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Item 7. Management’s Discussion and Analysis

2022-12-05 compared with 2021-12-06 · 156 added, 190 removed, 141 unchanged (71% of the section changed)

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

We derive 99% of our revenue from agencies of the Federal government, providing services to several agencies including the Department of Veteran Affairs ("VA"), Department of Health and Human Services ("HHS"), and the Department of Defense ("DoD").

We derive 99% of our revenue from agencies of the Federal government, providing services to several agencies including the Department of Veterans Affairs, Department of Health and Human Services, Department of Defense, and Department of Homeland Security.

The following table summarizes the revenues by customer for the years ended September 30, 2022 and 2021, respectively (in thousands):

Revenue Percent of total revenue Revenue Percent of total revenue

Department of Homeland Security $ 126,576 32.0 % $ 2,485 1.0 %

Department of Veterans Affairs 126,106 31.9 % 110,078 44.7 %

Department of Health and Human Services 102,201 25.9 % 91,543 37.2 %

Department of Defense 33,612 8.5 % 30,930 12.6 %

Customers with less than 10% share of total revenue 6,678 1.7 % 11,058 4.5 %

Total revenue $ 395,173 100.0 % $ 246,094 100.0 %

See “Item 1A – Risk Factors - A significant portion of our revenue is concentrated in a small number of contracts and we could be seriously harmed if we were unable to continue providing services under, or unsuccessful in our recompete efforts on, these contracts." for a discussion of concentration risk within our VA and HHS portfolio of contracts

The Company is a full-service provider of technology-enabled health and human services, providing solutions to three market focus areas:

Defense and Veteran 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 2,400 skilled employees working in more than 30 locations throughout the United States and one location overseas.

In recent years we have successfully completed acquisitions to increase future organic growth, diversify our customer base, and to expand into adjacent markets.

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("S3") and on September 30, 2020, we acquired Irving Burton Associates, LLC ("IBA").

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

• Defense and Veteran Health Solutions;

The following table summarizes revenues by our markets for the years ended September 30, 2022 and 2021, respectively (in thousands):

Revenue Percent of total revenue Revenue Percent of total revenue

Human Services and Solutions $ 165,970 42.0 % $ 37,260 15.1 %

Defense and Veteran Health Solutions 159,719 40.4 % 141,435 57.0 %

Public Health and Life Sciences 69,484 17.6 % 67,399 27.9 %

Major Customers

Our largest customer is the VA, which comprised approximately $110.1 million and $100.2 million of revenue for the years ended September 30, 2021 and 2020, respectively.

Our second largest customer, HHS, comprised approximately $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 relationships with the VA and HHS as a significant portion of our revenue is concentrated in a small number of contracts with these customers.

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

Total revenue $ 395,173 100.0 % $ 246,094 100.0 %

Forward Looking Business Trends:

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We believe these business development priorities will position the 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.

COVID-19 impact

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

government policies.

Current general economic conditions continue to be impacted by the COVID-19 pandemic, which resulted in both market size contractions due to economic slowdowns and government restrictions on movement during the height of the pandemic.

While the rollout of vaccines has positively correlated to an improvement in macroeconomic indicators, the lifting of various public health constraints, and a reduction of many restrictions on economic activity, there continues to be significant uncertainty as to the effects of the pandemic on the economy, which may impact our results of operations or cash flows in future periods.

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

Although we have also been successful in winning new contracts tied to the need to support public health initiatives in response to the pandemic, as the public health situation improves, there may be fewer such opportunities in the future.

General uncertainty related to the pandemic, the long-term efficacy of vaccines and the spread of new variants, may nonetheless 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 have been able to broadly maintain our operations.

Further, we have partnered with our clients to adopt particular measures to protect our employees at distribution centers, and we have been and expect to continue to execute on the remainder of our contracts through remote and teleworking arrangements.

We continue to monitor the evolving situation related to the COVID-19 pandemic and intend to continue to work with government authorities and other stakeholders to assess further potential implications to us, continue with employee safety measures to ensure that we are able to continue our operations during the pandemic, and take other actions where appropriate to mitigate other adverse consequences.

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 have 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 restriction of certain client activities due to COVID-19.

Due to our ability to continue to perform on our contract portfolio and generate cash flow, we do not presently expect nor have experienced liquidity constraints related to COVID-19.

We are presently in compliance with all covenants in our secured term loan and have access to a secured revolving line of credit to meet any short-term cash needs that cannot be funded by operations.

As such, mandatory demands on our cash flow remain low.

Further, we have not observed any material impairments of our assets or a significant change in the fair value of our assets due to the COVID-19 pandemic.

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

Federal budget outlook for fiscal year 2023:

The President’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 climate 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 future public health crises, expanding access to healthcare, and defeating diseases and epidemics such as, but not limited to, the opioid and 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.

The President’s budget proposal for fiscal year ("FY") 2023 outlines many initiatives that include investments to rebuild our country’s physical infrastructure, strengthen supply chains, combat inflation, expand economic opportunity, respond to the changing climate, sustain and strengthen national defense, and bolster America's public health infrastructure.

Specifically, the investment in public health infrastructure involves improving the nation’s readiness for future pandemics and other biological threats, expanding access to vaccines and healthcare, and defeating diseases and epidemics such as, but not limited to, the opioid and HIV/AIDs epidemics.

The budget's initiatives are further reflected in the budget requests for the Department of Health and Human Services, Department of Veterans Affairs, and Department of Defense.

While Congress has not completed the final appropriation bills for the government’s 2023 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 through February 18, 2022.

On September 30, 2022, the President signed a CR providing funds to the federal government through December 16, 2022.

When a CR expires, unless appropriations bills have been passed by Congress and signed by the President, or a new CR is passed and signed into law, the government must cease operations, or shutdown, except in certain emergency situations or when the law authorizes continued activity.

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As such, we do not anticipate or expect any significant changes to our operations.

Department of Veterans Affairs ("VA") health spending trends:

The 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 over 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.

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.

Department of Veterans Affairs

The VA is requesting a total of $301.4 billion for FY 2023, an increase of $30.7 billion above the FY 2022 request.

It includes $139.1 billion in discretionary funding, an increase of $21.9 billion, and $161.3 billion in mandatory funding, an increase of $8.6 billion from FY 2022 enacted.

The VA research program is expected to allocate increased funding to advance the Department’s understanding of the impact of traumatic brain injury and toxic exposure(s) on long-term health outcomes, coronavirus related research and impacts, and precision oncology.

The budget also includes $2.6 billion (from all funding sources) for the total telehealth program.

The VA is continuing to expand this program because of its ability to leverage VA providers and 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") spending trends:

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

The 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, an increase of $25 billion from the fiscal year 2021 appropriated amount, and $1.5 trillion in mandatory funding.

The budget includes $52 billion for the National Institutes of Health ("NIH"), an agency of HHS, an increase of $9 billion above fiscal year 2021 enacted, reflecting the Administration’s commitment to increasing investments in transformative biomedical research to advance the health of the nation and promote 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 programs that improve the health and well-being of young children and their families.

This includes $11.9 billion for the Office of Head Start.

We believe our capabilities and 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 preeminent 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 support the MHS’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 fiscal year 2021 appropriated amount.

The 2023 budget request for the VA's research enterprise is $916 million, an increase of $34 million from the 2022 budget, excluding mandatory funding.

In addition, the 2023 budget estimates $4.8 billion will be spent on telehealth treatment in 2023, an increase of $622 million from the 2022 current estimate.

The VA is continuing to expand this program because of its ability to leverage VA providers and provide better services to veterans.

Department of Health and Human Services

The FY 2023 budget request proposes $127.3 billion in discretionary budget authority for HHS and $1.7 trillion in mandatory funding for the department.

The budget proposes $63 billion in discretionary and mandatory resources for NIH, an increase of $16 billion above FY 2022 enacted, to address the opioid crisis and ending HIV crises, make new investments in pandemic preparedness and nutrition research, and drive biomedical innovations.

The budget also requests $45 million for telehealth, which is $9 million above FY 2022 enacted, to promote health services with telehealth technologies.

The budget also provides for investment in programs that improve the health and well-being of young children and their families.

This includes $12.2 billion for the Office of Head Start, principally to expand eligibility for participation in the program.

Department of Defense

The Military Health System ("MHS") is one of the largest health care systems, serving over 9 million beneficiaries.

As a part of the DoD, the Defense Health Agency ("DHA") manages a global health care network of military and civilian medical professionals, military hospitals and clinics around the world, and supports the delivery of integrated health services to MHS beneficiaries.

The funding and personnel to support MHS’s mission is referred to as the Unified Medical Budget ("UMB").

The FY 2023 UMB request for the Defense Health Program ("DHP") is $36.9 billion, a decrease of $0.4 billion from FY 2022 enacted.

It is anticipated that COVID-19 costs will decrease in FY 2023, driving a reduction in the budget request for DHP In Direct Care and Private Sector Care.

Industry consolidation among federal government contractors:

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However, 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.

In these cases, the Company may elect to join a team with an eligible contractor as prime in support of such small businesses for specific pursuits that align with our core markets and corporate growth strategy.

COVID-19 impact

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

government policies.

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

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

While the pandemic has had minor offsetting impacts during fiscal 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 2021 as Compared to Fiscal Year 2020

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

Year Ended Change in

Consolidated Statement of Operations:

September 30, 2021 September 30, 2020 $ % of Rev

In these cases, the Company may elect to join a team with an eligible contractor as prime for specific pursuits that align with our core markets and corporate growth strategy.

Results of Operations

Fiscal Year Ended September 30, 2022 as Compared to Fiscal Year Ended September 30, 2021

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

Year Ended September 30,

2022 2021 Change

Revenue $ 395,173 100.0 % $ 246,094 100.0 % $ 149,079

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Income from operations 33,278 8.4 % 17,223 7.0 % 16,055

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) %

Interest expense 2,215 0.6 % 3,784 1.6 % (1,569)

Income before provision for income taxes 31,063 7.8 % 13,439 5.4 % 17,624

Provision for income taxes 7,775 2.0 % 3,294 1.3 % 4,481

Net income $ 23,288 5.8 % $ 10,145 4.1 % $ 13,143

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For the year ended September 30, 2022 revenue was $395.2 million, an increase of $149.1 million or 60.6% over the prior year period.

The increase is partially due 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.

The increase in revenue is due primarily to the two task orders awarded under a FEMA contract to support Alaska with its response to COVID-19.

The revenue contribution from those task orders was $125.8 million.

The remainder of our revenue growth of approximately $25 million was from our remaining contract portfolio was primarily due to additional contracts awarded in late fiscal 2021 and increased volume on existing contracts.

Cost of Operations

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These costs are generally comprised of direct labor and associated fringe benefit costs, subcontract cost, other direct costs, and the related management and infrastructure costs.

For the year ended September 30, 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.

For the year ended September 30, 2022, contract costs increased by approximately $128.3 million principally due to the direct costs associated with the two task orders awarded under a FEMA contract to support Alaska with its response to COVID-19.

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.

These costs increased as compared to the prior fiscal year by $5.7 million to approximately $30.7 million primarily due to increased investment in the human capital and business development functions, increased regulatory compliance costs, primarily increased external accounting fees, and increased stock compensation expense from employees option grants awarded in the current fiscal year..

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 $1.5 million and $6.6 million, respectively, as compared to approximately $2.2 million and $4.8 million for the prior fiscal year, an aggregate increase of $1.1 million.

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

Interest Expense, net

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

For the year ended September 30, 2021, interest expense, net, was $3.8 million compared to interest expense, net of $3.4 million in the prior year, an increase of approximately $0.3 million over the prior year period.

The increase in interest expense was due to the $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, 2021 was $3.3 million, an increase of approximately $0.4 million from the prior fiscal year.

For the year ended September 30, 2022, depreciation and amortization costs were approximately $1.1 million and $6.6 million, respectively, as compared to approximately $1.5 million and $6.6 million for the prior fiscal year, an aggregate decrease of $0.5 million.

Interest Expense

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

For the year ended September 30, 2022, interest expense was $2.2 million compared to interest expense, net of $3.8 million in the prior year, a decrease of approximately $1.6 million over the prior year period.

The decrease in interest expense was primarily due to the decreased balance on our secured term loan.

Provision for Income Taxes

Provision for Income taxes for the fiscal year ended September 30, 2022 was $7.8 million, an increase of approximately $4.5 million from the prior fiscal year.

The effective tax rate was 24.8% and 24.5% for the fiscal years ending September 30, 2022 and 2021 respectively.

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On a non-GAAP basis, Earnings Before Interest Taxes Depreciation and Amortization (“EBITDA”) for the year ended September 30, 2022 was approximately $40.9 million, an increase of approximately $15.6 million, or 61.6%, over the prior fiscal year.

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

We incurred $1.1 million of corporate development costs for the year ended September 30, 2021, and $0.9 million in the fiscal year ended September 30, 2020.

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

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

The increase from the prior fiscal year was principally due to the two task orders awarded under a FEMA contract to support Alaska with its response to COVID-19.

Those contracts contributed a significant percentage of the growth we experienced for the year-to-date period, reflecting stronger margins than initially anticipated.

The increased margins were achieved by effectively staffing the projects with internal resources, rather than subcontractors, where appropriate.

The Company is presenting additional non-GAAP measures to describe the impact from two short-term FEMA task orders on its financial performance for the year ended September 30, 2022.

The measures presented are revenue, operating income, net income, diluted earnings per share, and EBITDA for our enterprise contract portfolio less the respective performance on the FEMA task orders.

These resulting measures present the contract portfolio's financial performance compared to results delivered in the prior year period.

Definitions of these additional non-GAAP measures are set forth in the footnotes to the reconciliation table below.

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

Management and our Board utilize these non-GAAP measures to make decisions about the use of our resources, analyze performance between periods, develop internal projections and measure

management's performance.

We believe that these non-GAAP measures are useful to investors in evaluating our ongoing operating and financial results and understanding how such results compare with our historical performance.

By providing this non-GAAP measure as a supplement to GAAP information, we believe this enhances investors understanding of our business and results of operations .

Reconciliation of GAAP net income to EBITDA, a non-GAAP measure (in thousands):

September 30,

GAAP net income to EBITDA, a non-GAAP measure for the years ended September 30, 2022 and 2021 (in thousands):

2022 2021 Change

Net income $ 23,288 $ 10,145 $ 13,143

(i) Interest expense, net:

3,784 3,441 343

(ii) Provision for taxes 3,294 2,906 388

(i) Interest expense 2,215 3,784 (1,569)

(ii) Provision for income taxes 7,775 3,294 4,481

(iii) Depreciation and amortization 7,665 8,115 (450)

EBITDA $ 40,943 $ 25,338 $ 15,605

Reconciliation of GAAP net income to net income adjusted for the effect of the corporate development costs, a non-GAAP measure (in thousands except for per share amounts):

September 30,

GAAP revenue, operating income, net income, diluted earnings per share, and non-GAAP EBITDA reported for the years ended September 30, 2022 and 2021 to the same metrics for our contract portfolio less the FEMA task orders (in thousands except for per share amounts):

2022 2021 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

Total enterprise $ 395,173 $ 246,094 $ 149,079

FEMA task orders to support Alaska 125,773 1,727 124,046

Remaining contract portfolio $ 269,400 $ 244,367 $ 25,033

Operating income (b)

Total enterprise $ 33,278 $ 17,223 $ 16,055

FEMA task orders to support Alaska 12,479 117 12,362

Remaining contract portfolio $ 20,799 $ 17,106 $ 3,693

Net income (c)

Total enterprise $ 23,288 $ 10,145 $ 13,143

FEMA task orders to support Alaska 9,235 117 9,118

Remaining contract portfolio $ 14,053 $ 10,028 $ 4,025

Diluted earnings per share (d)

Total enterprise $ 1.64 $ 0.75 $ 0.89

FEMA task orders to support Alaska 0.65 0.01 0.64

Remaining contract portfolio $ 0.99 $ 0.74 $ 0.25

Total enterprise $ 40,943 $ 25,338 $ 15,605

FEMA task orders to support Alaska 12,479 117 12,362

Remaining contract portfolio $ 28,464 $ 25,221 $ 3,243

Revenue for the Company’s remaining contract portfolio less the FEMA task orders represents our consolidated revenues less the revenues generated from the FEMA task orders.

Operating income attributable to the remaining contract portfolio less the FEMA task orders represents the Company’s consolidated operating income, determined in accordance with GAAP, less the operating income derived from the FEMA task orders.

Similarly, for the year ended September 30, 2022 operating income for the FEMA task orders is derived by subtracting from the revenue attributable to the tasks orders of $125.8 million the following amounts associated with such task orders:

contract costs $112.1 million and general & administrative costs of $1.2 million.

Net income attributable to the remaining contract portfolio less the FEMA task orders represents the Company’s consolidated net income, determined in accordance with GAAP, less the net income derived from the FEMA task orders.

For the year ended September 30, 2022 net income for the FEMA task orders is derived by subtracting from the revenue attributable to the tasks orders of $125.8 million the following amounts associated with such task orders:

contract costs of $112.1 million, general & administrative costs of $1.2 million, and provision for income taxes of $3.2 million.

Diluted earnings per share (diluted EPS) for the FEMA task orders is calculated using the net income attributable to such task orders as opposed to GAAP net income.

Diluted EPS for the remaining contract portfolio (total contract portfolio excluding the FEMA task orders) is calculated by subtracting the diluted EPS for the FEMA task orders from the Company's total diluted EPS.

EBITDA attributable to the FEMA task orders of $12.5 million for the year ended September 30, 2022, is arrived at through the same calculation as operating income as there are not any depreciation and amortization costs attributable to the FEMA task orders.

EBITDA for the remaining contract portfolio is calculated by subtracting the EBITDA attributable to the FEMA task orders from the Company’s total EBITDA.

Liquidity and Capital Management

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Cash flows from operations totaled approximately $1.2 million and $45.7 million for the years ended September 30, 2022 and 2021, respectively.

The increase in cash from operations was principally due to improved collections on key contracts and an advance payment to fund deployment of emergency medical resources under the FEMA contract awarded in late September.

The decrease in cash from operations was principally a result of performance of the deferred contract obligations on the FEMA task orders, for which an advance payment was received at the end of fiscal 2021.

We used less than $0.9 million and $0.1 million of cash in investing activities during fiscal years 2022 and 2021, respectively.

The cash utilized was predominantly due to capital expenditures in fiscal year 2021 and the IBA acquisition in fiscal year 2020.

Cash used in and provided by financing activities during the fiscal years ended September 30, 2021 and 2020 was approximately $22.9 million and $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, 2021, we had repayments of approximately $23.3 million under our credit facility.

The cash utilized was predominantly due to capital expenditures in fiscal year 2022 and 2021.

Cash used in financing activities during the fiscal years ended September 30, 2022 and 2021 was approximately $24.2 million and $22.9 million, respectively.

The activity in each fiscal year was primarily early repayment of principal on our secured term loan.

During the year ended September 30, 2022 and 2021, the Company repaid approximately $24.8 million and $23.3 million of secured term loan principal, respectively.

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

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

September 30,

A summary of the change in cash is presented below for the years ended September 30, 2022 and 2021 (in thousands):

Net cash provided by operating activities $ 1,243 $ 45,665

Net cash used in investing activities (872) (44)

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, 2021, our immediate sources of liquidity include cash and cash equivalents of approximately $24.1 million, accounts receivable, and access to our secured revolving line of credit facility.

Net cash used in by financing activities (24,194) (22,927)

Net change in cash $ (23,823) $ 22,694

Sources of Cash

As of September 30, 2022, our immediate sources of liquidity include cash of approximately $0.2 million, accounts receivable, and access to our secured revolving line of credit.

This credit facility provides us with access of up to $25.0 million, subject to certain conditions including eligible accounts receivable.

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We believe that our current investment and financing obligations are adequately covered by cash generated from profitable operations and that planned operating cash flow should be sufficient to support our operations for twelve months from the date of issuance of these consolidated financial statements.

Loan Facility

A summary of our loan facilities and subordinated debt financing as of September 30, 2021 is as follows:

($ in Millions)

As of September 30, 2021

Credit Facilities

A summary of our credit facilities as of September 30, 2022 is as follows (in millions):

Lender Arrangement Loan Balance Interest * Maturity Date

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*LIBOR rate as of September 30, 2022 was 2.52%.

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 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 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, 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 at 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 minimum 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 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.

The interest rate spread ranges from 2.5% to 4.5% depending on the funded indebtedness to adjusted EBITDA ratio.

(a) Represents the principal amounts payable on our secured term loan, which is secured by liens on substantially all of the assets of the Company.

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

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 as of September 30, 2022 is $16.2 million and matures in 2024.

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

(b) The secured revolving line of credit has a ceiling of up to $25.0 million and a maturity date of September 30, 2025.

The Company accessed funds from the secured revolving line of credit during the year, but has no outstanding balance at September 30, 2022.

The secured term loan and secured revolving line of credit are secured by liens on substantially all of the assets of the Company.

The provisions of the secured term loan and secured revolving line of credit, including financial covenants, are fully described in Note 7 to the consolidated financial statements.

Contractual Obligations as of September 30, 2022

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Facility operating leases 23,407 3,216 6,099 5,579 8,513

Equipment Operating Leases 218 83 135 — —

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 impact on the Company’s net revenues, results of operations, and cash flows as inflation 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 as needed and expects to be able to do so in future periods.

Equipment operating lease 135 83 52 — —

Total contractual obligations $ 45,542 $ 3,299 $ 28,151 $ 5,579 $ 8,513

Critical Accounting Policies and Estimates

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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 lease liabilities, valuation allowances established against deferred tax assets, and measurement of loss development on workers' compensation claims.

Significant estimates include valuation of goodwill and intangible assets, stock-based compensation, and measurement of loss development on workers' compensation 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 4 of the notes to our Consolidated Financial Statements contained elsewhere in this Annual Report on Form 10-K.

Revenue Recognition

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The Company continues to review its goodwill for possible impairment or loss of value at least annually or more frequently upon the occurrence of an event or when circumstances indicate that a reporting unit’s carrying amount is greater than its fair value.

At September 30, 2021, we performed a goodwill impairment evaluation.

At September 30, 2022, we performed an internal goodwill impairment evaluation.

We performed a qualitative assessment of factors to determine whether it was necessary to perform the goodwill impairment test.

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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.

Provision for 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.

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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 models to estimate the fair value of each stock option at the date of grant.

The Company uses a Monte Carlo method 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.

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

What changed 10-K

Item 7. Management’s Discussion and Analysis