Item 9A. Controls and Procedures
ITEM 9A. CONTROLS AND PROCEDURES
32
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, have 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, 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, 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 quarter of our fiscal year ended September 30, 2021, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
33
ITEM 9B. OTHER INFORMATION
As previously reported, certain entities affiliated with Wynnefield Capital, Inc., the Company’s largest stockholder, owned warrants to purchase 53,619 shares of common stock exercisable at a price of $3.73 until November 2021. In October 2021, the holders of the warrants 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 in reliance on the exemption from registration provided by Section 4(a)(2) of the Securities Act of 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 Item with respect to our executive officers, directors, board committees, and corporate governance matters will be set forth in our definitive Proxy Statement under the captions "Executive Officers," "Election of Directors," 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, 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
34
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) (1) Financial Statements
The financial statements and schedules of the Company are included in Part II, Item 8 of this report beginning on page F-1.
(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.
Exhibit No. Description
2.1
Stock Purchase Agreement among the Company, Social & Scientific Systems, Inc., and Social & Scientific Systems, Inc. Employee Stock Ownership Trust (filed as Exhibit 2.1 to Current Report on Form 8-K filed June 13, 2019).
2.2
Equity Purchase Agreement among DLH Holdings Corp., Irving Burton Associates, LLC, Project Insight Holdings, Inc., the Owners of the Seller and Anna L. Ryan as the Sellers' Representative (filed as Exhibit 2.1 to Current Report on Form 8-K filed October 6, 2020).
3.1
Amended and Restated Certificate of Incorporation (filed as Exhibit A to Definitive Proxy Statement dated May 1, 2000 as filed with the Securities and Exchange Commission).
3.2
Amended and Restated By-Laws of Registrant adopted as of August 27, 2020 (filed as Exhibit 3.1 to the Current Report on Form 8-K filed August 31, 2020).
3.3
Amendment to Amended and Restated Certificate of Incorporation of the Company (filed as Exhibit B to Definitive Proxy Statement dated March 13, 2008 as filed with the Securities and Exchange Commission) .
3.4
Amendment to Amended and Restated Certificate of Incorporation of the Company filed June 25, 2012 (filed as Exhibit 3.1 to Current Report on Form 8-K filed on June 26, 2012).
3.5
Amendment to Amended and Restated Certificate of Incorporation filed February 12, 2015 (filed as Annex A to the Company’s Proxy Statement dated December 31, 2014).
4.1
Specimen of the Common Stock Certificate (filed as Exhibit 4.1 to Annual Report on Form 10-K for the fiscal year ended September 30,2017.)
4.2
Form of Warrant issued to Subordinated Lenders (filed as Exhibit 4.4 to Current Report on Form 8-K filed May 6, 2016).
4.3
* Description of Securities (filed as Exhibit 4.3 to Annual Report on Form 10-K filed on December 7, 2020).
10.1
# Form of Stock Option Award under 2006 Long Term Incentive Plan (filed as Exhibit 10.6 to Quarterly Report on Form 10-Q filed on February 16, 2010).
10.2
# Employment Agreement between the Company and Kevin Wilson (filed as Exhibit 10.1 to Current Report on Form 8-K dated October 3, 2013).
10.3
# 2006 Long Term Incentive Plan, as amended (filed as Annex A to the Company’s Proxy Statement dated January 3, 2014).
10.4
Lease Agreement dated April 27, 2015 between DLH Holdings Corp. and Piedmont Center, 1-4 LLC (filed as Exhibit 10.1 to Quarterly Report on Form 10-Q filed on August 5, 2015)
10.5
# Amendment to Employment Agreement with Kevin Wilson (filed as Exhibit 10.1 to Current Report on Form 8-K filed October 2, 2015).
10.6
# 2016 Omnibus Equity Incentive Plan, as amended (incorporated by reference to Appendix A to the Company’s definitive Proxy Statement dated January 28, 2021).
10.7
# Form of Stock Option Award Agreement under the 2016 Omnibus Equity Incentive Plan (filed as Exhibit 10.8 to Quarterly Report on Form 10-Q filed May 16, 2016).
35
10.8
# Change in Control, Severance and Covenant Agreement with Helene Fisher, dated June 4, 2018 (filed as Exhibit 10.2 to Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2018, filed August 6, 2018).
10.9
Credit Agreement among DLH Holdings Corp., DLH Solutions, Inc., Danya International, LLC, Social & Scientific Systems, Inc., 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 on June 13, 2019).
10.10
First Amendment to Credit Agreement among DLH Holdings Corp., DLH Solutions, Inc., Danya International, LLC, Social & Scientific Systems, Inc., 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 on September 12, 2019).
10.11
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).
10.12
# Employment Agreement between the Company and Zachary C. Parker dated October 11, 2019 (filed as Exhibit 10.1 to Current Report on 8-K filed on October 17, 2019).
10.13
# Form of Restricted Stock Unit for non-employee directors under the 2016 Omnibus Equity Incentive Plan.
10.14
# Employment Offer Letter between the Company and Jeanine M. Christian (filed as Exhibit 10.1 to Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2020, filed August 5, 2020).
10.15
# Employment Offer Letter between the Company and Jacqueline S. Everett (filed as Exhibit 10.2 to Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2020, filed August 5, 2020).
10.16
# Change in Control, Severance and Covenant Agreement between the Company and Jeanine M. Christian (filed as Exhibit 10.3 to Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2020, filed August 5, 2020).
10.17
# Change in Control, Severance and Covenant Agreement between the Company and Jacqueline S. Everett (filed as Exhibit 10.4 to Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2020, filed August 5, 2020).
10.18
# Employment agreement between the Company and Kathryn M JohnBull dated September 14, 2020 (filed as Exhibit 10.1 to Current Report on Form 8-K filed on September 15, 2020)
10.19
# Form of Performance Restricted Stock Units granted December 9, 2020 granted under the 2016 Omnibus Equity Incentive Plan (filed as Exhibit 10.1 to Quarterly Report on Form 10-Q for the fiscal quarter ended December 31, 2020, filed February 2, 2021).
10.20
# Employment Offer Letter between the Company and G. Maliek Ferebee
10.21
# Change in Control, Severance and Covenant Agreement between the Company and G. Maliek Ferebee
21.00
* Subsidiaries of Registrants.
23.10
* Consent of WithumSmith+Brown, PC
31.10
* Certification of Chief Executive Officer pursuant to Section 17 CFR 240.13a-14(a) or 17 CFR 240.15d-14(a).
31.20
* Certification of Chief Financial Officer pursuant to Section 17 CFR 240.13a-14(a) or 17 CFR 240.15d-14(a).
32.10
* Certification of Chief Executive Officer and Chief Financial Officer pursuant to 17 CFR 240.13a-14(b) or 17 CFR 240.15d-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code.
101.0 The following financial information from the DLH Holdings Corp. Annual Report on Form 10-K for the fiscal year ended September 30, 2021, formatted in iXBRL (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)
36
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.
DLH HOLDINGS CORP.
/s/ KATHRYN M. JOHNBULL
By: Kathryn M. JohnBull
Chief Financial Officer
(Principal Accounting Officer)
Dated: December 6, 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:
37
Signature Capacity Date
/s/ FREDERICK G. WASSERMAN Chairman of the Board December 6, 2021
Frederick G. Wasserman
/s/ JAMES P. ALLEN Director December 6, 2021
James P. Allen
/s/ MARTIN J. DELANEY Director December 6, 2021
Martin J. Delaney
/s/ ELDER GRANGER Director December 6, 2021
Elder Granger
/s/ FRANCES MURPHY Director December 6, 2021
Frances Murphy
/s/ AUSTIN J. YERKS III Director December 6, 2021
Austin J. Yerks III
/s/ STEPHEN J. ZELKOWICZ Director December 6, 2021
Stephen J. Zelkowicz
/s/ ZACHARY C. PARKER Chief Executive Officer, President and Director December 6, 2021
Zachary C. Parker
/s/ KATHRYN M. JOHNBULL Chief Financial Officer and Principal Accounting Officer December 6, 2021
Kathryn M. JohnBull
38
DLH Holdings Corp. and Subsidiaries
Index to Consolidated Financial Statements
Page
Report of Independent Registered Public Accounting Firm
F-2
Consolidated Statements of Operations for the years ended September 30, 2021 and 2020
F-3
Consolidated Balance Sheets as of September 30, 2021 and 2020
F-4
Consolidated Statements of Cash Flows for the years ended September 30, 2021 and 2020
F-5
Consolidated Statements of Changes in Shareholders' Equity for the years ended September 30, 2021 and 2020
F-6
Notes to Consolidated Financial Statements
F-7
F-1
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, 2021 and 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, 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, 2021 and 2020, and the consolidated results of its operations and its cash flows for each of the two years in the period ended September 30, 2021, in conformity with accounting principles generally accepted in the United States.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's 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 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 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 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 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
F-2
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.
F-3
/s/ WithumSmith+Brown, PC
We have served as the Company's auditor since 2007.
Whippany, New Jersey
December 5, 2021
F-4
DLH HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands except per share amounts)
Year Ended
September 30,
2021 2020
Revenue $ 246,094 $ 209,185
Cost of Operations
Contract costs 194,614 163,596
General and administrative costs 25,054 24,195
Corporate development costs 1,088 930
Depreciation and amortization 8,115 7,003
Total operating costs 228,871 195,724
Income from operations 17,223 13,461
Interest expense, net 3,784 3,441
Income before income taxes 13,439 10,020
Income tax expense 3,294 2,906
Net income $ 10,145 $ 7,114
Net income per share - basic $ 0.81 $ 0.58
Net income per share - diluted $ 0.75 $ 0.54
Weighted average common shares outstanding
Basic 12,549 12,282
Diluted 13,597 13,105
The accompanying notes are an integral part of these consolidated financial statements.
F-5
DLH HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands except par value of shares)
September 30,
2021 September 30,
2020
ASSETS
Current assets:
Cash and cash equivalents $ 24,051 $ 1,357
Accounts receivable 33,447 32,541
Other current assets 4,265 3,499
Total current assets 61,763 37,397
Equipment and improvements, net 1,912 3,339
Operating lease right-of-use-assets 19,919 22,427
Deferred taxes, net — 37
Goodwill 65,643 67,144
Intangible assets, net 47,469 52,612
Other long-term assets 464 606
Total assets $ 197,170 $ 183,562
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Debt obligations - current, net of deferred financing costs $ — $ 6,727
Operating lease liabilities - current 2,261 2,045
Accrued payroll 9,125 10,611
Deferred revenue 22,273 —
Accounts payable, accrued expenses, and other current liabilities 32,717 28,578
Total current liabilities 66,376 47,961
Long-term liabilities:
Deferred taxes, net 1,176 —
Operating lease liabilities - long-term 19,374 21,620
Debt obligations - long-term, net of deferred financing costs 44,636 60,544
Total long-term liabilities 65,186 82,164
Total liabilities 131,562 130,125
Shareholders' equity:
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 87,893 85,868
Accumulated deficit ( 22,298 ) ( 32,443 )
Total shareholders’ equity 65,608 53,437
Total liabilities and shareholders' equity $ 197,170 $ 183,562
The accompanying notes are an integral part of these consolidated financial statements.
F-6
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
The accompanying notes are an integral part of these consolidated financial statements.
F-7
DLH HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the years ended September 30, 2021 and 2020
(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 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
F-8
DLH HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
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. 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.
2. Business Overview
The Company is a full-service provider of technology-enabled health and human services, providing solutions to three 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 seven 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 one location overseas.
At present, the Company derives 99 % of its revenue from agencies of the Federal government, primarily as a prime contractor but also as a subcontractor to other Federal prime contractors. A major customer is defined as a customer from whom the Company derives at least 10% of its revenues. Our three largest customers are the Department of Veteran Affairs ("VA"), the Department of Health and Human Services ("HHS"), and the Department of Defense ("DoD").
The following table summarizes the revenues by customer for the years ended September 30, 2021 and 2020, respectively:
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 %
3. New Accounting Pronouncements
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses, which requires companies to record an allowance for expected credit losses over the contractual term of certain financial assets, including short-term trade receivables and contract assets. Additionally, it expands disclosure requirements for credit quality of financial assets. ASU 2016-13 became effective for the Company in the first quarter of fiscal year 2021. The adoption of this standard did not have a material impact on our operating results, financial position, or cash flows. For further detail of our outstanding receivables see Note 7 .
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848), which provides optional expedients and exceptions for the application of U.S. GAAP to contracts, hedging relationships, and other transactions that reference the London Interbank Offered Rate ("LIBOR") and other references rates expected to be discontinued due to reference rate reform. ASU 2020-04 became effective on March 12, 2020 for 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 impact of
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electing this standard on its consolidated financial statements and related disclosures and does not expect the impact to be material.
In April 2020, the FASB issued a Staff Q&A, Topic 842 and 840: Accounting For Lease Concessions Related to the Effects of the 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, changes to certain lease terms not specified in the original 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 our 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 one of our operating leases as a resolution of a contingency, 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 election, our lease liability and right-of-use-asset decreased by less than $ 0.1 million.
In August 2020, the FASB issued ASU 2020-06, which amends the measurement and disclosure of convertible instruments, contracts in an entity's own equity, and EPS guidance. The guidance can be adopted using a modified retrospective method or a fully retrospective method. The amendments are effective for fiscal years beginning after December 15, 2021 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, 2023. The Company does not expect the update to have a material impact on its consolidated financial statements and related disclosures .
4. 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 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 loss 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 as well as identifying and assessing the accounting treatment with respect to commitments and contingencies. We revise material accounting estimates if changes occur, such 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. We account for the effect of a change in accounting estimate during the period in which the change occurs.
Fair Value of Financial Instruments
The carrying amounts of the Company's cash and cash equivalents, accounts receivable, 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
Our long-lived assets include equipment and improvements, intangible assets, right-of-use assets, and goodwill. The Company continues to review its long-lived assets for possible impairment or loss of value at least annually or more frequently upon the occurrence of an event or when circumstances indicate that a reporting unit’s carrying amount is greater than its fair value.
Equipment and improvements are stated at cost. Depreciation and amortization are provided using the straight-line method over the estimated useful asset lives ( 3 to 7 years) and the shorter of the initial lease term or estimated useful life for leasehold improvements. 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.
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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, 2021, we performed a goodwill impairment evaluation on the year-end carrying value of approximately $ 65.6 million. 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, 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. Similarly, there were no impairments during the prior year ended September 30, 2020.
Income Taxes
The Company accounts for income taxes in accordance with the liability method, whereby deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities, using enacted tax rates in effect for the year in which the differences are expected to reverse. Deferred tax assets are reflected on the consolidated balance sheet when it is determined that it is more likely than not that the asset will be realized. This guidance also requires that
deferred tax assets be reduced by a valuation allowance if it is more likely than not that some or all of the deferred tax asset will not be realized. 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, 2021 and 2020. We report interest and penalties as a component of income tax expense. For the years ended September 30, 2021 and 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. Diluted earnings per share is calculated using the treasury stock method.
Treasury Stock
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
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at cost. As of September 30, 2021, the Company did no t 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 no t 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.
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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
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6. Leases
We have leases for facilities and office equipment. Our lease liabilities are recognized as the present value of the future minimum lease payments over 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 one 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 two 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
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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
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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
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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
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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.
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(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 Compensation and Equity 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, 2021, there were 1.7 million shares available for grant.
Stock-based compensation expense, shown in the table below, is recorded in general and administrative expenses included in our Consolidated Statements of 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
Ref (a): Included 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 in this fiscal year, and 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, 2021.
Ref (b): In the first quarter of fiscal 2021, we issued 63,177 restricted stock units to the Company's non-employee directors, all of which vested as of September 30, 2021. The shares of common stock 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
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
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service period determined in the valuation. On a weighted average basis, this expense is expected to be recognized within the next 4.70 years.
Stock option activity for the year ended September 30, 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
Ref (a): Utilizing a volatility of 50 % along with assumptions of a 10-year term and the aforementioned 10-day stock
price threshold results in an indicated range of value of the Options granted during the year ended September 30, 2021,
as follows using the Monte Carlo 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
Stock options shares outstanding, vested and unvested for the 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
Ref (a): Weighted average exercise price of vested and exercisable shares was $ 3.91 and $ 2.25 at September 30, 2021 and 2020, respectively. Aggregate intrinsic value was approximately $ 13.9 and $ 6.1 million at September 30, 2021 and 2020, respectively. Weighted average contractual term remaining was 6.0 years and 4.6 years at September 30, 2021 and 2020, respectively.
Ref (b): Certain awards vest upon satisfaction of certain performance criteria.
F-20
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
11. Commitments and Contingencies
Contractual Obligations as of September 30, 2021 (in thousands):
Payments Due Per Fiscal Year
Total 2022 2023 2024 2025 2026 Thereafter
Debt obligations $ 46,750 $ — $ — $ 8,250 $ 38,500 $ — $ —
Facility leases 27,701 3,418 3,308 3,199 3,092 3,193 11,491
Equipment operating leases 218 83 83 52 — — —
Total contractual obligations $ 74,669 $ 3,501 $ 3,391 $ 11,501 $ 41,592 $ 3,193 $ 11,491
Workers' Compensation
We accrue workers' 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 as of September 30, 2021 and September 30, 2020 was approximately $ 7.0 million and $ 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.
F-21
12. Related Party Transactions
The Company has determined that for the years ended September 30, 2021 and 2020 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.
13. Income Taxes
The significant components of income tax expense for income taxes from continuing operations are summarized as 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
The following table indicates the significant differences between our income taxes at the federal statutory rate and the Company's effective tax rate for continuing operations (in thousands):
Year Ended
September 30,
2021 2020
Federal statutory rate $ 2,822 $ 2,104
State taxes, net 376 554
Other permanent items 96 160
Deferred tax estimate adjustment — 88
Total $ 3,294 $ 2,906
An analysis of the Company's deferred tax assets 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
F-22
14. Quarterly Financial Data (Unaudited)
A summary of quarterly information is as follows (in thousands, except per share data)
2021 Quarters
Ref First Second Third Fourth
Revenue (a) $ 57,852 $ 61,506 $ 61,555 $ 65,182
Income from operations 3,635 4,620 4,939 4,030
Interest expense, net ( 1,080 ) ( 1,004 ) ( 893 ) ( 808 )
Income before income taxes 2,555 3,616 4,046 3,222
Income tax expense 741 1,049 1,166 339
Net income $ 1,814 $ 2,567 $ 2,880 $ 2,883
Earnings per share:
Basic $ 0.15 $ 0.20 $ 0.23 $ 0.23
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
Ref (a): Given its closing on the final day of fiscal year 2020, IBA has no impact to fiscal 2020 quarterly results and is fully included in each of the quarters of fiscal 2021.
15. Employee Benefit Plans
As of September 30, 2021, the Company and its subsidiaries maintain a 401(k) Plan (the "401(k) Plan"), a defined contribution and supplemental pension plan for the benefit of its eligible employees. The Company may provide a discretionary matching contribution of a participant's elective contributions under the 401 (k) Plan. The Company recorded related expense of $ 1.5 million in fiscal 2021 and $ 1.2 million in fiscal year 2020. The increase was primarily due to headcount growth from the IBA acquisition. Participants are always fully vested in their elective contributions and vests in Company matching contributions over a four year period.
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.
F-23