Credit Facilities

On May 3, 2016, the Company acquired 100% of the equity interests of Dayna International, LLC. We financed the acquisition, in part, through a combination of borrowings of $30.0 million under our new credit facility with Fifth Third Bank, and $2.5 million from a subordinated loan arrangement with Wynnefield Capital. Concurrent with these new lending arrangements, we terminated any existing credit facilities that DLH or its acquired subsidiary had in place.

A summary of our loan facilities and subordinated debt financing for the period ended June 30, 2016 is as follows:



	($ in Millions)
	As of June 30, 2016
Lender	Arrangement	Loan Balance		Interest	Maturity Date
Fifth Third Bank	Secured term loan $25 million ceiling (a)	$	24.7	LIBOR* + 3.0%	05/01/21
Fifth Third Bank	Secured revolving line of credit $10 million ceiling (b)	$	0.8	LIBOR* + 3.0%	05/01/18
Wynnefield Capital	Subordinated notes (c)	$	2.5	4% per annum	11/02/21
* LIBOR rate as of June 30, 2016 was 0.46%

(a) Represents the principal amounts payable on our Term Loan with Fifth Third Bank that partially funded our acquisition of Danya on May 3, 2016. The $25.0 million term loan from Fifth Third Bank was funded at closing and is secured by liens on substantially all of the assets of DLH and Danya. The principal of the Term Loan is payable in fifty-nine consecutive monthly installments of $312,500 beginning on June 1, 2016 with the remaining balance due on May 1, 2021.

The Term Loan agreement requires compliance with a number of financial covenants and contains restrictions on our ability to engage in certain transactions. Among other matters, we must comply with limitations on: granting liens; incurring other indebtedness; maintenance of assets; investments in other entities and extensions of credit; mergers and consolidations; and changes in nature of business. The loan agreement also requires us to comply with certain financial covenants including:

(i) a minimum fixed charge coverage ratio of at least 1.35 to 1.0 commencing with the quarter ending June 30, 2016, and for all subsequent periods, and

(ii) a Funded Indebtedness to Adjusted EBITDA ratio not exceeding the ratio of 2.99 to 1.0 at closing and thereafter a ratio ranging from 3.5 to 1.0 for the period through September 30, 2016 to 2.5 to 1.0 for the period ending September 30, 2018.

In addition to monthly payments of the outstanding indebtedness, the loan agreement also requires prepayments of a percentage of excess cash flow, as defined in the loan agreement. Accordingly, a portion of our cash flow from operations will be dedicated to the repayment of our indebtedness. DLH is fully compliant with all covenants under the Loan Agreement with Fifth Third Bank.

(b) The secured revolving line of credit from Fifth Third Bank has a ceiling of up to $10.0 million, of which $5.0 million was drawn at closing to cover partial financing of the Danya purchase. Borrowing on the line of credit is secured by liens on substantially all of the assets of DLH and Danya. At June 30, 2016, DLH had repaid all but $0.8 million on the revolving line of credit, including the $5.0 million draw at closing, as well as interim borrowing to maintain operational cash flow during May and June.

The Company's total borrowing availability, based on eligible accounts receivables at June 30, 2016, was $6.0 million. This capacity was comprised of $0.9 million in a stand-by letter of credit, $0.8 million in borrowing on the line of credit, and unused borrowing capacity of $4.3 million.

The revolving line of credit is subject to loan covenants as described above in the Term Loan, and DLH is fully compliant with those covenants.

(c)The Company issued subordinated notes to Wynnefield Capital in the aggregate principal amount of $2.5 million with the terms described in the above table. The maturity date will accelerate upon completion of an equity financing transaction, including a rights offering currently underway, resulting in at least $2.5 million of gross proceeds. Under the note agreement, we anticipate that Wynnefield Capital will serve as a standby purchaser in connection with this rights offering, subject to the negotiation and execution of a mutually acceptable standby purchase agreement. In partial consideration for the subordinated notes, we issued Wynnefield Capital warrants to purchase 53,619 shares of common stock. Using a binomial pricing model, we valued the warrants at $177 thousand which is amortized over a period of 60 months. Given the provisions that may reduce the exercise price of these warrants in the event that other convertible securities or options have a lower price, these warrants are classified as a liability. This topic is further discussed in Note 12. Related Party Transactions.

The Company had a working capital deficit of $3.6 million as of June 30, 2016, due principally to cash provided to fund the Danya acquisition. It is our expectation that cash flow from operations will resolve that deficit.

Management believes that: (a) cash and cash equivalents of approximately $2.8 million as of June 30, 2016; (b) the amount available under its line of credit that was in effect at June 30, 2016; and (c) planned operating cash flow should be sufficient to support the Company's operations for twelve months from the date of these financial statements.