UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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ý☒ | | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended September 30, 20182021 |
o☐ | | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| For the transition period from to |
Commission File No. 0-18492
DLH HOLDINGS CORP.
(Exact name of registrant as specified in its charter) |
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New Jersey | | 22-1899798 |
(State or other jurisdiction of incorporation or organization) | | 22-1899798
(I.R.S. Employer Identification No.)
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3565 Piedmont Road, NE | Building 3, | Suite 700 | | | 30305 |
| Atlanta, | Georgia | | | | (Zip code) |
| (Address of principal executive offices) | | 30305
(Zip Code)
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(770) 554-3545
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Exchange Act |
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Title of Each Classeach class | Trading Symbol(s) | Name of Each Exchangeeach exchange on Which Registeredwhich registered |
COMMON STOCK, PAR VALUE $.001 PER SHARECommon Stock | DLHC | THE NASDAQ STOCK MARKET, LLCNasdaq | Capital Market |
Securities registered pursuant to Section 12(g) of the Securities Exchange Act:NONE
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No ý
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15 (d) of the Securities Exchange Act. Yes o No ý
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ý No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (ss.229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act. (check one):
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Large accelerated filer o | ☐ | | Accelerated filer��filer o | |
Non-accelerated filerý |
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| Smaller reporting company ýReporting Company | ☒ |
| | | Emerging growth company oGrowth Company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accountant standards provided pursuant to Section 13(a) of the Exchange Act. Yes o No ý
Indicate by check mark whether the registrant has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o☐ No ý
The aggregate market value of the voting and non-voting common equity held by non-affiliates, as of the last business day of the registrant's most recently completed second fiscal quarter, March 31, 20182021, was $38,686,852.$54,418,928.
As of November 30, 2018December 3, 2021 there were 11,899,49412,714,269 shares of the Registrant’s common stock outstanding.
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DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents if incorporated by reference and the Part of the Form 10-K (e.g., Part I, Part II, etc.) into which the document is incorporated: (1) Any annual report to security holders; (2) Any proxy or information statement; and (3) Any prospectus filed pursuant to Rule 424(b) or (e) under the Securities Act of 1933.
Part III of this report incorporates information by reference from the Company's definitive proxy statement, which proxy statement is due to be filed with the Securities and Exchange Commission not later than 120 days after September 30, 2018.2021.
PART I
FORWARD-LOOKING STATEMENTS
Certain information included or incorporated by reference in this document may not address historical facts and, therefore, could be interpreted to be “forward-looking statements” as that term is defined in the Private Securities Litigation Reform Act of 1995 and other federal securities laws. All statements other than statements of historical fact are statements that could be deemed forward-looking statements, including projections of financial performance; statements of plans, strategies and objectives of management for future operations; any statement concerning developments, performance or industry rankings relating to products or services; any statements regarding future economic conditions or performance; any statements of assumptions underlying any of the foregoing; and any other statements that address activities, events or developments that DLH Holdings Corp and its subsidiaries (“DLH” or the “Company” and also referred to as “we,” “us” and “our”) intends, expects, projects, believes or anticipates will or may occur in the future. Forward-looking statements may be characterized by terminology such as “believe,” “anticipate,” “expect,” “should,” “intend,” “plan,” “will,” “estimates,” “projects,” “strategy” and similar expressions. These statements are based on assumptions and assessments made by the Company’s management in light of its experience and its perception of historical trends, current conditions, expected future developments and other factors it believes to be appropriate. These forward-looking statements are subject to a number of risks and uncertainties that include but are not limited to the factors set forth under Item 1A, Risk Factors in this Annual Report on Form 10-K. Any such forward-looking statements are not guarantees of future performance (financial or operating), and actual results, developments and business decisions may differ materially from those envisioned by such forward-looking statements. These forward-looking statements are subject to a number of risks and uncertainties that include but are not limited to the following: the outbreak of the novel coronavirus (“COVID-19”), 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 failure to achieve the anticipated benefits of recent acquisitions (including anticipated future financial operating performance and results); diversion of management’s attention from normal daily operations of the business and 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; the risks and uncertainties associated with client interest in and purchases of new services; compliance with new bank financial and other covenants; changes in client budgetary priorities; government contract procurement (such as bid protest, 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 recent and any future acquisitions; and the other risk factors set forth under Item 1A, Risk Factors, in this Annual Report on Form 10-K and in our other SEC filings. The forward-looking statements included herein apply only as of the date of this Annual Report on Form 10-K. The Company disclaims any duty to update such forward-looking statements, all of which are expressly qualified by the foregoing.foregoing, except as may be required by law.
ITEM 1. BUSINESS
Overview
DLH Holdings Corp. (“DLH” or the “Company” and also referred to as “we,” “us” and “our”) is a full-service provider of professional healthcaretechnology-enabled business process outsourcing, program management solutions, and socialpublic health research and analytics; primarily focused 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 governmentseveral agencies including the Department of Veteran Affairs ("VA"), Department of Health and Human Services ("HHS"), and the Department of Defense ("DoD"), and other government agencies.. Incorporated in New Jersey in 1969, the Company primarily contracts with its government customers through its subsidiaries.
DLH manages its operations from its principal executive offices at 3565 Piedmont Road NE, Building 3 Suite 700, Atlanta, Georgia 30305. The Company also maintains a national capital region office in Silver Spring, Maryland.In recent years we have successfully completed acquisitions to increase future organic growth, diversify our customer base, and to expand into adjacent markets. On September 30, 2020, we acquired Irving Burton Associates, LLC ("IBA") and on June 7, 2019, we acquired Social & Scientific Systems, Inc. ("S3").
The Company employs over 1,500 skilled employees working in more than 30 locations throughout the United States.
Our business offerings are focused onaligned to three primary sources of revenuemarket focus areas within the Federalfederal health services market space, as follows:space.
Department of •Defense and veteran health services, comprising approximately 65% of our current business base;Veteran Health Solutions;
•Human servicesServices and solutions, comprising approximately 31% of our current business base;Solutions;
•Public Health and Life Sciences
Public health and life sciences, comprising approximately 4% of our current business base.
Defense and veterans’ health solutions:Veterans’ Health Solutions: DLH provides a wide range ofcritical healthcare, servicestechnology, and deliverylogistics solutions to the Department of Veteran Affairs, US Army Medical Materiel CommandVA, Defense Health Agency ("DHA"), Tele-medicine and its subordinate US Army MedicalAdvanced Technology Research Acquisition Activity,Center ("TATRC"), Navy Bureau of Medicine and Surgery, Defense Health Agency and the Army Medical Command.Research and Material Command ("MRDC"). We believe thatspecialize in supporting our DLH-developed toolscustomers' evolving needs by rapidly deploying resources and processes, including e-PRAT® solutions.
The VA is responsible for delivering medical, educational, financing and SPOT-m®, along with our cloud-based case management system have been major contributors in differentiating the Company within this Federal market sector.
DLH provides a range of case management, physical and behavioral health examinations and associated medical administrationother life event services to enhancean estimated 20.3 million veterans. There are over 9 million veterans enrolled in the assessment and transition process for military personnel readiness commands and individual service members. AdvancingVA health care program which provides services that include the technology readiness level of new developments and modifications is a critical priority of our federal agency customers. Our project managers and biomedical engineers perform state-of-the-art research and development, testing and evaluation, and development of new medical systems and devices intended to enhance the medical readiness of troops in combat theaters across the globe. Our medical logistics support assists the uniformed services plan for fielding these new systems and devices. We deliver clinical drug and alcohol counseling services to Navy installations worldwide as part of the clinical preceptorship program, thereby improving the sailor health and readiness.
DLH is ondistribution of prescription drugs from the network of regional processing centers. We are at the forefront of ensuring that veterans receive their out-patient prescriptions on time, each day, through the VA CMOP pharmacy program which has been recognized for service excellence, citingearning the JD Powers evaluation of mail order pharmacy for each ofpharmacies multiple times over recent years. Further, we have supported the past eight years. We believe that our operational efficiency and expertise is well-aligned with the VA strategic goals to manage and improve operations and to deliver seamless and integrated support. Our unique capabilities and solutions help the VA optimize efficiency and help ensure program accountability as well as better service.
DLH is also engaged inVA's efforts to alleviate homelessness among veterans. Webroaden its abilities to reach veterans and their families through telemedicine technology and practices.
The DHA is a joint, integrated combat support agency whose mission is to provide a rangemedically ready force to the Army, Navy, and Air Force. To execute this mission the DHA supports the delivery of professional case managementintegrated, affordable and high quality health services to the armed forces. We support veterans' transition back intotheir mission by providing leading technology-enabled solutions and services. These solutions and services encompass new capabilities at the community. These servicesforefront of technology to include mental health evaluations, behavioral readiness, skills assessment, career counseling,artificial intelligence, machine learning, heath informatics, and job preparation services.robotics.
Human servicesServices and solutions: DLH providesSolutions: Our customers support local communities by promoting economic, educational, and social well-being of children. The mission extends to international communities through the prevention of epidemic diseases, response to natural disasters, and development of local economies. We support our customers by providing a wide range of human services and solutions to HHS, the Department of HealthHomeland Security ("DHS"), and Human Services'the Department of State ("State"). Our range of services support the critical missions of these agencies and their respective operating divisions, to include the Office of Head Start ("OHS"), Administration for Children and Families ("ACF"), the Federal Emergency Management Agency ("FEMA"), and the DepartmentUnited States Agency of Homeland Security. DLH provides a systems-based approach toward assuring that underserved childrenInternational Development ("USAID"). In this market, we combine subject matter expertise with our experience in information technology and youth throughout the country are getting proper educational and environmental support, including health, nutritional, parental, and behavioral services during their formative years. Performance verification of grantors delivering such services nationwide is conducted using an evolving system of monitoring, evaluation, tracking and reporting tools against selected key performance indicators relativeanalytics to school readiness. Large scale federally-funded, regionally managed, and locally delivered services require innovativeprovide large-scale program monitoring and protocol systems integration to ensure productiveevaluation; electronic medical records migration; data collection and cost-effective results, whichmanagement; and nutritional and social health assessments. Additionally, we deliver. Finally, DLH provides thealso provide large-scale data analytics as well as enterprise-level IT system architecture design, migration plan,planning, and ongoing maintenance (including call center) to manage themanagement of system implementation and capacity building using experienced subject matter experts and project management resources.
FEMA is charged with supporting the nation before, during and after disasters. They execute their mission by building a culture of preparedness and readying the nation for catastrophic disasters. FEMA supports state and local government in their response to disasters by coordinating the federal government's response to the local jurisdiction and deploying resources to the areas of need. During the COVID-19 pandemic, we have supported FEMA's efforts by rapidly deploying specialty resources to support resource constrained health-care providers.
Public Health and Life Sciences: In this market, our customers support national interests by ensuring and enhancing our capability to fight diseases, respond to national and regional medical crises, and support the administration of providing health care benefits to senior and life sciences: DLH provides a wide rangeat-risk members of our communities. In support of this mission, we provide services to Departmentmultiple operating divisions within HHS, including National Institutes of Health and Human Services'("NIH"), the Center for Disease Control and Prevention ("CDC"), and Centers for Medicare and Medicaid Services ("CMS"). Many of these agencies are engaged to combat the DepartmentCOVID-19 pandemic in a variety of capacities and we have partnered with our customers to deliver solutions that allow the Interior,nation and its people to combat the Department of Agriculture. DLHpandemic and sustain operations and services.
Our services include clinical trials, epidemiology studies, advancing disease prevention methods and health promotion to underserved and at-risk communitiescommunities. We deliver our services through development of strategic communication campaigns, research on emerging trends, health informatics analyses, and application of best practices including mobile, social, and interactive media. The Company leveragesWe leverage evidence-based methods and web technology to drive health equity to our most vulnerable populations through public engagement. For at-risk wildlife, DLH conducts biological research and surveys covering waterways in key parts of the country to protect and conserve aquatic populations as well as manage wetlands and habitats through environmental assessments. Projects often involve highly specialized expertise and research methodologies. This work is often very seasonal with regard to resources and funding.
Customers and Contract Mix
At present,The following table summarizes the Company derives 100% of its revenue from agencies of the Federal government, primarily as a prime contractor but also as a subcontractor to other Federal prime contractors. Our current contracts are within the following markets: Defense/VA (65%), Human Services and Solutions (31%) and Public Health/Life Sciences (4%); of which 95% of these contracts have been awarded on a Time and Materials basis, 3% are Cost plus Fixed Fee contracts and 2% are Firm Fixed Price contracts. In addition, substantially all accounts receivable, including unbilled accounts receivable, are from agencies of the U.S. Government as of September 30, 2018 and 2017. We believe that the credit risk associated with our receivables is limited due to the creditworthiness of these customers. The Company’s current business base is 99% prime contracts and 1% subcontracts.
Our largest customer continues to be the VA, which comprised approximately 63% and 62% of revenuerevenues by market for the years ended September 30, 20182021 and 2017, respectively. HHS2020, respectively:
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| (Amounts in thousands) | | | | | | Revenue | Percent of total revenue | | Revenue | Percent of total revenue |
| Defense/VA | | | | | | $ | 141,435 | | 57 | % | | $ | 101,656 | | 49 | % |
| Human Services and Solutions | | | | | | 37,260 | | 15 | % | | 40,962 | | 20 | % |
| Public Health/Life Sciences | | | | | | 67,399 | | 28 | % | | 66,567 | | 31 | % |
| Total Revenue | | | | | | $ | 246,094 | | 100 | % | | $ | 209,185 | | 100 | % |
Capabilities and certifications
We continue to invest in credentials that drive excellence in our support to current clients and create differentiation as we compete in this space. These investments include development of secure IT platforms, sophisticated data analytic tools and techniques, and implementation of a lean six sigma environment. We are actively pursuing additional credentials that will support our customer's needs in providing a secure cloud computing environment.
Our Infinibyte® Cloud solution has achieved FedRAMP In Process status and received agency authorization. It is currently under review by the General Services Administration ("GSA") review for being listed on the public market place, further enhancing our ability to demonstrate our technical expertise and offer our customers a secure cloud environment. We have invested in agile software development credentials for our technical staff, and have achieved Capability Maturity Model Integration ("CMMI") level 3. We believe that these qualifications will further enhance our value propositions for current programs, as well as future business we pursue. In addition, we continue to build upon our heritage of excellent customer satisfaction in support of key federal programs. We have achieved Joint Commission certification for the safety and quality of our healthcare services delivery against national standards. These nationally recognized best practices certifications demonstrate our commitment to continuous improvement and performance excellence that is critical to our organic growth objectives.
Position and Distribution of Services and Solutions in Our Markets
The markets in which comprised approximately 34%we compete and 34%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;
•primarily performing from the prime contractor position in contracts;
•strong past performance record, as evidenced by our VA customer scoring the highest in overall satisfaction in the J.D. Power National Pharmacy Study multiple times in recent years; and
•targeted expansion in critical national priority markets with Federal budget stability to include public health and epidemiological support related to COVID-19.
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 is distributed to time and materials contracts (75%), cost reimbursable contracts (20%) and the remaining are firm fixed price contracts (5%). We also provide services under Indefinite Duration, Indefinite Quantity ("IDIQ") and government wide acquisition contracts, such as 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 multi-year periods.
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 years ended September 30, 20182021 and 2017, respectively, is also a major customer. These agreements are subject2020, respectively:
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| | | | Year Ended |
| | | | September 30, |
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| (Amounts in thousands) | | | | | | Revenue | Percent of total revenue | | Revenue | Percent of total revenue |
| Department of Veterans Affairs | | | | | | $ | 110,078 | | 45 | % | | $ | 100,204 | | 48 | % |
| Department of Health and Human Services | | | | | | 91,543 | | 37 | % | | 95,026 | | 45 | % |
| Department of Defense | | | | | | 30,930 | | 13 | % | | 1,303 | | 1 | % |
| Customers with less than 10% share of total revenue | | | | | | 13,543 | | 5 | % | | 12,652 | | 6 | % |
| Total revenue | | | | | | $ | 246,094 | | 100 | % | | $ | 209,185 | | 100 | % |
Major Contracts
The revenue attributable to the Federal Acquisition Regulations. While 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, we believe that our strong working relationships and our effective service delivery support ongoing performance for the terms of the contracts. 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 materially reduced.
DLH’s revenues from the VA are derived from 16 separate contracts related to itsfor our performance of pharmacy and logistics services in support of the VA’s consolidated mail outpatient pharmacy program. Approximately 57%Nine contracts for pharmacy services, which represent approximately $62.8 million and $56.5 million of revenues for the Company’s current business base with the VA is derived from nine contracts (for pharmacy services) thatyears ended September 30, 2021 and 2020, are currently operating under extensionsa bridge contract through April 2019 pending completion of the procurement process forOctober 2022.
As previously reported, a new contract. A single renewal request for proposal (“RFP”) has currentlyhad been issued for thesethe nine (9) pharmacy contracts and we expect further extensions until the procurement process is completed. The RFP, however, requiresthat required the prime contractor be a service-disabled veteran owned small business (SDVOSB)(“SDVOSB”), which precludes the Companywould have precluded us from bidding on the RFP as a prime contractor. We havehad joined ana SDVOSB team as a subcontractor to respond to this RFP. ShouldHowever, the contract be awarded to an SDVOSB partner of DLH,government has canceled the Company expects to
continue to perform a significant amount of the contract’s volume of business. See “MD&A -- Potential Impact of Federal Contractual set-aside Laws and Regulations”previously issued RFP for further discussion of the pending procurement of 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 represent approximately $47.2 million and $43.7 million of revenues for the years ended September 30, 2021 and 2020. In April 2021, we were awarded a follow-on contract to provide medical logistics to the VA are performed under contracts which do not expire until May 2019,VA's CMOP program. The contract award was protested and subsequently canceled during the Company believes that these contracts will be similarly extended duringthird 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. These contracts mayOnce the government completes this process, we expect to be subject toawarded a new contract. In the same requirement of awarding to a SDVOSB prime contractor.interim, the existing contract has been extended through November 2022.
Our contract with HHS in support of itsthe Head Start program generated 31%$28.2 million and 29%$32.4 million of our revenue from HHS for the fiscal years ended September 30, 20182021 and 2017,2020, respectively. This contract is onhas a time and materials basis and consists of a base period of four option periods for a total term of five yearsperformance through April 2020. The Company's Danya subsidiary has provided these similar services to HHS since 1999. Danya was acquired by the Company in May 2016.2025.
Backlog
At September 30, 2018, our total backlog was approximately $172 million. Total backlog as of September 30, 2017 was approximately $167 million. 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 believeswe believe 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’sour major customers have historically exercised their contractual renewal options. At September 30, 2021, our total backlog was approximately $651.5 million compared to $688.4 million as of September 30, 2020.
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 September 30, 2018,2021, our funded backlog was approximately $60$191.0 million and our unfunded backlog was $112$460.5 million.
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. The award of an IDIQ contract does not represent a firm order for services and is subject to competitive bidding. Generally, under an IDIQ contract, the government is not obligated to order a minimum of services or supplies from its contractor, irrespective of the total estimated contract value.
Position and Distribution of Services and Solutions in Our Markets
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:
high barriers for entry into the selected markets in which we serve, resulting from customer requirements including past performance and subject matter expertise;
specialized credentials and licenses held by a substantial component of our employee base;
prime contractor position in contracts representing 99% of our revenue;
strong past performance record, as evidenced by our VA customer scoring the highest in overall satisfaction in the J.D. Power National Pharmacy Study over the past eight years; and
targeted expansion in critical national priority markets with Federal budget stability.
The Company operates primarily through prime contracts awarded by the government through competitive bidding processes. The Company has a diverse mix of contract vehicles with various agencies of the United States Government, which supports our overall corporate growth strategy. The majority of our contracts are time and materials type contracts. The Company has developed and continues to leverage a suite of solution offerings in a Lean Six Sigma environment, geared toward enhancing performance and productivity while reducing costs to its US government clients. We also provide services under IDIQ and government wide acquisition contracts, such as General 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.
We continue to invest in measures that drive excellence in our support to current clients and create differentiation as we compete in this space. We have invested in talent development initiatives, to include industry-leading learning management and applicant tracking systems. These will further enhance our highly qualified employee base and augment our efforts to infuse top
talent into our operations through world-class recruiting and talent management tools. Building upon our lean six sigma and ISO 9001 credentials, we have invested further in agile software development credentials for our technical staff and have recently achieved Capability Maturity Model Integration (CMMI) level 3. We believe that these qualifications will further enhance our value propositions for current programs, as well as future business we pursue. In addition, we continue to build upon our heritage of excellent customer satisfaction in healthcare staffing services and have recently achieved Joint Commission certification for the safety and quality of our healthcare services delivery against national standards. These nationally recognized best practices certifications demonstrate our commitment to continuous improvement and performance excellence that is critical to our organic growth objectives.
Competitive Landscape
Competitive solicitations and long business development cycles are characteristics of the government and defense industry in which we operate. For major program competition, the business acquisition cycle typically ranges from 18 to 36 months. Companies may pursue work either as prime contractor or partner with other companies in a subcontractor role. Those competing as prime contractors normally expend substantially more resources than those in subcontractor roles. We partner and compete with several large and small-business companies in pursuit of acquiring new business.
We built Infinibyte® Cloud as a platform-as-a-service cloud computing offering. It delivers a platform to U.S. government agencies, enabling them to develop, run, and manage applications without the need to build and maintain the underlying infrastructure. Infinibyte Cloud provides the networks, servers, storage, operating systems, middleware, databases, and other services for hosting government applications and data. Infinibyte Cloud is currently in process for FedRAMP, the government’s rigorous security compliance framework which provides a standardized approach to security assessment, authorization, and continuous monitoring for cloud service providers who host services used by the U.S. government, authorization and has received ready status. The solution is currently available on the FedRAMP marketplace.
Our competitor and comparable companiescompetitors include operating units within, among others: Booz Allen Hamilton Holding Corp., CACI International, Inc., ICF International, Inc., Leidos Holdings, Inc., Mantech International Corp., MAXIMUS, Inc., RTI, UnitedHealth Group, Inc., VSE Corporation operating under Optum, RTI International, and Westat, Inc.
We compete with these companies by leveraging our differentiating suite of tools and uniquely integrating people and processes resulting in highly competitive proposals and a solid track record of past performance. We believe that our proprietary tools and processes, including e-PRAT® and SPOT-m®, along with our Infinibyte® cloud-based management system differentiate us from our competitors. We compete for awards through a full and open competition on a "best-value basis". The Company drawsbest-value basis. We draw heavily from itsour consistently high qualityhigh-quality past performance ratings, proven and evolving technical differentiators, key personnel credentials and growing market recognition to compete. The Company believesWe believe that itsour track record, knowledge and processes with respect to government contract bidding processes represent significant competitive advantages. Further, we believe that the range and depth of educational experience and professional credentials and certifications held by our employees allows us to deploy highly-qualified teams to implement solutions to address the needs of our customers. Our recent and future success in this competitive landscape hinges on our ability to continue to uniquely integrate people, processes and technology tools to deliver best value solutions for our targeted clients (both government and industry partners).
Additionally, the Federal government may elect to restrict certain procurements, including for renewals of our current contracts, to bidders that qualify for certain special statuses such as veteran owned, small, or small disadvantaged businesses. For those procurements, we would be limited to a subcontractor role.
Intellectual Property
Because our business involves providing services to government entities, our operations generally are not substantially dependent upon obtaining and/or maintaining copyright or trademark protections, although our operations make use of such protections and benefit from them as discriminators in competition. We claim copyright, trademark and other proprietary rights in a variety of intellectual property, including each of our proprietary computer software and data products and the related documentation. DLH holds twoWe hold the registered trademarks, e-PRAT® and SPOT-m®, for our offerings that optimize resource allocation and supply chain management processes in connection with our business process management services.services, as well as the registered trademark, Infinibyte®, for our cloud-based solution. We maintain a number of trade secrets that contribute to our success and competitive distinction and endeavor to accord such trade secrets adequate protection to ensure their continuing availability.
Government Regulation
Our business is affected by numerous laws and regulations relating to the award, administration and performance of U.S. Government contracts. In addition, many federal and state laws materially affect the Company'sour operations. These laws relate to ethics, labor, tax, and employment matters. As is any employer DLH is, we are subject to federal and state statutes and regulations governing their standards of business conduct with the government.government, including that government contracts typically contain provisions permitting government clients to terminate contracts without cause with limited notice or compensation. The development of additional statutes and regulations and interpretation of existing statutes and regulations with respect to our industry can be expected to evolve over time. Through its corporate membership with the Professional Services Council and other affiliations, DLH monitorswe monitor proposed and pending regulations from relevant congressional committees and government agency policies that have potential impact upon our industry and our specific strategically targeted markets. As with any commercial enterprise, DLHwe cannot predict with certainty the nature or direction of the development of Federal statutes and regulations that will affect its business operations. See Risk Factors in Part I, Item 1A.
Human Capital Management and Employee Relations
As of September 30, 2018, the Company2021, we employed over 1,5002,300 employees performing in over 30 locations throughout the U.S. and one location overseas. Management believes that isit has good relations with its employees. In October 2014, employees at our Chicago location approved the adoption of union representation for non-management employees. Union representation has been certified for these employees and collective bargaining discussions are ongoing. Management does not expect this agreement to materially impact results of operations.
We seek to attract and retain the best people by providing them with opportunities to grow, build skills, and be appreciated for their contributions as they work to serve our clients. Our employees are critical to our success and are the reason we continue to execute at a high level. We believe our continued focus on making employee engagement a top priority will help us provide high quality insights and information to our clients.
We are committed to the health, safety and wellness of our employees. We provide our employees and their families with flexible and convenient health and wellness programs, including competitive benefits arrangement to address healthcare needs, including health insurance benefits, health savings and flexible spending accounts, paid time off, family leave, and family care resources. In response to the COVID-19 pandemic, we implemented significant changes that we determined were in the best interest of our employees, as well as the communities in which we operate, and which comply with government regulations. This includes having our employees work from home when possible, implementing additional safety measures for employees continuing critical on-site work, and supporting our employees to receive the COVID-19 vaccination within appropriate medical and religious bounds. In addition, we are monitoring potential impacts and will implement new protocols, when needed, related to the vaccination requirements imposed by the Executive Order on Ensuring Adequate Safety Protocols for Federal Contractors signed by President Biden on September 9, 2021.
We provide competitive compensation programs to help meet the needs of our employees. In addition to salaries, these programs include annual bonuses, stock awards, and participation in a 401(k) Plan. We have used targeted equity-based grants with performance-based vesting conditions to facilitate retention of key personnel. We also invest in talent development initiatives, to include industry-leading learning management, professional credentialing, and applicant tracking systems. These will further enhance our highly qualified employee base and augment our efforts to infuse top talent into our operations through world-class recruiting and talent management tools.
Corporate
Our principal executive offices are located at 3565 Piedmont Road NE, Building 3 Suite 700, Atlanta, Georgia 30305. Our telephone number is 770.554.3545(770) 554-3545 and our website is www.dlhcorp.com. References herein to our website are provided purely as a convenience and do not constitute, and should not be viewed as, incorporation by reference of the information contained on, or available through, the website.
Principal Executive Officers
Our principal executive officers are: |
| | | | | |
Name | | Age | | Positions |
Zachary C. Parker | | 61 |
| | President, Chief Executive Officer and Director |
Kathryn M. JohnBull | | 59 |
| | Chief Financial Officer |
Kevin Wilson | | 53 |
| | President, DLH Solutions, Inc. |
Helene Fisher | | 54 |
| | President, Danya International, LLC. |
Zachary C. Parker became Chief Executive Officer and President of DLH Holdings Corp. in February 2010. He has over 25 years of experience with the government services market, including DoD, holding several senior and executive management positions in addition to business development posts. His tenure includes approximately 19 years with Northrop Grumman, 7 years with GE Government Services (now Leidos Holdings, Inc.), and 3 and 2 years with VSE Corporation and VT Group, respectively. Prior to joining DLH, Mr. Parker held executive positions, including President and previously Executive Vice President for Business Development, within VT Group, from March 2008 to February 2010. His executive development includes the GE Crotonville Executive Development Program, Darden Executive Leadership Program, Northrop Grumman Action Leadership Program, Wharton Earned Value Management, California Institute of Technology Strategic Marketing Program, and is Lean Six Sigma Green Belt certified among other professional and technical certifications. Mr. Parker is active in both professional and community associations including the Governmental Affairs Committee and the Veteran Affairs Task Force of the Washington DC-based Professional Services Council and has served as industry co-chair of the Government/Industry Partnership Executive council. He is an advisory board member of Hero Health Hire (a non-profit entity). He has also served as board member on joint venture companies in the government services business. Mr. Parker earned his bachelor's degree from California State University, Northridge (with honors) specializing in Human Factors Engineering and has completed post-graduate studies.
Kathryn M. JohnBull was named Chief Financial Officer on June 25, 2012. She has over 25 years of experience within the government services market, principally with publicly-traded companies who experienced substantial organic and acquisitive growth. From January 2008 to June 2012, Ms. JohnBull was a senior financial executive with QinetiQ North America, serving in both corporate and operating group roles, including as Senior Vice President—Finance for its overall operations. From August 2002 to December 2007, Ms. JohnBull served as Operations Segment Chief Financial Officer for MAXIMUS, Inc, a publicly-traded provider of business process outsourcing, consulting and systems solutions. Prior industry positions, with emphasis on tax and treasury, were with BDM International, Inc. and United Defense. Ms. JohnBull is a certified public accountant and from 1985 to 1988 was with Arthur Andersen & Company as a tax manager and staff. Ms. JohnBull received a Bachelor of Business Administration, summa cum laude, from the University of Tulsa.
Kevin Wilson was appointed as the President of our subsidiary DLH Solutions in October 2008, previously serving as the Director of DLH Solutions from June 2007 through September 2008. From January 2004 to June 2007, Mr. Wilson served as the Director of Strategic Alliances of government services provider SAIC, Inc., where he was responsible for business development in the domestic and foreign defense markets. From March 1997 to January 2004, Mr. Wilson was the Program Manager for a multiyear defense services contract with Endress Hauser Systems & Gauging. Mr. Wilson also worked at Tracer Research Corporation from January 1990 to March 1997, where he was Project Manager for the United States Air Force, Air Combat Command professional services contract. Mr. Wilson holds a BS in Business Marketing from Northwest Missouri State University.
Helene Fisher was appointed as President of our Danya International LLC subsidiary commencing on January 3, 2017. Ms. Fisher has extensive industry experience working on high profile federal government programs. Prior to joining DLH, from 2013 to December 2016 she held leadership positions with MAXIMUS Federal Solutions, LLC as Vice President/Program Director, including responsibility for operations and program performance of a major initiative for the Department of Health and Human Services and several Federal Civilian agencies. Prior to joining MAXIMUS, she held the position of Vice President, Federal Healthcare/Defense/Homeland Security Solutions with Xerox Federal Solutions, LLC from 2009 to 2012. Earlier in her career she held various senior and managerial positions with Northrop Grumman Information Systems and Lockheed Martin Enterprise Solutions & Services. Ms. Fisher holds Project Management Professional (PMP) and Information Technology Infrastructure Library (ITIL) certifications. Ms. Fisher previously served as a U.S. Army Officer, Signal Corps, Captain. She earned a Bachelor of Science degree in Mathematics/Computer Science from Prairie View A&M University, and a Master of Arts degree in Computer Information and Resources from Webster University.
Available Information
We file registration statements, periodic and current reports, proxy statements, and other materials with the Securities and Exchange Commission (SEC). You may read and copy any materials we file with the SEC at the SEC's Public Reference Room at 100 F Street, NE, Room 1580, Washington, DC 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains a website at www.sec.gov that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC, including our filings. We make our public filings with the SEC, including our Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all exhibits and amendments to these reports available free of charge on our website, http://www.dlhcorp.com, as soon as reasonably practicable after we file such material with the SEC. We also make available on our website reports filed by our executive officers and directors on Forms 3, 4 and 5 regarding their ownership of our securities. These materials are available in the "Investor Relations" portion of our website, under the link "SEC Filings." We also use our website to make generally available important information about our company. Important information, including press releases, presentation and financial information regarding our company, is routinely posted on and accessible on the Investor Relations subpage of our website, which is accessible by clicking on the tab labeled "Investor Relations" on our website home page. Information contained on our website is not part of this Annual Report on Form 10-K or any other filings we make with the SEC.
ITEM 1A. RISK FACTORS
As provided for under the Private Securities Litigation Reform Act of 1995 ("1995 Reform Act"), we wish to caution shareholders and investors that the following important factors, among others discussed throughout this Annual Report on Form 10-K for the fiscal year ended September 30, 2018,2021, have affected, and in some cases could affect, our actual results of operations and cause our results to differ materially from those anticipated in forward looking statements made herein. Our business, results of operations, cash flows and financial condition may be materially and adversely affected due to any of the following risks. The risks described below are not the only ones we face. Additional risks we are not presently aware of or that we currently believe are immaterial may also impair our business operations. The trading price of our common stock could decline due to any of these risks. 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 the Industry in which we Compete
Our Industryresults 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 coronavirus (COVID-19) pandemic and the mitigation efforts to control its spread have 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, including our ability to fully perform on our contracts as a result of government actions or reduction in personnel due to the federal vaccine mandate which requires all federal contractors to be vaccinated; 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 remains uncertain. The duration and spread of the pandemic still 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.
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 or changed its budgets or budgetary priorities.us.
At present, the Company derives 100%we derive 99% of itsour 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. Government as of September 30, 20182021 and 2017.2020. 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.
Our largest customer continues to be the VA, which comprised approximately 63% and 62% of revenue for the years ended September 30, 2018 and 2017, respectively. HHS which comprised approximately 34% and 34% of revenue for the years ended September 30, 2018 and 2017, respectively, is also a major customer. As previously discussed, a substantialA significant portion of our
revenue from these major customers derives fromis concentrated in a limitedsmall number of programs. Accordingly,contracts and we remaincould be seriously harmed if we were unable to continue providing services under, or unsuccessful in our recompete efforts on, these contracts.
We are dependent upon the continuation of our relationships with the VA and HHS. These agreements are subject to the Federal Acquisition Regulations. While thereHHS 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 Companywe will ultimately provide to VA and HHS under itsour 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 our effective service delivery support ongoing performance for the terms of the contracts.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 we were to lose any of our material current contracts, or if the amount of services we provide to them wasis materially reduced.
The U.S. government may prefer veteran-owned, minority-owned, small and small disadvantaged businesses; therefore, we may have fewer opportunities to bid for or could lose a portion of our existing work to small businesses.
As a result of the Small Business Administration (SBA) set-aside program, the U.S. government may decide to restrict certain procurements only to bidders that qualify as veteran owned, minority-owned, small, or small disadvantaged businesses. In such cases, we would not be eligible to perform as a prime contractor on those programs and would be limited to work as a subcontractor on those programs. 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 the VA, 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 the best value to the United States. The effect of these set-aside provisions may limit our ability to compete for prime contractor positions on programs that we have targeted for growth and to maintain our prime contractor position as current contracts are subject to renewal.
DLH’s revenues from the VA are derived from 16 separate contracts related to its performance of pharmacy and logistics services in support of the VA’s consolidated mail outpatient pharmacy program. Approximately 57% of the Company’s current business base with the VA is derived from nine contracts (for pharmacy services) that are currently operating under extensions through April 2019 pending completion of the procurement process for a new contract. A single renewal request for proposal (“RFP”) has currently been issued for these nine contracts and we expect further extensions until the procurement process is completed. The RFP, however, requires the prime contractor be a service-disabled veteran owned small business (SDVOSB), which precludes the Company from bidding on the RFP as a prime contractor. We have joined an SDVOSB team as a subcontractor to respond to this RFP. Should the contract be awarded to an SDVOSB partner of DLH, the Company expects to continue to perform a significant amount of the contract’s volume of business. The remaining seven contracts for logistics services to the VA are performed under contracts which do not expire until May 2019, and the Company believes that these contracts will be similarly extended during the procurement process. These contracts may be subject to the same requirement of awarding to a SDVOSB prime contractor.
Loss of our GSA schedule contracts or other contracting vehicles could impair our ability to win new business and perform under existing contracts.
We currently hold multiple GSA schedule contracts, including a Federal supply schedule contract for professional and allied healthcare services and the logistics worldwide services contract. 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 quarterly 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. 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.
U.S. Government programs are subject to annual congressional budget authorization and appropriation processes. For many programs, Congress appropriates funds on a fiscal year basis even though the program performance period may extend over several years. Consequently, programs are often partially funded initially and additional funds are committed only as Congress makes further appropriations. Further, congressional seats may change during election years, and the balance of spending priorities may change along with them. The recently completed mid-term elections in November 2018, which resulted in a shift in the majority party of the House of Representatives, could result in changing Federal spending priorities. These potential shifts in spending priorities could result in lower funding for our VA and Head Start programs.
In recent years, past, we have seen frequent debates regarding the scope of funding of our customers, thereby leading to budgetary uncertainty for our Federal customers. Changes in federal government budgetary priorities could directly affect our financial performance. A significant decline in government expenditures, a shift of expenditures away from programs that we support or a change in federal government contracting policies could cause federal government agencies to reduce their purchases under contracts, to exercise their right to terminate contracts at any time without penalty or not to exercise options to renew contracts. In the event the budgets or budgetary priorities of the U.S. Government entities with which we do business are delayed, decreased or underfunded, our consolidated revenues and results of operations could be materially and adversely affected.
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. 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. If there are no changes to at least the discretionary spending levels set by the BCA for the government’s 2020 fiscal year, full sequestration of defense and non-defense spending will return on October 1, 2019. The sequester mechanism, if left unmodified beyond the government’s 2019 fiscal year, along with other pressures on government spending, could negatively impact our business. 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 63%45% and 62%48% of Company revenue for the yearyears ended September 30, 20182021 and 2017,2020, respectively, were exempt from the spending caps established under Federal government sequestration targets enacted in 2013.
A final FY2019 budget was not passed into law prior to October 1, 2018 for all of the federal government. Consequently,The government is currently operating under a continuing resolution (CR) waswhich expires February 18, 2021. 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, on September 28, 2018the 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 subsequently extended through December 21, 2018. Congress has approved and the president has signed two "minibus" bills funding several agencies, including the Department of Veterans Affairs and Health and Human Services. If Congress cannot complete its budget process or does not pass another CR by December 21, 2018, a shutdownmany of the federal government will result at that time, as happened in October 2013 and again, briefly, in January 2018. Were a shutdown to occur, it could result in our incurringcompanies we compete against have substantial labor or other costs without being reimbursed under our contracts orresources. Further, the delaying or cancelling of certain programs. This could also have an adverse effect on our business and our industry.
The U.S. Government contract bid process is highly competitive, complex and sometimes lengthy, and is subject to protest and implementation delays.
ManyThe markets in which we operate are highly competitive. Further, many of our contracts and task orders with the Federal government are awarded through a competitive bidding process, which is complex and sometimes lengthy. We expect that much of the business thatopportunities we will seek in the foreseeable future will continue to be awarded through competitive bidding. Furthermore, budgetary pressures and developments in the procurement process have caused many government customers to increasingly purchase goods and services through IDIQ contracts, GSA schedule contracts and other government-wide acquisition contracts. These contracts, some of which are awarded to multiple contractors, have increased competition and pricing pressure, requiring that we make sustained post-award efforts to realize revenue under each such contract. Many of our competitors are larger and have greater resources than we do, larger client bases and greater brand recognition. Our competitors, individually or through relationships with third parties, may be able to provide clients with different or greater capabilities or benefits than we can provide. If we are unsuccessful in competing with these other companies, our revenues and margins may materially decline.
Overall, the competitive bidding process presents a number of risks, including the following: (i) we expend substantial cost and managerial time and effort to prepare bids and proposals for contracts that we may not win, and to defend those bids through any protest process; (ii) we may be unable to estimate accurately the resources and cost structure that will be required to service any contract we win; and (iii) we may encounter expenses and delays if our competitors protest or challenge awards of contracts to us in competitive bidding, and any such protest or challenge could result in the resubmission of bids on modified specifications, or in the termination, reduction or modification of the awarded contract. If we are unable to win particular contracts, we may be prevented from providing the services that are purchased under those contracts for a number of years. If we are unable to consistently win new contract awards over any extended period, our business and prospects will be adversely affected and that could cause our actual results to differ materially and adversely from those anticipated. In addition, upon the expiration of a contract, if the customer requires further services of the type provided by the contract, there is frequently a competitive rebidding process. There can be no assurance that we will win any particular bid, or that we will be able to replace business lost upon expiration or completion of a contract, and the
termination or non-renewal of any of our significant contracts could cause our actual results to differ materially and adversely from those anticipated.
If a bid is won and a contract awarded, there still is the possibility of a bid protest or other delays in implementation. Our business could be adversely affected by delays caused by our competitors protesting major contract awards received by us, resulting in the delay of the initiation of work. It can take many months to resolve protests by one or more of our competitors of contract awards we receive. 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 and maintain the necessary security clearances or other qualifications we and they needrequired 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. Depending on the level of clearance, security clearances can be difficult and time-consuming to obtain. If we or our employees lose or are unable to obtain necessary security clearances, we may not be able to win new business and our existing clients could terminate their contracts with us or decide not to renew them. To the extent we cannot obtain or maintain the required security clearances for our employees working on a particular contract, we may not derive the revenue anticipated from the contract, which could cause our results to differ materially and adversely from those anticipated.
Our business is regulated by complex federal procurement and contracting laws and regulations, and we are subject to periodic compliance reviews by governmental agencies.
We must comply with complex laws and regulations relating to the formation, administration, and performance of federal government contracts.contracts, including the Federal Acquisition Regulation, which, among other things, requires us to certify and disclose cost and pricing data and to divest work in the event of certain organizational conflicts of interest. These laws and regulations create compliance risk and affect how we do business with our federal agency clients, and may impose added costs on our business. The government may in the future reform its procurement practices or adopt new contracting rules and regulations, including cost accounting standards, that could be costly to satisfy or that could impair our ability to obtain new contracts. Additionally, the government may face restrictions from new legislation, regulations or government union pressures, on the nature and amount of services the government may obtain from private contractors. Any reduction in the government’s use of private contractors to provide federal services could cause our actual results to differ materially and adversely from those anticipated.
Our performance on our U.S. Government contracts and our compliance with applicable laws and regulations, including submission of invoices to our customers, are subject to audit by the government. The scope of any such audits could span multiple fiscal years. These agencies review our performance on contracts, pricing practices, cost structure and compliance with applicable laws, regulations and standards. They also evaluate the adequacy of internal controls over our business systems, including our purchasing, accounting, estimating, earned value management, and government property systems. If a government review or investigation uncovers illegal activities or activities not in compliance with a particular contract's terms or conditions, we may be subject to civil and criminal penalties and administrative sanctions, including termination of contracts, forfeiture of profits, harm to our reputation, suspension of payments, fines, and suspension or debarment from doing business with Federal government agencies. Any of these events could lead to a material reduction in our revenues, cash flows and operating results. Further, as the reputation and relationships that we have established and currently maintain with government personnel and agencies are important to our ability to maintain existing business and secure new business, damage to our reputation or relationships could have a material adverse effect on our revenue and operating results.
Federal government contracts may be terminated at will and may contain other provisions that may be unfavorable to us.
Many of the U.S. Government programs in which we participate as a contractor or subcontractor may extend for several years. The U.S. Government may modify, curtail or terminate its contracts and subcontracts for convenience and to the extent that a contract award contemplates one or more option years, the Government may decline to exercise such option periods. Accordingly, the maximum contract value specified under a government contract or task order awarded to us is not necessarily indicative of the revenue that we will realize under that contract. Due to our dependence on these programs, the modification, curtailment or termination of our major programs or contracts may have a material adverse effect on our results of operations and financial condition. In addition, federal government contracts contain provisions and are subject to laws and regulations that give the government rights and remedies, some of which are not typically found in commercial contracts, including allowing the government to (i) cancel multi-year contracts and related orders if funds for contract performance for an subsequent year become unavailable; (ii) claim rights in systems and software developed by us; (iii) suspend or debar us from doing business with the federal government or with a governmental agency; and (iv) impose fines and penalties and subject us to criminal prosecution. If the government terminates a contract for convenience, we may recover only our incurred or committed costs, settlement expenses and profit on work completed prior to the termination. If the government terminates a contract for default, we may be unable to recover even those amounts and instead may be liable for excess costs incurred by the government in procuring undelivered items and services from another source. Depending on the value of a contract, such termination could cause our actual results to differ materially and adversely from those anticipated. In addition,
We may not receive the full amounts authorized under the contracts included in our backlog, which could reduce our revenue in future periods below the levels anticipated.
Our total backlog consists of funded and unfunded amounts and may include estimates and assumptions about matters that cannot be determined with certainty at the time the backlog is calculated. Funded backlog represents contract value that has been appropriated by a customer and is expected to be recognized into revenue. Unfunded backlog represents the sum of the unappropriated contract value on executed contracts and unexercised option years that is expected to be recognized into revenue. The maximum contract value specified under a government contract or task order awarded to us is not necessarily indicative of the revenue that we will realize under that contract. For example, we generate revenue from IDIQ contracts, which do not require the government to purchase a pre-determined amount of goods or services under the contract. 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 fundedpartially-funded at any point during their term and somewith the unfunded portion subject to future appropriations by Congress. As a result of the work intendeda lack of appropriated funds or efforts to be performed under such contractsreduce federal government spending, our backlog may remain unfunded pending subsequent appropriations of funds to the contract by the procuring agency.
not result in revenue. Accordingly, our backlog may not result in actual revenue in any particular period, or at all, which could cause our actual results to differ materially and adversely from those anticipated.
Our business growth and profitable operations require that we develop and maintain strong relationships with other contractors with whom we partner or otherwise depend.depend on.
We may enter into future teaming ventures with other companies, which carry risk in regards to maintaining strong, trusted working relationships in order to successfully fulfill contract obligations. Teaming arrangements may include being engaged as a subcontractor to a prime contractor, engaging a subcontractor on a contract for which we are the prime contractor, or entering into a joint venture with another company. We may lack control over fulfillment of such contracts, and poor performance on the contract could impact our customer relationship, even if we perform as required. We expect to depend on relationships with other contractors for a portion of our revenue in the foreseeable future. Our revenue and operating results could differ materially and adversely from those anticipated if any such prime contractor or teammate choseschooses to offer directly to the client services of the type that we provide or if they team with other companies to provide those services.
Restrictions on or other changes to the federal government’s use of service contracts may harm our operating results.
We derive virtually all of our revenue from service contracts with the federal government. The government may face restrictions from new legislation, regulations or government union pressures, on the nature and amount of services the government may obtain from private contractors (i.e., insourcing versus outsourcing). Any reduction in the government’s use of private contractors to provide federal services could cause our actual results to differ materially and adversely from those anticipated.
Our earnings and margins may vary based on the mix of our contracts and programs.
At September 30, 2021, our backlog includes cost reimbursable, time-and-materials, and fixed-price contracts. 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.
We are exposed to risk from misconduct or fraud by our employees, or employees of our teaming partners. Such violations could include intentional disregard for Federal government procurement regulations, engaging in unauthorized activities, seeking reimbursement for improper expenses, or falsifying time records. Employee misconduct could also involve the improper use of our clients' sensitive or classified information and result in a serious harm to our reputation. While we have appropriate policies in effect to deter illegal activities and promote proper conduct, it is not always possible to deter employee misconduct. Precautions to prevent and detect this activity may not be effective in controlling such risks or losses,losses. As a result of employee misconduct, we could face fines and penalties, loss of security clearance and suspension or debarment from contracting with the federal government, 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, 2018, certain of our officers are under employment contracts. However, we do not maintain "key person" 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. Our placement of employees 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, unemployment taxes 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, state unemployment taxes 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.
We rely heavily on our ability to attract and retain qualified professionals and other personnel who possess the skills, experience and licenses necessary in order to provide our solutions for our assignments. Our business is materially dependent upon the continued availability of such qualified personnel. Our inability to secure qualified personnel would have a material adverse effect on our business. The cost of attracting qualified personnel and providing them with attractive benefits packages may be higher than we anticipate and, as a result, if we are unable to pass these costs on to our clients, our profitability could decline. 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.
We are highly dependent on the proper functioning of our information systems.
We are highly dependent on the proper functioning of our information systems in operating our business. Critical information systems used in daily operations match employee resources and client assignments and track regulatory credentialing. They also perform payroll, billing and accounts receivable functions. While we have multiple back up plans for these types of contingencies, our information systems are vulnerable to fire, storm, flood, power loss, telecommunication outages, physical or software break-ins and similar events. If our information systems become inoperable, or are otherwise unavailable, these functions would have to be accomplished manually, which in turn could impact our financial viability, due to the increased cost associated with performing these functions manually.
Our systems and networks may be subject to cybersecurity breaches.
Many of our operations rely heavily upon technology systems and networks to receive, input, maintain and communicate participant and client data pertaining to the programs we manage. If our systems or networks were compromised by a security breach, we could be adversely affected by losing confidential or protected information of program participants and clients, and we could suffer reputational damage and a loss of confidence from prospective and existing clients. Similarly, if our internal networks were compromised, we could be adversely affected by the loss of proprietary, trade secret or confidential technical and financial data. The loss, theft or improper disclosure of that information could subject the Company to sanctions under the relevant laws, 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.
We may have difficulty identifying and executing acquisitions on favorable terms and therefore may grow at slower than anticipated rates.
One of our potential paths to key growth is to selectively pursue acquisitions. Through acquisitions, we may be able to expand our base of federal government customers, increase the range of solutions we offer to our customers and deepen our penetration of existing markets and customers. We may not identify and execute suitable acquisitions. To the extent that management is involved in identifying acquisition opportunities or integrating new acquisitions into our business, our management may be diverted from operating our core business. Without acquisitions, we may not grow as rapidly otherwise, which could cause our actual results to differ materially and adversely from those anticipated.
We may encounter other risks in regard to making acquisitions, including:
increased competition for acquisitions may increase the costs of our acquisitions;
non-discovery or non-disclosure of material liabilities during the due diligence process, including omissions by prior owners of any acquired businesses or their employees in complying with applicable laws or regulations, or their inability to fulfill their contractual obligations to the federal government or other customers; and
acquisition financing may not be available on reasonable terms or at all.
Any of these risks could cause our actual results to differ materially and adversely from those anticipated.
We may have difficulty integrating the operations of companies we acquire, which could cause actual results to differ materially and adversely from those anticipated.
The success of our acquisition strategy will depend upon our ability to successfully integrate any businesses we may acquire in the future. The integration of these businesses into our operations may result in unforeseen operating difficulties, absorb significant management attention and require significant financial resources that would otherwise be available for the ongoing development of our business. These integration difficulties include the integration of personnel with disparate business backgrounds, the transition to new information systems, coordination of geographically dispersed organizations, loss of key employees of acquired companies, and reconciliation of different corporate cultures. For these or other reasons, we may be unable to retain key customers of acquired companies. Moreover, any acquired business may not generate the revenue or net income we expected or produce the efficiencies or cost-savings we anticipated. Any of these outcomes could cause our actual results to differ materially and adversely from those anticipated.
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.
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 consolidated financial statements reflect our estimates of the tax effects of the current tax laws and regulation.
Risks Relating to Our Information Technology Systems and Intellectual Property
We are highly dependent on the proper functioning of our information systems.
We are highly dependent on the proper functioning of our information systems in operating our business. Critical information systems used in daily operations match employee resources and client assignments and track regulatory credentialing. They also perform payroll, billing and accounts receivable functions. While we have multiple back up plans for these types of contingencies, our information systems are vulnerable to fire, storm, flood, power loss, telecommunication outages, physical break-ins, cyber-attack, ransomware, and similar events. If our information systems become inoperable, or are otherwise unavailable, these functions would have to be accomplished manually, which in turn could impact our financial viability, due to the increased cost associated with performing these functions manually.
Our systems and networks may be subject to cybersecurity breaches.
Many of our operations rely heavily upon technology systems and networks to receive, input, maintain and communicate participant and client data pertaining to the programs we manage. Any systems failures, whether caused by us, a third-party service provider, or unauthorized intruders and hackers, or due to situations such as computer viruses, natural disasters, or power shortages, could cause loss of data or interruptions or delays in our business or that of our customers. If our systems or networks were compromised by a security breach, we could be adversely affected by losing confidential or protected information of program participants and clients, and we could suffer reputational damage and a loss of confidence from prospective and existing clients. Similarly, if our internal networks were compromised, we could be adversely affected by the loss of proprietary, trade secret or confidential technical and financial data. The loss, theft or improper disclosure of that information could subject the Company to sanctions under the relevant laws, 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. Further, our property and cyber insurance may be inadequate to compensate us for all losses that may occur as a result of any system or operational failure or disruption and, as a result, our actual results could differ materially and adversely from those anticipated. In addition, in order to provide services to our customers, we often depend upon or use customer systems that are supported by the customer or third parties. Any security breach or system failure in such systems could result in an interruption of our customer’s operations which could cause us to experience significant delays under a contract, and a material adverse effect on our results of operations.
Additionally, a number of projects require us to receive, maintain and transmit protected health information or other types of confidential personal information. That information may be regulated by the Health Insurance Portability and Accountability Act (HIPAA), the Health Information Technology for Economic and Clinical Health Act of 2009, Internal Revenue Service regulations and other laws. 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.
One of our potential paths to growth is to selectively pursue acquisitions. Through acquisitions, we may be able to expand our base of customers, increase the range of solutions we offer to our customers and deepen our penetration of existing markets and customers. We may not identify and execute suitable acquisitions. To the extent that management is involved in identifying acquisition opportunities or integrating new acquisitions into our business, our management may be diverted from operating our core business. Without acquisitions, we may not grow as rapidly otherwise, which could cause our actual results to differ materially and adversely from those anticipated.
We may encounter other risks in regard to making acquisitions, including:
•increased competition for acquisitions may increase the costs of our acquisitions;
•non-discovery or non-disclosure of material liabilities during the due diligence process, including omissions by prior owners of any acquired businesses or their employees in complying with applicable laws or regulations, or their inability to fulfill their contractual obligations to the federal government or other customers; and
•acquisition financing may not be available on reasonable terms or at all.
Any of these risks could cause our actual results to differ materially and adversely from those anticipated.
We may have difficulty integrating the operations of companies we acquire, which could cause actual results to differ materially and adversely from those anticipated.
The success of a potential future acquisition strategy depends upon our ability to successfully integrate the businesses. We may have difficulty integrating a business that we may acquire in the future. The integration of a business into our operations may result in unforeseen operating difficulties, absorb significant management attention and require significant financial resources that would otherwise be available for the ongoing development of our business. These integration difficulties include the integration of personnel with disparate business backgrounds, the transition to new information systems, coordination of geographically dispersed organizations, loss of key employees of acquired companies, and reconciliation of different corporate cultures. For these or other reasons, we may be unable to retain key customers of acquired companies. Moreover, any acquired business may not generate the revenue or net income we expected or produce the efficiencies or cost-savings we anticipated. Any of these outcomes 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 an acquisitionacquisitions and we must make the scheduled principal and interest payments on the facility and maintain compliance with other debt covenants.
On May 2, 2016,September 30, 2020, we entered into a loanan amended and restated credit agreement with Fifth ThirdFirst National Bank under which the bank agreed to provide (i) a $25.0 million senior secured term loanof Pennsylvania and certain other lenders (the “Term Loan”) and (ii) a revolving loan facility in an aggregate amount of up to $10 million (the “Revolving Loan Facility”“Credit Agreement”). Specifics of the loan agreement are discussed in Note 5 of the notes to our Consolidated Financial Statements contained elsewhere in this Annual Report on Form 10-K.
The loan agreementCredit 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 withtransactions, including limitations on: granting liens; incurring other indebtedness; maintenance ofdisposing assets; making investments in other entitiesentities; and extensions of credit;completing other mergers and consolidations; and changes in nature
of business.consolidations. Also, the loan agreementCredit Agreement requires us to comply with certain financial covenants including a minimum fixed charge coverage ratio and a Funded Indebtedness to Adjusted EBITDAmaximum total leverage ratio. In addition, to monthly payments of the outstanding indebtedness, the loan agreementCredit Agreement also requires prepayments of a percentage of excess cash flow, as defined in the loan agreement.flow. Accordingly, a portion of our cash flow from operations will bewas dedicated to the repayment of our indebtedness and we expect future cash flow to be used to reduce our indebtedness.
The loan agreement provides for customary events of default, following which the bank may, at its option, terminate the commitments under the loan agreement, stop making additional credit available, declare amounts outstanding, including, principal and accrued interest and fees, payable immediately, and enforce any and all rights and interests of the lenders. The defined events of default include, 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 agreementCredit 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.
WeIn 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. In March 2021, the Financial Conduct Authority of the
United Kingdom has announced that LIBOR will no longer be provided for the one-week and two-month U.S. dollar settings after December 31, 2021 and that publication of the U.S. dollar settings for the overnight, one-month, three-month, six-month and 12-month LIBOR rates will cease after June 30, 2023. 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 substantial amount of goodwillmaterial adverse impact on our balance sheet. Future write-offs of goodwill may have the effect of decreasing our earnings or increasing our losses.
We have previously 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, 2018, we had net operating losses carryforwards, or NOLs, of approximately $23.8 million for U.S. Federal tax purposes. Our U.S. 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 ourbusiness, financial condition orand results of operation and create the risk that we may need to adjust our accounting for these changes.operations.
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 deductions, executive compensation, 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 Toto 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.
The price of our common stock could be subject to fluctuations and may decline in the future due to risks defined herein, or due to factors beyond our control, including changes in market conditions such as increased interest rates, a recession, or a change in Federal spending priorities. Stock markets in general have experienced volatility that has often been unrelated to the operating performance of a particular company. These broad market fluctuations could adversely affect the trading price of our common stock.
Since we have not paid dividends on our common stock, you cannot expect dividend income from an investment in our common stock.
We have not paid any dividends on our common stock since our inception and do not contemplate or anticipate paying any dividends on our common stock in the foreseeable future. Current lenders do and future potential lenders may prohibit us from paying dividends without prior consent. Therefore, holders of our common stock may not receive any dividends on their investment in us. Earnings, if any, may be retained and used to finance the development and expansion of our business.
We may issue preferred stock with rights senior to our common stock, which may adversely impact the voting and other rights of the holders of our common stock.
Our certificate of incorporation authorizes the issuance of "blank check" preferred stock with such designations, rights and preferences as may be determined from time to time by our board of directors up to an aggregate of 5,000,000 shares of preferred stock. Accordingly, our board of directors is empowered, without stockholder approval, to issue preferred stock with dividend, liquidation, conversion, voting or other rights, which would adversely affect the voting power or other rights of the holders of our common stock. In the event of issuance, the preferred stock could be utilized, under certain circumstances, as a method of discouraging, delaying or preventing a change in control of our Company, which could have the effect of discouraging bids for our Company and thereby prevent stockholders from receiving the maximum value for their shares. Although we have no present intention to issue any shares of our preferred stock, in order to discourage or delay a change of control of our Company, we may do so in the future. In addition, we may determine to issue preferred stock in connection with capital raising efforts and the terms of the stock so issued could have special voting rights or rights related to the composition of our Board.
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, 2018,To the followingextent 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 outstanding:
Executive and employee optionsattempted to purchase 2.13 millionbe sold within a short period of time, the market for our shares ofwould be adversely affected. It is also unclear whether or not the market for our common stock 1.33 millioncould absorb a large number of attempted sales in a short period of time. Moreover, the terms upon which are vested and immediately exercisable. The weighted averagewe will be able to obtain additional equity capital may be adversely affected, since the holders of these securities can be expected to exercise price ofthem at a time when we would, in all likelihood, be able to obtain any needed capital on terms more favorable to us than the outstanding stock options is $4.31 per share.
Warrants issued to Wynnefield Capital to purchase 53,619 shares of common stock with an exercise price of $3.73 per share.
terms provided by those securities. To the extent that these securities are exercised, dilution to our shareholders will occur. 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.
Anti-takeover provisions in our Articles of Incorporation make a change in control of our Company more difficult.
The provisions of our Articles of Incorporation and the New Jersey Business Corporation Act, together or separately, could discourage potential acquisition proposals, delay or prevent a change in control and limit the price that certain investors might be willing to pay in the future for our common stock. Among other things, these provisions:
•require certain supermajority votes; and
•establish certain advance notice procedures for nomination of candidates for election as directors and for shareholders' proposals to be considered at shareholders' meetings.
In addition, the New Jersey Business Corporation Act contains provisions that, under certain conditions, prohibit business combinations with 10% shareholders and any New Jersey corporation for a period of five years from the time of acquisition of shares by the 10% shareholder. The New Jersey Business Corporation Act also contains provisions that restrict certain business combinations and other transactions between a New Jersey corporation and 10% shareholders.
Our executive officers, directors and significant stockholders will be able to influence matters requiring stockholder approvalapproval.
As of September 30, 2018,2021, our executive officers, directors and largest shareholder (Wynnefield Capital, Inc. and its affiliates) own approximately 44% of our outstanding common stock. Within this amount, Wynnefield Capital, Inc. and its affiliates own approximately 34%31% of our outstanding common stock. This concentration of ownership may have the effect of delaying, preventing or deterring a change in control of our company,the Company, could deprive our stockholders of an opportunity to receive a premium for their common stock as part of a sale or merger of our company and may negatively affect the market price of our
common stock. These transactions might include proxy contests, tender offers, mergers or other purchases of common stock that could give our stockholders the opportunity to realize a premium over the then-prevailing market price for shares of our common stock.
In addition, persons associated with Wynnefield Capital, Inc. currently serve on our Board of Directors. As a result of this share ownership and relationships on our Board of Directors, our largest stockholder will be able to influence all affairs and actions of our company, including matters requiring stockholder approval such as the election of directors and approval of significant corporate transactions. The interests of our principal stockholders may differ from the interests of the other stockholders.
General Business Risks
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. Other factors which may cause our cash flows and results of operations to vary from quarter to quarter include: the terms and progress of contracts; expenses related to certain contracts which may be incurred in periods prior to revenue being recognized; the commencement, completion or termination of contracts during any particular quarter; the timing and terms of award contracts; and government budgetary delays or shortfalls. 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. In particular, if the federal government does not adopt, or delays adoption of, a budget for each fiscal year beginning on October 1, or fails to pass a continuing resolution, federal agencies may be forced to suspend our contracts and delay the award of new and follow-on contracts and orders due to a lack of funding. 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. Further, changes in the volume of activity and the number of contracts commenced, completed or terminated during any quarter may cause significant variations in our cash flows and results of operations. Therefore, period-to-period comparisons of our operating results may not be a good indication of our future performance.
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 provide 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, 2021, 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.
We may be subject to fines, penalties and other sanctions if we do not comply with laws governing our business.
Our business lines operate within a variety of complex regulatory schemes, including but not limited to the FAR, Federal Cost Accounting Standards, the Truth in Negotiations Act, as well as the regulations governing accounting standards. If a government audit finds improper or illegal activities by us or we otherwise determine that these activities have occurred, we may be subject to civil and criminal penalties and administrative sanctions, including termination of contracts, forfeiture of profits, suspension of payments, fines and suspension or disqualification from doing business with the government. Any adverse determination could adversely impact our ability to bid in response to RFPs in one or more jurisdictions. Further, as a government contractor subject to the types of regulatory schemes described above, we are subject to an increased risk of investigations, criminal prosecution, civil fraud, whistleblower lawsuits and other legal actions and liabilities to which private
sector companies are not, the result of which could have a material adverse effect on our operating results, cash flows and financial condition.
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.
ITEM 1B. UNRESOLVED STAFF COMMENTS
There are no unresolved staff comments.
ITEM 2. PROPERTIES
OperationsWe do not own any real estate or other properties. As of September 30, 2021, we operate five locations in the United States and Facilities
DLH'sone location in Kampala, Uganda; occupying a total of approximately 118 thousand square feet. The Company's corporate headquarters areis located at 3565 Piedmont Road NE, Building 3 Suite 700, Atlanta, Georgia 30305. The Company maintains30305, we presently maintain a National Capital Region office in Silver Spring, Maryland. All of our offices are in reasonably modern and well-maintained buildings and we believe that our facilities are adequate for present operations and the foreseeable future. Our leases expire between 2022 and 2031.
InFor the fiscal year ended September 30, 2018, DLH's2021, the Company's total lease expense for operations was approximately $0.9$3.5 million. See Note 6. Leases in the Consolidated Financial Statements contained in the Annual Report on Form 10-K for additional information regarding our lease commitments.The following is summary information on DLH's facilities as of September 30, 2018:
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| | | | ($ in thousands) | |
| Location | Approximate Square Feet | | Approximate Annual Lease Expense | | Expiration Date |
| | | | | | |
| Corporate Headquarters | | | | | |
| | 3565 Piedmont Road, NE, Building 3, Suite 700 | 12,275 |
| | $306.42 | | 4/30/2024 |
| | Atlanta, GA 30305 | | | | | |
| | | | | | |
| National Capital Region Office | | | | | |
| | 8737 Colesville Road, Suite 1100 | 22,400 |
| | $594.47 | | 4/30/2020 |
| | Silver Spring, MD 20910 | | | | | |
| | | | | | | |
ITEM 3. LEGAL PROCEEDINGS
As a commercial enterprise and employer, the Company is subject to various claims and legal actions in the ordinary course of business. These matters can include professional liability, employment-relations issues, workers’ compensation, tax, payroll and employee-related matters, other commercial disputes arising in the course of its business, and inquiries and investigations by governmental agencies regarding our employment practices or other matters. The Company is not aware of any pending or threatened litigation that it believes is reasonably likely to have a material adverse effect on its results of operations, financial position or cash flows.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Principal Market
Our common stock is currently traded on The Nasdaq Capital Market under the symbol "DLHC."
Market Information
The ranges of high and low sales prices for the Company's common stock for the periods indicated below are:
Common Stock
|
| | | | | | | | |
| FISCAL YEAR 2018 | | LOW | | HIGH |
| 1st Quarter | | $ | 5.55 |
| | $ | 6.83 |
|
| 2nd Quarter | | $ | 5.54 |
| | $ | 6.30 |
|
| 3rd Quarter | | $ | 5.00 |
| | $ | 6.23 |
|
| 4th Quarter | | $ | 5.01 |
| | $ | 6.30 |
|
|
| | | | | | | | |
| FISCAL YEAR 2017 | | LOW | | HIGH |
| 1st Quarter | | $ | 4.47 |
| | $ | 7.38 |
|
| 2nd Quarter | | $ | 4.61 |
| | $ | 6.72 |
|
| 3rd Quarter | | $ | 4.10 |
| | $ | 6.36 |
|
| 4th Quarter | | $ | 5.33 |
| | $ | 6.49 |
|
The above quotations reported by Nasdaq, represent prices between dealers and do not include retail mark-ups, markdowns or commissions. Such quotations do not necessarily represent actual transactions. On September 28, 2018, the Company's common stock had a closing price of $5.76 per share.
Dividends
The Company has not declared or paid any cash dividends on its common stock since inception and has no present intention of paying any cash dividends on its common stock in the foreseeable future.
Approximate Number of Equity Security Holders
As of September 30, 2018,2021, there were 11,899,49412,714,269 shares of common stock outstanding held of record by approximately 9293 persons. The number of stockholders of record is not representative of the number of beneficial stockholders due to the fact that many shares are held by depositories, brokers, or nominees. As of September 30, 2018,2021, the Company estimates that there are approximately 1,300 beneficial owners of its common stock.
Sales of Unregistered Securities
During the period covered by this report, the Company did not issue any securities that were not registered under the Securities Act of 1933, as amended, except as has been reported in previous filings with the SEC or as set forth elsewhere herein.
Registrant Repurchases of Securities
In August 2021, in connection with exercise of employee stock options, a holder of options surrendered to the company a total of 6,314 shares of our common stock already held by him in partial consideration of the payment of the exercise price of such options. Such event is reflected on the table below.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | ($ in thousands) |
| Period | | Total Number of Shares Purchased | | Average Price Paid Per Share | | Total Number of Shares Purchased As Part of Publicly Announced Programs | | Dollar Value of Shares that May Yet Be Purchased Under the Plan or Program |
| July 2021 | | — | | | $ | — | | | — | | | $ | — | |
| August 2021 | | 6,314 | | | 10.75 | | | — | | | — | |
| September 2021 | | — | | | — | | | — | | | — | |
| Total | | 6,314 | | | 10.75 | | | — | | | $ | — | |
Securities Authorized for Issuance under Equity Compensation Plans
DLHThe Company presently utilizes one shareholder-approved equity compensation plan under which it makes equity compensation awards available to officers, directors, employees and consultants. The table set forth below discloses outstanding and available awards under our equity compensation plans as of September 30, 2018.2021. All grants of equity securities made to executive officers and directors are presently made under the 2016 Omnibus Equity Incentive Plan (the “2016 Plan”). Prior to the adoption of the 2016 Plan, awards of equity securities were made under the 2006 Long Term Incentive Plan.
21
|
| | | | | | | | | |
| Equity Compensation Plan Information |
| Plan Category | (a) Number of Securities to be issued upon exercise of outstanding options, warrants and rights | | (b) Weighted Average exercise price of outstanding options, warrants and rights (or fair value at date of grant) | | (c) Number of securities remaining available for future issuances under equity compensation plans (excluding securities reflected in column (a)) |
| Equity Compensation Plans Approved by Security Holders: | |
| | |
| | |
|
| Employee stock options | 2,134,000 |
| | $ | 4.31 |
| | 1,660,625 |
|
| | | | | | | | | | | | | | | | | |
| Equity Compensation Plan Information |
| Plan Category | (a)
Number of Securities
to be issued
upon exercise of
outstanding options,
warrants and rights | | (b)
Weighted Average
exercise price of
outstanding options,
warrants and rights
(or fair value at
date of grant) | | (c)
Number of securities
remaining available for
future issuances under
equity compensation
plans (excluding securities
reflected in column (a)) |
| Equity Compensation Plans Approved by Security Holders: | | | | | |
| Employee stock options | 2,373,500 | | | $ | 7.77 | | | 1,730,850 | |
Registrant Repurchases of Securities
On September 18, 2013, the Company announced that our Board of Directors authorized a stock repurchase program (the Program) under which we could repurchase up to 350 thousand of shares of our common stock through open market transactions in compliance with Securities and Exchange Commission Rule 10b-18, privately negotiated transactions, or other means. This repurchase program does not have an expiration date.
During fiscal year ended September 30, 2018 the Company did not repurchase any shares of its common stock pursuant to the program. As of September 30, 2018 there is a total of $77 thousand remaining for repurchases under the program.
The following table provides certain information with respect to the status of our stock repurchase program as of fourth quarter ended September 30, 2018:
|
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | ($ in thousands) |
| Period | | Total Number
of Shares
Purchased | | Average Price
Paid Per Share | | Total Number of
Shares Purchased As Part of Publicly
Announced Programs | | Dollar Value of Shares that May Yet Be Purchased Under the Plan or Program |
| July 2018 | | — |
| | $ | — |
| | | — |
| | | | $ | 77 |
| |
| August 2018 | | — |
| | $ | — |
| | | — |
| | | | $ | 77 |
| |
| September 2018 | | — |
| | $ | — |
| | | — |
| | | | $ | 77 |
| |
| Fourth Quarter Total | | — |
| | $ | — |
| | | — |
| | | | $ | 77 |
| |
ITEM 6. SELECTED FINANCIAL DATA
We are a "smaller reporting company" as defined by Regulation S-K and as such, are not required to provide the information contained in this item pursuant to Regulation S-K.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 Annual Report on Form 10-K for the year ended September 30, 2018.2021. This discussion 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. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances are forward-looking statements. The forward-looking statements are not historical facts, but rather are based on current expectations, estimates, assumptions and projections about our industry and business. Our actual results could differ materially from the results contemplated by these forward-looking statements.
Business Overview:
DLH isWe 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. DLH derives 100%We derive 99% of itsour 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").
Publicly traded with more than 1,500 employees working in overIn recent years we have successfully completed acquisitions to increase future organic growth, diversify our customer base, and to expand into adjacent markets. On June 7, 2019 we acquired Social & Scientific Systems, Inc. ("S3") and on September 30, locations throughout the United States, DLH was recently recognized by GovWin IQ as a top service provider in the Health Services Spending category.2020, we acquired Irving Burton Associates, LLC ("IBA").
Our business offerings are focused onaligned to three primary sources of revenuemarket focus areas within the Federalfederal health services market space, as follows:space.
Department of •Defense and veteran health services, comprising approximately 65% of our current business base;Veteran Health Solutions;
•Human Services and Solutions;
•Public Health and Life Sciences.
Major Customers
Human servicesOur largest customer is the VA, which comprised approximately $110.1 million and solutions, comprising$100.2 million of revenue for the years ended September 30, 2021 and 2020, respectively. Our second largest customer, HHS, comprised approximately 31%$91.5 million and $95.0 million of revenue for the years ended September 30, 2021 and 2020, respectively. We remain dependent upon the continuation of our current business base;relationships with the VA and
Public health and life sciences, comprising approximately 4% HHS as a significant portion of our current business base.revenue is concentrated in a small number of contracts with these customers. 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:
DLH'sOur mission is to become the mostexpand our position as a trusted provider of technology-enabled healthcare and public health services, medical logistics, and readiness enhancement services to active duty personnel, securing the freedom of our nation, veterans, and civilian populations and communities. Our primary focus within the defense agency markets include military service membersmembers' and veterans' requirements for telehealth services, behavioral healthcare, medication therapy management, health IT commodities, process management, clinical systems support, and healthcare delivery. Our primary focus within the civilian agency markets includeincludes healthcare and social programs delivery and readiness. These include compliance monitoring on large scale programs, technology-enabled program management, consulting, and digital communications solutions ensuring that education, health, and social standards are being achieved within underserved and at riskat-risk populations. We believe these business development priorities will position DLHthe Company to expand within top national priority programs and funded areas.
Recent significant contract award activity
As previously announced, we were recently awarded two short-term task orders under a FEMA contract to provide support for states seeking temporary medical staffing support and COVID-19 related community testing, vaccination and therapy. The ceiling value of these awards is approximately $107 million over base periods of three months, which will be largely earned in DLH's first quarter of fiscal year 2022. Further, our customer has exercised the first of three one month contract options on the medical staffing task order, which has additional value of approximately $35 million. This option is expected to be earned in DLH's second quarter of fiscal year 2022. Additional options may be exercised, and would be expected to impact the second quarter financial performance. We expect that our operating margin on these FEMA task orders will be approximately 5% of revenue. The FEMA contracts provide for advance payments for the substantial staffing resources that are required to be deployed; therefore, we do not expect these contracts to consume operating cash flow.
Federal budget outlook for fiscal 2019:year 2022:
The PresidentPresident’s budget proposal for fiscal year 2022 outlines many initiatives that include focusing on rebuilding and investing in our country’s physical infrastructure; expanding access to early childhood education; improving the affordability of child care and healthcare; and enacting broad tax reform. The budget also details additional proposals to expand economic opportunity, tackle the United States' broad agenda callsclimate 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 increased militaryfuture public health crises, expanding access to healthcare, and in certain cases, domestic spending, with reduced spending on foreign programs. Most relevantdefeating diseases and epidemics such as, but not limited to, DLH’s targeted markets, the President advocates the lifting of sequestration caps in the defense sector; increasing infrastructure spending in the United States;opioid and tightening controls on immigration.
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. Since March 2013,
While Congress 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. On December 2, 2021, Congress passed and, on December 3, 2021, the President signed, a CR providing funds to the federal government hasthrough February 18, 2022. When a CR expires, unless appropriations bills have been operating under sequestration requiredpassed by Congress and signed by the BCA. Under sequestration, constraints on discretionary expenditures have taken place each of the government’s fiscal years since 2013 and, unless the BCAPresident, or a new CR is amended or repealed, will continue through the government’s Fiscal Year 2021. Congress has amended the BCA primarily through the passage of bipartisan budget acts, most recently in February 2018. The Bipartisan Budget Act of 2018 (the “2018 Budget Act”), passed and signed into law, in February 2018, established a framework and increased the caps on defense and non-defense discretionary spending for the government’s 2018 and 2019 fiscal years. A final FY2019 budget was not passed into law prior to October 1, 2018 for all of the federal government. Consequently, a continuing resolution (CR) was passed into law on September 28, 2018 and subsequently extended through December 21, 2018. Congress has approved and the president has signed two "minibus" bills funding several agencies, including the Department of Veterans Affairs and Health and Human Services. If Congress cannot complete its budget process or does not pass another CR by December 21, 2018, a shutdown of the federal government will result at that time, as happened in October 2013 and again, briefly, in January 2018. Were a shutdown to occur, it could result in our incurring substantial labor or other costs without being reimbursed under our contracts or the delaying or canceling of certain programs. This could also have an adverse effect on our business and our industry. Accordingly, Congress must pass and the president must sign legislation to fund the remaining federal agencies and programs either by discretionary funding through annual appropriations acts or interim CR prior to December 21, 2018 or federal agencies and programs will lack funding and must cease operations, or shutdown, except in certain emergency situations or when the law authorizes continued activity. Government shutdowns necessitate furloughs of several hundred thousand federal employees, require cessation or reduction of many government activities,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 affect numerous sectorsexecutive branches of the economy. federal government. As such, we do not anticipate or expect any significant changes to our operations.
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.
Department of Veterans Affairs (VA)("VA") health spending trends:
DLHThe Company continues to see critical need for expanded health care solutions within our sector of the Federal health market, largely focused on the needs of veterans and their families. Serving nearlyover nine million veterans each year, the VA operates the nation's largest integrated health care system, with more than 1,700 hospitals, clinics, community living centers, readjustment counseling centers, and other facilities.
On September 21, 2018,The VA is requesting a total of $269.9 billion for fiscal year 2022, a 10% increase above fiscal year 2021 enacted levels. It includes $117.2 billion in discretionary funding, an increase of $9.7 billion, and $152.7 billion in mandatory funding, an increase of $14.9 billion from fiscal year 2021. The VA research program is expected to allocate increased funding to advance the President signed the Energy and Water, Legislative Branch, and Military Construction and Veterans Affairs Appropriations Act which provides full-year funding through September 30, 2019 for various projects and
activitiesDepartment’s understanding of the Federal Government.impact of traumatic brain injury and toxic exposure(s) on long-term health outcomes, coronavirus related research and impacts, and precision oncology. The billbudget also includes $2.6 billion (from all funding sources) for criticalthe total telehealth program. The VA healthcare programs, including theis continuing to expand this program because of its ability to leverage VA MISSION Actproviders and Veterans Electronic Health Record system.to provide better services to veterans. We believe our capabilities and service delivery models are aligned with our customers growth initiatives.
Department of Health and Human Services (HHS)("HHS") spending trends:
HHS is the principal federal department charged with protecting the health of all Americans and providing essential human services. DLHThe Company has existing contracts with multiple agencies under HHS, and we are actively pursuing growth opportunities within this vital agency.
The fiscal year 2022 budget request proposes $131.8 billion in discretionary budget authority for HHS, spending priorities are being evaluated by the Trump administration with particular focus on the Affordable Care Act programs which are outsidean increase of our market space.
On September 28, 2018 the President signed$25 billion from the fiscal 2019 appropriations billyear 2021 appropriated amount, and $1.5 trillion in mandatory funding. The budget includes $52 billion for the DepartmentsNational Institutes of Labor, Health and Human Services and Education. The bill targets("NIH"), an agency of HHS, an increase of $9 billion above fiscal year 2021 enacted, reflecting the Administration’s commitment to increasing investments in medicaltransformative biomedical research to advance the health of the nation and biodefense. Priority issues addressedpromote innovation. The budget requests $37 million for Telehealth which is $3 million above fiscal year 2021 enacted, to promote health services and distance learning with telehealth technologies. The budget also invests in FY19 funding include researchprograms that improve the health and well-being of young children and their families. This includes $11.9 billion for cancerthe Office of Head Start. We believe our capabilities and Alzheimers disease,past performance are well aligned with the service sought under this budget increase.
Department of Defense ("DoD") health spending trends:
The Military Health System ("MHS") is one of the largest health care systems and a historical levelpreeminent military medical enterprise, serving over 9 million beneficiaries. As a part of the DoD, the Defense Health Agency manages a global health care network of military and civilian medical professionals, more than 400 military hospitals and clinics around the world, and supports the delivery of health services to MHS beneficiaries. The funding and personnel to help combatsupport the opioid epidemic.
Large defense companies divesting from Federal services market:
Large government contractors have been divestingMHS’s mission is referred to as the Unified Medical Budget ("UMB"). The fiscal year 2022 UMB request for the Defense Health Program is $35.6 billion, an increase of $1.5 billion from the Federal services market to increase their focus on advanced military products, which typically generate higher margins than services. This trend may open up increased opportunities for smaller Federal service providers such as DLH.fiscal year 2021 appropriated amount.
Industry consolidation among federal government contractors:
There has been active consolidation and a strong increase in M&Amerger and acquisition activity among federal government contractors over the
past few years that we expect to continue, into fiscal year 2019 and beyond, fueled by public companies leveraging strong
balance sheets to pursue strategic acquisitions that supplement organic growth and create shareholder value.sheets. Companies often
look to acquisitions that augment core capabilities, contracts, customers, market differentiators, stability, cost synergies, and
higher margin and revenue streams. We plan continued focus on our core capabilities, as we look at potential future strategic
acquisitions to grow our business and enhance shareholder value.
Potential Impactimpact of Federal Contractualfederal contractual set-aside Lawslaws and Regulations: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 the VA, 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 to the United States. When two qualifying small businesses cannot be identified, the VA may proceed to award contracts following a full and open bid process.
At present, the Company derives 100% of its revenue from agencies of the Federal government, primarily as a prime contractor but also as a subcontractor to other Federal prime contractors. Our largest customer continues to be the VA, which comprised approximately 63% and 62% of revenue for the year ended September 30, 2018 and 2017, respectively. HHS which comprised approximately 34% and 34% of revenue for the year ended September 30, 2018 and 2017, respectively, is also a major customer. These agreements are subject to the Federal Acquisition Regulations. While 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, we believe that our strong working relationships and our effective service delivery support ongoing performance for the terms of the contracts. 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, or if the amount of services we provide to them was materially reduced.
Our revenues from the VA are derived from 16 separate contracts related to its performance of pharmacy and logistics services in support of the VA’s consolidated mail outpatient pharmacy program. Approximately 57% of the Company’s current business base with the VA is derived from nine contracts (for pharmacy services) that are currently operating under extensions through April 2019 pending completion of the procurement process for a new contract. A single renewal request for proposal (“RFP”) has currently been issued for these nine contracts and we expect further extensions until the procurement process is completed. The RFP, however, requires the prime contractor be a service-disabled veteran owned small business (SDVOSB), which
precludes us from bidding on the RFP as a prime contractor. We have joined an SDVOSB team as a subcontractor to respond to this RFP. Should the contract be awarded to an SDVOSB partner of DLH, we expect to continue to perform a significant amount of the contract’s volume of business. The remaining seven contracts for logistics services to the VA are performed under contracts which do not expire until May 2019, and we believe that these contracts will be similarly extended during the procurement process. These contracts may be subject to the same requirement of awarding to a SDVOSB prime contractor.
The award of any contract is subject to an evaluation of proposals submitted and adjudication of any and all protests filed. The Company believes that protests may be filed for any award announcement. Based on historical experience, the Company believes that final resolution of all protests could require an extended period of time, during which the Company expects to continue to perform as prime contractor. Should the VA fail to receive proposals from two qualified SDVOSB companies which is required in order for the work to be eligible for set aside status, the Company expects that the VA would reissue the RFP on a full and open basis in which DLH can respond as a prime contractor. DLH believes that its past performance onin this businessmarket and track record of successfully vying for renewalssuccess provide a competitive advantage. WhileHowever, 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, DLHgrowth. In these cases, the Company may elect to join a team with an SDVOSB teameligible contractor as a subcontractorprime 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 2021 due to social distancing and travel restrictions, we do not expect material adverse impacts from COVID-19 in the next fiscal year.
While we have been awarded contracts related to responding to the pandemic, such as awards to provide emergency medical services and community testing, vaccination and therapy services, 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. Additionally, we are complying with industry specific government directions that affect government contractors. As such, we have mandated that all employees receive an approved COVID-19 vaccination or apply for and receive an approved vaccine exception. 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 FEMA, 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. 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 20182021 as Compared to Fiscal Year 20172020
The following table summarizes, for the periodsyears 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, 2021 | | September 30, 2020 | | $ | | % of Rev |
| Revenue | | $ | 246,094 | | | 100.0 | % | | $ | 209,185 | | | 100.0 | % | | $ | 36,909 | | | — | % |
| Cost of operations | | | | | | | | | | | | |
| Contract costs | | 194,614 | | | 79.1 | % | | 163,596 | | | 78.2 | % | | 31,018 | | | 0.9 | % |
| General and administrative costs | | 25,054 | | | 10.2 | % | | 24,195 | | | 11.6 | % | | 859 | | | (1.4) | % |
| Corporate development costs | | 1,088 | | | 0.4 | % | | 930 | | | 0.5 | % | | 158 | | | (0.1) | % |
| Depreciation and amortization | | 8,115 | | | 3.3 | % | | 7,003 | | | 3.3 | % | | 1,112 | | | — | % |
| Total operating costs | | 228,871 | | | 93.0 | % | | 195,724 | | | 93.6 | % | | 33,147 | | | (0.6) | % |
| Income from operations | | 17,223 | | | 7.0 | % | | 13,461 | | | 6.4 | % | | 3,762 | | | 0.6 | % |
| Interest expense, net | | 3,784 | | | 1.6 | % | | 3,441 | | | 1.6 | % | | 343 | | | — | % |
| Income before income taxes | | 13,439 | | | 5.4 | % | | 10,020 | | | 4.8 | % | | 3,419 | | | 0.6 | % |
| Income tax expense | | 3,294 | | | 1.3 | % | | 2,906 | | | 1.4 | % | | 388 | | | (0.1) | % |
| Net income | | $ | 10,145 | | | 4.1 | % | | $ | 7,114 | | | 3.4 | % | | $ | 3,031 | | | 0.7 | % |
| Net income per share - basic | | $ | 0.81 | | | | | $ | 0.58 | | | | | $ | 0.23 | | | |
| Net income per share - diluted | | $ | 0.75 | | | | | $ | 0.54 | | | | | $ | 0.20 | | | |
|
| | | | | | | | | | | | | | | | | | | | | |
| |
| Year Ended | | Change in |
| Consolidated Statement of Operations: |
| September 30, 2018 | | September 30, 2017 | | $ | | % of Rev |
| Revenue |
| $ | 133,236 |
| | 100.0 | % | | $ | 115,662 |
| | 100.0 | % | | $ | 17,574 |
| | — | % |
| Direct expenses (exclusive of depreciation and amortization shown below) |
| 103,034 |
| | 77.3 | % | | 89,812 |
| | 77.7 | % | | 13,222 |
| | (0.4 | )% |
| Gross margin |
| 30,202 |
| | 22.7 | % | | 25,850 |
| | 22.3 | % | | 4,352 |
| | 0.4 | % |
| General and administrative expenses |
| 19,178 |
| | 14.4 | % | | 17,466 |
| | 15.1 | % | | 1,712 |
| | (0.7 | )% |
| Depreciation and amortization |
| 2,242 |
| | 1.7 | % | | 1,754 |
| | 1.5 | % | | 488 |
| | 0.2 | % |
| Income from operations |
| 8,782 |
| | 6.6 | % | | 6,630 |
| | 5.7 | % | | 2,152 |
| | 0.9 | % |
| Interest expense, net | | (1,116 | ) | | (0.8 | )% | | (1,228 | ) | | (1.1 | )% | | 112 |
| | 0.3 | % |
| Income before income taxes |
| 7,666 |
| | 5.8 | % | | 5,402 |
| | 4.6 | % | | 2,264 |
| | 1.2 | % |
| Income tax expense | | 5,830 |
| | 4.4 | % | | 2,114 |
| | 1.8 | % | | 3,716 |
| | 2.6 | % |
| Net income | | $ | 1,836 |
| | 1.4 | % | | $ | 3,288 |
| | 2.8 | % | | $ | (1,452 | ) | | (1.4 | )% |
| | | | | | | | | | | | | |
| Net income per share - basic | | $ | 0.15 |
| | | | $ | 0.29 |
| | | | $ | (0.14 | ) | | |
| Net income per share - diluted | | $ | 0.14 |
| | | | $ | 0.27 |
| | | | $ | (0.13 | ) | | |
Revenue
Revenue
FiscalFor the year 2018ended September 30, 2021 revenue was $133.2$246.1 million, an increase of $17.6$36.9 million or 15.2%17.6% over the prior year period. The increase is partially due principally to the inclusion of Irving Burton Associates, LLC. ("IBA"), acquired in September 2020, for the full year in fiscal year 2021. IBA contributed $30.2 of revenue for fiscal year 2021. The remaining net growth was due to contract expansion on existing contracts and new contracts awarded during the fiscal year.
Cost of workload volumes on our VA and HHS contracts.Operations
Direct Expenses
Direct expenses generally comprise direct labor (including benefits), taxes and insurance, workers compensation expense, subcontract cost, and other directContract costs attributable toprimarily include the costs associated with providing services to our customers. Direct expenses forThese costs are generally comprised of direct labor and associated fringe benefit costs, subcontract cost, other direct costs, and the year ended September 30, 2018 were $103.0 million, an increase of $13.2 million, or 14.7% over prior year due principally to increased professional service costs attributed to increased revenue. As a percentage of revenue, direct expenses were 77.3%, a favorable reduction of 0.4% with the improvement largely attributable to effective programrelated management and cost efficiencies on existing contracts.
Gross Margin
Gross margin for the year ended September 30, 2018 was approximately $30.2 million, as an increase of approximately $4.4 million or 16.8% over prior fiscal year on higher revenue and improved performance on contracts. As a percentage of revenue, our gross margin rate of 22.7% increased by 40 basis points, or 0.4%, over the prior year. Favorable gross margin results are due principally to expanded contribution from more differentiated contracts, and effective assignment of staff to deliver strong contract performance. We continue to focus on internal productivity measures to control costs and improve our gross margin.
General and Administrative Expenses
General and administrative (“G&A”) expenses primarily relate to functions such as operations overhead, corporate management, legal, finance, accounting, contracts administration, human resources, management information systems, and business development. Fiscal year 2018 G&A expenses were approximately $19.2 million, an increase of $1.7 million or 9.8% over the prior year period. The increase in G&A spending reflects the impact of the additional investment in business development and management resources to grow the Company's business. As a percent of revenue, G&A expenses were 14.4%, a decrease of approximately 0.7% from the prior year period.
Depreciation and Amortization
This category comprises non-cash expenditures related to depreciation on fixed assets and the amortization of acquired definite-lived intangible assets. As a primarily professional services organization, DLH does not require significant expenditures on capital equipment and other fixed assets.infrastructure costs. For the year ended September 30, 2018,2021, contract costs increased by approximately $31.0 million consistent with the growth in revenues. The increase in contract costs was due to the IBA acquisition, growth on existing contracts, and new contracts awarded during the fiscal year.
General and administrative costs are for those employees not directly providing services to our customers, including but not limited to executive management, bid and proposal, accounting, and human resources. These costs increased as compared to the prior fiscal year by $0.9 million to approximately $25.1 million primarily from the growth in revenues. As a percent of revenue, general and administrative costs decreased as we were able to increase operating leverage due to the acquisition and integration of IBA into the corporate structure.
Corporate development costs are incremental due diligence costs, such as legal and accounting fees. Fiscal year 2021 costs were due to a transaction that was evaluated but was not executed. Costs incurred in fiscal year 2020 were due to the IBA acquisition.
For the year ended September 30, 2021, depreciation and amortization costs were approximately $2.2$1.5 million as comparedand $6.6 million, respectively, as compared to approximately $1.7$2.2 million and $4.8 million for the prior fiscal year, an aggregate increase of $0.5 million or 27.8%, with the$1.1 million. The increase was principally due principally to the amortization of intangibles and the Company’s new internally developed ERP system software which was placed in service in January 2018.acquired definite-lived intangible assets of IBA.
Income from operations for the year ended September 30, 2018 was $8.8 million, with an operating margin of 6.6%, representing an increase of approximately $2.2 million over the prior fiscal year for which the operating income was $6.6 million at an operating margin of 5.7%. The improvement is due principally to gross margin growth of $4.4 million, partially offset by expense growth of $1.7 million as described above.
Interest Expense, net
Interest expense, net, typically includes items such as, interest expense and amortization of deferred financing costs on debt obligations. For the year ended September 30, 2018,2021, interest expense, net, was $1.1$3.8 million compared to interest expense, net of $1.2$3.4 million in the prior year, a favorable expense decreasean increase of $0.1approximately $0.3 million over the prior year period.
Income before Income Taxes
Income before taxes for fiscal year ended September 30, 2018 The increase in interest expense was $7.7 million, compared to $5.4 million for the prior year; an increase of approximately $2.3 million. The fiscal year 2018 increase is due principally to the increased gross margin, offset in part by increased expenses.$33.0 million increase to the senior term loan used to finance the acquisition of IBA.
Income Tax Expense
Income tax expense for fiscal year ended September 30, 20182021 was $5.8$3.3 million, as compared to income tax expensean increase of $2.1approximately $0.4 million forfrom the prior fiscal year. The increase in income tax expense is due to the impact of a $3.4 million write-down of deferred tax assets from revaluation of our net operating loss carryforwards from the previously recognized federal rate of 34% to the 21% rate in the 2017 Tax Act enacted in December 2017. The fiscal year 2018 effective tax rate net of the discrete item associated with the deferred tax asset write-down was 32.2% as compared to the prior year effective tax rate of 39.1%.
Net Income
Net income24.5% and 29% for the year endedfiscal years ending September 30, 2018 was $1.8 million resulting in per share earnings of $0.152021 and $0.14 per basic and diluted share, respectively, compared to $3.3 million for the prior year period, which resulted in $0.29 and $0.27 earnings per basic and diluted share,2020 respectively. The decrease in net income was due to the write-down of deferred tax assets described above which significantly offset the increase in Income before Taxes.
Non-GAAP Financial Measures for Fiscal 20182021 and 20172020
On a non-GAAP basis, Earnings Before Interest Tax Depreciation and Amortization (“EBITDA”) for the year ended September 30, 2018 was approximately $11.0 million, an increase of approximately $2.6 million, or 31.5%, over the prior fiscal year. This increase was due principally to improved gross margin of approximately $4.4 million, partially offset by expense growth of $1.7 million as previously described.
The Company uses EBITDA as a supplemental non-GAAP measures of our performance. DLHThe 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.
Beginning withOn a non-GAAP basis, Earnings Before Interest Taxes Depreciation and Amortization (“EBITDA”) for the first quarteryear ended September 30, 2021 was approximately $25.3 million, an increase of approximately $4.9 million, or 23.8%, over the prior fiscal year 2018, we commenced reporting EBITDA rather than adjusted EBITDA, as a key non-GAAP financial measure of our business. We believe thatyear. This increase was principally due to the growthcontribution of IBA and maturationeffective management of our business, this change will improve the transparencygeneral and administrative expenses.
We incurred $1.1 million of our business performance and increase the comparability of our results with peers. Non-GAAP measures for prior periods have been recast to conform to this change in our reporting. It is important to note that our GAAP results and presentation of GAAP metrics do not change and this change has no effect on our business, nor how we manage our business.
In addition,corporate development costs for the year weended September 30, 2021, and $0.9 million in the fiscal year ended September 30, 2020. We are also reporting our net income excluding corporate development costs from this measure because they were incurred as a result of specific events, do not reflect the impact of the Tax Cut and Jobs Act of 2017 on the valuationcosts of our deferred tax assets. On December 22, 2017,operations, and can affect the Tax Cut and Jobs Act was enacted, which, among other things, reduced corporate tax rates and revised rules regarding the usabilityperiod-over-period assessment of net operating losses. These changes have resulted in a discrete charge to the first quarter tax provision of $3.4 million associated with revaluing the benefit of our net operating losses.results. We are reporting this non-GAAP metric to demonstrate the impact of the tax law change.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'sour Board utilize these non-GAAP measures to make decisions about the use of the Company'sour resources, analyze performance between periods, develop internal projections and measure management's performance. DLH believesWe believe that these non-GAAP measures are useful to investors in evaluating the Company'sour ongoing operating and financial results and understanding how such results compare with the Company'sour historical performance. By providing thesethis non-GAAP measure as a supplement to GAAP information, DLH believes we enhancebelieve this enhances investors understanding of our business and results of operations.operations.
Reconciliation of GAAP net income to EBITDA, a non-GAAP measure:measure (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | |
| | Year Ended |
| | September 30, |
| | 2021 | | 2020 | | Change |
| Net income | | $ | 10,145 | | | $ | 7,114 | | | $ | 3,031 | |
| (i) Interest expense, net: | | 3,784 | | | 3,441 | | | 343 | |
| | | | | | |
| | | | | | |
| (ii) Provision for taxes | | 3,294 | | | 2,906 | | | 388 | |
| (iii) Depreciation and amortization | | 8,115 | | | 7,003 | | | 1,112 | |
| | | | | | |
| EBITDA | | $ | 25,338 | | | $ | 20,464 | | | $ | 4,874 | |
| | | | | | |
27
|
| | | | | | | | | | | | |
| | | Years Ended |
| | | September 30, |
| | | 2018 | | 2017 | | Change |
| Net income | | $ | 1,836 |
| | $ | 3,288 |
| | $ | (1,452 | ) |
| (i) Interest and other (income) expense (net): | | | | | | |
| (i)(a) Interest and other expense | | 1,116 |
| | 1,228 |
| | (112 | ) |
| (ii) Provision for taxes | | 5,830 |
| | 2,114 |
| | 3,716 |
|
| (iii) Depreciation and amortization | | 2,242 |
| | 1,754 |
| | 488 |
|
| EBITDA | | $ | 11,024 |
| | $ | 8,384 |
| | $ | 2,640 |
|
| | | | | | | |
Reconciliation of GAAP net income to net income adjusted for the effect of the 2017 Tax Act,corporate development costs, a non-GAAP measure:measure (in thousands except for per share amounts):
| | | | | | | | | | | | | | | | | | | | |
| | |
| | Year Ended |
| | September 30, |
| | 2021 | | 2020 | | Change |
| Net income | | $ | 10,145 | | | $ | 7,114 | | | $ | 3,031 | |
| Corporate development costs | | 1,088 | | | 930 | | | 158 | |
| Tax effect of excluding corporate development costs | | (267) | | | (270) | | | 3 | |
| Net income adjusted for corporate development costs | | $ | 10,966 | | | $ | 7,774 | | | $ | 3,192 | |
| | | | | | |
| Net income per diluted share | | $ | 0.75 | | | $ | 0.54 | | | $ | 0.21 | |
| Impact of corporate development costs, net | | 0.06 | | | 0.05 | | | 0.01 | |
| Net income per diluted share adjusted for corporate development costs | | $ | 0.81 | | | $ | 0.59 | | | $ | 0.22 | |
|
| | | | | | | | | | | | |
| | | Year Ended |
| | | September 30, |
| | | 2018 | | 2017 | | Change |
| Net income | | $ | 1,836 |
| | $ | 3,288 |
| | $ | (1,452 | ) |
| Write-down of deferred tax assets | | 3,365 |
| | — |
| | 3,365 |
|
| Pro-forma impact of tax rate change | | | | 527 |
| | (527 | ) |
| Net income, adjusted for the effect of the 2017 Tax Act | | $ | 5,201 |
| | $ | 3,815 |
| | $ | 1,386 |
|
| | | | | | | |
| Net income per diluted share | | $ | 0.14 |
| | $ | 0.27 |
| | $ | (0.13 | ) |
| Impact of write-down of deferred tax asset | | $ | 0.26 |
| | $ | — |
| | $ | 0.26 |
|
| Pro-forma impact of tax rate change | | $ | — |
| | $ | 0.04 |
| | $ | (0.04 | ) |
| Net income per diluted share, adjusted for the effect of the 2017 Tax Act | | $ | 0.40 |
| | $ | 0.31 |
| | $ | 0.09 |
|
Liquidity and capital managementCapital Management
For the year ended September 30, 2018,2021, the Company generated operating income of $8.8approximately $17.2 million and net income of approximately $1.8$10.1 million. Cash flows from operations totaled approximately $14.0$45.7 million and $6.5$19.5 million for the years ended September 30, 20182021 and 2017,2020, respectively. The increase in cash flow from operations was principally due principally to increased income from operationsimproved collections on key contracts and increased non-cash expenses.an advance payment to fund deployment of emergency medical resources under the FEMA contract awarded in late September.
We used $0.7less than $0.1 million and $1.3$32.8 million of cash in investing activities during fiscal 2018years 2021 and fiscal 2017,2020, respectively. Generally, we have relatively lowThe cash utilized was predominantly due to capital expenditure requirements for our business, and expect these expenditures in fiscal year 2021 and the coming years to remain consistent with the levels reportedIBA acquisition in fiscal 2018.year 2020.
Cash used in and provided by financing activities during the fiscal years ended September 30, 20182021 and 20172020 was approximately $12.0$22.9 million and $3.7$12.9 million, respectively. The activity in each fiscal year was primarily the sourcing of capital to fund the IBA acquisition and early repayment of principal on our senior term loan. We entered into a $95 million credit facility on June 7, 2019 which included a $70.0 million term loan. We amended and restated the credit facility on September 30, 2020 in connection with our acquisition of IBA. During the year ended September 30, 2018,2021, we had net repayments of approximately $12.0$23.3 million under our credit facility, comparedfacility. We expect to $3.75 million for fiscal 2017.continue to use operating cash flow to pay outstanding debt.
SourcesA summary of the change in cash and cash equivalents is presented below (in thousands):
| | | | | | | | | | | | | | | |
| | | Year Ended |
| | | September 30, |
| | | 2021 | | 2020 |
| Net cash provided by operating activities | | | $ | 45,665 | | | $ | 19,451 | |
| Net cash used in investing activities | | | (44) | | | (32,830) | |
| Net cash (used in) provided by financing activities | | | (22,927) | | | 12,946 | |
| Net change in cash and cash equivalents | | | $ | 22,694 | | | $ | (433) | |
Sources of Cash and Cash Equivalents
As of September 30, 2018, the Company's2021, our immediate sources of liquidity include cash and cash equivalents of approximately $24.1 million, accounts receivable, and access to itsour secured revolving line of credit facility with Fifth Third Bank.facility. This credit facility provides us with access of up to $10.0$25.0 million, subject to certain conditions including eligible accounts receivable. As of September 30, 2021, we had unused borrowing capacity of $25.0 million. The Company's present operating liabilities are largely predictable and consist of vendor and payroll related obligations. OurWe believe that our current investment and financing obligations are adequately covered by cash generated from profitable operations and that planned operating cash flow should be sufficient to support the Company'sour operations for twelve months from the date of issuance of these consolidated financial statements.
Loan Facility
A summary of our loan facilities and subordinated debt financing as of September 30, 20182021 is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | ($ in Millions) |
| | As of September 30, 2021 |
| Lender | | Arrangement | | Loan Balance | | Interest * | | Maturity Date |
| First National Bank of Pennsylvania | | Secured term loan (a) | | $ | 46.8 | | | LIBOR* + 3.5% | | 09/30/25 |
| First National Bank of Pennsylvania | | Secured revolving line of credit (b) | | $ | — | | | LIBOR* + 3.5% | | 09/30/25 |
|
| | | | | | | | | | |
| | | ($ in Millions) |
| | | As of September 30, 2018 |
| Lender | | Arrangement | | Loan Balance | | Interest * | | Maturity Date |
| Fifth Third Bank | | Secured term loan $25 million (a) | | $ | 7.7 |
| | LIBOR* + 3.0% | | 05/01/21 |
| Fifth Third Bank | | Secured revolving line of credit $10 million ceiling (b) | | $ | — |
| | LIBOR* + 3.0% | | 05/01/21 |
* InterestLIBOR rate as of September 30, 20182021 was 2.08%0.08%. As of September 30, 2020, our LIBOR rate is subject to a minimum floor of 0.5%. The floor affects interest payments for periods after September 30, 2020.
(a) aRepresents 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 an original aggregate principal amount of $25.0 million (the "Term Loan").the remaining balance due on September 30, 2025.
(b) a secured revolving credit facility in aggregate principal amount of up to $10.0 million, subject to certain conditions including eligible accounts receivable (the "Revolving Credit Facility").
The Term Loan agreementCredit 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 quarterly financial covenants including: (i) a minimum fixed charge coverage ratio of at least 1.351.25 to 1.0 commencing with the quarter ending June 30, 2016, and for all subsequent periods,1.00, and (ii) a Funded Indebtedness to Adjusted EBITDA ratio not exceeding the ratio of 2.53.75:1.0 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. The term loan has an interest rate spread range from 2.5% to 4.5% depending on the period endingfunded indebtedness to adjusted EBITDA ratio. 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, 2018 through maturity. 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. During the year ended September 30, 2021, the Company made voluntary prepayments of $16.3 million, bringing the total amount paid on the secured term loan to $23.3 million. As of September 30, 2021, we have satisfied mandatory principal amortization until December 31, 2023.
In addition to monthlyquarterly payments of the outstanding indebtedness, the loan agreement also requires prepaymentsannual payments of a percentage of excess cash flow, as defined in the loan agreement. We madeThe loan agreement states that an excess cash flow recapture payment must be made equal to (a) 75% of $2.9 millionthe excess cash flow for the immediately preceding fiscal year in January 2018, and based on ourwhich indebtedness to consolidated EBITDA ratio is greater than or equal to 2.50:1.0; (b) 50% of the excess cash flow for the immediately preceding fiscal year in which the funded indebtedness to Adjustedconsolidated EBITDA ratio, do not expectRatio is less than 2.50:1.0 but greater than or equal to make any future1.5:1.0; or (c) 0% of the excess cash flow payments. Additionally, we made afor the immediately preceding fiscal year in which the funded indebtedness to consolidated EBITDA Ratio is less than 1.5:1.0. 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. Due to the voluntary prepayment of term debt, there was no excess cash flow payment required. For additional information regarding the schedule of $5.6future payment obligations, please refer to Note 11 Commitments and Contingencies.
On September 30, 2019, we executed a floating-to-fixed interest rate swap, maturing in 2024, with First National Bank ("FNB") as counter party. The notional amount in the floating-to-fixed interest rate swap is $22.8 million in September 2018, which we attributedat the end of fiscal year 2021 and $28.8 million at the end of fiscal year 2020. The remaining outstanding balance of our term loan is subject to interest rate fluctuations and the scheduled monthly paymentsminimum LIBOR floor of 50 bps. On the notional amount, the Company pays a fixed rate of 1.61%, plus applicable credit spread. As a result, for the upcoming 18 months through March 2020. Seeyear ended September 30, 2021, interest expense increased by approximately $0.4 million.
(b) The secured revolving line of credit has a ceiling of up to $25.0 million. Borrowing on the information in Note 5 toline of credit is secured by liens on substantially all of the Consolidated Financial Statements filed with this Annual Report on Form 10-K for additional details regarding ourassets of the Company. The Company accessed funds from the revolving credit agreements with Fifth Third Bank.facility during the year, but has no outstanding balance at September 30, 2021.
The Company's total borrowing availability, based on eligible accounts receivables at September 30, 2018,2021, was $8.9$25.0 million. This capacity was further reduced by $1.3As part of the revolving credit facility, the lenders agreed to a sublimit of $5 million in a stand-by letterfor letters of credit resulting in unused borrowing capacityfor the account of $7.6 million.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 in the Term Loan, and DLHabove. The Company is fully compliant with those covenants.
Contractual Obligations as of September 30, 20182021
| | | | | | | | | | | | | | | | | | | | | | | | | | Payments Due By Period |
| | | | | Payments Due By Period | | | | Next 12 | | 2-3 | | 4-5 | | More than 5 |
| Contractual obligations | | | | Next 12 | | 2-3 | | 4-5 | | More than 5 | |
| (Amounts in thousands) | Ref | Total | | Months | | Years | | Years | | Years | (Amounts in thousands) | | Total | | Months | | Years | | Years | | Years |
| Debt Obligations | | $ | 7,708 |
| | $ | — |
| | $ | 7,708 |
| | $ | — |
| | $ | — |
| Debt Obligations | | $ | 46,750 | | | $ | — | | | $ | 8,250 | | | $ | 38,500 | | | $ | — | |
| Facility leases | | 2,764 |
| | 901 |
| | 988 |
| | 672 |
| | 203 |
| |
| Equipment operating leases | | 38 |
| | 22 |
| | 16 |
| | — |
| | — |
| |
| Facility Operating Leases | | Facility Operating Leases | | 27,701 | | | 3,418 | | | 6,507 | | | 6,285 | | | 11,491 | |
| | Equipment Operating Leases | | Equipment Operating Leases | | 218 | | | 83 | | | 135 | | | — | | | — | |
| Total Obligations | | $ | 10,510 |
| | $ | 923 |
|
| $ | 8,712 |
| | $ | 672 |
| | $ | 203 |
| Total Obligations | | $ | 74,669 | | | $ | 3,501 | | | $ | 14,892 | | | $ | 44,785 | | | $ | 11,491 | |
Off-Balance Sheet Arrangements
The Company did not have any material off-balance sheet arrangements as of September 30, 2021 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 effectimpact on DLH’sthe Company’s net revenues, and results of operations, and cash flows as DLHinflation has generally been limited. However, we are subject to current inflation pressures which may increase the cost of labor, subcontractors and other direct costs. The Company has been able to modify its prices and cost structure to respond to inflation and changing prices.prices as needed and expects to be able to do so in future periods.
Critical Accounting Policies and Estimates
Use of Estimates
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’interest rate swaps, stock-based compensation, right-of-use assets and lease liabilities, valuation allowances established against deferred tax assets, and measurement of contingent liabilities, accounts payable, workers’loss development on workers' compensation claims, and accrued expenses and the valuation of derivative financial
instruments associated with debt agreements.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 64 of the notes to our Consolidated Financial Statements contained elsewhere in this Annual Report on Form 10-K.
Revenue Recognition
DLH’sWe recognize revenue over time when there is derived from professionala continuous transfer of control to our customer. For our U.S. government contracts, this continuous transfer of control to the customer is supported by clauses in the contract that allow the U.S. government to unilaterally terminate the contract for convenience, pay us for costs incurred plus a reasonable profit and other specialized service offerings to US Government agencies through a varietytake control of contracts, some of which are fixed-priceany work in nature and/or sourced through Federal Supply Schedules administered by the General Services Administration (“GSA”) at fixed unit rates or hourly arrangements. Revenue onprocess. When control is transferred over time, and materials contractsrevenue 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.
For time-and-materials contracts, revenue is recognized to the extent of billable rates times hours performed times the applicable hourly rate,delivered plus materials and other directreimbursable costs incurred. Revenue for cost-reimbursable contracts is recorded as reimbursable costs are incurred, onincluding an estimated share of the contract.applicable contractual fees earned. For firm-fixed-price contracts, the consideration received for our performance is set at a predetermined price. Revenue on fixed fee for serviceour firm-fixed-price contracts is recognized over time using a straight-line measure of progress or using the periodpercentage-of-completion method whereby progress toward completion is based on a comparison of performance of the contract. Revenue on cost reimbursable contracts is recognized equal to allowableactual costs incurred plus a ratable portion ofto total estimated costs to be incurred over the applicable fee.contract term. Contract costs are expensed as incurred. Estimated losses are recognized when identified.
We generally operate as a prime contractor, but have also entered into contracts as a subcontractor. Our Company's current business base is 99% prime contracts and 1% subcontracts. DLH recognizes and records revenue on government contracts when: (a) persuasive evidence of an arrangement exists; (b) the services have been delivered to the customer; (c) the sales price is fixed or determinable and free of contingencies or significant uncertainties; and (d) collectibility is reasonably assured. Refer to Note 35 of the accompanying notes to our Consolidated Financial Statements contained elsewhere in thiethis Annual Report on Form 10-K for discussion relative to the Company's adoption ofrevenue 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 adoptedcontinues to review its long-lived assets for possible impairment or loss of value at least annually or more frequently upon the standardoccurrence 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 modified retrospectivestraight-line basis on October 1, 2018, wherebyover the cumulative effectestimated useful life of applying the standard was recognized through shareholders’ equity onsoftware.
Right-of-use assets are measured at the datepresent value of adoption. In interim periods of our fiscal year ending September 30, 2019, we will be required to provide additional disclosures regarding the amount by which each financial statement line item is affected in the current reporting period by the application of this ASU as comparedfuture minimum lease payments, including all probable renewals, plus lease payments made to the guidance that was in effectlessor 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 change. Upon adoption on October 1, 2018, the Company recorded a net increase to shareholders’ equity of approximately $0.1 million. This amount related principally to the proportional recognition of revenue on fixed price services contracts.assets are 10 years.
Goodwill
DLHThe 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, 2018,2021, 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, 2018. Factors2021, 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.
Long Lived Assets
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.
Certain costs incurred in the implementation of our Enterprise Resource Planning (ERP) system, including implementation labor, are capitalized as computer software costs. Costs incurred outside of the implementation stage are expensed as incurred. 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. The assessed useful lives of the assets are 10 years.
Income Taxes
DLHThe 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 utilizeutilized its net operating loss carryforwards before their expiration. The Company recorded no valuation allowance as of September 30, 2018 and September 30, 2017, respectively.carryforwards.
Stock-based Equity Compensation
The Company uses the fair value-based method for stock-based equity 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 a Monte Carlo binomial and Black Scholes option pricing modelmodels 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 in of the Notesaccompanying notes to our Consolidated Financial Statements filed with contained elsewhere in this Annual Report, and we incorporate such discussion by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
DLH doesExcept as described in this Item 7A, the Company has not undertakeengaged in trading practices in securities or other financial instruments and therefore does not have any material exposure to interest rate risk, foreign currency exchange rate risk, commodity price risk or other similar risks, which might otherwise result from such practices. DLH does not haveThe Company has limited foreign operations and therefore is not materially subject to fluctuations in foreign exchange rates, commodity prices or other market rates or prices from market sensitive instruments. DLH believes it does not haveOn September 30 2019, we executed a materialfloating-to-fixed interest rate riskswap with respect toFNB as counter party. The notional amount in the floating-to-fixed interest rate swap is $22.8 million at the end of fiscal year 2021. The remaining outstanding balance of our prior workers’ compensation programs, for which funds were deposited into trust for possible future payments of claims. DLH does not believe the level of exposureterm loan is subject to interest rate fluctuations on its debt instruments is material, andfluctuations. The Company has determined that a 1.0% increase to the LIBOR rate would incrementally impact our interest expense by $0.1approximately $0.2 million per year. As of September 30, 2018,2021, the Lender's interest rate was 5.08%3.58%.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
See attached Consolidated Financial Statements beginning on page F-1 attached to this Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our CEO and President and Chief Financial Officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) or 15d-15(e) under the Exchange Act) as of the end of the period covered by this report, hashave concluded that, based on the evaluation of these controls and procedures, our disclosure controls and procedures were effective at the reasonable assurance level to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our CEO and President and Chief Financial Officer, to allow timely decisions regarding required disclosure.
Our management, including our CEO and President and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been detected. Our management, however, believes our disclosure controls and procedures are in fact effective to provide reasonable assurance that the objectives of the control system are met.
Management’s Report on Internal Control over Financial Reporting
Our management, under the supervision of our Chief Executive Officer and Chief Financial Officer, is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended). Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. The Company's internal control over financial reporting includes those policies and procedures that:
(i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;
(ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the company; and
(iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company's assets that could have a material effect on the financial statements.
Management, including our Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of our internal control over financial reporting as of September 30, 2018.2021. In making this evaluation, management used the 2013 framework on Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on our evaluation under the COSO framework, our management has concluded that our internal control over financial reporting was effective as of September 30, 2018.2021.
This annual report does not include an attestation report of our independent registered public accounting firm regarding our internal control over financial reporting. Management's report was not subject to attestation by our independent registered public accounting firm pursuant to rules of the Securities and Exchange Commission.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Changes in Internal Controls over Financial Reporting
There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) identified in connection with the evaluation of our internal control that occurred during the fourth fiscal quarter of our fiscal year ended September 30, 2018,2021, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
On November 9, 2018, an aggregate of 101,667As previously reported, certain entities affiliated with Wynnefield Capital, Inc., the Company’s largest stockholder, owned warrants to purchase 53,619 shares of Common Stockcommon stock exercisable at a price of $3.73 until November 2021. In October 2021, the holders of the Companywarrants exercised such warrants in full for 53,619 shares of common stock. The shares of common stock issued upon exercise of the warrants were issued toin reliance on the non-employee membersexemption from registration provided by Section 4(a)(2) of the Company’s BoardSecurities Act of Directors, in accordance with the Company’s compensation policy for non-employee directors.1933, as amended.
PART III
The Information required by Items 10, 11, 12, 13 and 14 of Part III of Form 10-K has been omitted in reliance on General Instruction G(3) and is incorporated herein by reference to our proxy statement to be filed with the SEC pursuant to Regulation 14A promulgated under the Securities Exchange Act of 1934, as amended, as set forth below:
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this itemItem with respect to our executive officers, is provided under the caption entitled "Executive Officers of the Company" in Part I of this Annual Report on Form 10-K and is incorporated by reference herein. The information required by this item with respect to our directors, board committees, and corporate governance matters will be set forth in our definitive Proxy Statement under the captions "Executive Officers," "Election of Directors," "Section 16(a) Beneficial Ownership Reporting Compliance" and "Corporate Governance" of the Proxy Statement, to be filed within 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K, and is incorporated herein by reference to our Proxy Statement.
We have adopted a written code of business conduct and ethics, which applies to our principal executive officer, principal financial or accounting officer or person serving similar functions and all of our other employees and members of our board of directors. We did not waive any provisions of the code of business ethics during the year ended September 30, 2018.2021. Our code of business conduct and ethics is posted in the investor relations - corporate governance section of our website at www.dlhcorp.com. If we amend, or grant a waiver under, our code of business ethics that applies to our principal executive officer, principal financial or accounting officer, or persons performing similar functions, we intend to post information about such amendment or waiver on our website.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item will be set forth in our definitive Proxy Statement, to be filed within 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K, and is incorporated herein by reference to our Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by this Item will be set forth in our definitive Proxy Statement, to be filed within 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K, and is incorporated herein by reference to our Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this Item will be set forth in our definitive Proxy Statement, to be filed within 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K, and is incorporated herein by reference to our Proxy Statement.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this Item will be set forth in our definitive Proxy Statement under the caption "Independent Registered Public Accounting Firm", to be filed within 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K, and is incorporated herein by reference to our Proxy Statement.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
| |
(a) | (1) Financial Statements |
(a)(1) Financial Statements
The financial statements and schedules of DLHthe Company are included in Part II, Item 8 of this report beginning on page F-1.
| |
(a) | (2) Financial Statement Schedule |
(a)(2) Financial Statement Schedule
All schedules have been omitted since the required information is not applicable or because the information required is included in the Consolidated Financial Statements or the notes thereto.
(a)(3) Exhibits
The exhibits designated with an asterisk (*) are filed herewith. All other exhibits have been previously filed with the Commission and, pursuant to 17 C.F.R. Secs. 20l.24 and 240.12b-32, are incorporated by reference to the document referenced
in brackets following the descriptions of such exhibits. The exhibits designated with a number sign (#) indicate a management contract or compensation plan or arrangement.
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35
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| | Amended and Restated Credit Agreement among DLH Holdings Corp., DLH Solutions, Inc., Danya International, LLC, Social & Scientific Systems, Inc., Irving Burton Associates, LLC, First National Bank of Pennsylvania, as Administrative Agent and other lenders party thereto (filed as Exhibit 10.1 to Current Report on Form 8-K filed October 6, 2020). |
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| 101.0 | * | The following financial information from the DLH Holdings Corp. Annual Report on Form 10-K for the fiscal year ended September 30, 2018,2021, formatted in XBRL (eXtensibleiXBRL (Inline eXtensible Business Reporting Language) and filed electronically herewith: (i) the Consolidated Balance Sheets; (ii) the Consolidated Statements of Operations; (iii) the Consolidated Statements of Cash Flows; (iv) the Consolidated Statements of Changes in Shareholders' Equity and, (v) the Notes to the Consolidated Financial Statements. Filed electronically herewith. |
| 104.0 | | Cover Page Interactive Data File. (formatted as Inline XBRL tags and contained in Exhibit 101) |
ITEM 16. FORM 10-K SUMMARY
None
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
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| | DLH HOLDINGS CORP. |
| | | | /s/ ZACHARY C. PARKERKATHRYN M. JOHNBULL |
| | By: | | Zachary C. ParkerKathryn M. JohnBull
Chief ExecutiveFinancial Officer (Principal ExecutiveAccounting Officer) |
Dated: December 12, 20186, 2021
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
| | | | | | | | |
| Signature | Capacity | Date |
| | |
| /s/ FREDERICK G. WASSERMAN | Chairman of the Board | December 6, 2021 |
| Frederick G. Wasserman | | |
| | |
Signature/s/ JAMES P. ALLEN | CapacityDirector | DateDecember 6, 2021 |
| James P. Allen | | |
/s/ FREDERICK G. WASSERMAN | Chairman of the Board | December 12, 2018 |
Frederick G. Wasserman | | |
| | |
/s/ FRANCES MURPHY | Director | December 12, 2018 |
Frances Murphy | | |
| | |
| /s/ MARTIN J. DELANEY | Director | December 12, 20186, 2021 |
| Martin J. Delaney | | |
| | |
/s/ WILLIAM H. ALDERMANELDER GRANGER | Director | December 12, 20186, 2021 |
William H. AldermanElder Granger | | |
| | |
| /s/ FRANCES MURPHY | Director | December 6, 2021 |
| Frances Murphy | | |
| | |
| /s/ AUSTIN J. YERKS III | Director | December 12, 20186, 2021 |
| Austin J. Yerks III | | |
| | |
/s/ ELDER GRANGERSTEPHEN J. ZELKOWICZ | Director | December 12, 20186, 2021 |
Elder GrangerStephen J. Zelkowicz | | |
| | |
/s/ JAMES P. ALLEN | Director | December 12, 2018 |
James P. Allen | | |
| | |
| /s/ ZACHARY C. PARKER | Chief Executive Officer, President and Director | December 12, 20186, 2021 |
| Zachary C. Parker | | |
| | |
| /s/ KATHRYN M. JOHNBULL | Chief Financial Officer and Principal Accounting Officer | December 12, 20186, 2021 |
| Kathryn M. JohnBull | | |
DLH Holdings Corp. and Subsidiaries
Index to Consolidated Financial Statements
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| Page |
| | F-2 |
| | F-3 |
| | F-4 |
| | F-5 |
2020
| | F-6 |
| | F-7 |
Report of Independent Registered Public Accounting Firm
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of DLH Holdings Corp.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of DLH Holdings Corp. and Subsidiaries (the “Company”) as of September 30, 20182021 and 2017,2020, the related consolidated statements of operations, cash flows, and changes in shareholders’ equity, for each of the two years in the period ended September 30, 2018,2021, and the related notes (collectively referred to as the "consolidated financial statements"). In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company as of September 30, 20182021 and 2017,2020, and the consolidated results of its operations and its cash flows for each of the two years in the period ended September 30, 2018,2021, in conformity with accounting principles generally accepted in the United States of America.States.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Revenue Recognition
Critical Audit Matter Description:
As described in Note 5 to the consolidated financial statements, the Company generally recognizes revenue over time as services are provided, as most of its contracts involve a continuous transfer of control to the customer. This continuous transfer of control to the customer is supported by clauses in the contract that allow the customer to unilaterally terminate the contract for convenience, pay the Company 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, the Company satisfies performance obligations as services are rendered. We identified the Company’s revenue recognition as a critical audit matter because of certain significant assumptions management makes when
estimating progress over time and subjective auditor judgement on completion of the contract performance obligations. Auditing these assumptions involved a high degree of judgement and subjectivity as changes in these assumptions could have a significant impact on the amount of revenue recognized.
Response:
The following are the primary procedures we performed to address this critical audit matter.
To test the recognition of revenue, our audit procedures included among others, testing the internal controls over the proper accumulation of labor costs by contract as well as the approval of monthly invoices for accuracy and completeness, reviewing key provisions and deliverables within customer contracts, and comparing actual results to prior management estimates. We evaluated management’s application of their revenue recognition policies in the determination of revenue recognition conclusions. We selected a sample of revenue transactions, and performed the following procedures: we reviewed the signed contract; we reviewed the recorded timesheet data related to the selected invoices; and we reviewed the signed contract related to the selected invoice, noting each task has an agreed upon unit price per contract and the unit price matched what was shown on the invoice. We also tested for proper revenue recognition cut off and assessed the adequacy of the reserve for subsequent credits granted.
Workers' Compensation Claims Liabilities
Critical Audit Matter Description:
The Company uses a combination of insured and self-insurance programs to cover workers’ compensation claims. Workers’ compensation claims liabilities represent management’s estimate of future amounts necessary to pay claims and related expenses with respect to workplace injuries that have occurred as of a given reporting date. The estimated liability of workers’ compensation claims is based on an evaluation of information provided by the Company’s third-party administrators for workers’ compensation claims, coupled with an actuarial estimate of future adverse loss development with respect to reported claims and incurred but not reported claims (together, IBNR). The process of arriving at an estimate of unpaid claims and claims adjustment expense involves a high degree of judgment and is affected by both internal and external events, including the Company's claims experience. The Company’s estimates are based on informed judgment, derived from individual experience and expertise applied to multiple sets of data and analyses. As noted in Note 7 to the consolidated financial statements, workers’ compensation claims liabilities as of September 30, 2021 were approximately $7.0 million. Given the high degree of judgment required to estimate the value of the workers’ compensation claims liabilities, performing audit procedures to evaluate the workers’ compensation claims liabilities recorded as of September 30, 2021 required an increased extent of effort. As a result, we identified the Company’s workers’ compensation claims liabilities as a critical audit matter because of certain significant assumptions management makes when estimating future incurred but not reported claims using both internal and external events to drive the accruals. Auditing these assumptions involved a high degree of judgement and subjectivity as changes in these assumptions could have a significant impact on the accruals recorded to estimate unpaid claims and the related expenses.
Response:
The following are the primary procedures we performed to address this critical audit matter.
We assessed whether there were any changes to the Company’s estimation process during the current year. We assessed whether any changes in the business or environment, including any changes to claims handling practices, were appropriately considered in the reserve setting process as well. We tested the underlying data that served as inputs into the Company’s analysis, including historical claims from third party and claims paid, to evaluate whether inputs and assumptions were reasonable. We compared management’s prior-year assumptions of expected claims development and ultimate loss to actuals incurred during the current year to identify and evaluate potential management bias in the determination of the workers’ compensation claims liabilities. We compared the estimated ultimate loss per each insurance year to prior years estimated ultimate loss by year to reassess the Company’s estimation process. We tested the mathematical accuracy of the accrual as of September 30, 2021. We reviewed supporting vendor documentation related to the current year’s base premiums. We also analyzed the qualifications of the Company’s third-party administrators for their expertise in this area.
/s/ WithumSmith+Brown, PC
We have served as the Company's auditor since 2007.
Whippany, New Jersey
December 12, 2018
5, 2021
DLH HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands except per share amounts)
| | | | Year Ended |
| | | | | September 30, |
| | | 2021 | | 2020 |
| Revenue | | Revenue | | $ | 246,094 | | | $ | 209,185 | |
| Cost of Operations | | Cost of Operations | |
| Contract costs | | Contract costs | | 194,614 | | | 163,596 | |
| | General and administrative costs | | General and administrative costs | | 25,054 | | | 24,195 | |
| Corporate development costs | | Corporate development costs | | 1,088 | | | 930 | |
| Depreciation and amortization | | Depreciation and amortization | | 8,115 | | | 7,003 | |
| Total operating costs | | Total operating costs | | 228,871 | | | 195,724 | |
| Income from operations | | Income from operations | | 17,223 | | | 13,461 | |
| Interest expense, net | | Interest expense, net | | 3,784 | | | 3,441 | |
| | Income before income taxes | | Income before income taxes | | 13,439 | | | 10,020 | |
| Income tax expense | | Income tax expense | | 3,294 | | | 2,906 | |
| Net income | | Net income | | $ | 10,145 | | | $ | 7,114 | |
| |
|
| Year Ended | |
| |
| September 30, | |
| | | 2018 | | 2017 | |
| Revenue |
| $ | 133,236 |
| | $ | 115,662 |
| |
| Direct expenses (exclusive of depreciation and amortization shown below) |
| 103,034 |
| | 89,812 |
| |
| Gross margin |
| 30,202 |
| | 25,850 |
| |
| General and administrative expenses |
| 19,178 |
| | 17,466 |
| |
| Depreciation and amortization |
| 2,242 |
| | 1,754 |
| |
| Income from operations |
| 8,782 |
| | 6,630 |
| |
| Interest expense, net | | (1,116 | ) | | (1,228 | ) | |
| Income before income taxes |
| 7,666 |
| | 5,402 |
| |
| Income tax expense |
| 5,830 |
| | 2,114 |
| |
| Net income |
| $ | 1,836 |
| | $ | 3,288 |
| |
| | | | | | |
| Net income per share - basic |
| $ | 0.15 |
| | $ | 0.29 |
| Net income per share - basic | | $ | 0.81 | | | $ | 0.58 | |
| Net income per share - diluted | | $ | 0.14 |
| | $ | 0.27 |
| Net income per share - diluted | | $ | 0.75 | | | $ | 0.54 | |
| | | | | | |
| Weighted average common shares outstanding | | | | | Weighted average common shares outstanding | |
| Basic |
| 11,881 |
| | 11,345 |
| Basic | | 12,549 | | | 12,282 | |
| Diluted |
| 12,873 |
| | 12,352 |
| Diluted | | 13,597 | | | 13,105 | |
The accompanying notes are an integral part of these consolidated financial statements.
DLH HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands except par value of shares)
| | | |
| |
| | |
| |
| September 30,
2018 |
| September 30,
2017 | | September 30,
2021 | | September 30,
2020 |
| ASSETS |
| |
| |
| ASSETS | | | | |
| Current assets: |
| |
| |
| Current assets: | | |
| Cash and cash equivalents |
| $ | 6,355 |
|
| $ | 4,930 |
| Cash and cash equivalents | | $ | 24,051 | | | $ | 1,357 | |
| Accounts receivable |
| 10,280 |
|
| 11,911 |
| Accounts receivable | | 33,447 | | | 32,541 | |
| | Other current assets |
| 760 |
|
| 598 |
| Other current assets | | 4,265 | | | 3,499 | |
| Total current assets |
| 17,395 |
|
| 17,439 |
| Total current assets | | 61,763 | | | 37,397 | |
| Equipment and improvements, net |
| 1,566 |
| | 1,391 |
| Equipment and improvements, net | | 1,912 | | | 3,339 | |
| Operating lease right-of-use-assets | | Operating lease right-of-use-assets | | 19,919 | | | 22,427 | |
| Deferred taxes, net | | 4,137 |
| | 9,639 |
| Deferred taxes, net | | — | | | 37 | |
| Goodwill |
| 25,989 |
|
| 25,989 |
| Goodwill | | 65,643 | | | 67,144 | |
| Intangible assets, net | | 13,365 |
| | 15,127 |
| Intangible assets, net | | 47,469 | | | 52,612 | |
| Other long-term assets |
| 89 |
|
| 139 |
| Other long-term assets | | 464 | | | 606 | |
| Total assets |
| $ | 62,541 |
|
| $ | 69,724 |
| Total assets | | $ | 197,170 | | | $ | 183,562 | |
| LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | |
| LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | |
| Current liabilities: | | | | |
| Current liabilities: | | |
| Debt obligations - current | | $ | — |
| | $ | 6,518 |
| |
| Derivative financial instruments, at fair value | | — |
| | 306 |
| |
| Debt obligations - current, net of deferred financing costs | | Debt obligations - current, net of deferred financing costs | | $ | — | | | $ | 6,727 | |
| | Operating lease liabilities - current | | Operating lease liabilities - current | | 2,261 | | | 2,045 | |
| Accrued payroll | | 4,983 |
| | 3,723 |
| Accrued payroll | | 9,125 | | | 10,611 | |
| Deferred revenue | | Deferred revenue | | 22,273 | | | — | |
| Accounts payable, accrued expenses, and other current liabilities | | 10,950 |
| | 10,895 |
| Accounts payable, accrued expenses, and other current liabilities | | 32,717 | | | 28,578 | |
| Total current liabilities | | 15,933 |
| | 21,442 |
| Total current liabilities | | 66,376 | | | 47,961 | |
| Total long term liabilities | | 7,190 |
| | 12,427 |
| |
| Long-term liabilities: | | Long-term liabilities: | |
| Deferred taxes, net | | Deferred taxes, net | | 1,176 | | | — | |
| Operating lease liabilities - long-term | | Operating lease liabilities - long-term | | 19,374 | | | 21,620 | |
| Debt obligations - long-term, net of deferred financing costs | | Debt obligations - long-term, net of deferred financing costs | | 44,636 | | | 60,544 | |
| | Total long-term liabilities | | Total long-term liabilities | | 65,186 | | | 82,164 | |
| Total liabilities | | 23,123 |
| | 33,869 |
| Total liabilities | | 131,562 | | | 130,125 | |
| Commitments and contingencies | |
|
| |
|
| |
| | Shareholders' equity: | | | | | Shareholders' equity: | |
| Common stock, $.001 par value; authorized 40,000 shares; issued and outstanding 11,899 and 11,767 at September 30, 2018 and 2017, respectively. | | 12 |
| | 12 |
| |
| Common stock, $0.001 par value; authorized 40,000 shares; issued and outstanding 12,714 and 12,404 at September 30, 2021 and 2020, respectively | | Common stock, $0.001 par value; authorized 40,000 shares; issued and outstanding 12,714 and 12,404 at September 30, 2021 and 2020, respectively | | 13 | | | 12 | |
| Additional paid-in capital | | 84,285 |
| | 82,687 |
| Additional paid-in capital | | 87,893 | | | 85,868 | |
| Accumulated deficit | | (44,879 | ) | | (46,844 | ) | Accumulated deficit | | (22,298) | | | (32,443) | |
| Total shareholders’ equity | | 39,418 |
| | 35,855 |
| Total shareholders’ equity | | 65,608 | | | 53,437 | |
| Total liabilities and shareholders' equity | | $ | 62,541 |
| | $ | 69,724 |
| Total liabilities and shareholders' equity | | $ | 197,170 | | | $ | 183,562 | |
The accompanying notes are an integral part of these consolidated financial statements.
DLH HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
| | | | | | | | | | | | | | |
| | Year Ended |
| | | September 30, |
| | 2021 | | 2020 |
| Operating activities | | | | |
| Net income | | $ | 10,145 | | | $ | 7,114 | |
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | |
| Depreciation and amortization | | 8,115 | | | 7,003 | |
| Amortization of deferred financing costs charged to interest expense | | 792 | | | 721 | |
| | | | |
| Stock based compensation expense | | 1,660 | | | 910 | |
| | | | |
| Deferred taxes, net | | 1,213 | | | 2,308 | |
| Gain from lease modification | | — | | | (121) | |
| Changes in operating assets and liabilities | | | | |
| Accounts receivable | | (906) | | | (5,408) | |
| Other current assets | | (766) | | | (1,592) | |
| Accrued payroll | | (1,486) | | | 489 | |
| Deferred revenue | | 22,273 | | | — | |
| Accounts payable, accrued expenses, and other current liabilities | | 4,139 | | | 7,188 | |
| Other long-term assets and liabilities | | 486 | | | 839 | |
| Net cash provided by operating activities | | 45,665 | | | 19,451 | |
| | | | |
| Investing activities | | | | |
| Business acquisition, net of cash acquired | | 59 | | | (32,678) | |
| Purchase of equipment and improvements | | (103) | | | (152) | |
| Net cash used in investing activities | | (44) | | | (32,830) | |
| | | | |
| Financing activities | | | | |
| Proceeds from debt obligations | | — | | | 33,000 | |
| Repayment of debt obligations | | (23,250) | | | (19,000) | |
| | | | |
| | | | |
| | | | |
| | | | |
| Repurchase of common stock | | — | | | (211) | |
| Payment of deferred financing costs | | (43) | | | (898) | |
| Proceeds from issuance of common stock upon exercise of options | | 366 | | | 55 | |
| | | | |
| Net cash (used in)/provided by financing activities | | (22,927) | | | 12,946 | |
| | | | |
| Net change in cash and cash equivalents | | 22,694 | | | (433) | |
| Cash and cash equivalents at beginning of year | | 1,357 | | | 1,790 | |
| Cash and cash equivalents at end of year | | $ | 24,051 | | | $ | 1,357 | |
| | | | |
| Supplemental disclosures of cash flow information | | | | |
| Cash paid during the year for interest | | $ | 2,941 | | | $ | 2,806 | |
| Cash paid during the year for income taxes | | $ | 936 | | | $ | 917 | |
| Supplemental disclosures of non-cash activity | | | | |
| Non-cash cancellation of common stock | | $ | 68 | | | $ | 211 | |
| | | | |
| | | | |
| | | | |
|
| | | | | | | | |
| | | Year Ended |
| | | September 30, |
| | | 2018 | | 2017 |
| Operating activities | | | | |
| Net income | | $ | 1,836 |
| | $ | 3,288 |
|
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | |
| Depreciation and amortization expense | | 2,242 |
| | 1,724 |
|
| Amortization of debt financing costs as interest expense | | 275 |
| | 268 |
|
| Change in fair value of derivative financial instruments | | — |
| | 102 |
|
| Stock based compensation expense | | 1,375 |
| | 662 |
|
| Loss on retirement of equipment | | — |
| | 31 |
|
| Deferred taxes, net | | 5,502 |
| | 1,776 |
|
| Changes in operating assets and liabilities | | | | |
| Accounts receivable | | 1,631 |
| | (5,274 | ) |
| Other current assets | | (162 | ) | | (56 | ) |
| Accounts payable, accrued payroll, accrued expenses and other current liabilities | | 1,314 |
| | 3,945 |
|
| Other long term assets/liabilities | | 64 |
| | 58 |
|
| Net cash provided by operating activities | | 14,077 |
| | 6,524 |
|
| | | | | |
| Investing activities | | | | |
| Acquisition, net of cash acquired | | — |
| | (250 | ) |
| Purchase of equipment and improvements | | (654 | ) | | (1,064 | ) |
| Net cash used in investing activities | | (654 | ) | | (1,314 | ) |
| | | | | |
| Financing activities | | | | |
| Repayments on senior debt | | (11,979 | ) | | (3,750 | ) |
| Repayments of capital lease obligations | | — |
| | (86 | ) |
| Payment of deferred financing costs | | (65 | ) | | — |
|
| Proceeds from stock option exercise | | 46 |
| | 129 |
|
| Net cash used in financing activities | | (11,998 | ) | | (3,707 | ) |
| | | | | |
| Net change in cash and cash equivalents | | 1,425 |
| | 1,503 |
|
| Cash and cash equivalents at beginning of year | | 4,930 |
| | 3,427 |
|
| Cash and cash equivalents at end of year | | $ | 6,355 |
| | $ | 4,930 |
|
| | | | | |
| Supplemental disclosures of cash flow information | | | | |
| Cash paid during the year for interest | | $ | 800 |
| | $ | 883 |
|
| Cash paid during the year for income taxes | | $ | 876 |
| | $ | 337 |
|
| Non-cash issuance of stock upon exercise of options | | $ | 25 |
| | $ | — |
|
| Derivative warrant liability reclassified as equity | | $ | (306 | ) | | $ | — |
|
The accompanying notes are an integral part of these consolidated financial statements.
DLH HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the years endedSeptember 30, 20182021 and20172020
(Amounts in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | Treasury Stock | | Additional
Paid-In
Capital | | Accumulated
Deficit | | Total Shareholders' Equity |
| | Shares | | Amount | | Shares | | Amount | | | |
| Year Ended September 30, 2021 | | | | | | | | | | | | | | |
| Balance at September 30, 2020 | | 12,404 | | | $ | 12 | | | — | | | $ | — | | | $ | 85,868 | | | $ | (32,443) | | | $ | 53,437 | |
| | | | | | | | | | | | | | |
| Expense related to director restricted stock units | | 141 | | | — | | | — | | | — | | | 467 | | | — | | | 467 | |
| Expense related to employee stock options | | — | | | — | | | — | | | — | | | 1,193 | | | — | | | 1,193 | |
| Exercise of stock options | | 175 | | | 1 | | | — | | | — | | | 433 | | | — | | | 434 | |
| Repurchase of common stock | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Cancellation of common stock | | (6) | | | — | | | — | | | — | | | (68) | | | — | | | (68) | |
| Net income | | — | | | — | | | — | | | — | | | — | | | 10,145 | | | 10,145 | |
| Balance at September 30, 2021 | | 12,714 | | | $ | 13 | | | — | | | $ | — | | | $ | 87,893 | | | $ | (22,298) | | | $ | 65,608 | |
|
| | | | | | | | | | | | | | | | | | | |
| | | Common Stock | | | | | | |
| | | Additional Paid-In Capital | | Accumulated Deficit | | |
| | | Shares | | Amount | | Total Shareholders' Equity |
| BALANCE, September 30, 2016 | | 11,148 |
| | $ | 11 |
| | $ | 81,897 |
| | $ | (50,132 | ) | | $ | 31,776 |
|
| Directors' stock grants | | 103 |
| | — |
| | 496 |
| |
| | 496 |
|
| Expense related to employee stock options | | — |
| | — |
| | 166 |
| |
| | 166 |
|
| Exercise of stock options | | 516 |
| | 1 |
| | 128 |
| | — |
| | 129 |
|
| Net Income | | — |
| | — |
| | — |
| | 3,288 |
| | 3,288 |
|
| BALANCE, September 30, 2017 | | 11,767 |
| | $ | 12 |
| | $ | 82,687 |
| | $ | (46,844 | ) | | $ | 35,855 |
|
| Directors' stock grants | | 93 |
| | — |
| | 1,109 |
| | — |
| | 1,109 |
|
| Expense related to employee stock options | | — |
| | — |
| | 266 |
| | — |
| | 266 |
|
| Exercise of stock options | | 39 |
| | — |
| | 46 |
| | — |
| | 46 |
|
| Change in accounting principle - reclassification of warrant liability | | — |
| | — |
| | 177 |
| | 129 |
| | 306 |
|
| Net Income | | — |
| | — |
| | — |
| | 1,836 |
| | 1,836 |
|
| BALANCE, September 30, 2018 | | 11,899 |
| | $ | 12 |
| | $ | 84,285 |
| | $ | (44,879 | ) | | $ | 39,418 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | Treasury Stock | | Additional
Paid-In
Capital | | Accumulated
Deficit | | | | | | Total Shareholders' Equity |
| | Shares | | Amount | | Shares | | Amount | | | | | | | |
| Year Ended September 30, 2020 | | | | | | | | | | | | | | | | | | |
| Balance at September 30, 2019 | | 12,036 | | | $ | 12 | | | — | | | $ | — | | | $ | 85,114 | | | $ | (39,555) | | | | | | | $ | 45,571 | |
Cumulative-effect adjustment for adoption of ASC 842 | | — | | | — | | | — | | | — | | | — | | | (2) | | | | | | | (2) | |
| Expense related to director restricted stock units | | 90 | | | — | | | — | | | — | | | 347 | | | — | | | | | | | 347 | |
| Expense related to employee stock options | | — | | | — | | | — | | | — | | | 563 | | | — | | | | | | | 563 | |
| Exercise of stock options | | 395 | | | — | | | — | | | — | | | 55 | | | — | | | | | | | 55 | |
| | | | | | | | | | | | | | | | | | |
| Repurchase of common stock | | — | | | — | | | 28 | | | (113) | | | — | | | — | | | | | | | (113) | |
| Cancellation of common stock | | (117) | | | — | | | (28) | | | 113 | | | (211) | | | — | | | | | | | (98) | |
| Net income | | — | | | — | | | — | | | — | | | — | | | 7,114 | | | | | | | 7,114 | |
| Balance at September 30, 2020 | | 12,404 | | | $ | 12 | | | — | | | $ | — | | | $ | 85,868 | | | $ | (32,443) | | | | | | | $ | 53,437 | |
The accompanying notes are an integral part of these consolidated financial statements
DLH HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 20182021
1. Basis of Presentation
The accompanying consolidated financial statements include the accounts of DLH Holdings Corp. and its subsidiaries (together with its subsidiaries, "DLH" or the "Company" and also referred to as "we," "us," and "our"), all of which are wholly owned.wholly-owned. All significant intercompany balances and transactions have been eliminated in consolidation. The accompanying financial statements have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP") and with the instructions to Form 10-K, Regulation S-X, and Regulation S-K. Certain reclassifications have been made to the prior year’s consolidated financial statements to conform to the current year presentation.
2. Business Overview
The Company is a full-service provider of technology-enabled health and human services, providing solutions to 3 market focus areas: Defense and Veterans' Health Solutions, Human Solutions and Services, and Public Health and Life Sciences. We deliver domain-specific expertise, industry best-practices and innovations to customers across these markets leveraging 7 core competencies: secure data analytics, clinical trials and laboratory services, case management, performance evaluation, system modernization, operational logistics and readiness, and strategic digital communications. The Company manages its operations from its principal executive offices in Atlanta, Georgia, and we have a complementary headquarters office in Silver Spring, Maryland. We employ over 2,300 skilled employees working in more than 30 locations throughout the United States and 1 location overseas.
At present, the Company derives 100%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. A major customer is defined as a customer from whom the Company derives at least 10% of its revenues. Our current contracts3 largest customers are within the following markets: Defense/VA (65%Department of Veteran Affairs ("VA"), the Department of Health and Human Services ("HHS"), and Solutions (31%) and Public Health/Life Sciences (4%);the Department of which 95% of these contracts have been awarded on a Time and Materials basis, 3% are Cost plus Fixed Fee contracts and 2% are Firm Fixed Price contracts. In addition, substantially all accounts receivable, including unbilled accounts receivable, are from agencies ofDefense ("DoD").
The following table summarizes the U.S. Government as of September 30, 2018 and 2017. We believe that the credit risk associated with our receivables is limited due to the creditworthiness of these customers. The Company’s current business base is 99% prime contracts and 1% subcontracts.
Our largestrevenues by customer continues to be the VA, which comprised approximately 63% and 62% of revenue for the years ended September 30, 20182021 and 2017, respectively. HHS, which comprised approximately 34% and 34% of revenue for the year ended September 30, 2018 and 2017, respectively, is also a major customer. These agreements are subject to the Federal Acquisition Regulations. While 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, we believe that our strong working relationships and our effective service delivery support ongoing performance for the terms of the contracts. 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, or if the amount of services we provide to them was materially reduced.2020, respectively:
DLH’s revenues from the VA are derived from 16 separate contracts related to its performance of pharmacy and logistics services in support of the VA’s consolidated mail outpatient pharmacy program. Approximately 57% of the Company’s current business base with the VA is derived from nine contracts (for pharmacy services) that are currently operating under extensions through April 2019 pending completion of the procurement process for a new contract. A single renewal request for proposal (“RFP”) has currently been issued for these nine contracts and we expect further extensions until the procurement process is completed. The RFP, however, requires the prime contractor be a service-disabled veteran owned small business (SDVOSB), which precludes the Company from bidding on the RFP as a prime contractor. We have joined an SDVOSB team as a subcontractor to respond to this RFP. Should the contract be awarded to an SDVOSB partner of DLH, the Company expects to continue to perform a significant amount of the contract’s volume of business. The remaining seven contracts for logistics services to the VA are performed under contracts which do not expire until May 2019, and the Company believes that these contracts will be similarly extended during the procurement process. These contracts may be subject to the same requirement of awarding to a SDVOSB prime contractor. | | | | | | | | | | | | | | | | | | | | |
| | Year Ended |
| | September 30, |
| | 2021 | | 2020 |
| (Amounts in thousands) | | Revenue | Percent of total revenue | | Revenue | Percent of total revenue |
| Department of Veterans Affairs | | $ | 110,078 | | 45 | % | | $ | 100,204 | | 48 | % |
| Department of Health and Human Services | | 91,543 | | 37 | % | | 95,026 | | 45 | % |
| Department of Defense | | 30,930 | | 13 | % | | 1,303 | | 1 | % |
| Customers with less than 10% share of total revenue | | 13,543 | | 5 | % | | 12,652 | | 6 | % |
| Total revenue | | $ | 246,094 | | 100 | % | | $ | 209,185 | | 100 | % |
| | | | | | |
Our contract with HHS in support of its Head Start program generated 31% and 29% of our revenue from HHS for the fiscal years ended September 30, 2018 and 2017, respectively. This contract is on a time and materials basis and consists of a base period of four option periods for a total term of five years through April 2020. The Company's Danya subsidiary has provided these similar services to HHS since 1999. Danya was acquired by the Company in May 2016
3. New Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board ("FASB") issued amended revenue recognition guidance, including subsequent amendments, which was summarized into ASC 606, "Revenue from Contracts with Customers". ASC 606 affects any entity using U.S. GAAP that either enters into contracts with customers to transfer goods or services unless those contracts are within the scope of other standards. The new guidance outlines a single comprehensive model for entities to apply in accounting for revenue arising from contracts with customers. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Additionally, this guidance required improved
disclosures to help users of the financial statements better understand the nature, timing, and potential uncertainty of revenue that is recognized. To achieve that core principle, an entity should apply the following steps:
Step 1: Identify the contract(s) with a customer.
Step 2: Identify the performance obligations in the contract.
Step 3: Determine the transaction price.
Step 4: Allocate the transaction price to the performance obligations in the contract.
Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation.
In addition, the FASB amended ASC 340-40 to provide guidance on costs to obtain contracts with customers. For a public entity, the amendments in this ASU are effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period, using either a full retrospective approach or a modified approach.
The Company adopted the standard on a modified retrospective basis on October 1, 2018, whereby the cumulative effect of applying the standard was recognized through shareholders’ equity on the date of adoption. In interim periods of our fiscal year ending September 30, 2019, we will be required to provide additional disclosures regarding the amount by which each financial statement line item is affected in the current reporting period by the application of this ASU as compared to the guidance that was in effect before the change. Upon adoption on October 1, 2018, the Company recorded a net increase to shareholders’ equity of approximately $0.1 million. This amount related principally to the proportional recognition of revenue on fixed price services contracts.
As part of our implementation process, we reviewed representative contracts within each revenue stream, updated accounting policies and procedures, and internal controls over financial reporting. We evaluated the cumulative equity adjustment and updated financial reporting and footnote disclosures as required by the new standard. We have substantially completed our implementation process in 2018.
We do not expect that ASC 606 will have a material impact to our pattern of revenue recognition. Revenue for our current contract base is predominantly (95%) recognized on a time and materials basis, as the performance obligation is satisfied. An additional 3% of our revenue is derived from cost plus fixed fee contract arrangements, under which revenue is recognized as reimbursement of costs incurred in satisfaction of performance obligations, plus a proportional share of the fee earned. The final 2% of our revenue is derived from short-term (one year or less) fixed price services contracts. Revenue from fixed price services contracts is currently recognized evenly throughout the period of performance, but under ASC 606 we will estimate satisfaction of performance obligations on a proportional basis using a cost-to-cost input method. The adoption of ASC 340-40 will require capitalization of certain costs to obtain and fulfill a contract, with amortization of those deferred costs over the contract’s period of performance as underlying performance obligations are satisfied.
In FebruaryJune 2016, the FASB issued new accounting guidance relatedASU 2016-13, Financial Instruments - Credit Losses, which requires companies to leases. This new accounting guidance is intended to improverecord an allowance for expected credit losses over the contractual term of certain financial reporting about leasing transactions. This accounting standard will require organizations that lease assets, referred to as “Lessees” to recognize on the balance sheet the assetsincluding short-term trade receivables and liabilitiescontract assets. Additionally, it expands disclosure requirements for credit quality of financial assets. ASU 2016-13 became effective for the rights and obligations created by those leases. An organization is to provide disclosures designed to enable users of financial statements to understand the amount, timing, and uncertainty of cash flows arising from leases. These disclosures include qualitative and quantitative requirements concerning additional information about the amounts recordedCompany in the financial statements. Under the new guidance, a lessee will be required to recognize assets and liabilities for leases with lease termsfirst quarter of more than twelve months. Consistent with current GAAP, the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a finance or operating lease. However, unlike current GAAP which requires only capital leases to be recognized on the balance sheet, new guidance will require both types of leases (i.e., operating and finance) to be recognized. Finance leases will be accounted for in substantially the same manner as capital leases. Public companies will be required to adopt the new leasing standard for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted for all companies and organizations. ASU 2018-11 allows companies to elect not to recast comparative period presented when transitioning to ASC 842.year 2021. The Company does not have a large portfolio of leases and is not likely to see a significant increase in balance sheet assets and liabilities resulting from the adoption of this new lease accounting guidance. As shown in Note 10, the Company currently has approximately $2.8 million of active lease commitments that will be evaluated as the implementation of this new lease accounting guidance becomes effective.
In August 2016, the FASB issued Accounting Standards Update (“ASU”) No. 2016-15, Statement of Cash Flows (Topic 230). This amendment provides guidance on the presentation and classification of specific cash flow items to improve consistency within the statement of cash flows. The Company adopted ASU No. 2016-15 on October 1, 2017 and its adoptionstandard did not have a material impact on the Company’s consolidatedour operating results, financial position, or cash flows. For further detail of our outstanding receivables see Note 7.
In January 2017,March 2020, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment2020-04, Reference Rate Reform (Topic 848), which simplifiesprovides optional expedients and exceptions for the accounting for goodwill impairments by eliminating step two fromapplication of U.S. GAAP to contracts, hedging relationships, and other transactions that reference the goodwill impairment test. Instead, if the carrying amount of a reporting unit exceeds its fair value, an impairment loss shallLondon Interbank Offered Rate ("LIBOR") and other references rates expected to be recognized in an amount equaldiscontinued due to that excess, limited to the total amount of goodwill allocated to that reporting unit.reference rate reform. ASU 2017-04 also clarifies the requirements for excluding and allocating foreign currency translation adjustments to reporting units related to an entity's testing of reporting units for goodwill impairment and clarifies that an entity should consider income tax effects from any tax-deductible goodwill2020-04 became effective on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. The new standard is effective for fiscal years beginning January 1,March 12, 2020 for both interim and annual reporting periods.all entities meeting certain criteria. The Company may elect to apply the amendments using a prospective approach through December 31, 2022. The Company is currently assessing the potential impact of the adoption of ASC 2017-04
electing this standard on its consolidated financial statements.statements and related disclosures and does not expect the impact to be material.
In May 2017,April 2020, the FASB issued a Staff Q&A, Topic 842 and 840: Accounting Standards Update ASU 2017-09, Compensation-Stock Compensation (Topic 718): ScopeFor Lease Concessions Related to the Effects of Modification Accounting. ASC 2017-09 providesthe COVID-19 Pandemic in order to provide clarity regarding the accounting treatment for lease concessions provided as a result of COVID-19. Under existing lease guidance, about which changes to certain lease terms not specified in the termsoriginal lease agreement require modification accounting treatment. To provide relief, the FASB Staff Q&A permits alternatives to modification accounting under Topic 842. For concessions related to the effects of the COVID-19 pandemic that do not result in a substantial increase in the rights of the lessor or conditionsour obligations as the lessee, we are not required to analyze each contract to determine whether enforceable rights and obligations for concessions exist in the lease agreement and can elect to apply or not apply the lease modification guidance in Topic 842. In fiscal year 2021, we elected to account for lease concessions received for 1 of our operating leases as a resolution of a share-based payment award require an entity to apply modification accounting in Topic 718. The Company will adoptcontingency, whereby we remeasured our lease liability and recorded the adjustment against the right-of-use asset, without reassessing lease classification or modifying the original discount rate. As a result of this standard in the first quarter of fiscal 2019election, our lease liability and its adoption is not expected to have a material impact on the Company’s consolidated financial statements.right-of-use-asset decreased by less than $0.1 million.
In July 2017, the FASB issued new accounting guidance related to certain equity-linked financial instruments with down round features, such as warrants. The guidance provides for a scope exception from derivative accounting if the instruments qualify for equity classification. Should the instruments qualify for equity classification, they would no longer be considered liabilities subject to fair value measurement at each reporting period. This update is effective for the Company as of its fiscal year beginning October 1, 2019, with early adoption permitted. The Company has elected to adopt the provisions of this ASU in the current fiscal year. See Note 8. Common Stock Warrants.
In June 2018,August 2020, the FASB issued ASU 2018-07 Improvements to Nonemployee Share-Based Payment Accounting,2020-06, which simplifiesamends the accounting for share-based payments granted to nonemployees for goodsmeasurement and services. Under the ASU, mostdisclosure of theconvertible instruments, contracts in an entity's own equity, and EPS guidance. The guidance on such payments to nonemployees wouldcan be aligned with the requirements for share-based payments granted to employees.adopted using a modified retrospective method or a fully retrospective method. The amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within2021 for public entities, excluding those that are smaller reporting companies. For all other entities the amendments are effective for fiscal years beginning after December 15, 2020. Early adoption is permitted, but no earlier than an entity’s adoption date of Topic 606.2023. The Company is currently assessingdoes not expect the potentialupdate to have a material impact on the Company’sits consolidated financial statements and related disclosures.
4. Supporting Financial Information
Accounts receivable
|
| | | | | | | | | | | | | |
| | | | | (in thousands) | |
| | | | September 30, | | September 30, |
| | Ref | | | 2018 | | | | 2017 | |
| Billed receivables | | | | $ | 10,066 |
| | | | $ | 11,862 |
| |
| Unbilled receivables | | | | 214 |
| | | | 49 |
| |
| Total accounts receivable | | | | 10,280 |
| | | | 11,911 |
| |
| Less: Allowance for doubtful accounts | (a) | | | — |
| | | | — |
| |
| Accounts receivable, net | | | | $ | 10,280 |
| | | | $ | 11,911 |
| |
Ref (a): Accounts receivable are non-interest bearing, unsecured and net of an allowance for doubtful accounts. We evaluate our receivables on a quarterly basis and determine whether an allowance is appropriate based on specific collection issues. No allowance for doubtful accounts was deemed necessary at either September 30, 2018 or September 30, 2017.
Other current assets
|
| | | | | | | | | | | | | |
| | | | | (in thousands) | |
| | | | September 30, | | September 30, |
| | Ref | | | 2018 | | | | 2017 | |
| Prepaid insurance and benefits | | | | $ | 401 |
| | | | $ | 240 |
| |
| Other receivables and prepaid expenses | | | | 359 |
| | | | 358 |
| |
| Other current assets | | | | $ | 760 |
| | | | $ | 598 |
| |
Equipment and improvements, net
|
| | | | | | | | | | | | | |
| | | | | (in thousands) | |
| | | | September 30, | | September 30, |
| | Ref | | | 2018 | | | | 2017 | |
| Furniture and equipment | | | | $ | 326 |
| | | | $ | 331 |
| |
| Computer equipment | | | | 751 |
| | | | 715 |
| |
| Computer software | (a) | | | 1,731 |
| | | | 1,108 |
| |
| Leasehold improvements | | | | 66 |
| | | | 66 |
| |
| Total fixed assets | | | | 2,874 |
| | | | 2,220 |
| |
| Less accumulated depreciation and amortization | | | | (1,308 | ) | | | | (829 | ) | |
| Equipment and improvements, net | (b) | | | $ | 1,566 |
| | | | $ | 1,391 |
| |
Ref (a): The Company implemented a new Enterprise Resource Planning system on January 1, 2018. Capitalized costs include $1.3 million and $0.7 million as of September 30, 2018 and 2017, respectively, of software licenses and implementation labor related to application development. The asset was placed in service as of January 1, 2018 with an estimated useful life of 5 years.
Ref (b): 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. Maintenance and repair costs are expensed as incurred. Depreciation of equipment was $479 thousand and $287 thousand for the years ended September 30, 2018 and 2017, respectively.
Intangibles assets, net
|
| | | | | | | | | |
| | | | (in thousands) |
| | | | September 30, | | September 30, |
| | Ref | | 2018 | | 2017 |
| Intangible assets | (a) | | | | |
| Customer contracts and related customer relationships | | | $ | 16,626 |
| | $ | 16,626 |
|
| Covenants not to compete | | | 480 |
| | 480 |
|
| Trade name | | | 517 |
| | 517 |
|
| Total intangible assets | | | 17,623 |
| | 17,623 |
|
| Less accumulated amortization | | | | | |
| Customer contracts and related customer relationships | | | (4,018 | ) | | (2,355 | ) |
| Covenants not to compete | | | (116 | ) | | (68 | ) |
| Trade name | | | (124 | ) | | (73 | ) |
| Total accumulated amortization | | | (4,258 | ) | | (2,496 | ) |
| Intangible assets, net | | | $ | 13,365 |
| | $ | 15,127 |
|
Ref (a): Intangible assets are amortized on a straight-line basis over their estimated useful lives of 10 years. Total amount of amortization expense for the years ended September 30, 2018 and 2017 was $1.8 million and $1.4 million, respectively.
|
| | | | |
| Estimated amortization expense for future years: | | (in thousands) |
| Fiscal 2019 | | $ | 1,762 |
|
| Fiscal 2020 | | 1,762 |
|
| Fiscal 2021 | | 1,762 |
|
| Fiscal 2022 | | 1,762 |
|
| Fiscal 2023 | | 1,762 |
|
| Thereafter | | 4,555 |
|
| Total amortization expense | | $ | 13,365 |
|
Accounts payable, accrued expenses and other current liabilities
|
| | | | | | | | |
| | | (in thousands) |
| | | September 30, | | September 30, |
| | | 2018 | | 2017 |
| Accounts payable | | $ | 3,393 |
| | $ | 5,205 |
|
| Accrued benefits | | 2,060 |
| | 1,831 |
|
| Accrued bonus and incentive compensation | | 2,191 |
| | 1,544 |
|
| Accrued workers compensation insurance | | 2,642 |
| | 1,598 |
|
| Other accrued expenses | | 664 |
| | 717 |
|
| Accounts payable, accrued expenses, and other current liabilities | | $ | 10,950 |
| | $ | 10,895 |
|
Debt obligations
|
| | | | | | | | | |
| | | | (in thousands) |
| | | | September 30, | | September 30, |
| | Ref | | 2018 | | 2017 |
| Bank term loan | (a) | | $ | 7,708 |
| | $ | 19,688 |
|
| Less unamortized debt issuance costs | | | (750 | ) | | (961 | ) |
| Net bank debt obligation | | | 6,958 |
| | 18,727 |
|
| Less current portion of bank debt obligations | | | — |
| | (6,518 | ) |
| Long term portion of bank debt obligation | | | $ | 6,958 |
| | $ | 12,209 |
|
|
| | | | | |
| Ref (a): Maturity of the bank debt obligation as follows, in thousands: | | | |
| Fiscal 2019 | | $ | — |
| |
| Fiscal 2020 | | 1,875 |
| |
| Fiscal 2021 | | 5,833 |
| |
| Total bank debt obligation | | $ | 7,708 |
| |
Interest expense
|
| | | | | | | | | |
| | | | (in thousands) |
| | | | Years Ended |
| | | | September 30, |
| | Ref | | 2018 | | 2017 |
| Interest expense | (a) | | $ | (800 | ) | | $ | (883 | ) |
| Amortization of debt financing costs as interest expense | (b) | | (275 | ) | | (268 | ) |
| Change in fair value of derivative financial instruments | | | — |
| | (102 | ) |
| Other income (expense), net | | | (41 | ) | | 25 |
|
| Interest expense, net | | | $ | (1,116 | ) | | $ | (1,228 | ) |
Ref (a): Interest expense on borrowing
Ref (b): Amortization of expenses related to securing financing
5. Cash and Credit Facilities
A summary of our loan facilities and subordinated debt financing as of September 30, 2018 is as follows:
|
| | | | | | | | | | |
| | | ($ in Millions) |
| | | As of September 30, 2018 |
| Lender | | Arrangement | | Loan Balance | | Interest | | Maturity Date |
| Fifth Third Bank |
| Secured term loan $25 million (a) |
| $ | 7.7 |
|
| LIBOR* + 3.0% |
| 05/01/21 |
| Fifth Third Bank |
| Secured revolving line of credit $10 million ceiling (b) |
| $ | — |
|
| LIBOR* + 3.0% |
| 05/01/21 |
* LIBOR rate as of September 30, 2018 was 2.08%
(a) Represents the principal amounts payable on our Term Loan with Fifth Third Bank. The $25.0 million term loan from Fifth Third Bank is secured by liens on substantially all of the assets of the Company. The principal of the Term Loan is payable in fifty-nine consecutive monthly installments of $312,500 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. We are in compliance with all loan covenants and restrictions. 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 quarterly 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 3.0 to 1.0 for the period through June 30, 2018 to 2.5 to 1.0 for the period ending September 30, 2018 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, including acquisition expenses, net, (ii) provision for or benefit from income taxes, if any, (iii) depreciation and amortization, and (iv) G&A expenses - equity grants.
In addition to monthly 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. The loan agreement states that an excess cash flow recapture payment must be made equal to (a) 75% of the excess cash flow for each year in which the Funded Indebtedness to Adjusted EBITDA ratio is greater than or equal to 2.50:1.0, or (b) 50% of the Excess Cash Flow for each fiscal year in which the funded indebtedness to Adjusted EBITDA Ratio is less than 2.50:1.0 but greater than or equal to 2.0:1.0. DLH made an excess cash flow payment of $2.9 million in January 2018, and based on its funded indebtedness to Adjusted EBITDA ratio, does not expect to make any future excess cash flow payments. Additionally, DLH made a voluntary prepayment of term debt of $5.6 million in September 2018, which has been attributed to the scheduled monthly payments for the upcoming 18 months through March 2020.
(b) The secured revolving line of credit from Fifth Third Bank has a ceiling of up to $10.0 million. Borrowing on the line of credit is secured by liens on substantially all of the assets of the Company.
The Company's total remaining borrowing availability, based on eligible accounts receivables at September 30, 2018, was $8.9 million. This capacity was further reduced by $1.3 million in a stand-by letter of credit and thus unused borrowing capacity of $7.6 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.
6. Significant Accounting Policies
Use of Estimates
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 measurement of prepaid workers’and intangible assets, interest rate swaps, stock-based compensation, right-of-use assets and liabilities, valuation allowances established against accounts receivable and deferred tax assets, and measurement of contingentloss development on workers' compensation claims. We evaluate these estimates and judgments on an ongoing basis and base our estimates on historical experience, current and expected future outcomes, third-party evaluations, and various other assumptions that we believe are reasonable under the circumstances. The results of these estimates form the basis for making judgments about the carrying values of assets and liabilities accounts payable, workers’ compensation claims,as well as identifying and accrued expensesassessing the accounting treatment with respect to commitments and the valuation of derivative financial instruments associated with debt agreements. In addition, the Companycontingencies. We revise material accounting estimates overhead charges and allocatesif changes occur, such charges throughout the year.as more experience is acquired, additional information is obtained, or there is new information on which an estimate was or can be based. 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.
Revenue Recognition
DLH’s revenue is derived from professional and other specialized service offerings to US Government agencies through We account for the effect of a variety of contracts, some of which are fixed-pricechange 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 overaccounting estimate during the period of performance ofin which the contract. Revenue on cost reimbursable contracts is recognized equal to allowable costs incurred, plus a ratable portion of the applicable fee.change occurs.
DLH recognizes and records revenue on government contracts when: (a) persuasive evidence of an arrangement exists; (b) the services have been delivered to the customer; (c) the sales price is fixed or determinable and free of contingencies or significant uncertainties; and (d) collectibility is reasonably assured. Refer to Note 3 for discussion of the adoption of ASC 606, which is effective as of October 1, 2018, and the Company's estimated impact of implementation.
Fair Value of Financial Instruments
The carrying amounts of the Company's cash and cash equivalents, accounts receivable, unbilled receivables,contract assets, accrued expenses, and accounts payable approximate fair value due to the short-term nature of these instruments. The fair values of the Company's debt instruments approximate fair value because the underlying interest rates approximate market rates that the Company could obtain for similar instruments at the balance sheet dates.
Long-lived Assets
Goodwill
Our long-lived assets include equipment and otherimprovements, intangible assets,
DLH right-of-use assets, and goodwill. The Company continues to review its goodwill and other intangiblelong-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. Intangible assets (other than goodwill) are originally recorded at fair value and are amortized on a straight-line basis over their estimated useful lives of 10 years. Maintenance and repair costs are expensed as incurred.
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 paid, less incentives received. Our right-of-use assets include long-term leases for facilities and equipment and are amortized over their respective lease terms.
Goodwill
At September 30, 2018,2021, we performed a goodwill impairment evaluation on the year-end carrying value of approximately $26$65.6 million. We performed both a qualitative and quantitative 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, 2018,2021, 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 is not expected to 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. ThereSimilarly, there were no impairments during the prior year ended September 30, 2017.2020.
Long Lived Assets
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.
Income Taxes
DLHThe 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. We account for uncertain tax positions by recognizing the financial statement effects of a tax position only when, based upon the technical merits, it is "more-likely-than-not" that the position will be sustained upon examination. We had no uncertain tax positions at either September 30, 20182021 and 2017.2020. We report interest and penalties as a component of income tax expense. InFor the years ended September 30, 20182021 and 2017,2020, we recognized no interest and no penalties related to income taxes.
Stock-based Equity Compensation
The Company uses the fair value-based method for stock-based equity 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 a binomial and Black Scholes option pricing model 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.
Cash and Cash Equivalents
We consider all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents. We maintain cash balances at financial institutions that are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000. Deposits held with financial institutions may exceed the $250,000 limit.
Earnings per Share
Basic earnings per share is calculated by dividing income available to common shareholders by the weighted average number of common stock outstanding and restricted stock grants that vested or are likely to vest during the period. Diluted earnings per share is calculated by dividing income available to common shareholders by the weighted average number of basic common shares outstanding, adjusted to reflect potentially dilutive securities such as common stock warrants and stock options.securities. Diluted earnings per share is calculated using the treasury stock method.
The Company periodically purchases its own common stock that is traded on public markets as part of announced stock repurchase programs. The repurchased common stock is classified as treasury stock on the consolidated balance sheets and held
at cost. As of September 30, 2021, the Company did not hold any treasury stock.
Preferred Stock
Our certificate of incorporation authorizes the issuance of "blank check" preferred stock with such designations, rights and preferences as may be determined from time to time by our board of directors up to an aggregate of 5,000,000 shares of preferred stock. As of September 30, 2021, the Company has not issued any preferred stock.
Interest Rate Swap
The Company uses derivative financial instruments to manage interest rate risk associated with its variable debt. The Company's objective in using these interest rate derivatives is to manage its exposure to interest rate movements and reduce volatility of interest expense. The gains and losses due to changes in the fair value of the interest rate swap agreements completely offset changes in the fair value of the hedged portion of the underlying debt. Offsetting changes in fair value of both the interest rate swaps and the hedged portion of the underlying debt are recognized in interest expense in the Consolidated Statements of Operations. The Company does not hold or issue any derivative instrument for trading or speculative purposes.
Risks & Uncertainties
Management continues to evaluate the impact of the COVID-19 pandemic on the industry and has concluded
that while it is reasonably possible that the virus could have a negative effect on the Company’s financial position and the
results of its operations, the specific impact is not readily determinable as of the date of these financial statements. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
5. Revenue Recognition
We recognize revenue over time when there is a continuous transfer of control to our customer. For our U.S. government contracts, this continuous transfer of control to the customer is supported by clauses in the contract that allow the U.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.
Contract costs include labor, material and allocable indirect expenses. For time-and-material contracts, we bill the customer per labor hour and per material, and revenue is recognized in the amount invoiced since the amount corresponds directly to the value of our performance to date. We consider control to transfer when we have a present right to payment. Essentially, all of our contracts satisfy their performance obligations over time. Contracts are often modified to account for changes in contract specifications and requirements. Contract modifications impact performance obligations when the modification either creates new or changes the existing enforceable rights and obligations. The effect of a contract modification on the transaction price and our measure of progress for the performance obligation to which it relates is recognized as an adjustment to revenue and profit cumulatively. Furthermore, a significant change in one or more estimates could affect the profitability of our contracts. We recognize adjustments in estimated profit on contracts in the period identified.
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.
Contract assets - Amounts are invoiced as work progresses in accordance with agreed-upon contractual terms. In part, revenue recognition occurs before we have the right to bill, resulting in contract assets. These contract assets are reported within receivables, net on our consolidated balance sheets and are invoiced in accordance with payment terms defined in each contract. Period end balances will vary from period to period due to agreed-upon contractual terms.
Contract liabilities - Amounts are a result of billings in excess of costs incurred.
The following table summarizes the contract balances recognized within the Company's consolidated balance sheets (in thousands):
| | | | | | | | | | | | | | | | | |
| | | |
| | | September 30, | | September 30, | | |
| Ref | | 2021 | | 2020 | | |
| | | | | | | |
| Contract assets | | | $ | 7,307 | | | $ | 7,943 | | | |
| Contract liabilities | (a) | | $ | 22,473 | | | $ | 200 | | | |
Ref (a): The increase in contract liabilities is primarily due to contract start up funding provided under a contract awarded at the end of the fiscal year.
Disaggregation of revenue from contracts with customers
We disaggregate our revenue from contracts with customers by customer, contract type, as well as whether the Company acts as prime contractor or subcontractor. We believe these categories best depict how the nature, amount, timing and uncertainty of our revenue and cash flows are affected by economic factors. The following series of tables present our revenue disaggregated by these categories:
Revenue by customer (in thousands):
| | | | | | | | | | | | | | | | | |
| | | | | |
| | | Year Ended |
| | | September 30, | | |
| | | 2021 | | 2020 | | |
| Department of Veterans Affairs | | | $ | 110,078 | | | $ | 100,204 | | | |
| Department of Health and Human Services | | | 91,543 | | | 95,026 | | | |
| Department of Defense | | | 30,930 | | | 1,303 | | | |
| Other | | | 13,543 | | | 12,652 | | | |
| Total Revenue | | | $ | 246,094 | | | $ | 209,185 | | | |
Revenue by contract type (in thousands):
| | | | | | | | | | | | | | | | | |
| | | | | |
| | | Year Ended |
| | | September 30, | | |
| | | 2021 | | 2020 | | |
| Time and Materials | | | $ | 185,656 | | | $ | 147,509 | | | |
| Cost Reimbursable | | | 48,101 | | | 58,091 | | | |
| Firm Fixed Price | | | 12,337 | | | 3,585 | | | |
| Total Revenue | | | $ | 246,094 | | | $ | 209,185 | | | |
Revenue by whether the Company acts as a prime contractor or a subcontractor (in thousands):
| | | | | | | | | | | | | | | | | |
| | | | | |
| | | Year Ended |
| | | September 30, | | |
| | | 2021 | | 2020 | | |
| Prime Contractor | | | $ | 215,241 | | | $ | 193,448 | | | |
| Subcontractor | | | 30,853 | | | 15,737 | | | |
| Total Revenue | | | $ | 246,094 | | | $ | 209,185 | | | |
6. Leases
We have leases for facilities and office equipment. Our lease liabilities are recognized as thepresent value of the future minimum lease paymentsover the lease term. Our right-of-use assets are recognized as the present value of the future minimum lease payments over the lease term less unamortized lease incentives and the balance remaining in deferred rent liability under ASC 840. Our lease payments consist of fixed and in-substance fixed amounts attributable to the use of the underlying asset over the lease term. Variable lease payments that do not depend on an index rate or are not in-substance fixed payments are excluded in the measurement of right-of-use assets and lease liabilities and are expensed in the period incurred. The incremental borrowing rate on our credit facility is used in determining the present value of future minimum lease payments. Some of our lease agreements include options to extend the lease term or terminate the lease. These options are accounted for in our right-of-use assets and lease liabilities when it is reasonably certain that the Company will extend the lease term or terminate the lease. The Company does not have any finance leases. As of September 30, 2021, operating leases for facilities and equipment have remaining lease terms of 1.2 to 9.5 years.
The following table summarizes lease balances on our consolidated balance sheet at September 30, 2021 and 2020 (in thousands):
| | | | | | | | | | | |
| September 30, | | September 30, |
| 2021 | | 2020 |
| Operating lease right-of-use assets | $ | 19,919 | | | $ | 22,427 | |
| | | |
| Operating lease liabilities, current | $ | 2,261 | | | $ | 2,045 | |
| Operating lease liabilities, long-term | 19,374 | | | 21,620 | |
| Total operating lease liabilities | $ | 21,635 | | | $ | 23,665 | |
The Company subleases a portion of 1 of its leased facilities. The sublease is classified as an operating lease with respect to the underlying asset. The sublease term is 5 years and ends June 2025. The sublease includes 2 additional 1 year term extension options.
For the years ended September 30, 2021 and 2020, total lease costs for our operating leases are as follows (in thousands):
| | | | | | | | | | | | | |
| |
| Year Ended |
| September 30, | | |
| 2021 | | 2020 | | |
| Operating | $ | 3,653 | | | $ | 4,236 | | | |
| Short-term | 103 | | | 155 | | | |
| Variable | 81 | | | 63 | | | |
| Sublease income | (302) | | | (271) | | | |
| Total lease costs | $ | 3,535 | | | $ | 4,183 | | | |
At September 30, 2021, the weighted-average remaining lease term and weighted-average discount rate are 8.3 years and 6.0%, respectively. The calculation of the weighted-average discount rate was determined based on borrowing terms from our senior credit facility.
Other information related to our leases is as follows (in thousands):
| | | | | | | | | | | | | | |
| | |
| | Year Ended |
| | September 30, | | |
| | 2021 | | 2020 | | |
| Cash paid for amounts included in the measurement of lease liabilities | | $ | 3,306 | | | $ | 3,586 | | | |
| New lease liabilities, net of new right-of-use-assets | | $ | — | | | $ | 229 | | | |
| Lease liabilities arising from obtaining right-of-use-assets | | $ | — | | | $ | 7,822 | | | |
The Company's future minimum lease payments as of September 30, 2021 are as follows:
| | | | | |
| For the Fiscal Year Ending September 30, | (in thousands) |
| 2022 | $ | 3,501 | |
| 2023 | 3,391 | |
| 2024 | 3,251 | |
| 2025 | 3,092 | |
| 2026 | 3,193 | |
| Thereafter | 11,491 | |
| Total future minimum lease payments | 27,919 | |
| Less: imputed interest | (6,284) | |
| Present value of future minimum lease payments | 21,635 | |
| Less: current portion of operating lease liabilities | (2,261) | |
| Long-term operating lease liabilities | $ | 19,374 | |
7. Supporting Financial Information
Accounts receivable
| | | | | | | | | | | | | | |
| | (in thousands) |
| | September 30, | | September 30, |
| Ref | 2021 | | 2020 |
| Billed receivables | | $ | 26,140 | | | $ | 24,598 | |
| Contract assets | | 7,307 | | | 7,943 | |
| Total accounts receivable | | 33,447 | | | 32,541 | |
| Less: Allowance for doubtful accounts | (a) | — | | | — | |
| Accounts receivable, net | | $ | 33,447 | | | $ | 32,541 | |
Ref (a): Accounts receivable are non-interest bearing, unsecured and carried at net realizable value. We evaluate our receivables on a quarterly basis and determine whether an allowance is appropriate based on specific collection issues. No allowance for doubtful accounts was deemed necessary at either September 30, 2021 or September 30, 2020.
Other current assets
| | | | | | | | | | | | | | |
| | (in thousands) |
| | September 30, | | September 30, |
| | 2021 | | 2020 |
| Prepaid insurance and benefits | | $ | 655 | | | $ | 665 | |
| Other receivables | | 995 | | | 1,363 | |
| Prepaid expenses | | 2,615 | | | 1,471 | |
| Other current assets | | $ | 4,265 | | | $ | 3,499 | |
Equipment and improvements, net
| | | | | | | | | | | | | | |
| | (in thousands) |
| | September 30, | | September 30, |
| Ref | 2021 | | 2020 |
| Furniture and equipment | | $ | 958 | | | $ | 958 | |
| Computer equipment | | 1,262 | | | 1,171 | |
| Computer software | | 4,353 | | | 4,341 | |
| Leasehold improvements | | 1,595 | | | 1,595 | |
| Total equipment and improvements | | 8,168 | | | 8,065 | |
| Less accumulated depreciation and amortization | | (6,256) | | | (4,726) | |
| Equipment and improvements, net | (a) | $ | 1,912 | | | $ | 3,339 | |
Ref (a): Depreciation and amortization was $1.5 million and $2.2 million for the years ended September 30, 2021 and 2020, respectively.
Intangible assets, net
| | | | | | | | | | | | | | |
| | (in thousands) |
| | September 30, | | September 30, |
| Ref | 2021 | | 2020 |
| Intangible assets | | | | |
| Customer contracts and related customer relationships | | $ | 62,281 | | | $ | 45,600 | |
| Covenants-not-to-compete | | 522 | | | 480 | |
| Trade name | | 3,051 | | | 2,109 | |
| Acquired intangibles - IBA acquisition | | — | | | 16,223 | |
| Total intangible assets | | 65,854 | | | 64,412 | |
| Less accumulated amortization | | | | |
| Customer contracts and related customer relationships | | (17,378) | | | (11,150) | |
| Covenants-not-to-compete | | (264) | | | (212) | |
| Trade name | | (743) | | | (438) | |
| | | | |
| Total accumulated amortization | | (18,385) | | | (11,800) | |
| Intangible assets, net | (a) | $ | 47,469 | | | $ | 52,612 | |
Ref (a): Total amount of amortization expense for the years ended September 30, 2021 and 2020 was $6.6 million and $4.8 million, respectively.
| | | | | | | | |
| Estimated amortization expense for future years: | | (in thousands) |
| | |
| Fiscal 2022 | | $ | 6,585 | |
| Fiscal 2023 | | 6,585 | |
| Fiscal 2024 | | 6,585 | |
| Fiscal 2025 | | 6,585 | |
| Fiscal 2026 | | 5,851 | |
| Thereafter | | 15,278 | |
| Total amortization expense | | $ | 47,469 | |
Goodwill
The changes in the carrying amount of goodwill for the years ended September 30, 2021 and 2020 are as follows:
| | | | | | | | | | | |
| | | (in thousands) |
| Ref | | Total |
| | | |
| | | |
| Balance at September 30, 2019 | | | $ | 52,758 | |
| Preliminary increase from IBA acquisition | | | 14,386 | |
| Balance at September 30, 2020 | | | 67,144 | |
| Total adjustments from IBA acquisition | (a) | | (1,501) | |
| Balance at September 30, 2021 | | | $ | 65,643 | |
Ref (a): The adjustments were determined based on third party valuations.
Accounts payable, accrued expenses, and other current liabilities
| | | | | | | | | | | | | | |
| | (in thousands) |
| | September 30, | | September 30, |
| | 2021 | | 2020 |
| Accounts payable | | $ | 16,684 | | | $ | 14,645 | |
| Accrued benefits | | 2,916 | | | 2,833 | |
| Accrued bonus and incentive compensation | | 2,381 | | | 2,340 | |
| Accrued workers' compensation insurance | | 7,014 | | | 5,529 | |
| Other accrued expenses | | 3,722 | | | 3,231 | |
| Accounts payable, accrued expenses, and other current liabilities | | $ | 32,717 | | | $ | 28,578 | |
Debt obligations
| | | | | | | | | | | | |
| | (in thousands) |
| | September 30, | | September 30, |
| | 2021 | | 2020 |
| | | | |
| Bank term loan | | $ | 46,750 | | | $ | 70,000 | |
| | | | |
| Less: unamortized deferred financing costs | | (2,114) | | | (2,729) | |
| Net bank debt obligations | | 44,636 | | | 67,271 | |
| Less: current portion of bank debt obligations, net of deferred financing costs | | — | | | (6,727) | |
| Long-term portion of bank debt obligations, net of deferred financing costs | | $ | 44,636 | | | $ | 60,544 | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
Interest expense
| | | | | | | | | | | | | | |
| | (in thousands) |
| | Year Ended |
| | | September 30, |
| Ref | 2021 | | 2020 |
| Interest expense | (a) | $ | (2,992) | | | $ | (2,841) | |
| Amortization of deferred financing costs | (b) | (792) | | | (721) | |
| | | | |
| Other income (expense), net | (c) | — | | | 121 | |
| | | | |
| Interest expense, net | | $ | (3,784) | | | $ | (3,441) | |
Ref (a): Interest expense on borrowing
Ref (b): Amortization of expenses related to term loan and revolving line of credit.
Ref (c): Gain on lease modification due to a lease amendment
8. Credit Facilities
A summary of our loan facility as of September 30, 2021 is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | ($ in Millions) |
| | As of September 30, 2021 |
| Lender | | Arrangement | | Loan Balance | | Interest | | Maturity Date |
| First National Bank of Pennsylvania | | Secured term loan (a) | | $ | 46.8 | | | 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, 2021 was 0.08%. As of September 30, 2020, our LIBOR rate is subject to a minimum floor of 0.5%. The floor affects interest payments for 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 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. 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 quarterly financial covenants including: (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. The term loan has an interest rate spread range from 2.5% to 4.5% depending on the funded indebtedness to adjusted EBITDA ratio. 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 each for fiscal years 2021 and 2022 and $8.75 million each for fiscal years 2023 - 2025. The quarterly payments are in equal installments. During the year ended September 30, 2021, the Company made voluntary prepayments of $16.3 million, bringing the total amount paid on the secured loan term loan to $23.3 million. As of September 30, 2021, we have satisfied mandatory principal amortization until December 31, 2023.
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. The loan agreement states that an excess cash flow recapture payment must be made equal to (a) 75% of the excess cash flow for the immediately preceding fiscal year in which indebtedness to consolidated EBITDA ratio is greater than or equal to 2.50:1.0; (b) 50% of the excess cash flow for the immediately preceding fiscal year in which the funded indebtedness to consolidated EBITDA Ratio is less than 2.50:1.0 but greater than or equal to 1.5:1.0; or (c) 0% of the excess cash flow for the immediately preceding fiscal year in which the funded indebtedness to consolidated EBITDA Ratio is less than 1.5:1.0. 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. Due to the voluntary prepayment of term debt, there was no excess cash flow payment required. For additional information regarding the schedule of future payment obligations, please refer to Note 11 Commitments and Contingencies.
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 on September 30, 2021 is $22.8 million and matures in 2024. The notional amount was $28.8 million at the end prior fiscal year. 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 base fixed rate of 1.61%, plus applicable credit spread. As a result, for the year ended September 30, 2021, interest expense increased by approximately $0.4 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, 2021.
The Company's total borrowing availability, based on eligible accounts receivables at September 30, 2021, was $25.0 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.
9. Stock-based compensationCompensation and equity grantsEquity Grants
Stock-based compensation expense
Options issued under equity incentive plans were designated as either an incentive stock or a non-statutory stock option. No option was granted with a term of more than 10 years from the date of grant. Exercisability of 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 shares. As of September 30, 2018,2021, there were 1.7 million shares available for grant under the Company's 2016 Omnibus Equity Incentive Plan.grant.
Stock-based compensation expense, shown in the table below, is recorded in general and administrative expenses included in our consolidated statementConsolidated Statements of operations:Operations:
| | | | | | | | | | | | | | |
| | (in thousands) |
| | Year Ended |
| | Ref | September 30, |
| | | 2021 | | 2020 |
| DLH employees | (a) | $ | 1,193 | | | $ | 563 | |
| Non-employee directors | (b) | 467 | | | 347 | |
| Total stock option expense | | $ | 1,660 | | | $ | 910 | |
|
| | | | | | | | | |
| | | | (in thousands) |
| | | | Year Ended |
| | Ref | | September 30, |
| | | | 2018 | | 2017 |
| DLH employees |
| | $ | 266 |
| | $ | 166 |
|
| Non-employee directors | (a) | | 1,109 |
| | 496 |
|
| Total stock option expense | | | $ | 1,375 |
| | $ | 662 |
|
Ref (a): EquityIncluded in this amount are equity grants of restricted stock units to Named Executive Officers ("NEO"), which were issued in accordance with the DLH long-term incentive compensation policy for non-employee directors. During thein this fiscal year, endedand stock option grants to NEO and non-NEO company employees. The restricted stock units totaled 147,431 restricted stock units issued and outstanding at September 30, 2018,2021.
Ref (b): In the Company revised its Board compensation policyfirst quarter of fiscal 2021, we issued 63,177 restricted stock units to provide that equity grants were earned ratably throughout the year rather than retrospectively in the quarter following the completionCompany's non-employee directors, all of the fiscal year. On November 9, 2018 the Company issued 101,667which vested as of September 30, 2021. The shares of cliff-vested common stock to non-employee members of the Company's Board of Directors, in accordance with DLH's revised compensation policy for non-employee directors.underlying such restricted stock units were issued on September 30, 2021.
Unrecognized stock-based compensation expense
| | | | | | | | | | | | | | |
| | (in thousands) |
| | Year Ended |
| | | September 30, |
| | Ref | 2021 | | 2020 |
| Unrecognized expense for DLH employees | (a) | $ | 4,468 | | | $ | 2,633 | |
| | | | |
| | | | |
|
| | | | | | | | | |
| | | | (in thousands) |
| | | | Year Ended |
| | | | September 30, |
| | Ref | | 2018 | | 2017 |
| Unrecognized expense for DLH employees | (a) | | $ | 876 |
| | $ | 299 |
|
Ref (a): Compensation expense for the portion of equity awards for which the requisite service has not been rendered is recognized as the requisite service is rendered. The compensation expense for that portion of awards has been based on the grant-date fair value of those awards as calculated for recognition purposes under applicable guidance. For options that vest based on the Company’s common stock achieving and maintaining defined market prices, the Company values the awards with a Monte Carlo binomial model that utilizes various probability factors and other criterion in establishing fair value of the grant. The related compensation expense is recognized over the derived
service period determined in the valuation. ThisOn a weighted average basis, this expense is expected to be recognized within the next 4.254.70 years.
Stock option activity for the year ended September 30, 2018:2021:
The aggregate intrinsic value in the table below represents the total pretax intrinsic value (i.e., the difference between the Company’s closing stock price on the last trading day of the period and the exercise price, times the number of shares) that would have been received by the option holders had all option holders exercised their in the money options on those dates. This amount will change based on the fair market value of the Company’s stock.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | (in years) | | |
| | | | | | Weighted | | |
| | | | Weighted | | Average | | (in thousands) |
| | (in thousands) | | Average | | Remaining | | Aggregate |
| | Number of | | Exercise | | Contractual | | Intrinsic |
| Ref | Shares | | Price | | Term | | Value |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Options outstanding, September 30, 2020 | | 2,129 | | | $6.14 | | 7.4 | | $ | 6,583 | |
| Granted | (a) | 455 | | | $10.47 | | — | | | — | |
| Exercised | | (175) | | | $2.48 | | — | | | — | |
| Cancelled | | (35) | | | $7.36 | | — | | | — | |
| Options outstanding, September 30, 2021 | | 2,374 | | | $7.77 | | 7.7 | | $ | 15,899 | |
|
| | | | | | | | | | | | |
| | | | | | | | (in years) | | |
| | | | | | | | Weighted | | |
| | | | | | Weighted | | Average | | (in thousands) |
| | | | (in thousands) | | Average | | Remaining | | Aggregate |
| | | | Number of | | Exercise | | Contractual | | Intrinsic |
| | Ref | | Shares | | Price | | Term | | Value |
| Options outstanding, September 30, 2016 | | | 2,226 |
| | $1.40 | | 5.8 | | $ | 7,581 |
|
| Granted | (a) | | 400 |
| | $5.94 | | | | |
|
| Exercised or canceled | | | (632 | ) | | $1.28 | | | | |
|
| Options outstanding, September 30, 2017 | | | 1,994 |
| | $3.83 | | 6.4 | | $ | 8,489 |
|
| Granted | (b) | | 217 |
| | $6.33 | | | | |
| Exercised or canceled | | | (77 | ) | | $3.70 | | | | |
| Options outstanding, September 30, 2018 | | | 2,134 |
| | $4.31 | | 6.3 | | $ | 6,949 |
|
Ref (a): Option grants to DLH employees in the fiscal year ended September 30, 2017 were valued using a binomial model, under the following criteria:
|
| | |
| September 30, |
| 2017 |
Risk free interest rate | 2.46 | % |
Contractual term | 10 years |
|
Dividend yield | — | % |
Expected lives | 10 years |
|
Expected volatility | 144 | % |
Fair value per option | $0.93 - $1.47 |
Ref (b): Utilizing a volatility range of 50% along with assumptions of a 10 year10-year term and the aforementioned 10-day stock
price threshold results in an indicated range of value of the Options granted during the current fiscal year ended September 30, 2018, 2021,
as follows using the Monte Carlo Method.method.
| | | | | | | | | | | | | | | | | | |
| | | | | | Volatility |
| | | | | | 50% |
| | | | Vesting | Expected | |
| | Strike | Stock | Threshold | Term | Calculated |
| Grant Date | | Price | Price | Price | (Years) | Fair Value |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| December 15, 2020 | | $ | 10.05 | | $ | 10.05 | | $ | 13.00 | | 10 | $ | 5.83 | |
| July 30, 2021 | | $ | 10.75 | | $ | 10.75 | | $ | 14.00 | | 10 | $ | 5.83 | |
| Notes: | | | | | | |
| Results based on 100,000 simulations | | | | | |
|
| | | | | | | | | | | | | | | |
| | | | | | | Volatility |
| | | | | | | 50% |
| | | | Vesting | | Expected | |
| | Strike | Stock | Threshold | Risk-Free | Term | Calculated |
| Grant Date | Price | Price | Price | Rate | (Years) | Fair Value |
| 11/29/2017 | $ | 6.46 |
| $ | 6.46 |
| $ | 12.00 |
| 2.4 | % | 10 | $ | 3.98 |
|
| 12/01/2017 | $ | 6.28 |
| $ | 6.28 |
| $ | 8.00 |
| 2.4 | % | 10 | $ | 3.87 |
|
| 12/01/2017 | $ | 6.28 |
| $ | 6.28 |
| $ | 10.00 |
| 2.4 | % | 10 | $ | 3.82 |
|
| | | | | | | |
| Notes: | | | | | | |
| Results based on 100,000 simulations | | | | |
Stock options shares outstanding, vested and unvested for the period ended:years ended September 30, 2021 and 2020 (in thousands):
| | | | | | | | | | | | | | |
| | |
| | Number of Shares |
| | | September 30, |
| Ref | 2021 | | 2020 |
| Vested and exercisable | (a) | 1,662 | | | 1,213 | |
| Unvested | (b) | 712 | | | 916 | |
| Options outstanding | | 2,374 | | | 2,129 | |
|
| | | | | | | |
| | | | (in thousands) |
| | | | Number of Shares |
| | | | September 30, |
| | Ref | | 2018 | | 2017 |
| Vested and exercisable | (a) | | 1,335 |
| | 1,327 |
|
| Unvested | (b) | | 799 |
| | 667 |
|
| Options outstanding | | | 2,134 |
| | 1,994 |
|
Ref (a): Weighted average exercise price of vested and exercisable shares was $1.50$3.91 and $1.45$2.25 at September 30, 20182021 and 2017,2020, respectively. Aggregate intrinsic value was $5.7 millionapproximately $13.9 and $6.8$6.1 million at September 30, 20182021 and 2017,2020, respectively. Weighted average contractual term remaining was 4.56.0 years and 5.04.6 years at September 30, 20182021 and 2017,2020, respectively.
Ref (b): Certain awards vest upon satisfaction of certain performance criteria.
8. Common Stock Warrants
During the current fiscal year, the Company adopted the provisions of Accounting Standards Update ("ASU") 2017-11, "Earning Per Share (Topic 260): Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815). The amendments in Part I of this ASU change the classification analysis of certain equity-linked financial instruments (or embedded features) with down round features. The fair value of a financial instrument with a down round features is now permitted to be classified as a component of stockholder's equity, as opposed to a liability as it was previously required to be reported. In addition, the recorded fair value of the financial instruments is no longer required to be subsequently revalued. Should the down round feature of the financial instrument be triggered due to a change in the underlying strike price, the change in the fair value
would be treated as a dividend and as a reduction of income available to common stockholders in accordance with the guidance of ASC-260.
Prior accounting treatment: In connection with issuing subordinated debt to finance its May 2, 2016 acquisition, the Company issued warrants to purchase 53,619 shares of Common Stock. These warrants contain certain pricing previsions which apply if the Company sells or issues Common Stock or Common Stock equivalents at a price that is less than the exercise price of the warrants, over the life of the warrants, excluding certain exempt issuances. In addition, these warrants may only be exercised with cash. Accordingly, the Company recognized a liability for these warrants based on their fair value as of the date of grant. The initial warrant liability recognized on the related warrants totaled $177 thousand. At each subsequent quarter end, the Company then remeasured the fair value of the warrants, and recorded the change in the warrant liability as a component of net income. As of September 30, 2017, the warrant liability was valued at $306 thousand.
Current accounting treatment: The Company chose a modified retrospective adoption, and therefore, is recognizing the cumulative effect of the change as an adjustment to retained earnings in the period of adoption. The warrant liability has been eliminated from the Company's balance sheet as of September 30, 2018. The fair value of the warrant liability has been reduced by $306 thousand by reclassifying this liability to retained earnings and additional paid in capital by $129 thousand and $177 thousand, respectively.
9.10. Earnings Per Share
Basic earnings per share is calculated by dividing income available to common shareholders by the weighted average number of common shares outstanding and restricted stock grants that vested or are likely to vest during the period. Diluted earnings per share is calculated by dividing income available to common shareholders by the weighted average number of basic common shares outstanding, adjusted to reflect potentially dilutive securities. Diluted earnings per share is calculated using the treasury stock method.
| | | | | | | | | | | | | | |
| | (in thousands) |
| | Year Ended |
| | September 30, |
| | 2021 | | 2020 |
| Numerator: | | | | |
| Net income | | $ | 10,145 | | | $ | 7,114 | |
| Denominator: | | | | |
| Denominator for basic net income per share - weighted-average outstanding shares | | 12,549 | | | 12,282 | |
| Effect of dilutive securities: | | | | |
| Stock options and restricted stock | | 1,048 | | | 823 | |
| Denominator for diluted net income per share - weighted-average outstanding shares | | 13,597 | | | 13,105 | |
| Net income per share - basic | | $ | 0.81 | | | $ | 0.58 | |
| Net income per share - diluted | | $ | 0.75 | | | $ | 0.54 | |
|
| | | | | | | | | |
| | | | (in thousands) |
| | | | Year Ended |
| | | | September 30, |
| | | | 2018 | | 2017 |
| Numerator: | | | | | |
| Net income | | | $ | 1,836 |
| | $ | 3,288 |
|
| Denominator: | | | | | |
| Denominator for basic net income per share - weighted-average outstanding shares | | | 11,881 |
| | 11,345 |
|
| Effect of dilutive securities: | | | | | |
| Stock options and restricted stock | | | 992 |
| | 1,007 |
|
| Denominator for diluted net income per share - weighted-average outstanding shares | | | 12,873 |
| | 12,352 |
|
| | | | | | |
| Net income per share - basic |
| $ | 0.15 |
| | $ | 0.29 |
|
| Net income per share - diluted | | $ | 0.14 |
| | $ | 0.27 |
|
10.11. Commitments and Contingencies
Contractual Obligations as of September 30, 2018:2021 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | Payments Due Per Fiscal Year |
| | | | | Payments Due By Period | | | |
| Contractual obligations | | | | Next 12 | | 2-3 | | 4-5 | | More than 5 | |
| (Amounts in thousands) | Ref | Total | | Months | | Years | | Years | | Years | |
| | | Total | 2022 | 2023 | 2024 | 2025 | 2026 | Thereafter |
| Debt obligations | | $ | 7,708 |
| | $ | — |
|
| $ | 7,708 |
|
| $ | — |
|
| $ | — |
| Debt obligations | $ | 46,750 | | $ | — | | $ | — | | $ | 8,250 | | $ | 38,500 | | $ | — | | $ | — | |
| Facility leases | | 2,764 |
| | 901 |
| | 988 |
| | 672 |
| | 203 |
| Facility leases | 27,701 | | 3,418 | | 3,308 | | 3,199 | | 3,092 | | 3,193 | | 11,491 | |
| Equipment operating leases | | 38 |
| | 22 |
| | 16 |
| | — |
| | — |
| Equipment operating leases | 218 | | 83 | | 83 | | 52 | | — | | — | | — | |
| Total Contractual Obligations | | $ | 10,510 |
|
| $ | 923 |
|
| $ | 8,712 |
|
| $ | 672 |
|
| $ | 203 |
| |
| Total contractual obligations | | Total contractual obligations | $ | 74,669 | | $ | 3,501 | | $ | 3,391 | | $ | 11,501 | | $ | 41,592 | | $ | 3,193 | | $ | 11,491 | |
WorkersWorkers' Compensation
We accrue workersworkers' compensation expense based on claims submitted, applying actuarial loss development factors to estimate the costs incurred but not yet recorded. Our accrued liability for claims development for the periods endedas of September 30, 20182021 and September 30, 20172020 was $2.6approximately $7.0 million and $1.6$5.5 million, respectively.
Legal Proceedings
As a commercial enterprise and employer, the Company is subject to various claims and legal actions in the ordinary course of business. These matters can include professional liability, employment-relations issues, workers’ compensation, tax, payroll and employee-related matters, other commercial disputes arising in the course of its business, and inquiries and investigations by governmental agencies regarding our employment practices or other matters. The Company is not aware of any pending or threatened litigation that it believes is reasonably likely to have a material adverse effect on its results of operations, financial position or cash flows.
11.
12. Related Party Transactions
The Company has determined that for the years ended September 30, 20182021 and 20172020 and through the filing date of this report, there were no significant related party transactions that have occurred which require disclosure through the date that these consolidated financial statements were issued.
12.13. Income Taxes
DLH accounts for income taxes in accordance with the liability method. Under this method, 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 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. We also set up a valuation allowance, reducing the carrying value of deferred tax assets if it is more likely than not that some or all of the deferred tax asset will not be realized, as based on estimated future taxable income. Presently, the Company has no deferred tax asset valuation allowances.
During the fiscal year ending September 30, 2018, the Company recognized 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 2017 Tax Act enacted in December 2017. In addition to this discrete item the Company recognized $2.4 million of income tax expense associated with current operations resulting in total income tax expense of $5.8 million for the 2018 fiscal year. The fiscal year 2018 effective tax rate, excluding the discrete item associated with the deferred tax asset write-down was 32.2% as compared to the prior year effective tax rate of 39.1%.
At September 30, 2018 and 2017, respectively, the Company had federal net operating losses of approximately $23.8 million and $31.5 million. The Company utilized approximately $7.7 million of federal net operating losses to offset taxes otherwise currently due. The federal NOLs begin to expire in 2021 and continue to expire through 2033. The Company has no material state net operating losses carryforward.
A provision of the 2017 Tax Act repealed the alternative minimum tax (AMT). Additionally, prior AMT paid is either creditable against regular tax liability or refundable. For tax years beginning after 2017 and before 2022, 50 percent of AMT credits are refundable; from 2022, the credits are fully refundable. The Company has AMT credits of $369 thousand as of the year ended September 30, 2018, of which 50 percent has been established as an income tax receivable in current assets.
An analysis of DLH's deferred tax asset and liability is as follows: |
| | | | | | | | |
| | | Year Ended |
| | | September 30, |
| (amounts in thousands) | | 2018 | | 2017 |
| Deferred income tax asset: | | | | |
| Net operating loss carry forwards | | $ | 5,005 |
| | $ | 10,786 |
|
| AMT credit carryforward | | 185 |
| | 316 |
|
| Stock based compensation | | 140 |
| | 236 |
|
| Accrued expenses | | 1,202 |
| | 1,303 |
|
| Other items, net | | 45 |
| | 241 |
|
| Total deferred tax asset | | 6,577 |
| | 12,882 |
|
| Deferred tax liability: | | | | |
| Fixed and intangible assets | | (2,440 | ) | | (3,243 | ) |
| Net deferred tax asset | | $ | 4,137 |
| | $ | 9,639 |
|
The significant components of income tax expense for income taxes from continuing operations are summarized as follows:follows (in thousands):
| | | | | | | | | | | | | | |
| | Year Ended |
| | | September 30, |
| | 2021 | | 2020 |
| Current expense | | $ | 2,081 | | | $ | 598 | |
| Deferred expense | | 1,213 | | | 2,308 | |
| Total expense | | $ | 3,294 | | | $ | 2,906 | |
|
| | | | | | | | |
| | | Year Ended |
| | | September 30, |
| (amounts in thousands) | | 2018 | | 2017 |
| Current expense | | $ | 328 |
| | $ | 338 |
|
| Deferred expense | | 5,502 |
| | 1,776 |
|
| Total expense | | $ | 5,830 |
| | $ | 2,114 |
|
The following table indicates the significant differences between our income taxes at the federal statutory rate and DLH'sthe Company's effective tax rate for continuing operations:operations (in thousands):
| | | | | | | | | | | Year Ended |
| | | Year Ended | | | September 30, |
| | | September 30, | | | 2021 | | 2020 |
| (amounts in thousands) | | 2018 | | 2017 | |
| Federal statutory rate | | $ | 1,861 |
| | $ | 1,837 |
| Federal statutory rate | | $ | 2,822 | | | $ | 2,104 | |
| State taxes, net | | 393 |
| | 260 |
| State taxes, net | | 376 | | | 554 | |
| Other permanent items | | 77 |
| | 17 |
| Other permanent items | | 96 | | | 160 | |
| Miscellaneous true up of prior year deferred | | 134 |
| | — |
| |
| Discrete item (a) | | 3,365 |
| | — |
| |
| Deferred tax estimate adjustment | | Deferred tax estimate adjustment | | — | | | 88 | |
| | Total | | $ | 5,830 |
| | $ | 2,114 |
| Total | | $ | 3,294 | | | $ | 2,906 | |
(a): Write-down
An analysis of the Company's deferred tax assets due to change in federal income tax rate from the 2017 Tax Act.and liabilities is as follows (in thousands):
| | | | | | | | | | | | | | |
| | Year Ended |
| | | September 30, |
| | 2021 | | 2020 |
| Deferred income tax assets: | | | | |
| Net operating loss carry forwards, net | | $ | 29 | | | $ | 1,554 | |
| | | | |
| Stock based compensation | | 508 | | | 140 | |
| Accrued expenses | | 1,944 | | | 1,698 | |
| Other items, net | | — | | | 258 | |
| Total deferred tax asset | | 2,481 | | | 3,650 | |
| Deferred tax liability: | | | | |
| Equipment and intangible assets | | (3,507) | | | (3,613) | |
| Right of use liability | | (150) | | | — | |
| Total deferred tax liability | | (3,657) | | | (3,613) | |
| Net deferred tax (liability)/asset | | $ | (1,176) | | | $ | 37 | |
We file income tax returns in the U.S. federal jurisdiction and in various state jurisdictions. We are no longer subject to income tax examinations for years before 2015.
13.
14. Quarterly Financial Data (Unaudited)
A summary of quarterly information is as follows (in thousands, except per share data) | | | | | 2018 Quarters | | 2021 Quarters |
| | | First | | Second | | Third | | Fourth | | Ref | | First | | Second | | Third | | Fourth |
| Revenue | | $ | 30,215 |
| | $ | 34,401 |
| | $ | 36,131 |
| | $ | 32,489 |
| Revenue | (a) | | $ | 57,852 | | | $ | 61,506 | | | $ | 61,555 | | | $ | 65,182 | |
| Gross margin | | 6,532 |
| | 7,448 |
| | 8,338 |
| | 7,885 |
| |
| | Income from operations | | 1,146 |
| | 2,204 |
| | 2,614 |
| | 2,819 |
| Income from operations | | 3,635 | | | 4,620 | | | 4,939 | | | 4,030 | |
| Interest expense, net | | (278 | ) | | (261 | ) | | (262 | ) | | (315 | ) | Interest expense, net | | (1,080) | | | (1,004) | | | (893) | | | (808) | |
| Income before income taxes | | 868 |
| | $ | 1,943 |
| | 2,352 |
| | 2,504 |
| Income before income taxes | | 2,555 | | | 3,616 | | | 4,046 | | | 3,222 | |
| Income tax expense | (1) | | 3,719 |
| | $ | 627 |
| | 738 |
| | 747 |
| Income tax expense | | 741 | | | 1,049 | | | 1,166 | | | 339 | |
| Net income (loss) | | $ | (2,851 | ) | | $ | 1,316 |
| | $ | 1,614 |
| | $ | 1,757 |
| |
| Earnings (loss) per share: | | | | | | | | | |
| Net income | | Net income | | $ | 1,814 | | | $ | 2,567 | | | $ | 2,880 | | | $ | 2,883 | |
| Earnings per share: | | Earnings per share: | | | | | | | | |
| Basic | | $ | (0.24 | ) | | $ | 0.11 |
| | $ | 0.14 |
| | $ | 0.15 |
| Basic | | $ | 0.15 | | | $ | 0.20 | | | $ | 0.23 | | | $ | 0.23 | |
| Diluted | | $ | (0.24 | ) | | $ | 0.10 |
| | $ | 0.13 |
| | $ | 0.14 |
| Diluted | | $ | 0.13 | | | $ | 0.19 | | | $ | 0.21 | | | $ | 0.21 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | 2020 Quarters |
| | | First | | Second | | Third | | Fourth |
| Revenue | | | $ | 52,238 | | | $ | 54,798 | | | $ | 51,459 | | | $ | 50,691 | |
| | | | | | | | | |
| Income from operations | | | 3,126 | | | 3,837 | | | 3,800 | | | 2,698 | |
| Interest expense, net | | | (941) | | | (906) | | | (813) | | | (781) | |
| Income before income taxes | | | 2,185 | | | 2,931 | | | 2,987 | | | 1,917 | |
| Income tax expense | | | 634 | | | 855 | | | 863 | | | 554 | |
| Net income | | | $ | 1,551 | | | $ | 2,076 | | | $ | 2,124 | | | $ | 1,363 | |
| Earnings per share: | | | | | | | | | |
| Basic | | | $ | 0.13 | | | $ | 0.17 | | | $ | 0.17 | | | $ | 0.11 | |
| Diluted | | | $ | 0.12 | | | $ | 0.16 | | | $ | 0.16 | | | $ | 0.10 | |
|
| | | | | | | | | | | | | | | | |
| | | 2017 Quarters |
| | | First | | Second | | Third | | Fourth |
| Revenue | | $ | 26,111 |
| | $ | 29,905 |
| | $ | 29,256 |
| | $ | 30,390 |
|
| Gross margin | | 5,811 |
| | 6,401 |
| | 6,385 |
| | 7,253 |
|
| Income from operations | | 889 |
| | 1,839 |
| | 1,753 |
| | 2,149 |
|
| Interest expense, net | | (364 | ) | | (255 | ) | | (269 | ) | | (340 | ) |
| Income before income taxes | | 525 |
| | 1,584 |
| | 1,484 |
| | 1,809 |
|
| Income tax expense | | 201 |
| | 605 |
| | 539 |
| | 769 |
|
| Net income | | $ | 324 |
| | $ | 979 |
| | $ | 945 |
| | $ | 1,040 |
|
| Earnings per share: | | | | | | | | |
| Basic | | $ | 0.03 |
| | $ | 0.09 |
| | $ | 0.08 |
| | $ | 0.09 |
|
| Diluted | | $ | 0.03 |
| | $ | 0.08 |
| | $ | 0.08 |
| | $ | 0.08 |
|
(1) ReferRef (a): Given its closing on the final day of fiscal year 2020, IBA has no impact to Note 12, Income Taxes, for a detailed explanationfiscal 2020 quarterly results and is fully included in each of the $3.4 million income tax discrete charge inquarters of fiscal year 2018, related to the 2017 Tax Cut and Jobs Act. 2021.
14.
15. Employee Benefit Plans
As of September 30, 2018, DLH2021, the Company and its subsidiaries maintain the DLHa 401(k) Plan (the "401(k) Plan"), a defined contribution and supplemental pension plan for the benefit of its eligible employees. DLHThe Company may provide a discretionary matching contribution of a participant's elective contributions under the 401 (k) Plan. DLHThe Company recorded related expense of $222 thousand$1.5 million in fiscal 20182021 and $154 thousand$1.2 million in fiscal year 2017. A participant is2020. The increase was primarily due to headcount growth from the IBA acquisition. Participants are always fully vested in his or hertheir elective contributions and vests in Company matching contributions over a four year period.
15.
16. Subsequent Events
Management has evaluated subsequent events through the date that the Company's consolidated financial statements were issued. Based on this evaluation, the Company has determined that no further subsequent events have occurred which require disclosure through the date that these consolidated financial statements were issued.