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Item 7. Management’s Discussion and Analysis

2024-12-04 compared with 2023-12-06 · 74 added, 147 removed, 152 unchanged (59% of the section changed)

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Business Overview:

DLH is a holding company operating through a number of operating subsidiaries.

In December 2022, we acquired Grove Resource Solutions, LLC ("GRSi"), which provides research and development, systems engineering and integration, and digital transformations solutions to federal agencies, notably the National Institutes of Health ("NIH"), U.S.

Navy and U.S.

Marine Corps.

We deliver improved health and cyber readiness solutions for federal government customers through digital transformation, science research and development, and systems engineering and integration.

DLH Holdings Corp.

("DLH") delivers improved health and cyber readiness solutions for federal government customers through digital transformation, science research and development, and systems engineering and integration.

We bring a unique combination of government sector experience, proven methodologies, and unwavering commitment to solve the complex problems faced by civilian and military customers alike, doing so by leveraging a robust capability set, including cyber technology, artificial intelligence, advanced analytics, cloud-based applications, and telehealth systems.

We derive 98% of our revenue from agencies of the Federal government, providing services to several agencies including the HHS, VA, DoD, and DHS.

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Department of Defense 64,128 16.2 % 70,325 18.7 %

Department of Homeland Security 919 0.2 % 126,576 32.0 %

Customers with less than 10% share of total revenue 7,320 1.9 % 5,374 1.4 %

$ 395,937 100.0 % $ 375,872 100.0 %

The following table summarizes revenues by our markets for the years ended September 30, 2023 and 2022, respectively (in thousands):

Revenue Percent of total revenue Revenue Percent of total revenue

Defense and Veteran Health Solutions $ 209,187 55.7 % $ 159,719 40.4 %

Human Services and Solutions 110,068 29.3 % 165,970 42.0 %

Public Health and Life Sciences 56,617 15.0 % 69,484 17.6 %

$ 375,872 100.0 % $ 395,173 100.0 %

Forward Looking Business Trends:

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

Through our acquisition program, we have built a platform of technology-powered solutions to enable us to provide an array of innovative, high-value solutions in information technology, public health and digital transformation.

We are focused on increasing organic growth across our addressable market and delivering robust cash flow.

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

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Federal budget outlook for fiscal year 2025 :

The President’s budget proposal for fiscal year ("FY") 2024 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 HHS, VA, and DoD.

While Congress has not completed the final appropriation bills for the government’s 2024 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.

While Congress has not completed the final appropriation bills for the government’s 2025 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 November 16, 2023, the President signed a CR providing funds to the federal government through January 19, 2024 for several agencies and through February 2, 2024 for the remaining.

On September 26, 2024, the President signed a continuing resolution (CR, H.R.

The CR extends fiscal year 2025 funding for all 12 annual spending bills, including the Defense, Labor, Health and Human Services, and Education bills, through December 20, 2024.

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

We are monitoring impact the new Presidential Administration will have on government funding negotiations as their legislative and political priorities .

We continuously review our operations in an attempt to identify programs potentially at risk from CRs so that we can consider appropriate contingency plans.

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

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

Department of Veterans Affairs

The VA is requesting a total of $325.1 billion for FY 2024, an increase of $16.6 billion above the FY 2023 enacted level.

It includes $142.8 billion in discretionary funding, an increase of $3.0 billion, and $182.3 billion in mandatory funding, an increase of $13.6 billion from FY 2023 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 FY 2024 budget request for the VA's research enterprise is $938.0 million, an increase of $22.0 million from the FY 2023 budget, excluding mandatory funding.

In addition, the FY 2024 budget estimates $4.9 billion will be spent on telehealth treatment in FY 2024, an increase of $78.0 million from the FY 2023 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 2024 budget request proposes $144.3 billion in discretionary budget authority for HHS and $1.7 trillion in mandatory funding for the department.

The budget proposes $48.6 million in discretionary and mandatory resources for NIH, an increase of $920.0 million above FY 2023 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 $45.0 million for telehealth, which is an increase of $7.0 million above FY 2023 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 $13.1 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 9.5 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 2024 UMB request for the Defense Health Program ("DHP") is $58.7 billion, an increase of 0.5% from FY 2023 enacted.

It is anticipated that COVID-19 costs will decrease in FY 2024, driving a reduction in the budget request for DHP In Direct Care and Private Sector Care.

Historically, our customers’ missions have received bipartisan support from the legislative and executive branches of the federal government.

However, we anticipate that the President-Elect and new Congress will seek to implement their budget priorities, which may impact our customers’ projects and budgets.

Industry consolidation among federal government contractors:

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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.

During the fiscal year ended September 30, 2024, we generated revenues of approximately $140.0 million from our set of contracts in support of the VA's Consolidated Mail Outpatient Pharmacy ("CMOP") program.

As previously reported, the VA has been soliciting proposals for new contracts covering this work with a preference for a Service-Disabled Veteran Owned Small Business, or SDVOSB, to perform as the prime contractor.

During the 2024 fiscal year, the VA awarded one contract to a SDVOSB that was not affiliated with DLH.

Should awards for the locations for which we have submitted a proposal be offered to a partner of DLH, we expect to continue to perform a significant amount of those contracts' volume of business as a subcontractor.

While the acquisition process is being conducted, DLH continues to operate as the prime contractor for all CMOP locations other than the Chelmsford location.

For more information concerning the status of this procurement effort, see Item 1.

Business – Major Contracts .

Results of Operations

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Income before provision for income tax (benefit) expense 7,747 2.0 % 820 0.2 % 6,927

Provision for income tax (benefit) expense (641) (0.2) % 7,775 2.0 % (8,416)

Provision for income tax expense (benefit)

350 0.1 % (641) (0.2) % 991

Net income $ 7,397 1.9 % $ 1,461 0.4 % $ 5,936

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Net income per share - diluted $ 0.51 $ 0.10 $ 0.41

For the year ended September 30, 2023 revenue was $375.9 million, a decrease of $19.3 million or 4.9% over the prior year period.

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

The revenue contribution from those task orders in fiscal year 2022 was $125.8 million.

Included in fiscal 2023 revenue is $107.0 million contributed from GRSi subsequent to the acquisition.

For the year ended September 30, 2024 revenue was $395.9 million, an increase of $20.1 million or 5.3% over the prior year period.

The increase in revenue is principally due to the December 2022 acquisition.

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, 2023, the contract costs decreased as compared to the prior fiscal year by $26.9 million to approximately $296.0 million primarily due to completion of the FEMA task orders, offset by the contribution from the acquisition of GRSi.

For the year ended September 30, 2024, the contract costs increased as compared to the prior fiscal year by $21.0 million to approximately $317.0 million primarily due to the increase in revenue volume.

Non-labor costs, which consist primarily of subcontract and other direct costs and inherently carry a lower margin, increased as a percentage of revenue in fiscal 2024 as compared to the prior fiscal year.

General and administrative costs are for employees and third parties 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 $7.1 million to approximately $37.8 million primarily due to the acquisition of GRSi.

Impairment loss of long-lived assets is a loss associated with a reduction of the fair value of an asset during the fourth quarter of fiscal 2023, DLH reduced its leased office space requirement by consolidating underutilized premises as part of a facility rationalization effort, to accurately reflect the operational needs of the business.

As a result, the Company has determined that its Right of Use Assets experienced a reduction in fair value below its associated carrying value of $7.7 million.

Corporate development costs are incremental due diligence costs, such as legal and accounting fees.

Fiscal year 2023 and 2022 costs were associated with the acquisition of GRSi.

For the year ended September 30, 2023, depreciation and amortization costs were approximately $0.8 million and $14.8 million, respectively, as compared to approximately $1.1 million and $6.6 million, respectively for the prior fiscal year, an aggregate increase of $7.9 million which is primary due to the acquisition of GRSi during the fiscal year.

These costs decreased as compared to the prior fiscal year by $0.8 million to approximately $37.0 million as the company achieved operating leverage following the December 2022 acquisition.

In the 2023 fiscal year there were two costs that did not recur in fiscal 2024 which impacted the Company’s operating income and net income.

These costs consisted of an impairment loss of a long-lived asset of $7.7 million and corporate development costs of $1.7 million.

The impairment charge resulted from the consolidation of under utilized real estate assets.

The corporate development costs were incurred to complete the December 2022 acquisition and include legal counsel, financial due diligence, customer market analysis and representation and warranty insurance premiums.

For the year ended September 30, 2024, depreciation and amortization costs were $0.6 million and $16.5 million, respectively, as compared to $0.8 million and $14.8 million for the year ended September 30, 2023, respectively, an aggregate increase of $1.5 million which is primary due to the December 2022 acquisition.

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, 2023, interest expense was $16.3 million compared to interest expense, net of $2.2 million in the prior year, an increase of approximately $14.1 million over the prior year period.

The increase in interest expense was primarily due to the increase in long-term debt associated with the acquisition of GRSi during the fiscal year.

For the year ended September 30, 2024, interest expense was $17.2 million compared to interest expense of $16.3 million in the prior year, an increase of approximately $0.9 million over the prior year period.

The increase in interest expense was primarily due to the increase in debt associated with the December 2022 acquisition.

Provision for Income Taxes

Provision for Income taxes for the fiscal year ended September 30, 2023 was a reduction of tax by $0.6 million, a decrease of approximately $8.4 million from the prior fiscal year.

The effective tax rate was a negative 72.2% for the fiscal year ending September 30, 2023 and 24.8% for the fiscal year ending September 30, 2022.

Non-GAAP Financial Measures for Fiscal 2023 and 2022

The Company is presenting certain non-GAAP measures regarding its financial performance for the fiscal years ended September 30, 2023 and 2022.

The measures presented are Adjusted Revenue, Adjusted Operating Income, Adjusted Net Income, Adjusted Diluted Earnings Per Share ("EPS"), Earnings Before Interest Taxes Depreciation and Amortization (“EBITDA”), EBITDA Margin on Revenue, Adjusted EBITDA, and Adjusted EBITDA Margin on Adjusted Revenue.

In calculating these measures, we have added the corporate development costs associated with completing the GRSi acquisition to our results for fiscal year 2023 and 2022, removed the impairment loss on certain real estate assets, and removed the contribution from the FEMA task orders from the results for fiscal year 2022.

These resulting measures present our financial performance compared to results delivered in the prior year period.

Provision for Income taxes for the fiscal year ended September 30, 2024 was a tax expense of $0.4 million, an increase of approximately $1.0 million from the prior fiscal year.

The increase was primarily due to the impairment of real estate assets in fiscal 2023 that did not impact fiscal 2024.

The effective tax rate was a positive 4.5% for the fiscal year ending September 30, 2024 and a negative 72.2% for the fiscal year ending September 30, 2023.

Non-GAAP Financial Measures

The Company is presenting additional non-GAAP measures regarding its financial performance for years ended September 30, 2024 and 2023.

The measures presented are Earnings Before Interest Taxes Depreciation and Amortization (“EBITDA”), and Adjusted EBITDA.

In calculating Adjusted EBITDA, we have added the corporate development costs associated with completing the December 2022 acquisition to our results for fiscal year 2023 and removed the impairment loss on certain real estate assets.

These resulting measures present the annual financial performance compared to results delivered in the prior year period.

Definitions of these additional non-GAAP measures are set forth below.

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These supplemental performance measurements may vary from and may not be comparable to similarly titled measures by other companies in our industry.

Adjusted Revenue, Adjusted Operating Income, Adjusted Net Income, Adjusted Diluted EPS, EBITDA, Adjusted EBITDA, EBITDA Margin on Revenue, and Adjusted EBITDA Margin on Adjusted Revenue are not recognized measurements under accounting principles generally accepted in the United States, or GAAP, and when analyzing our performance investors should (i) evaluate each adjustment in our reconciliation to the nearest GAAP financial measures and (ii) use the aforementioned non-GAAP measures in addition to, and not as an alternative to, revenue, operating income, net income or diluted EPS, as measures of operating results, each as defined under GAAP.

EBITDA and Adjusted EBITDA are not recognized measurements under accounting principles generally accepted in the United States, or GAAP, and when analyzing our performance investors should (i) evaluate each adjustment in our reconciliation to the nearest GAAP financial measures and (ii) use the aforementioned non-GAAP measures in addition to, and not as an alternative to, revenue, operating income, or net income, as measures of operating results, each as defined under GAAP.

We have defined these non-GAAP measures as follows:

“Adjusted Revenue” represents revenue less the contribution to revenue from the short-term FEMA task orders.

“Adjusted Operating Income” represents operating income plus the corporate development costs associated with completing the GRSi acquisition in fiscal 2023 and 2022 and the impairment loss on the right of use asset incurred only in fiscal 2023, less the contribution from the FEMA task orders, which occurred only in fiscal 2022.

“Adjusted Net Income” represents net income including the corporate development costs associated with completing the acquisition, the impairment loss on the right of use asset, as well as the FEMA task orders.

“Adjusted Diluted EPS” represents diluted EPS calculated using Adjusted Net Income as opposed to net income.

"EBITDA" represents net income before income taxes, interest, depreciation and amortization.

“Adjusted EBITDA” represents net income before income taxes, interest, depreciation and amortization and the corporate costs associated with completing the acquisition, and the impairment loss on the right of use asset less the contribution from FEMA task orders.

“Adjusted EBITDA Margin on Adjusted Revenue” is calculated as Adjusted EBITDA divided by Adjusted Revenue.

Below is a reconciliation of Adjusted Revenue, Adjusted Operating Income, Adjusted Net Income, Adjusted Diluted EPS, EBITDA, Adjusted EBITDA, EBITDA Margin on Revenue and Adjusted EBITDA Margin on Adjusted Revenue reported for the fiscal years ended September 30, 2023 and 2022 compared to the most directly comparable financial measure calculated and presented in accordance with GAAP as follows (in thousands, except for per share amounts):

2023 2022 Change

Adjusted Revenue

Revenue $ 375,872 $ 395,173 $ (19,301)

FEMA task orders to support Alaska (a)

— 125,773 (125,773)

Adjusted Revenue $ 375,872 $ 269,400 $ 106,472

Adjusted Operating Income

Operating Income $ 17,091 $ 33,278 $ (16,187)

Impairment loss of long-lived asset (c)

7,673 — 7,673

Corporate development costs (b) 1,735 614 1,121

FEMA task orders to support Alaska (d)

— 12,479 (12,479)

Adjusted Operating Income $ 26,499 $ 21,413 $ 5,086

Adjusted Net income (e)

$ 1,461 23,288 $ (21,827)

Impairment loss of long-lived asset (c)

7,673 — 7,673

Corporate development costs (b) 1,735 614 1,121

FEMA task orders to support Alaska (d)

— 12,479 (12,479)

Adjustment for tax effect (g)

(2,993) 3,007 (6,000)

Adjusted Net Income $ 7,876 $ 14,430 $ (6,554)

Adjusted Diluted Earnings Per Share (f)

Weighted average diluted shares outstanding

“Adjusted EBITDA” represents net income before income taxes, interest, depreciation and amortization and the corporate costs associated with completing the acquisition and the impairment loss on the right of use asset.

Reconciliation of GAAP net income to EBITDA and Adjusted EBITDA, non-GAAP measures (in thousands):

September 30,

$ 7,397 $ 1,461 $ 5,936

Diluted earnings per share

Interest expense, net $ 17,153 $ 16,271 882

Provision for income tax expense (benefit)

350 (641) 991

Adjusted Diluted Earnings Per Share $ 0.55 $ 1.01 $ (0.46)

EBITDA, Adjusted EBITDA, EBITDA Margin on Revenue & Adjusted EBITDA Margin on Adjusted Revenue

Net Income $ 1,461 $ 23,288 $ (21,827)

Interest expense 16,271 2,215 14,056

Depreciation and amortization 17,052 15,562 1,490

Provision for income taxes (641) 7,775 (8,416)

EBITDA $ 32,653 $ 40,943 $ (8,290)

Corporate development costs (b) 1,735 614 1,121

Impairment loss of long-lived asset (c)

$ 41,952 32,653 $ 9,299

FEMA task order to support Alaska (d)

— 12,479 (12,479)

Impairment loss of long-lived asset (a) — 7,673 (7,673)

Corporate development costs (b) — 1,735 (1,735)

Adjusted EBITDA $ 41,952 42,061 $ (109)

Net income margin on Revenue 0.4% 5.9%

EBITDA Margin on Revenue 8.7% 10.4%

Adjusted EBITDA Margin on Adjusted Revenue 11.2% 10.8%

Represents revenue adjusted to exclude revenue from the short-term FEMA task orders during the fiscal year ended September 30, 2022.

Represents corporate development costs we incurred to complete the GRSi transaction.

These costs primarily include legal counsel, financial due diligence, customer market analysis and representation and warranty insurance premiums.

Represents impairment loss of certain long-lived real estate assets associated with a reduction of the fair value of an asset prompted by a triggering event.

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As a result, the Company has determined that its Right of Use Assets experienced a reduction in fair value below its associated carrying value and recorded a $7.7 million loss of fair value.

(d):Adjusted operating income represents the Company’s consolidated operating income, determined in accordance with GAAP, adjusted to add the corporate development costs associated with the GRSi acquisition for fiscal year 2023, adjusted to add back the impairment loss of certain real estate assets and adjusted to exclude the operating income derived from the FEMA task orders.

Operating income for the FEMA task orders for the fiscal year ended September 30, 2022, 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.

(e) Adjusted net income represents the Company’s consolidated net income, determined in accordance with GAAP, adding back the impairment loss of long-lived assets and corporate development costs as defined, less the net income derived from the FEMA task orders.

There was no net income derived from the FEMA task orders during the fiscal year ended September 30, 2023.

For the fiscal 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.

(f) Adjusted diluted earnings per share (adjusted diluted EPS) is calculated by adding back the effect on the Company's diluted EPS determined in accordance with GAAP, of the impairment loss of long-lived assets and corporate development costs as defined, as well as their tax effect as defined, and subtracting the effect on diluted EPS for the FEMA task orders.

(g) Tax effect is the impact the tax expense per the tax provision

Represents corporate development costs we incurred to complete the December 2022 transaction.

These costs primarily include legal counsel, financial due diligence, customer market analysis and representation and warranty insurance premiums.

Liquidity and Capital Management

The Company generated operating income of approximately $17.1 million and $33.3 million for the years ended September 30, 2023 and 2022, respectively and net income of approximately $1.5 million and $23.3 million for the years ended September 30, 2023 and 2022 respectively.

Cash flows from operations totaled approximately $31.0 million and $1.2 million for the years ended September 30, 2023 and 2022, respectively.

The increase in cash from operations was principally a result of a decrease in accounts receivable.

We used $181.2 million and $0.9 million of cash in investing activities during fiscal years 2023 and 2022, respectively.

The cash utilized was predominantly due to the acquisition of GRSi and capital expenditures in fiscal years 2023 and 2022, respectively.

Cash used provided by financing activities during the fiscal year ended September 30, 2023 was approximately $150.2 million and cash used in financing activities during the fiscal year ended September 30, 2022 was $24.2 million, respectively.

The cash provided by financial activities during the fiscal year ended September 30, 2023, was primarily due to the debt incurred to finance the acquisition of GRSi during the fiscal year.

The activity in the fiscal year ended September 30, 2022 was primarily due to the early repayment of principal on our secured term loan.

During the years ended September 30, 2023 and 2022, the Company repaid approximately $20.2 million and $24.8 million of secured term loan principal, respectively.

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

Cash is approximately $0.3 million and $0.2 million for the period ended September 30, 2024 and 2023 respectively.

Credit facility availability was approximately $32.5 million and $32.0 million for the period ended September 30, 2024 and 2023, respectively.

A summary of the change in cash is presented below for the years ended September 30, 2024 and 2023 (in thousands):

Year Ended September 30,

Net cash provided by operating activities $ 27,366 $ 31,033

Net cash used in investing activities (836) (181,197)

Net cash provided by (used in) financing activities 150,151 (24,194)

Net cash (used in) provided by financing activities

(26,403) 150,151

Net change in cash $ 127 $ (13)

Cash flows from operations totaled approximately $27.4 million and $31.0 million for the years ended September 30, 2024 and 2023, respectively.

The decrease in cash from operations was principally due to a decrease in current liabilities, specifically lease liabilities.

We used $0.8 million and $181.2 million of cash in investing activities during fiscal years 2024 and 2023, respectively.

The cash utilized was predominantly due capital expenditures and the December 2022 acquisition in fiscal years 2024 and 2023, respectively.

Cash used in financing activities during the fiscal year ended September 30, 2024 was approximately $26.4 million and cash provided by financing activities during the fiscal year ended September 30, 2023 was $150.2 million, respectively.

The cash used in financial activities during the fiscal year ended September 30, 2024, was primarily due to the early repayment of principal on our secured term loan.

The activity in the fiscal year ended September 30, 2023 was primarily due to finance the December 2022 acquisition.

Sources of Cash

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Lender Arrangement Loan Balance Interest * Maturity Date

First National Bank of Pennsylvania Secured term loan (a) $ 169.8 SOFR 1 + 4.1%

December 8, 2027

First National Bank of Pennsylvania Secured revolving line of credit (b) $ 9.5 SOFR 1 + 4.1%

December 8, 2027

First National Bank of Pennsylvania Secured term loan (a) $ 142.5 SOFR1 + 4.1% December 8, 2027

First National Bank of Pennsylvania Secured revolving line of credit (b) $ 12.1 SOFR1 + 4.1% December 8, 2027

1 Secured Overnight Financing Rate ("SOFR") as of September 30, 2024 was 5.2%.

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, 2023 is $16.2 million and matures in 2024 and the fixed rate of 1.61%.

On January 31, 2023, we executed an additional floating-to-fixed interest rate swap with FNB;

the notional amount as of September 30, 2024 is $80.0 million, it matures in January 2026, and the fixed rate is 4.1%.

The total floating-to-fixed swap balance as of September 30, 2023 is $112.2 million.

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

As a result of entering interest rate swap agreements, for the twelve months ended September 30, 2024, interest expense has been decreased by approximately $1.3 million.

(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 December 8, 2027.

(b) The secured revolving line of credit has a ceiling of up to $70.0 million and a maturity date of December 8, 2027.

The Company accessed funds from the secured revolving line of credit during the year, but had $9.5 million outstanding balance at September 30, 2023.

(b) As of September 30, 2024 the secured revolving line of credit had a borrowing base of $32.5 million.

The Company accessed funds from the secured revolving line of credit during the year, and had $12.1 million outstanding balance at September 30, 2024.

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 8 to the consolidated financial statements.

The provisions of the secured term loan and secured revolving line of credit, including financial covenants, as amended, are fully described in Note 8 to the consolidated financial statements.

Contractual Obligations as of September 30, 2024

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Facility operating leases 18,538 3,536 6,011 5,203 3,788

Equipment operating lease 50 50 — — —

Contractual obligations

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Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the U.S.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.

The preparation of financial statements in conformity with accounting principles generally accepted in the U.S.

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, and stock-based compensation.

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Equipment and improvements are stated at cost, less accumulated depreciation and amortization.

Depreciation and amortization are provided using the straight-line method over the estimated useful asset lives (P3Y to P7Y) and the shorter of the initial lease term or estimated useful life for leasehold improvements.

Depreciation and amortization are provided using the straight-line method over the estimated useful asset lives (3 years to 7 years) and the shorter of the initial lease term or estimated useful life for leasehold improvements.

Costs incurred to place the asset in service are capitalized and costs incurred after implementation are expensed.

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

The assessed useful lives of the assets are P10Y.

The assessed useful lives of the assets are 10 years.

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.

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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 assets will not be realized.

The Company has fully utilized its net operating loss carryforwards.

Stock-based Equity Compensation

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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 P10Y from the date of grant.

No option may be granted with a term of more than 10 years from the date of grant.

Option awards may depend on the achievement of certain performance measures determined by the Compensation Committee of our Board.

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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