

Subsequently, in December 2019, Congress passed two appropriations bills totaling $1.4 trillion for the 2020 fiscal year;

on December 20, 2019, both bills were signed into law.

We may experience disruption of existing programs, delays in contract awards, and other actions, including partial or complete contract terminations.

VA programs, which accounted for approximately 48% and 57% of Company revenue for the years ended September 30, 2020 and 2019, respectively, were exempt from the spending caps established under Federal government sequestration targets enacted in 2013.

While we view the budget environment as stable under BBA 2019 and believe there is bipartisan support for continued investment in the areas of defense and national security, the government is currently operating under a continuing resolution (a CR) which expires December 11, 2020.

When a CR expires, unless appropriations bills have been passed by Congress 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.

The markets in which we operate are highly competitive, and many of the companies we compete against have substantial resources.

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The resulting delay in the startup and funding of the work under these contracts may cause our actual results to differ materially and adversely from those anticipated, and there can be no assurance that such protest process or implementation delays will not have a material adverse effect on our financial condition or results of operations in the future.

Our business may suffer if we or our employees are unable to obtain the necessary security clearances or other qualifications required to perform services for our clients.

Our business may suffer if we or our employees are unable to obtain and maintain the necessary security clearances or other qualifications required to perform services for our clients.

Many federal government contracts require us to have security clearances and employ personnel with specified levels of education, work experience and security clearances.

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Action by the government to obtain support from other contractors or failure of the government to order the quantity of work anticipated could cause our actual results to differ materially and adversely from those anticipated.

Additionally, many of our multi-year contracts may only be partially-funded at any point during their term with the unfunded portion subject to future appropriations

Additionally, many of our multi-year contracts may only be partially-funded at any point during their term with the unfunded portion subject to future appropriations by Congress.

As a result of a lack of appropriated funds or efforts to reduce federal government spending, our backlog may not result in revenue.

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At September 30, 2020, our backlog included cost reimbursable, time-and-materials and fixed-price contracts.

Cost reimbursable and time-and-materials contracts generally have lower profit margins than fixed-price contracts.

Our earnings and margins may therefore vary materially and adversely depending on the relative mix of contract types, the costs incurred in their performance, the achievement of other performance objectives and the stage of performance at which the right to receive fees, particularly under incentive and award fee contracts, is finally determined.

Our earnings and margins may vary depending on the relative mix of contract types, the costs incurred in their performance, the achievement of other performance objectives and the stage of performance at which the right to receive fees, particularly under incentive and award fee contracts, is finally determined.

Our employees, or those of our teaming partners, may engage in misconduct or other improper activities which could harm our business.

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Precautions to prevent and detect this activity may not be effective in controlling such risks or losses, which could materially and adversely affect our business, results of operations, financial condition, cash flows, and liquidity.

Our profits and revenues could suffer if we are involved in legal proceedings, investigations, and disputes.

We are exposed to legal proceedings, investigations and disputes.

In addition, in the ordinary course of our business we may become involved in legal disputes regarding personal injury or employee disputes.

While we provision for these types of incidents through commercial third-party insurance carriers, we often defray these types of cost through higher deductibles.

Any unfavorable legal ruling against us could result in substantial monetary damages by losing our deductible portion of carried insurance.

We maintain insurance coverage as part of our overall legal and risk management strategy to lower our potential liabilities.

If we sustain liabilities that exceed our insurance coverage or for which we are not insured, it could have a material adverse impact on our results of operations, cash flows and financial condition, including our profits, revenues and liquidity.

We are dependent upon certain of our management personnel and do not maintain "key personnel" life insurance on our executive officers.

Our success to date has resulted in part from the significant contributions of our executive officers.

Our executive officers are expected to continue to make important contributions to our success.

As of September 30, 2019 , certain of our officers are under employment contracts.

However, we do not maintain "key personnel" life insurance on any of our executive officers.

Loss for any reason of the services of our key personnel could materially affect our operations.

We may not be fully covered by the insurance we procure and our business could be adversely impacted if we were not able to renew all of our insurance plans.

Although we carry multiple lines of liability insurance (including coverage for medical malpractice and workers' compensation), they may not be sufficient to cover the total cost of any judgments, settlements or costs relating to any present or future claims, suits or complaints.

If we are unable to secure renewal of our insurance contracts or the renewal of such contracts with favorable rates and with competitive benefits, our business could be adversely affected.

In addition, sufficient insurance may not be available to us in the future on satisfactory terms or at all.

Further, the fact that the majority of our employees are located at customer locations increases our potential liability for negligence and professional malpractice and such liabilities may not become immediately apparent.

Any increase in our costs of insurance will impact our profitability to the extent that we cannot offset these increases into our costs of services.

If the insurance we carry is not sufficient to cover any judgments, settlements or costs relating to any present or future claims, suits or complaints, our business, financial condition, results of operations and liquidity could be materially adversely affected.

Our financial condition may be affected by increases in employee healthcare claims and insurance premiums, and workers' compensation claims and insurance rates.

Our current workers' compensation and medical plans are partially self-funded insurance programs.

The Company currently pays base premiums plus actual losses incurred, not to exceed certain individual and aggregate stop-loss limits.

In addition, health insurance premiums, and workers' compensation rates for the Company are in large part determined by our claims experience.

These categories of expenditure comprise a significant portion of our direct costs.

If we experience a large increase in claim activity, our direct expenditures, health insurance premiums, unemployment taxes or workers' compensation rates may increase.

Although we employ internal and external risk management procedures in an attempt to manage our claims incidence and estimate claims expenses and structure our benefit contracts to provide as much cost stability as reasonably possible given the self-funded nature of our plans, we may not be able to prevent increases in claim activity, accurately estimate our claims expenses or pass the cost of such increases on to our clients.

Since our ability to incorporate such increases into our fees to our clients is constrained by contractual arrangements with our clients, a delay could occur before such increases could be reflected in our fees, which may reduce our profit margin.

As a result, such increases could have a material adverse effect on our financial condition, results of operations and liquidity.

If we are unable to attract qualified personnel, our business may be negatively affected.

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Moreover, if we are unable to attract and retain qualified personnel, the quality of our services may decline and, as a result, we could lose clients.

We are exposed to increased costs and risks associated with complying with increasing and new regulation of corporate governance and disclosure standards.

Since the implementation of the Sarbanes-Oxley Act of 2002, we spend a significant amount of management's time and resources (both internal and external) to comply with changing laws, regulations and standards relating to corporate governance and public disclosures.

This compliance requires management's annual review and evaluation of our internal control systems.

This process has caused us to engage outside advisory services and has resulted in additional accounting and legal expenses.

We may encounter problems or delays in completing these reviews and evaluation and the implementation of improvements.

If we are not able to timely comply with the requirements set forth in the Sarbanes-Oxley Act of 2002, we might be subject to sanctions or investigation by regulatory authorities.

Any such action could materially adversely affect our business and our stock price.

If our subcontractors do not perform their contractual obligations, our performance as a prime contractor and our ability to obtain future business could be materially and adversely impacted and our actual results could differ materially and adversely from those anticipated.

Our performance of government contracts may involve the issuance of subcontracts to other companies upon which we rely to perform all or a portion of the work we are obligated to deliver to our customers.

Unsatisfactory performance by one or more of our subcontractors to deliver on a timely basis the agreed-upon supplies, perform the agreed-upon services, or appropriately manage their vendors may materially and adversely impact our ability to perform our obligations as a prime contractor.

A subcontractor’s performance deficiency could result in the government terminating our contract for default.

A default termination could expose us to liability for excess costs of reprocurement by the government and have a material adverse effect on our ability to compete for future contracts and task orders.

Depending upon the level of problem experienced, such problems with subcontractors could cause our actual results to differ materially and adversely from those anticipated.

We have a significant amount of federal net operating loss carry forwards which we may not be able to utilize in certain circumstances.

At September 30, 2020, we had net operating losses carryforwards, or NOLs, of approximately $7.4 million for U.S.

Federal tax purposes.

NOLs begin to expire in 2030 and continue to expire through 2033.

Based upon our current estimate of future taxable earnings, we expect to fully utilize these NOLs;

however future taxable income may vary significantly from our current estimate.

Additionally, changes to U.S.

tax laws may adversely affect our financial condition or results of operations and create the risk that we may need to adjust our accounting for these changes.

The accounting treatment of these tax law changes is complex, and some of the changes may affect both current and future periods.

Consistent with guidance from the SEC, our financial statements reflect our estimates of the tax effects of the current tax laws and regulation.

Our results of operations could in the future be materially adversely impacted by global, macroeconomic events, such as the coronavirus pandemic (COVID-19), and the response to contain it.

The global spread of the coronavirus (COVID-19) has created significant volatility, uncertainty and economic disruption.

The extent to which the coronavirus pandemic impacts our business, operations and financial results will depend on numerous evolving factors that we may not be able to accurately predict, including:

the duration and scope of the pandemic;

governmental, business and individuals’ actions that have been and continue to be taken in response to the pandemic;

the impact of the pandemic on economic activity and actions taken in response;

the effect on our clients and client demand for our services and solutions;

our ability to sell and provide our services and solutions, including as a result of travel restrictions and people working from home (as described below in the Management Discussion & Analysis, this has resulted in certain delays in our provision of services and postponements of project work requiring travel) and any closures of our and our clients’ offices and facilities, particularly at our pharmacy distribution centers.

Furthermore, the significant increase in remote working of our employees may exacerbate certain risks to our business, including an increased demand for information technology resources and the increased risk of malicious technology-related events, such as cyberattacks and phishing attacks.

Customers may also slow down decision making, delay planned work or seek to terminate existing agreements.

Government agencies are our primary customers and the long-term impact of increased government spending in response to COVID-19 is uncertain.

For example, we expect that the U.S.

government fiscal year 2021 budget cycle may be delayed as the U.S.

government focuses its attention on mitigating the impact of COVID-19, which could result in a re-evaluation of spending levels and priorities.

The pandemic may cause reduced demand for certain services we provide, particularly if its results in a recessionary economic environment or the spending priorities of the U.S.

government shift in ways adverse to our business focus.

Any of these events could materially adversely affect our business, financial condition, results of operations and the market price of our common stock.

Risks Relating to Our Information Technology Systems and Intellectual Property

We are highly dependent on the proper functioning of our information systems.

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The loss, theft or improper disclosure of that information could subject us to sanctions under these laws, breach of contract claims, lawsuits from affected individuals, negative press articles and a loss of confidence from our government clients, all of which could adversely affect our existing business, future opportunities and financial condition.

Failure to adequately protect, maintain, or enforce our rights in our intellectual property may adversely limit our competitive position.

We rely upon a combination of nondisclosure agreements and other contractual arrangements, as well as copyright, trademark, and trade secret laws to protect our proprietary information.

We also enter into proprietary information and intellectual property agreements with employees, which require them to disclose any inventions created during employment, to convey such rights to inventions to us, and to restrict any disclosure of proprietary information.

Trade secrets are generally difficult to protect.

Although our employees are subject to confidentiality obligations, this protection may be inadequate to deter or prevent misappropriation of our confidential information and/or the infringement of our trademarks and copyrights.

Further, we may be unable to detect unauthorized use of our intellectual property or otherwise take appropriate steps to enforce our rights.

Failure to adequately protect, maintain, or enforce our intellectual property rights may adversely limit our competitive position.

We may face from time to time, allegations that we or a supplier or customer have violated the intellectual property rights of third parties.

If, with respect to any claim against us for violation of third-party intellectual property rights, we are unable to prevail in the litigation or retain or obtain sufficient rights or develop non-infringing intellectual property or otherwise alter our business practices on a timely or cost-efficient basis, our business and competitive position may be adversely affected.

Any infringement, misappropriation or related claims, whether or not meritorious, are time consuming, divert technical and management personnel, and are costly to resolve.

As a result of any such dispute, we may have to develop non-infringing intellectual property, pay damages, enter into royalty or licensing agreements, cease utilizing certain products or services, or take other actions to resolve the claims.

These actions, if required, may be costly or unavailable on terms acceptable to us.

Risks Relating to Acquisitions

We may have difficulty identifying and executing acquisitions on favorable terms and therefore may grow at slower than anticipated rates.

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Any of these outcomes could cause our actual results to differ materially and adversely from those anticipated.

A subcontractor’s performance deficiency could result in the government terminating our contract for default.

Depending upon the level of problem experienced, such problems with subcontractors could cause our actual results to differ materially and adversely from those anticipated.

We have a substantial amount of goodwill on our balance sheet.

Future write-offs of goodwill may have the effect of decreasing our earnings or increasing our losses.

We have obtained growth through acquisitions of other companies and businesses.

Under existing accounting standards, we are required to periodically review goodwill for possible impairment.

In the event that we are required to write down the value of any assets under these pronouncements, it may materially and adversely affect our earnings.

See the more detailed discussion appearing as part of our Management's Discussion and Analysis of Financial Condition and Results of Operations in Item 7 herein.

Risks Relating to Our Outstanding Indebtedness

We have incurred debt in connection with acquisitions and we must make the scheduled principal and interest payments on the facility and maintain compliance with other debt covenants.

On June 7, 2019, we entered into a loan agreement with First National Bank and certain other lenders under which the lenders agreed to provide (i) a $70.0 million senior secured loan (the “Term Loan”) and (ii) a revolving loan facility in an aggregate amount of up to $25 million (the “Revolving Loan Facility ”).

Specifics of the loan agreement are discussed in Note 6 of the notes to our Consolidated Financial Statements contained elsewhere in this Annual Report on Form 10-K.

The loan agreement requires compliance with a number of financial covenants and contains restrictions on our ability to engage in certain transactions, including limitations on:

On September 30, 2020, we entered into an amended and restated credit agreement with First National Bank of Pennsylvania and certain other lenders (the “Credit Agreement”).

The Credit Agreement requires compliance with a number of financial covenants and contains restrictions on our ability to engage in certain transactions, including limitations on:

granting liens;

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and completing other mergers and consolidations.

Also, the loan agreement requires us to comply with certain financial covenants including a minimum fixed charge coverage ratio and a maximum total leverage ratio.

In addition, the loan agreement also requires prepayments of a percentage of excess cash flow.

Also, the Credit Agreement requires us to comply with certain financial covenants including a minimum fixed charge coverage ratio and a maximum total leverage ratio.

In addition, the Credit Agreement also requires prepayments of a percentage of excess cash flow.

Accordingly, a portion of our cash flow from operations will be dedicated to the repayment of our indebtedness.

The loan agreement provides for customary events of default, including, among other things, a payment default, covenant default or defaults on other indebtedness or judgments in excess of a stipulated amount, change of control events, suspension or disbarment from contracting with the federal government and the material inaccuracy of our representations and warranties.

If we are unable to make the scheduled principal and interest payments on the loan agreement or maintain compliance with other debt covenants, we may be in default under the loan agreement, which if not waived, could cause our debt to become immediately due and payable and enable the lenders to enforce their rights under the loan agreement.

If we are unable to make the scheduled principal and interest payments on the Credit Agreement or maintain compliance with other debt covenants, we may be in default under the loan agreement, which if not waived, could cause our debt to become immediately due and payable and enable the lenders to enforce their rights under the Credit Agreement.

Such an event would likely have a material adverse effect on our business, financial condition and results of operations.

We have a substantial amount of goodwill on our balance sheet.

Future write-offs of goodwill may have the effect of decreasing our earnings or increasing our losses.

We have obtained growth through acquisitions of other companies and businesses.

Under existing accounting standards, we are required to periodically review goodwill assets for possible impairment.

In the event that we are required to write down the value of any assets under these pronouncements, it may materially and adversely affect our earnings.

See the more detailed discussion appearing as part of our Management's Discussion and Analysis of Financial Condition and Results of Operations in Item 7 herein.

We have a significant amount of federal net operating loss carry forwards which we may not be able to utilize in certain circumstances.

At September 30, 2019 , we had net operating losses carryforwards, or NOLs, of approximately $17.2 million for U.S.

Federal tax purposes.

NOLs begin to expire in 2021 and continue to expire through 2033.

Based upon our current estimate of future taxable earnings, we expect to fully utilize these NOLs;

however future taxable income may vary significantly from our current estimate.

Additionally, changes to U.S.

tax laws may adversely affect our financial condition or results of operation and create the risk that we may need to adjust our accounting for these changes.

The Tax Cuts and Jobs Act (the “Tax Act”), enacted in late 2017, made significant changes to U.S.

tax laws and includes numerous provisions that affect businesses, including ours.

For instance, as a result of lower corporate tax rates, the Tax Act reduced both the value of deferred tax assets and the amount of deferred tax liabilities.

It also limited interest expense, executive compensation deductions, and the amount of net operating losses that can be used each year and altered the expensing of capital expenditures.

During the fiscal year ending September 30, 2018 the Company recorded a $3.4 million write-down of deferred tax assets from revaluation of our net operating loss carryforwards from the previously recognized federal income tax rate of 34% to the 21% rate in the Tax Act.

The Tax Act will require interpretations and implementing regulations by the Internal Revenue Service, as well as state tax authorities, and the Tax Act could be subject to amendments and technical corrections, any of which could lessen or increase its impacts.

The accounting treatment of these tax law changes is complex, and some of the changes may affect both current and future periods.

Consistent with guidance from the SEC, our financial statements reflect our estimates of the tax effects of the Tax Act on us.

Risks Relating to Our Stock

In addition, a transition away from the London Interbank Offering Rate (“LIBOR”) as a benchmark for establishing the applicable interest rate may affect the cost of servicing our debt under the Credit Agreement.

The indebtedness outstanding under the Credit Agreement initially incurs interest based on LIBOR.

The Financial Conduct Authority of the United Kingdom has announced that it plans to phase out LIBOR by the end of calendar year 2021.

Although our Credit Agreement provides for an alternative base rate, the consequences of the phase out of LIBOR cannot be entirely predicted at this time.

For example, if any alternative base rate or means of calculating interest with respect to our outstanding indebtedness leads to an increase in the interest rates charged, it could result in an increase in the cost of such indebtedness or otherwise have a material adverse impact on our business, financial condition and results of operations .

Risks Relating to Our Corporate Structure and Capital Stock

Our stock price may be volatile and your investment in our common stock may suffer a decline in value.

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The exercise of our outstanding common stock options and warrants may depress our stock price and dilute your ownership of the Company.

As of September 30, 2019 , the following options and warrants were outstanding:

Executive and employee options to purchase 2.13 million shares of common stock, 1.30 million of which are vested and immediately exercisable.

The weighted average exercise price of the outstanding stock options is $4.36 per share.

Warrants issued to Wynnefield Capital to purchase 53,619 shares of common stock with an exercise price of $3.73 per share.

To the extent that options and warrants are exercised or the restricted stock units vest, dilution to our shareholders will occur.

We cannot foresee the impact of any potential sales of our common shares on the market, but it is possible that if a significant percentage of such available shares were attempted to be sold within a short period of time, the market for our shares would be adversely affected.

It is also unclear whether or not the market for our common stock could absorb a large number of attempted sales in a short period of time.

Moreover, the terms upon which we will be able to obtain additional equity capital may be adversely affected, since the holders of these securities can be expected to exercise them at a time when we would, in all likelihood, be able to obtain any needed capital on terms more favorable to us than the exercise terms provided by those securities.

To the extent that these securities are exercised, dilution to our shareholders will occur.

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The interests of our principal stockholders may differ from the interests of the other stockholders.

General Business Risks