What changed in this filing

/stocks — the workspaceLOADING

Item 7. Management’s Discussion and Analysis

2020-12-07 compared with 2019-12-11 · 147 added, 108 removed, 171 unchanged (60% of the section changed)

8 unchanged sentences

Business Overview:

The Company is a provider of technology-enabled business process outsourcing and program management solutions, primarily to improve and better deploy 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 the Department of Veteran Affairs ("VA"), Department of Health and Human Services ("HHS"), and the Department of Defense ("DoD").

On June 7, 2019, the Company acquired Social & Scientific Systems, Inc.

(“S3”), which provides clinical and biomedical research, epidemiology, health policy, and program evaluation services in the public health space.

S3 utilizes advanced research (including longitudinal studies), data analytics, and secure IT platform services to asset public health agencies within the Department of Health and Human Services including National Institutes of Health (“NIH”) and Centers for Medicare and Medicaid Services (“CMS”).

The acquisition expands our ability to provide complementary services across multiple government markets.

We are a provider of technology-enabled business process outsourcing and program management solutions, and public health research and analytics;

primarily focused to improve and better deploy large-scale federal health and human service initiatives.

We derive 98% of our revenue from agencies of the Federal government, providing services to several agencies including the Department of Veteran Affairs ("VA"), Department of Health and Human Services ("HHS"), and the Department of Defense ("DoD").

On September 30, 2020, we acquired Irving Burton Associates, LLC (“IBA”) for the base purchase price of $32.0 million in cash.

We funded the purchase price and the costs and expenses of the acquisition through funds received under our amended and restated credit agreement, as described in greater detail below.

IBA provides research, systems development, and other technology-enabled solutions to the DHA, the Telemedicine & Advanced Technology Research Center of the US Army’s Medical Research and Development Command, and other agencies within the DoD.

IBA maintains a top-secret facility clearance, and its defense contracts provide for a range of health IT services including digital transformation, data analytics, cybersecurity, and artificial intelligence

Our business offerings are aligned to three market focus areas within the federal health services market space.

2 unchanged sentences

• Public Health and Life Sciences.

Prospectively, we expect they will represent approximately 45% , 20% , and 35% of our revenue stream, respectively, for fiscal 2020.

Major Customers

Our largest customer is the VA, which comprised approximately 57% and 63% of revenue for the years ended September 30, 2019 and 2018 , respectively.

Our second largest customer, HHS, comprised approximately 39% and 34% of revenue for the years ended September 30, 2019 and 2018 , respectively.

The recent acquisition of S3 furthers the Company's reach into HHS, and we expect HHS to surpass the VA as our largest customer in fiscal 2020 as measured in revenue volume.

Our largest customer is the VA, which comprised approximately $100.2 million and $91.9 million of revenue for the years ended September 30, 2020 and 2019, respectively.

Our second largest customer, HHS, comprised approximately $95.0 million and $62.0 million of revenue for the years ended September 30, 2020 and 2019, respectively.

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.

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.

As described in greater detail above in "Item 1 - Business - Major Contracts", our contracts with the VA are currently subject to renewal solicitations.

Forward Looking Business Trends:

The Company's mission is to expand our position as a trusted provider of technology-enabled healthcare and public health services, medical logistics, and readiness enhancement services to active duty personnel, veterans, and civilian populations and communities.

Our primary focus within the defense agency markets include military service members' and veterans' requirements for telehealth services, behavioral healthcare, medication therapy management, health IT commodities, process management, clinical systems support, and healthcare delivery.

Our mission is to expand our position as a trusted provider of technology-enabled healthcare and public health services, medical logistics, and readiness enhancement services to active duty personnel, veterans, and civilian populations and communities.

Our primary focus within the defense agency markets include military service members' and veterans' requirements for telehealth services, behavioral healthcare, medication therapy management, process management, clinical systems support, and healthcare delivery.

Our primary focus within the civilian agency markets includes healthcare and social programs delivery and readiness.

11 unchanged sentences

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.

While Congress has not completed the final appropriation bills for the government’s 2021 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.

Following a CR passed on September 27, 2019, the President signed into law a second CR on November 21, 2019 to continue to fund federal agencies through December 20, 2019 at levels applicable for fiscal 2019.

After this date, unless appropriations bills are passed by Congress and signed by the President, or a new CR is passed and signed into law, the government must cease operations, except in certain emergency situations or when the law authorizes continued activity.

We also continue to face uncertainties due to the current general business environment, and we continue to see protests of major contract awards and delays in government procurement activities.

In addition, a shift of expenditures away from programs that we support could cause federal government agencies to reduce their purchases under contracts, to exercise their right to terminate contracts at any time without penalty, or to decide not to exercise options to renew contracts.

Additional factors that could affect our federal government contracting business include an increase in set-asides for small businesses and budgetary priorities limiting or delaying federal government spending in general.

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 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.

Our customer's missions have received broad support from the legislative and executive branches of the federal government.

We expect that support to continue with the change of administration with amended and new priorities established by the President-Elect.

As such, we do not anticipate or expect any significant changes to our operations as a result of the recent elections.

Department of Veterans Affairs (VA) health spending trends:

4 unchanged sentences

We believe the fiscal 2021 budget request supports our identified growth opportunities.

The VA is requesting a total budget of $243.3 billion, an increase in fiscal 2021 of 10.2% above the fiscal 2020 budget.

The budget increase focuses on several key veteran health initiatives to include telehealth and mental health.

For these initiatives the VA has requested budgets of $1.3 and $10.3 billion, respectively.

These requests represent an approximately 27% and 7% increase from fiscal 2020.

We believe our capabilities and service delivery models are aligned with our customers growth initiatives.

Department of Health and Human Services (HHS) spending trends:

3 unchanged sentences

The Company has existing contracts with multiple agencies under HHS, and we are actively pursuing growth opportunities within this vital agency.

Over the past two government fiscal years, spending on health care initiatives has increased and is expected to increase in fiscal 2021 to $1.4 trillion.

HHS is the principal federal department charged with protecting the health of all Americans and providing essential human services.

The National Institutes of Health ("NIH"), a part of HHS, is asking for approximately $8.8 billion to fund new COVID-19 projects.

These projects will focus not only on vaccines and other treatments, but will also evaluate the societal impacts of the disease.

We believe our capabilities and past performance are well aligned with the service sought under this budget increase.

Industry consolidation among federal government contractors:

9 unchanged sentences

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.

COVID-19 Impact

We are exposed to and impacted by macroeconomic factors and U.S.

government policies.

Current general economic conditions are highly volatile due to the COVID-19 pandemic, resulting in both market size contractions due to economic slowdowns and government restrictions on movement.

We have seen continued demand for the services we provide under our current contract portfolio as the services we provide are largely deemed essential.

While the pandemic has had minor offsetting impacts during fiscal 2020 due to social distancing and travel restrictions, we do not expect material impacts from COVID-19 in this fiscal year.

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 the U.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 were 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 expect to execute on a remainder of our contracts through remote and teleworking arrangements.

We intend to continue to work with government authorities and implement our employee safety measures to ensure that we are able to continue our operations during the pandemic.

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 has 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 deterioration of certain client activities due to COVID-19.

The longer the duration of the pandemic, the more likely it is that it could have an adverse effect on our business, financial position, results of operations and/or cash flows.

However, we also believe that we are likely to see additional demand from federal agencies such as the CDC and the NIH for our services.

Due to our ability to continue to perform under our contracts and our cash flow generation, we do not presently expect material 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.

For additional information on risk factors that could impact our results, please refer to “Risk Factors” in Part I, Item 1A of this Form 10-K.

Results of Operations for Fiscal Year 2020 as Compared to Fiscal Year 2019

The following table summarizes, for the years indicated, consolidated statements of operations data expressed in dollars in thousands except for per share amounts, and as a percentage of revenue:

Year Ended Change in

Consolidated Statement of Operations:

September 30, 2019

September 30, 2018

September 30, 2020 September 30, 2019 $ % of Rev

Revenue $ 209,185 100.0 % $ 160,391 100.0 % $ 48,794 — %

Cost of operations

8 unchanged sentences

Income tax expense 2,906 1.4 % 2,171 1.4 % 735 — %

Net income $ 7,114 3.4 % $ 5,324 3.3 % $ 1,790 0.1 %

Net income per share - basic 0.58 0.44 0.14

1 unchanged sentence

For the twelve months ended September 30, 2020 revenue was $209.2 million, an increase of $48.8 million or 30.4% over the prior year period.

The increase is primarily due to the revenue contribution of approximately $24.3 million by S3 since the acquisition on June 7, 2019.

The increase is primarily due to the inclusion of Social & Scientific Systems, Inc.

("S3"), acquired in June 2019, for the full year in fiscal 2020.

Cost of Operations

1 unchanged sentence

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 twelve months ended September 30, 2019, contract costs increased by approximately $19.2 million principally due to the addition of S3.

As a share of revenue, contract costs decreased primarily due to effective management of fringe benefit costs.

For the twelve months ended September 30, 2020, contract costs increased by approximately $39.0 million principally due to the growth in revenues.

General and administrative costs are for those employees not directly providing services to our customers, to include but not limited to executive management, bid & proposal, accounting, and human resources.

These costs increased as compared to the prior fiscal year by $3.7 million primarily from the inclusion of S3.

Acquisition costs were due to the S3 acquisition and include due diligence costs, such as legal and accounting fees.

For the year ended September 30, 2019 , depreciation and amortization costs were approximately $1.2 million and $2.7 million, respectively, as compared as compared to approximately $0.5 million and $1.8 million for the prior fiscal year, an aggregate increase of $1.7 million.

These costs increased as compared to the prior fiscal year by $3.7 million to approximately $24.2 million primarily from the growth in revenues.

Acquisition costs in 2020 were due to the IBA acquisition and include due diligence costs, such as legal and accounting fees.

For the year ended September 30, 2020, depreciation and amortization costs were approximately $2.2 million and $4.8 million, respectively, as compared to approximately $1.2 million and $2.7 million for the prior fiscal year, an aggregate increase of $3.0 million.

The increase was principally due to the amortization of the acquired definite-lived intangible assets of S3.

1 unchanged sentence

Interest expense, net, includes items such as, interest expense and amortization of deferred financing costs on debt obligations.

For the year ended September 30, 2019 , interest expense, net, was $2.5 million compared to interest expense, net of $1.1 million in the prior year, an increase $1.4 million over the prior year period.

For the year ended September 30, 2020, interest expense, net, was $3.4 million compared to interest expense, net of $2.5 million in the prior year, an increase of approximately $1.0 million over the prior year period.

The increase in interest expense was due to the new credit facility used to finance the acquisition of S3.

Income Tax Expense

Income tax expense for fiscal year ended September 30, 2019 was $2.2 million , a decrease of $3.6 million from the prior fiscal year.

Fiscal 2018 was impacted by a $3.4 million write-down of our deferred tax asset due to the revaluation of our net operating loss carryforwards.

The decrease in the value of our deferred tax asset was primarily due to a decrease in the federal statutory rate of 34% to 21% rate as a result of the 2017 Tax Cut and Jobs Act enacted in December 2017.

The effective tax rate for the fiscal year ending September 30, 2019 was approximately 29% compared to the 32%, which was the blended effective tax rate, for the prior fiscal year ending September 30, 2018 .

Income tax expense for fiscal year ended September 30, 2020 was $2.9 million, an increase of approximately $0.7 million from the prior fiscal year.

The effective tax rate for the fiscal years ending September 30, 2020 and 2019 was approximately 29%.

Non-GAAP Financial Measures for Fiscal 2020 and 2019

1 unchanged sentence

The Company 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 year ended September 30, 2019 was approximately $13.9 million , an increase of approximately $2.9 million , or 26.3% , over the prior fiscal year.

This increase was principally due to the contribution of S3.

For fiscal 2019 and the comparative period of fiscal 2018, the Company's net income was impacted by transaction costs incurred as a result of the S3 acquisition and The Tax Cut and Jobs Act of 2017 ("TCJA of 2017"), which resulted in reduced corporate tax rates and revised rules regarding the usability of net operating losses.

These changes resulted in a discrete charge to the first quarter tax provision for fiscal 2018 of $3.4 million due to revaluing the benefit of our net operating losses.

Additionally, for comparability, the tax provision for the prior year periods has been restated using the current year rate of 29%.

In fiscal 2019, the Company incurred $1.4 million of acquisition-related expenses during the year ended September 30, 2019 for the acquisition of S3.

The Company i s excluding acquisition-related expenses from this measure because they were incurred as a result of a specific event, do not reflect the costs of our operations, and can affect the period-over-period assessment of operating results.

In addition, the non-GAAP financial measure we are including for net income adjusted for the effect of the Tax Cut and Jobs Act and the acquisition of S3, in total and on a per share basis, is presented on a tax-effected basis.

On a non-GAAP basis, Earnings Before Interest Taxes Depreciation and Amortization (“EBITDA”) for the year ended September 30, 2020 was approximately $20.5 million, an increase of approximately $6.5 million, or 47.0%, over the prior fiscal year.

This increase was principally due to the contribution of S3 and effective management of general and administrative expenses.

For fiscal 2020 and fiscal 2019, our net income was impacted by transaction costs incurred as a result of the IBA and S3 acquisitions, respectively.

In fiscal 2020, we incurred $1.0 million of acquisition-related expenses and in fiscal 2019, we incurred $1.4 million of acquisition-related expenses.

We are excluding acquisition-related expenses from this measure because they were incurred as a result of specific events, do not reflect the costs of our operations, and can affect the period-over-period assessment of operating results.

We are reporting this non-GAAP metric to demonstrate the impact of these events.

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 the Company's Board utilize these non-GAAP measures to make decisions about the use of the Company's resources, analyze performance between periods, develop internal projections and measure management's performance.

The Company believes that these non-GAAP measures are 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, the Company believes this enhances investors understanding of its business and results of operations .

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:

1 unchanged sentence

September 30,

2020 2019 Change

Net income $ 7,114 $ 5,324 $ 1,790

(i) Interest expense, net:

3,441 2,473 968

(ii) Provision for taxes 2,906 2,171 735

(iii) Depreciation and amortization 7,003 3,956 3,047

Reconciliation of GAAP net income to net income adjusted for the effect of the 2017 Tax Act, a non-GAAP measure:

EBITDA $ 20,464 $ 13,924 $ 6,540

Reconciliation of GAAP net income to net income adjusted for the effect of the acquisition costs, a non-GAAP measure:

(in thousands)

September 30,

Write-down of deferred tax assets

Pro-forma impact of tax rate change

2020 2019 Change

Net income $ 7,114 $ 5,324 $ 1,790

Acquisition costs 930 1,391 (461)

Tax effect of excluding acquisition costs, net

Net income, adjusted for the effect of TCJA of 2017 and the acquisition of S3

Tax effect of excluding acquisition costs (270) (403) 133

Net income adjusted for acquisition costs $ 7,774 $ 6,312 $ 1,462

Net income per diluted share $ 0.54 $ 0.41 $ 0.13

Impact of write-down of deferred tax asset

Pro-forma impact of tax rate change

Impact of acquisition costs, net 0.05 $ 0.08 (0.03)

Net income per diluted share, adjusted for the effect of TCJA of 2017 and the acquisition of S3

Net income per diluted share adjusted for acquisition costs $ 0.59 $ 0.49 $ 0.10

Liquidity and capital management

1 unchanged sentence

Cash flows from operations totaled approximately $19.5 million and $18.0 million for the years ended September 30, 2020 and 2019, respectively.

The increase in cash flow from operations was principally due to increased income from operations and effective management of working capital.

The increase in cash from operations was principally due to higher profitability.

We used $32.8 million and $67.5 million of cash in investing activities during fiscal 2020 and fiscal 2019, respectively.

The increase in cash used in investing activities was primarily due to the acquisition of S3.

The cash utilized in each respective fiscal year was predominantly due to acquisitions, IBA in fiscal 2020 and S3 in fiscal 2019.

Cash provided by financing activities during the fiscal years ended September 30, 2020 and 2019 was approximately $12.9 million and $44.9 million, respectively.

The credit facility entered on June 7, 2019 provided $70.0 million, which financed the S3 acquisition.

During the year ended September 30, 2019 , we had repayments of approximately $21.7 million under our credit facility, compared to $12.0 million for fiscal 2018 .

We expect to continue to use free cash flow to service term debt in advance of required principal amortization.

At September 30, 2019, we had $1.0 million available for future repurchases of our shares of common stock under a plan approved by our Board of Directors.

We have not repurchased shares of common stock during fiscal years 2019 and 2018.

The activity in each fiscal year was primarily the sourcing of capital to fund acquisitions and early repayment of principal on our senior term loan.

We entered into a $95 million credit facility entered on June 7, 2019 which included a $70.0 million term loan.

During the year ended September 30, 2020, we had repayments of approximately $19.0 million under our credit facility.

We amended and restated the credit facility on September 30, 2020 to acquire IBA.

We expect to continue to use operating cash flow to pay outstanding debt.

A summary of the change in cash and cash equivalents is presented below:

September 30,

Net cash provided by operating activities $ 19,451 $ 18,039

Net cash used in investing activities (32,830) (67,484)

Net cash provided by financing activities 12,946 44,880

Net change in cash and cash equivalents $ (433) $ (4,565)

Sources of cash and cash equivalents

As of September 30, 2019 , the Company's immediate sources of liquidity include cash and cash equivalents, accounts receivable, and access to its newly secured revolving line of credit facility.

As of September 30, 2020, our immediate sources of liquidity include cash and cash equivalents of approximately $1.4 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.

1 unchanged sentence

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 the Company's operations for twelve months from the date of issuance of these consolidated financial statements.

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.

Loan Facility

2 unchanged sentences

As of September 30, 2020

Maturity Date

First National Bank of Pennsylvania

Secured term loan (a)

LIBOR* + 4.0%

First National Bank of Pennsylvania

Secured revolving line of credit (b)

LIBOR* + 4.0%

Lender Arrangement Loan Balance Interest * Maturity Date

First National Bank of Pennsylvania Secured term loan (a) $ 70.0 LIBOR* + 3.5% 09/30/25

First National Bank of Pennsylvania Secured revolving line of credit (b) $ — LIBOR* + 3.5% 09/30/25

*LIBOR rate as of September 30, 2020 was 0.16%.

As of September 30, 2020, our LIBOR rate is subject to a minimum floor of 0.5%.

The floor affects interest payments for the periods after September 30, 2020.

(a) Represents the principal amounts payable on our secured term loan.

The $70.0 million secured term loan 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 on June 7, 2024 .

The Company made voluntary prepayments of term debt of $12.7 million in the year ending September 30, 2019, which satisfies mandatory principal amortization until March 31, 2022.

The principal of the term loan is payable in quarterly installments with the remaining balance due on September 30, 2025.

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

7 unchanged sentences

The loan agreement also requires us to comply with certain quarterly financial covenants including:

(i) a minimum fixed charge coverage ratio of at least 1.25 to 1.00 commencing with the quarter ending September 30, 2019, and for all subsequent periods, and (ii) a Funded Indebtedness to Adjusted EBITDA ratio not exceeding the ratio of 4.25:1.0 to 3.25:1.0 through maturity.

(i) a minimum fixed charge coverage ratio of at least 1.25 to 1.00, and (ii) a Funded Indebtedness to Adjusted EBITDA ratio not exceeding the ratio of 3.75:1.0 to 2.75:1.0 through maturity.

Adjusted EBITDA ratio is calculated by dividing the Company's total interest-bearing debt by net income adjusted to exclude (i) interest and other expenses, (ii) provision for or benefit from income taxes, if any, (iii) depreciation and amortization, and (iv) non-recurring charges, losses or expenses to include transaction and non-cash equity expense.

1 unchanged sentence

We are in compliance with all loan covenants and restrictions.

We are required to pay quarterly amortization payments commencing in December 2020 through September 2025.

The annual amount of principal amortization is based on a percentage of the loan balance at September 30, 2020.

The annual amortization amounts are $7.0 million for fiscal years 2021 and 2022 and $8.75 million each for fiscal years 2023 - 2025.

The quarterly payments are in equal installments.

In addition to quarterly payments of the outstanding indebtedness, the loan agreement also requires annual payments of a percentage of excess cash flow, as defined in the loan agreement.

3 unchanged sentences

In addition, the Company must make additional mandatory prepayment of amounts outstanding based on proceeds received from asset sales and sales of certain equity securities or other indebtedness.

On September 30 2019, we executed a floating-to-fixed interest rate swap with First National Bank as counter party.

The notional amount in the floating-to-fixed interest rate swap is $36 million;

the remaining outstanding balance of our term loan is subject to interest rate fluctuations.

For additional information regarding the schedule of future payment obligations, please refer to Note 11 Commitments and Contingencies .

(b) The secured revolving line of credit has a ceiling of up to $25.0 million and a maturity date of June 7, 2024.

The Company did not access funds from the revolving credit facility at the closing, and such facility will be available to support future cash needs.

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 6 of the consolidated financial statements.

On September 30, 2019, we executed a floating-to-fixed interest rate swap with First National Bank ("FNB") as counter party.

The notional amount in the floating-to-fixed interest rate swap is $36 million;

the remaining outstanding balance of our term loan is subject to interest rate fluctuations and the minimum LIBOR floor.

On the notional amount, the Company pays a fixed rate of 1.61%, plus applicable credit spread.

As a result, for the year ended September 30, 2020, interest expense increased by less than $0.2 million.

(b) The secured revolving line of credit has a ceiling of up to $25.0 million.

Borrowing on the line of credit is secured by liens on substantially all of the assets of the Company.

The Company accessed funds from the revolving credit facility during the year, but has no outstanding balance at September 30, 2020.

The Company's total borrowing availability, based on eligible accounts receivables at September 30, 2020, was $24.8 million.

As part of the revolving credit facility, the lenders agreed to a sublimit of $5 million for letters of credit for the account of the Company, subject to applicable procedures.

The revolving line of credit has a maturity date of September 30, 2025 and is subject to loan covenants as described above.

The Company is fully compliant with those covenants.

Contractual Obligations as of September 30, 2020

Payments Due By Period

Contractual obligations

(Amounts in thousands)

Contractual obligations Next 12 2-3 4-5 More than 5

(Amounts in thousands) Total Months Years Years Years

Debt Obligations $ 70,000 $ 7,000 $ 15,750 $ 47,250 $ —

3 unchanged sentences

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 under SEC rules.

The Company did not have any material off-balance sheet arrangements as of September 30, 2020 or subsequent to, or upon the filing of our consolidated financial statements in our Annual Report as defined under SEC rules.

Effects of Inflation

Inflation and changing prices have not had a material effect on the Company’s net revenues and results of operations, as the Company has been able to modify its prices and cost structure to respond to inflation and changing prices.

Inflation and changing prices have not had a material impact on the Company’s net revenues, results of operations, and cash flows as inflation has generally been limited.

However, the Company has been able to modify its prices and cost structure to respond to inflation and changing prices as needed and expects to be able to do so in future periods.

Critical Accounting Policies and Estimates

1 unchanged sentence

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.

Significant estimates include valuation of goodwill and intangible assets, measurement of prepaid workers’ compensation, valuation allowances established against deferred tax assets, measurement of contingent liabilities, accounts payable, workers’ compensation claims, and accrued expenses.

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, measurement of loss development on workers' compensation claims.

In addition, the Company estimates overhead charges and allocates such charges throughout the year.

3 unchanged sentences

Revenue Recognition

The Company’s revenue is derived from professional and other specialized service offerings to US Government agencies through a variety of contract types, 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.

Revenue on time and materials contracts is recognized based on hours performed times the applicable hourly rate, plus materials and other direct costs incurred on the contract.

Revenue on fixed fee for service contracts is recognized over the period of performance of the contract.

Revenue on cost reimbursable contracts is recognized equal to allowable costs incurred, plus a ratable portion of the applicable fee.

We generally operate as a prime contractor, but have also entered into contracts as a subcontractor.

Our Company's current business base is 96% prime contracts and 4% subcontracts.

Results for reporting periods beginning after October 1, 2018 are presented under ASC 606.

As such, we account for a contract when both we and the customer approve and commit;

our rights and those of the customer are identified, payment terms are identified;

the contract has commercial substance;

and collectability of consideration is probable.

At contract inception, we identify the distinct goods or services promised in the contract, referred to as performance obligations.

Then we determine the total transaction price for the contract;

which is the total consideration which we can expect in exchange for the promised goods or services in the contract.

The transaction price may include fixed or variable amounts.

Due to our contracts being predominantly time and material, the Company does not have variable consideration.

The transaction price is allocated to each distinct performance obligation using our best estimate of the standalone selling price for each service promised in the contract.

The primary method used to estimate standalone selling price is the hourly billing rate for each labor category identified in the contract with the customer.

Revenue is recognized when, or as, the performance obligation is satisfied.

We recognize revenue over time when there is a continuous transfer of control to our customer.

4 unchanged sentences

We use a cost-based input method to measure progress.

Refer to Note 4 of the accompanying notes to our Consolidated Financial Statements contained elsewhere in this Annual Report on Form 10-K for discussion relative to the Company's adoption of ASC-606.

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.

At September 30, 2019 , we performed a goodwill impairment evaluation.

We performed a qualitative 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, 2019 .

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 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.

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 Annual Report on Form 10-K for discussion relative to the Company's revenue recognition in accordance with ASC-606.

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.

2 unchanged sentences

Amortization expense is recorded when the software is placed in service on a straight-line basis over the estimated useful life of the software.

Intangible assets are recorded at a fair value and amortized on a straight-line basis over their assessed useful lives.

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.

At September 30, 2020, we performed a goodwill impairment evaluation.

We performed a qualitative 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, 2020, 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.

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.

10 unchanged sentences

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 a Monte Carlo binomial option pricing model to estimate the fair value of each stock option at the date of grant.

The Company uses a Monte 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.

2 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis