UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
☒
☐
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 2021
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the transition period from to
Commission File No. 0-18492
DLH HOLDINGS CORP.
(Exact name of registrant as specified in its charter)
New Jersey
(State or other jurisdiction of
incorporation or organization)
3565 Piedmont Road, Building 3,
Atlanta,
Georgia
Suite 700
(Address of principal executive offices)
22-1899798
(I.R.S. Employer
Identification No.)
30305
(Zip code)
(770) 554-3545
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Exchange Act
Title of each class
Common Stock
Trading Symbol(s)
DLHC
Name of each exchange on which
registered
Nasdaq
Capital Market
Securities registered pursuant to Section 12(g) of the Securities Exchange Act: NONE
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15 (d) of the Securities Exchange Act. Yes o No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act during the preceding 12 months (or for such
shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12
months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See
definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act. (check one):
Large accelerated filer o
Non-accelerated filer
☐
x
Accelerated filer o
Smaller Reporting Company
Emerging Growth Company
☒
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accountant
standards provided pursuant to Section 13(a) of the Exchange Act. Yes o No ☒
Indicate by check mark whether the registrant has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under
Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The aggregate market value of the voting and non-voting common equity held by non-affiliates, as of the last business day of the registrant's most recently completed second fiscal quarter,
March 31, 2021, was $54,418,928.
As of December 3, 2021 there were 12,714,269 shares of the Registrant’s common stock outstanding.
List hereunder the following documents if incorporated by reference and the Part of the Form 10-K (e.g., Part I, Part II, etc.) into which the document is incorporated: (1) Any annual report to
security holders; (2) Any proxy or information statement; and (3) Any prospectus filed pursuant to Rule 424(b) or (e) under the Securities Act of 1933.
Part III of this report incorporates information by reference from the Company's definitive proxy statement, which proxy statement is due to be filed with the Securities and Exchange
Commission not later than 120 days after September 30, 2021.
DOCUMENTS INCORPORATED BY REFERENCE
1
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosure
TABLE OF CONTENTS
PART I
PART II
Market For the Registrant's Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities
Selected Financial Data
Management's Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplemental Data
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
PART III
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accountant Fees and Services
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
Item 15.
Item 16.
Exhibits and Financial Statement Schedules
Form 10-K Summary
PART IV
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PART I
FORWARD-LOOKING STATEMENTS
Certain information included or incorporated by reference in this document may not address historical facts and, therefore, could be interpreted to be “forward-
looking statements” as that term is defined in the Private Securities Litigation Reform Act of 1995 and other federal securities laws. All statements other than
statements of historical fact are statements that could be deemed forward-looking statements, including projections of financial performance; statements of
plans, strategies and objectives of management for future operations; any statement concerning developments, performance or industry rankings relating to
products or services; any statements regarding future economic conditions or performance; any statements of assumptions underlying any of the foregoing; and
any other statements that address activities, events or developments that DLH Holdings Corp and its subsidiaries (“DLH” or the “Company” and also referred to
as “we,” “us” and “our”) intends, expects, projects, believes or anticipates will or may occur in the future. Forward-looking statements may be characterized by
terminology such as “believe,” “anticipate,” “expect,” “should,” “intend,” “plan,” “will,” “estimates,” “projects,” “strategy” and similar expressions. These
statements are based on assumptions and assessments made by the Company’s management in light of its experience and its perception of historical trends,
current conditions, expected future developments and other factors it believes to be appropriate. Any such forward-looking statements are not guarantees of
future performance (financial or operating), and actual results, developments and business decisions may differ materially from those envisioned by such
forward-looking statements. These forward-looking statements are subject to a number of risks and uncertainties that include but are not limited to the
following: the outbreak of the novel coronavirus (“COVID-19”), including the measures to reduce its spread, and its impact on the economy and demand for our
services, are uncertain, cannot be predicted, and may precipitate or exacerbate other risks and uncertainties; the failure to achieve the anticipated benefits of
recent acquisitions (including anticipated future financial operating performance and results); diversion of management’s attention from normal daily operations
of the business and the challenges of managing larger and more widespread operations resulting from the acquisition; contract awards in connection with re-
competes for present business and/or competition for new business; the risks and uncertainties associated with client interest in and purchases of new services;
compliance with new bank financial and other covenants; changes in client budgetary priorities; government contract procurement (such as bid protest, small
business set asides, loss of work due to organizational conflicts of interest, etc.) and termination risks; the ability to successfully integrate the operations of
recent and any future acquisitions; and the other risk factors set forth under Item 1A, Risk Factors, in this Annual Report on Form 10-K and in our other SEC
filings. The forward-looking statements included herein apply only as of the date of this Annual Report on Form 10-K. The Company disclaims any duty to
update such forward-looking statements, all of which are expressly qualified by the foregoing, except as may be required by law.
ITEM 1. BUSINESS
Overview
DLH Holdings Corp. is a provider of technology-enabled business process outsourcing, program management solutions, and public health research and
analytics; primarily focused to improve and better deploy large-scale federal health and human service initiatives. The Company derives 99% of its revenue
from agencies of the Federal government, providing services to several agencies including the Department of Veteran Affairs ("VA"), Department of Health and
Human Services ("HHS"), and the Department of Defense ("DoD"). Incorporated in New Jersey in 1969, the Company contracts with its government customers
through its subsidiaries.
In recent years we have successfully completed acquisitions to increase future organic growth, diversify our customer base, and to expand into adjacent markets.
On September 30, 2020, we acquired Irving Burton Associates, LLC ("IBA") and on June 7, 2019, we acquired Social & Scientific Systems, Inc. ("S3").
Our business offerings are aligned to three market focus areas within the federal health services market space.
• Defense and Veteran Health Solutions;
• Human Services and Solutions;
Public Health and Life Sciences
•
Defense and Veterans’ Health Solutions: DLH provides critical healthcare, technology, and logistics solutions to the VA, Defense Health Agency ("DHA"),
Tele-medicine and Advanced Technology Research Center ("TATRC"), Navy Bureau of Medicine and Surgery, and the Army Medical Research and Material
Command ("MRDC"). We specialize in supporting our customers' evolving needs by rapidly deploying resources and solutions.
The VA is responsible for delivering medical, educational, financing and other life event services to an estimated 20.3 million veterans. There are over 9 million
veterans enrolled in the VA health care program which provides services that include the
3
distribution of prescription drugs from the network of regional processing centers. We are at the forefront of ensuring that veterans receive their out-patient
prescriptions on time, each day, through the VA CMOP pharmacy program which has been recognized for service excellence, earning the JD Powers evaluation
of mail order pharmacies multiple times over recent years. Further, we have supported the VA's efforts to broaden its abilities to reach veterans and their
families through telemedicine technology and practices.
The DHA is a joint, integrated combat support agency whose mission is to provide a medically ready force to the Army, Navy, and Air Force. To execute this
mission the DHA supports the delivery of integrated, affordable and high quality health services to the armed forces. We support their mission by providing
leading technology-enabled solutions and services. These solutions and services encompass new capabilities at the forefront of technology to include artificial
intelligence, machine learning, heath informatics, and robotics.
Human Services and Solutions: Our customers support local communities by promoting economic, educational, and social well-being of children. The mission
extends to international communities through the prevention of epidemic diseases, response to natural disasters, and development of local economies. We
support our customers by providing a wide range of services and solutions to HHS, the Department of Homeland Security ("DHS"), and the Department of State
("State"). Our range of services support the critical missions of these agencies and their respective operating divisions, to include the Office of Head Start
("OHS"), Administration for Children and Families ("ACF"), the Federal Emergency Management Agency ("FEMA"), and the United States Agency of
International Development ("USAID"). In this market, we combine subject matter expertise with our experience in information technology and analytics to
provide large-scale program monitoring and evaluation; electronic medical records migration; data collection and management; and nutritional and social health
assessments. Additionally, we also provide large-scale data analytics as well as enterprise-level IT system architecture design, migration planning, and ongoing
management of system implementation and capacity building using experienced subject matter experts and project management resources.
FEMA is charged with supporting the nation before, during and after disasters. They execute their mission by building a culture of preparedness and readying
the nation for catastrophic disasters. FEMA supports state and local government in their response to disasters by coordinating the federal government's response
to the local jurisdiction and deploying resources to the areas of need. During the COVID-19 pandemic, we have supported FEMA's efforts by rapidly deploying
specialty resources to support resource constrained health-care providers.
Public Health and Life Sciences: In this market, our customers support national interests by ensuring and enhancing our capability to fight diseases, respond to
national and regional medical crises, and support the administration of providing health care benefits to senior and at-risk members of our communities. In
support of this mission, we provide services to multiple operating divisions within HHS, including National Institutes of Health ("NIH"), the Center for Disease
Control and Prevention ("CDC"), and Centers for Medicare and Medicaid Services ("CMS"). Many of these agencies are engaged to combat the COVID-19
pandemic in a variety of capacities and we have partnered with our customers to deliver solutions that allow the nation and its people to combat the pandemic
and sustain operations and services.
Our services include clinical trials, epidemiology studies, advancing disease prevention methods and health promotion to underserved and at-risk communities.
We deliver our services through development of strategic communication campaigns, research on emerging trends, health informatics analyses, and application
of best practices including mobile, social, and interactive media. We leverage evidence-based methods and web technology to drive health equity to our most
vulnerable populations through public engagement. Projects often involve highly specialized expertise and research methodologies.
The following table summarizes the revenues by market for the years ended September 30, 2021 and 2020, respectively:
(Amounts in thousands)
Defense/VA
Human Services and Solutions
Public Health/Life Sciences
Total Revenue
Year Ended
September 30,
2021
2020
Revenue
Percent of total
revenue
Revenue
Percent of total
revenue
$
$
141,435
37,260
67,399
246,094
57 % $
15 %
28 %
100 % $
101,656
40,962
66,567
209,185
49 %
20 %
31 %
100 %
4
Capabilities and certifications
We continue to invest in credentials that drive excellence in our support to current clients and create differentiation as we compete in this space. These
investments include development of secure IT platforms, sophisticated data analytic tools and techniques, and implementation of a lean six sigma environment.
We are actively pursuing additional credentials that will support our customer's needs in providing a secure cloud computing environment.
Our Infinibyte® Cloud solution has achieved FedRAMP In Process status and received agency authorization. It is currently under review by the General
Services Administration ("GSA") review for being listed on the public market place, further enhancing our ability to demonstrate our technical expertise and
offer our customers a secure cloud environment. We have invested in agile software development credentials for our technical staff, and have achieved
Capability Maturity Model Integration ("CMMI") level 3. We believe that these qualifications will further enhance our value propositions for current programs,
as well as future business we pursue. In addition, we continue to build upon our heritage of excellent customer satisfaction in support of key federal programs.
We have achieved Joint Commission certification for the safety and quality of our healthcare services delivery against national standards. These nationally
recognized best practices certifications demonstrate our commitment to continuous improvement and performance excellence that is critical to our organic
growth objectives.
Position and Distribution of Services and Solutions in Our Markets
The markets in which we compete and the manner in which we are positioned within them are characterized by a number of features including, but not limited
to:
•
•
•
•
specialized credentials and licenses held by a substantial component of our employee base;
primarily performing from the prime contractor position in contracts;
strong past performance record, as evidenced by our VA customer scoring the highest in overall satisfaction in the J.D. Power National Pharmacy
Study multiple times in recent years; and
targeted expansion in critical national priority markets with Federal budget stability to include public health and epidemiological support related to
COVID-19.
We operate primarily through prime contracts awarded by the government through competitive bidding processes. We have a diverse mix of contract vehicles
with various agencies of the United States Government, which supports our overall corporate growth strategy. Our revenue is distributed to time and materials
contracts (75%), cost reimbursable contracts (20%) and the remaining are firm fixed price contracts (5%). We also provide services under Indefinite Duration,
Indefinite Quantity ("IDIQ") and government wide acquisition contracts, such as GSA schedule contracts. The Company currently holds multiple GSA schedule
contracts, under which we provide services that constitute a significant percentage of our total revenue. These Federal contract schedules are renewed on a
recurring basis for multi-year periods.
Major Customers
A major customer is defined as a customer from whom we derive at least 10% of our revenues. The following table summarizes the revenues by customer for
the years ended September 30, 2021 and 2020, respectively:
(Amounts in thousands)
Department of Veterans Affairs
Department of Health and Human Services
Department of Defense
Customers with less than 10% share of total revenue
Total revenue
Year Ended
September 30,
2021
2020
Revenue
Percent of total
revenue
Revenue
Percent of total
revenue
45 % $
37 %
13 %
5 %
100 % $
100,204
95,026
1,303
12,652
209,185
48 %
45 %
1 %
6 %
100 %
$
$
110,078
91,543
30,930
13,543
246,094
5
Major Contracts
The revenue attributable to the VA customers was derived from 16 separate contracts for our performance of pharmacy and logistics services in support of the
VA’s consolidated mail outpatient pharmacy program. Nine contracts for pharmacy services, which represent approximately $62.8 million and $56.5 million of
revenues for the years ended September 30, 2021 and 2020, are currently operating under a bridge contract through October 2022.
As previously reported, a single renewal request for proposal (“RFP”) had been issued for the nine (9) pharmacy contracts that required the prime contractor be
a service-disabled veteran owned small business (“SDVOSB”), which would have precluded us from bidding on the RFP as a prime contractor. We had joined a
SDVOSB team as a subcontractor to respond to this RFP. However, the government has canceled the previously issued RFP for these contracts. The government
has neither indicated nor announced its future procurement strategy. Due to the time required to conduct a procurement process, we expect these contracts to be
further extended.
The remaining seven contracts for logistics services represent approximately $47.2 million and $43.7 million of revenues for the years ended September 30,
2021 and 2020. In April 2021, we were awarded a follow-on contract to provide medical logistics to the VA's CMOP program. The contract award was
protested and subsequently canceled during the third quarter of fiscal year 2021. The contract award was canceled in accordance with procurement requirements
to allow the government sufficient time to address administrative concerns raised in the protest about the procurement process. Once the government completes
this process, we expect to be awarded a new contract. In the interim, the existing contract has been extended through November 2022.
Our contract with HHS in support of the Head Start program generated $28.2 million and $32.4 million of revenue for the years ended September 30, 2021 and
2020, respectively. This contract has a period of performance through April 2025.
Backlog
Backlog represents total estimated contract value of predominantly multi-year government contracts and will vary depending upon the timing of new/renewal
contract awards. Backlog is based upon customer commitments that we believe to be firm over the remaining performance period of our contracts. The value of
multi-client, competitive Indefinite Delivery/Indefinite Quantity ("IDIQ") contract awards is included in backlog computation only when a task order is awarded
or if the contract is a single award IDIQ contract. While no assurances can be given that existing contracts will result in earned revenue in any future period, or
at all, our major customers have historically exercised their contractual renewal options. At September 30, 2021, our total backlog was approximately $651.5
million compared to $688.4 million as of September 30, 2020.
Backlog value is quantified from management's judgment and assumptions about the volume of services based on past volume trends and current planning
developed with customers. Our backlog may consist of both funded and unfunded amounts under existing contracts including option periods. At September 30,
2021, our funded backlog was approximately $191.0 million and our unfunded backlog was $460.5 million.
Competitive Landscape
Competitive solicitations and long business development cycles are characteristics of the government and defense industry in which we operate. For major
program competition, the business acquisition cycle typically ranges from 18 to 36 months. Companies may pursue work either as prime contractor or partner
with other companies in a subcontractor role. Those competing as prime contractors normally expend substantially more resources than those in subcontractor
roles. We partner and compete with several large and small-business companies in pursuit of acquiring new business.
®
We built Infinibyte Cloud as a platform-as-a-service cloud computing offering. It delivers a platform to U.S. government agencies, enabling them to develop,
run, and manage applications without the need to build and maintain the underlying infrastructure. Infinibyte Cloud provides the networks, servers, storage,
operating systems, middleware, databases, and other services for hosting government applications and data. Infinibyte Cloud is currently in process for
FedRAMP, the government’s rigorous security compliance framework which provides a standardized approach to security assessment, authorization, and
continuous monitoring for cloud service providers who host services used by the U.S. government, authorization and has received ready status. The solution is
currently available on the FedRAMP marketplace.
Our competitors include operating units within, among others: Booz Allen Hamilton Holding Corp., CACI International, Inc., ICF International, Inc., Leidos
Holdings, Inc., Mantech International Corp., MAXIMUS, Inc., UnitedHealth Group, Inc. operating under Optum, RTI International, and Westat, Inc.
6
®
We compete with these companies by leveraging our differentiating suite of tools and uniquely integrating people and processes resulting in highly competitive
proposals and a solid track record of past performance. We believe that our proprietary tools and processes, including e-PRAT and SPOT-m , along with our
Infinibyte cloud-based management system differentiate us from our competitors. We compete for awards through a full and open competition on a best-value
basis. We draw heavily from our consistently high-quality past performance ratings, proven and evolving technical differentiators, key personnel credentials and
growing market recognition to compete. We believe that our track record, knowledge and processes with respect to government contract bidding represent
significant competitive advantages. Further, we believe that the range and depth of educational experience and professional credentials and certifications held by
our employees allows us to deploy highly-qualified teams to implement solutions to address the needs of our customers. Our recent and future success in this
competitive landscape hinges on our ability to continue to uniquely integrate people, processes and technology tools to deliver best value solutions for our
targeted clients (both government and industry partners).
®
®
Additionally, the Federal government may elect to restrict certain procurements, including renewals of our current contracts, to bidders that qualify for certain
special statuses such as veteran owned, small, or small disadvantaged businesses. For those procurements, we would be limited to a subcontractor role.
Intellectual Property
Because our business involves providing services to government entities, our operations generally are not substantially dependent upon obtaining and/or
maintaining copyright or trademark protections, although our operations make use of such protections and benefit from them as discriminators in competition.
We claim copyright, trademark and other proprietary rights in a variety of intellectual property, including each of our proprietary computer software and data
products and the related documentation. We hold the registered trademarks, e-PRAT and SPOT-m , for our offerings that optimize resource allocation and
supply chain management processes in connection with our business process management services, as well as the registered trademark, Infinibyte , for our
cloud-based solution. We maintain a number of trade secrets that contribute to our success and competitive distinction and endeavor to accord such trade secrets
adequate protection to ensure their continuing availability.
®
®
®
Government Regulation
Our business is affected by numerous laws and regulations relating to the award, administration and performance of U.S. Government contracts. In addition,
many federal and state laws materially affect our operations. These laws relate to ethics, labor, tax, and employment matters. As any employer is, we are subject
to federal and state statutes and regulations governing their standards of business conduct with the government, including that government contracts typically
contain provisions permitting government clients to terminate contracts without cause with limited notice or compensation. The development of additional
statutes and regulations and interpretation of existing statutes and regulations with respect to our industry can be expected to evolve over time. Through its
corporate membership with the Professional Services Council and other affiliations, we monitor proposed and pending regulations from relevant congressional
committees and government agency policies that have potential impact upon our industry and our specific strategically targeted markets. As with any
commercial enterprise, we cannot predict with certainty the nature or direction of the development of Federal statutes and regulations that will affect its business
operations. See Risk Factors in Part I, Item 1A.
Human Capital Management and Employee Relations
As of September 30, 2021, we employed over 2,300 employees performing in over 30 locations throughout the U.S. and one location overseas. Management
believes that it has good relations with its employees. In October 2014, employees at our Chicago location approved the adoption of union representation for
non-management employees. Union representation has been certified for these employees and collective bargaining discussions are ongoing. Management does
not expect this agreement to materially impact results of operations.
We seek to attract and retain the best people by providing them with opportunities to grow, build skills, and be appreciated for their contributions as they work
to serve our clients. Our employees are critical to our success and are the reason we continue to execute at a high level. We believe our continued focus on
making employee engagement a top priority will help us provide high quality insights and information to our clients.
7
We are committed to the health, safety and wellness of our employees. We provide our employees and their families with flexible and convenient health and
wellness programs, including competitive benefits arrangement to address healthcare needs, including health insurance benefits, health savings and flexible
spending accounts, paid time off, family leave, and family care resources. In response to the COVID-19 pandemic, we implemented significant changes that we
determined were in the best interest of our employees, as well as the communities in which we operate, and which comply with government regulations. This
includes having our employees work from home when possible, implementing additional safety measures for employees continuing critical on-site work, and
supporting our employees to receive the COVID-19 vaccination within appropriate medical and religious bounds. In addition, we are monitoring potential
impacts and will implement new protocols, when needed, related to the vaccination requirements imposed by the Executive Order on Ensuring Adequate Safety
Protocols for Federal Contractors signed by President Biden on September 9, 2021.
We provide competitive compensation programs to help meet the needs of our employees. In addition to salaries, these programs include annual bonuses, stock
awards, and participation in a 401(k) Plan. We have used targeted equity-based grants with performance-based vesting conditions to facilitate retention of key
personnel. We also invest in talent development initiatives, to include industry-leading learning management, professional credentialing, and applicant tracking
systems. These will further enhance our highly qualified employee base and augment our efforts to infuse top talent into our operations through world-class
recruiting and talent management tools.
Corporate
Our principal executive offices are located at 3565 Piedmont Road NE, Building 3 Suite 700, Atlanta, Georgia 30305. Our telephone number is (770) 554-3545
and our website is www.dlhcorp.com. References herein to our website are provided purely as a convenience and do not constitute, and should not be viewed as,
incorporation by reference of the information contained on, or available through, the website.
Available Information
We file registration statements, periodic and current reports, proxy statements, and other materials with the Securities and Exchange Commission (SEC). You
may read and copy any materials we file with the SEC at the SEC's Public Reference Room at 100 F Street, NE, Room 1580, Washington, DC 20549. You may
obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains a website at www.sec.gov that
contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC, including our filings. We make
our public filings with the SEC, including our Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all exhibits and
amendments to these reports available free of charge on our website, http://www.dlhcorp.com, as soon as reasonably practicable after we file such material with
the SEC. We also make available on our website reports filed by our executive officers and directors on Forms 3, 4 and 5 regarding their ownership of our
securities. These materials are available in the "Investor Relations" portion of our website, under the link "SEC Filings." We also use our website to make
generally available important information about our company. Important information, including press releases, presentation and financial information regarding
our company, is routinely posted on and accessible on the Investor Relations subpage of our website, which is accessible by clicking on the tab labeled "Investor
Relations" on our website home page. Information contained on our website is not part of this Annual Report on Form 10-K or any other filings we make with
the SEC.
ITEM 1A. RISK FACTORS
As provided for under the Private Securities Litigation Reform Act of 1995 ("1995 Reform Act"), we wish to caution shareholders and investors that the
following important factors, among others discussed throughout this Annual Report on Form 10-K for the fiscal year ended September 30, 2021, have affected,
and in some cases could affect, our actual results of operations and cause our results to differ materially from those anticipated in forward looking statements
made herein. Our business, results of operations, cash flows and financial condition may be materially and adversely affected due to any of the following risks.
The risks described below are not the only ones we face. Additional risks we are not presently aware of or that we currently believe are immaterial may also
impair our business operations. The trading price of our common stock could decline due to any of these risks. In assessing these risks, you should also refer to
the other information contained or incorporated by reference in this Annual Report on Form 10-K, including our consolidated financial statements and related
notes.
8
Risks Relating to Our Business and the Industry in which we Compete
Our results of operations could in the future be materially adversely impacted by global, macroeconomic events, such as the coronavirus pandemic
(COVID-19), and the response to contain it.
The coronavirus (COVID-19) pandemic and the mitigation efforts to control its spread have created significant volatility, uncertainty and economic disruption.
The extent to which the coronavirus pandemic impacts our business, operations and financial results will depend on numerous evolving factors that we may not
be able to accurately predict, including: the duration and scope of the pandemic; governmental, business and individuals’ actions that have been and continue to
be taken in response to the pandemic, including our ability to fully perform on our contracts as a result of government actions or reduction in personnel due to
the federal vaccine mandate which requires all federal contractors to be vaccinated; the impact of the pandemic on economic activity and actions taken in
response; the effect on our clients and client demand for our services and solutions; our ability to sell and provide our services and solutions, including as a
result of travel restrictions and people working from home (as described below in the Management Discussion & Analysis, this has resulted in certain delays in
our provision of services and postponements of project work requiring travel) and any closures of our and our clients’ offices and facilities, particularly at our
pharmacy distribution centers. Furthermore, the significant increase in remote working of our employees may exacerbate certain risks to our business, including
an increased demand for information technology resources and the increased risk of malicious technology-related events, such as cyberattacks and phishing
attacks. Customers may also slow down decision making, delay planned work or seek to terminate existing agreements. Government agencies are our primary
customers and the long-term impact of increased government spending in response to COVID-19 remains uncertain. The duration and spread of the pandemic
still may cause reduced demand for certain services we provide, particularly if its results in a recessionary economic environment or the spending priorities of
the U.S. government shift in ways adverse to our business focus. Any of these events could materially adversely affect our business, financial condition, results
of operations and the market price of our common stock.
We depend on contracts with the Federal government for virtually all of our revenue and our business could be seriously harmed if the Federal government
decreased or ceased doing business with us.
At present, we derive 99% of our revenue from agencies of the Federal government, primarily as a prime contractor but also as a subcontractor to other Federal
prime contractors. In addition, substantially all accounts receivable, including unbilled accounts receivable, are from agencies of the U.S. Government as
of September 30, 2021 and 2020. We believe that the credit risk associated with our receivables is limited due to the creditworthiness of these customers. In
general, if we were suspended or debarred from contracting with the federal government or if the government otherwise ceased doing business with us or
significantly decreased the amount of business it does with us, our business, financial condition and operating results would be materially and adversely
affected.
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.
We are 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. There can be no assurance as to the actual amount of services that we will ultimately provide to VA and HHS under our current
contracts, or that we will be successful in recompete efforts. As described in greater detail above in "Item 1 - Business - Major Contracts", our contracts with the
VA for the provision of services to its CMOP operations are currently subject to renewal solicitations. We believe that our strong working relationships and
effective service delivery support ongoing performance for the terms of the contracts and recompete efforts as a prime or subcontractor. Our results of
operations, cash flows and financial condition would be materially adversely affected if we were unable to continue our relationship with either of these
customers, if we were to lose any of our material current contracts, or if the amount of services we provide to them is materially reduced.
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The U.S. government may prefer veteran-owned, minority-owned, small and small disadvantaged businesses; therefore, we may have fewer opportunities to
bid for or could lose a portion of our existing work to small businesses.
As a result of the Small Business Administration (SBA) set-aside program, the U.S. government may decide to restrict certain procurements only to bidders that
qualify as veteran owned, minority-owned, small, or small disadvantaged businesses. In such cases, we would not be eligible to perform as a prime contractor
on those programs and would be limited to work as a subcontractor on those programs. As previously reported, various agencies within the federal government
have policies that support small business goals, including the adoption of the “Rule of Two” by the VA, which provides that the agency shall award contracts by
restricting competition for the contract to service-disabled or other veteran owned businesses. To restrict competition pursuant to this rule, the contracting
officer must reasonably expect that at least two of these businesses, which are capable of delivering the services, will submit offers and that the award can be
made at a fair and reasonable price that offers the best value to the United States. The effect of these set-aside provisions may limit our ability to compete for
prime contractor positions on programs that we have targeted for growth and to maintain our prime contractor position as current contracts are subject to
renewal.
Loss of our GSA schedule contracts or other contracting vehicles could impair our ability to win new business and perform under existing contracts.
We currently hold multiple GSA schedule contracts, including a Federal supply schedule contract for professional and allied healthcare services and the logistics
worldwide services contract. If we were to lose one or more of these contracts or other contracting vehicles, we could lose a significant revenue source and our
operating results and financial condition could be materially and adversely affected.
Future legislative or government budgetary and spending changes could negatively impact our business.
U.S. Government programs are subject to annual congressional budget authorization and appropriation processes. For many programs, Congress appropriates
funds on a fiscal year basis even though the program performance period may extend over several years. Consequently, programs are often partially funded
initially and additional funds are committed only as Congress makes further appropriations. Further, congressional seats may change during election years, and
the balance of spending priorities may change along with them.
In recent years, we have seen frequent debates regarding the scope of funding of our customers, thereby leading to budgetary uncertainty for our Federal
customers. Changes in federal government budgetary priorities could directly affect our financial performance. A significant decline in government
expenditures, a shift of expenditures away from programs that we support or a change in federal government contracting policies could cause federal
government agencies to reduce their purchases under contracts, to exercise their right to terminate contracts at any time without penalty or not to exercise
options to renew contracts. In the event the budgets or budgetary priorities of the U.S. Government entities with which we do business are delayed, decreased or
underfunded, our consolidated revenues and results of operations could be materially and adversely affected.
We may experience disruption of existing programs, delays in contract awards, and other actions, including partial or complete contract terminations. VA
programs, which accounted for approximately 45% and 48% of Company revenue for the years ended September 30, 2021 and 2020, respectively, were exempt
from the spending caps established under Federal government sequestration targets enacted in 2013.
The government is currently operating under a continuing resolution (CR) which expires February 18, 2021. When a CR expires, unless appropriations bills
have been passed by Congress and signed by the President, or a new CR is passed and signed into law, the government must cease operations, or shutdown,
except in certain emergency situations or when the law authorizes continued activity. We continuously review our operations in an attempt to identify programs
potentially at risk from CRs so that we can consider appropriate contingency plans.
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The markets in which we operate are highly competitive, and many of the companies we compete against have substantial resources. Further, the U.S.
Government contract bid process is highly competitive, complex and sometimes lengthy, and is subject to protest and implementation delays.
The markets in which we operate are highly competitive. Further, many of our contracts and task orders with the Federal government are awarded through a
competitive bidding process, which is complex and sometimes lengthy. We expect that much of the opportunities we will seek in the foreseeable future will be
awarded through competitive bidding. Furthermore, budgetary pressures and developments in the procurement process have caused many government
customers to increasingly purchase goods and services through IDIQ contracts, GSA schedule contracts and other government-wide acquisition contracts. These
contracts, some of which are awarded to multiple contractors, have increased competition and pricing pressure, requiring that we make sustained post-award
efforts to realize revenue under each such contract. Many of our competitors are larger and have greater resources than we do, larger client bases and greater
brand recognition. Our competitors, individually or through relationships with third parties, may be able to provide clients with different or greater capabilities
or benefits than we can provide. If we are unsuccessful in competing with these other companies, our revenues and margins may materially decline.
Overall, the competitive bidding process presents a number of risks, including the following: (i) we expend substantial cost and managerial time and effort to
prepare bids and proposals for contracts that we may not win, and to defend those bids through any protest process; (ii) we may be unable to estimate accurately
the resources and cost structure that will be required to service any contract we win; and (iii) we may encounter expenses and delays if our competitors protest
or challenge awards of contracts to us in competitive bidding, and any such protest or challenge could result in the resubmission of bids on modified
specifications, or in the termination, reduction or modification of the awarded contract. If we are unable to win particular contracts, we may be prevented from
providing the services that are purchased under those contracts for a number of years. If we are unable to consistently win new contract awards over any
extended period, our business and prospects will be adversely affected and that could cause our actual results to differ materially and adversely from those
anticipated. In addition, upon the expiration of a contract, if the customer requires further services of the type provided by the contract, there is frequently a
competitive rebidding process. There can be no assurance that we will win any particular bid, or that we will be able to replace business lost upon expiration or
completion of a contract, and the termination or non-renewal of any of our significant contracts could cause our actual results to differ materially and adversely
from those anticipated.
If a bid is won and a contract awarded, there still is the possibility of a bid protest or other delays in implementation. Our business could be adversely affected
by delays caused by our competitors protesting major contract awards received by us, resulting in the delay of the initiation of work. It can take many months to
resolve protests by one or more of our competitors of contract awards we receive. The resulting delay in the startup and funding of the work under these
contracts may cause our actual results to differ materially and adversely from those anticipated, and there can be no assurance that such protest process or
implementation delays will not have a material adverse effect on our financial condition or results of operations in the future.
Our business may suffer if we or our employees are unable to obtain and maintain the necessary security clearances or other qualifications required to
perform services for our clients.
Many federal government contracts require us to have security clearances and employ personnel with specified levels of education, work experience and
security clearances. Depending on the level of clearance, security clearances can be difficult and time-consuming to obtain. If we or our employees lose or are
unable to obtain necessary security clearances, we may not be able to win new business and our existing clients could terminate their contracts with us or decide
not to renew them. To the extent we cannot obtain or maintain the required security clearances for our employees working on a particular contract, we may not
derive the revenue anticipated from the contract, which could cause our results to differ materially and adversely from those anticipated.
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Our business is regulated by complex federal procurement and contracting laws and regulations, and we are subject to periodic compliance reviews by
governmental agencies.
We must comply with complex laws and regulations relating to the formation, administration, and performance of federal government contracts, including the
Federal Acquisition Regulation, which, among other things, requires us to certify and disclose cost and pricing data and to divest work in the event of certain
organizational conflicts of interest. These laws and regulations create compliance risk and affect how we do business with our federal agency clients, and may
impose added costs on our business. The government may in the future reform its procurement practices or adopt new contracting rules and regulations,
including cost accounting standards, that could be costly to satisfy or that could impair our ability to obtain new contracts. Additionally, the government may
face restrictions from new legislation, regulations or government union pressures, on the nature and amount of services the government may obtain from private
contractors. Any reduction in the government’s use of private contractors to provide federal services could cause our actual results to differ materially and
adversely from those anticipated.
Our performance on our U.S. Government contracts and our compliance with applicable laws and regulations, including submission of invoices to our
customers, are subject to audit by the government. The scope of any such audits could span multiple fiscal years. These agencies review our performance on
contracts, pricing practices, cost structure and compliance with applicable laws, regulations and standards. They also evaluate the adequacy of internal controls
over our business systems, including our purchasing, accounting, estimating, earned value management, and government property systems. If a government
review or investigation uncovers illegal activities or activities not in compliance with a particular contract's terms or conditions, we may be subject to civil and
criminal penalties and administrative sanctions, including termination of contracts, forfeiture of profits, harm to our reputation, suspension of payments, fines,
and suspension or debarment from doing business with Federal government agencies. Any of these events could lead to a material reduction in our revenues,
cash flows and operating results. Further, as the reputation and relationships that we have established and currently maintain with government personnel and
agencies are important to our ability to maintain existing business and secure new business, damage to our reputation or relationships could have a material
adverse effect on our revenue and operating results.
Federal government contracts may be terminated at will and may contain other provisions that may be unfavorable to us.
Many of the U.S. Government programs in which we participate as a contractor or subcontractor may extend for several years. The U.S. Government may
modify, curtail or terminate its contracts and subcontracts for convenience and to the extent that a contract award contemplates one or more option years, the
Government may decline to exercise such option periods. Accordingly, the maximum contract value specified under a government contract or task order
awarded to us is not necessarily indicative of the revenue that we will realize under that contract. Due to our dependence on these programs, the modification,
curtailment or termination of our major programs or contracts may have a material adverse effect on our results of operations and financial condition. In
addition, federal government contracts contain provisions and are subject to laws and regulations that give the government rights and remedies, some of which
are not typically found in commercial contracts, including allowing the government to (i) cancel multi-year contracts and related orders if funds for contract
performance for an subsequent year become unavailable; (ii) claim rights in systems and software developed by us; (iii) suspend or debar us from doing
business with the federal government or with a governmental agency; and (iv) impose fines and penalties and subject us to criminal prosecution. If the
government terminates a contract for convenience, we may recover only our incurred or committed costs, settlement expenses and profit on work completed
prior to the termination. If the government terminates a contract for default, we may be unable to recover even those amounts and instead may be liable for
excess costs incurred by the government in procuring undelivered items and services from another source. Depending on the value of a contract, such
termination could cause our actual results to differ materially and adversely from those anticipated.
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We may not receive the full amounts authorized under the contracts included in our backlog, which could reduce our revenue in future periods below the
levels anticipated.
Our total backlog consists of funded and unfunded amounts and may include estimates and assumptions about matters that cannot be determined with certainty
at the time the backlog is calculated. Funded backlog represents contract value that has been appropriated by a customer and is expected to be recognized into
revenue. Unfunded backlog represents the sum of the unappropriated contract value on executed contracts and unexercised option years that is expected to be
recognized into revenue. The maximum contract value specified under a government contract or task order awarded to us is not necessarily indicative of the
revenue that we will realize under that contract. For example, we generate revenue from IDIQ contracts, which do not require the government to purchase a pre-
determined amount of goods or services under the contract. Action by the government to obtain support from other contractors or failure of the government to
order the quantity of work anticipated could cause our actual results to differ materially and adversely from those anticipated. Additionally, many of our multi-
year contracts may only be partially-funded at any point during their term with the unfunded portion subject to future appropriations by Congress. As a result of
a lack of appropriated funds or efforts to reduce federal government spending, our backlog may not result in revenue. Accordingly, our backlog may not result
in actual revenue in any particular period, or at all, which could cause our actual results to differ materially and adversely from those anticipated.
Our business growth and profitable operations require that we develop and maintain strong relationships with other contractors with whom we partner or
otherwise depend on.
We may enter into future teaming ventures with other companies, which carry risk in regards to maintaining strong, trusted working relationships in order to
successfully fulfill contract obligations. Teaming arrangements may include being engaged as a subcontractor to a prime contractor, engaging a subcontractor on
a contract for which we are the prime contractor, or entering into a joint venture with another company. We may lack control over fulfillment of such contracts,
and poor performance on the contract could impact our customer relationship, even if we perform as required. We expect to depend on relationships with other
contractors for a portion of our revenue in the foreseeable future. Our revenue and operating results could differ materially and adversely from those anticipated
if any such prime contractor or teammate chooses to offer directly to the client services of the type that we provide or if they team with other companies to
provide those services.
Restrictions on or other changes to the federal government’s use of service contracts may harm our operating results.
We derive virtually all of our revenue from service contracts with the federal government. The government may face restrictions from new legislation,
regulations or government union pressures, on the nature and amount of services the government may obtain from private contractors (i.e., insourcing versus
outsourcing). Any reduction in the government’s use of private contractors to provide federal services could cause our actual results to differ materially and
adversely from those anticipated.
Our earnings and margins may vary based on the mix of our contracts and programs.
At September 30, 2021, our backlog includes cost reimbursable, time-and-materials, and fixed-price contracts. Our earnings and margins may vary depending
on the relative mix of contract types, the costs incurred in their performance, the achievement of other performance objectives and the stage of performance at
which the right to receive fees, particularly under incentive and award fee contracts, is finally determined.
Our employees, or those of our teaming partners, may engage in misconduct or other improper activities which could harm our business.
We are exposed to risk from misconduct or fraud by our employees, or employees of our teaming partners. Such violations could include intentional disregard
for Federal government procurement regulations, engaging in unauthorized activities, seeking reimbursement for improper expenses, or falsifying time records.
Employee misconduct could also involve the improper use of our clients' sensitive or classified information and result in a serious harm to our reputation. While
we have appropriate policies in effect to deter illegal activities and promote proper conduct, it is not always possible to deter employee misconduct. Precautions
to prevent and detect this activity may not be effective in controlling such risks or losses. As a result of employee misconduct, we could face fines and penalties,
loss of security clearance and suspension or debarment from contracting with the federal government, which could materially and adversely affect our business,
results of operations, financial condition, cash flows, and liquidity.
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If we are unable to attract qualified personnel, our business may be negatively affected.
We rely heavily on our ability to attract and retain qualified professionals and other personnel who possess the skills, experience and licenses necessary in order
to provide our solutions for our assignments. Our business is materially dependent upon the continued availability of such qualified personnel. Our inability to
secure qualified personnel would have a material adverse effect on our business. The cost of attracting qualified personnel and providing them with attractive
benefits packages may be higher than we anticipate and, as a result, if we are unable to pass these costs on to our clients, our profitability could decline.
Moreover, if we are unable to attract and retain qualified personnel, the quality of our services may decline and, as a result, we could lose clients.
If our subcontractors do not perform their contractual obligations, our performance as a prime contractor and our ability to obtain future business could be
materially and adversely impacted and our actual results could differ materially and adversely from those anticipated.
Our performance of government contracts may involve the issuance of subcontracts to other companies upon which we rely to perform all or a portion of the
work we are obligated to deliver to our customers. Unsatisfactory performance by one or more of our subcontractors to deliver on a timely basis the agreed-
upon supplies, perform the agreed-upon services, or appropriately manage their vendors may materially and adversely impact our ability to perform our
obligations as a prime contractor. A subcontractor’s performance deficiency could result in the government terminating our contract for default. A default
termination could expose us to liability for excess costs of reprocurement by the government and have a material adverse effect on our ability to compete for
future contracts and task orders. Depending upon the level of problem experienced, such problems with subcontractors could cause our actual results to differ
materially and adversely from those anticipated.
Changes to U.S. tax laws may adversely affect our financial condition or results of operations and create the risk that we may need to adjust our accounting
for these changes.
The accounting treatment of these tax law changes is complex, and some of the changes may affect both current and future periods. Consistent with guidance
from the SEC, our consolidated financial statements reflect our estimates of the tax effects of the current tax laws and regulation.
Risks Relating to Our Information Technology Systems and Intellectual Property
We are highly dependent on the proper functioning of our information systems.
We are highly dependent on the proper functioning of our information systems in operating our business. Critical information systems used in daily operations
match employee resources and client assignments and track regulatory credentialing. They also perform payroll, billing and accounts receivable functions.
While we have multiple back up plans for these types of contingencies, our information systems are vulnerable to fire, storm, flood, power loss,
telecommunication outages, physical break-ins, cyber-attack, ransomware, and similar events. If our information systems become inoperable, or are otherwise
unavailable, these functions would have to be accomplished manually, which in turn could impact our financial viability, due to the increased cost associated
with performing these functions manually.
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Our systems and networks may be subject to cybersecurity breaches.
Many of our operations rely heavily upon technology systems and networks to receive, input, maintain and communicate participant and client data pertaining
to the programs we manage. Any systems failures, whether caused by us, a third-party service provider, or unauthorized intruders and hackers, or due to
situations such as computer viruses, natural disasters, or power shortages, could cause loss of data or interruptions or delays in our business or that of our
customers. If our systems or networks were compromised by a security breach, we could be adversely affected by losing confidential or protected information
of program participants and clients, and we could suffer reputational damage and a loss of confidence from prospective and existing clients. Similarly, if our
internal networks were compromised, we could be adversely affected by the loss of proprietary, trade secret or confidential technical and financial data. The
loss, theft or improper disclosure of that information could subject the Company to sanctions under the relevant laws, lawsuits from affected individuals,
negative press articles and a loss of confidence from our government clients, all of which could adversely affect our existing business, future opportunities and
financial condition. Further, our property and cyber insurance may be inadequate to compensate us for all losses that may occur as a result of any system or
operational failure or disruption and, as a result, our actual results could differ materially and adversely from those anticipated. In addition, in order to provide
services to our customers, we often depend upon or use customer systems that are supported by the customer or third parties. Any security breach or system
failure in such systems could result in an interruption of our customer’s operations which could cause us to experience significant delays under a contract, and a
material adverse effect on our results of operations.
Additionally, a number of projects require us to receive, maintain and transmit protected health information or other types of confidential personal information.
That information may be regulated by the Health Insurance Portability and Accountability Act (HIPAA), the Health Information Technology for Economic and
Clinical Health Act of 2009, Internal Revenue Service regulations and other laws. The loss, theft or improper disclosure of that information could subject us to
sanctions under these laws, breach of contract claims, lawsuits from affected individuals, negative press articles and a loss of confidence from our government
clients, all of which could adversely affect our existing business, future opportunities and financial condition.
Failure to adequately protect, maintain, or enforce our rights in our intellectual property may adversely limit our competitive position.
We rely upon a combination of nondisclosure agreements and other contractual arrangements, as well as copyright, trademark, and trade secret laws to protect
our proprietary information. We also enter into proprietary information and intellectual property agreements with employees, which require them to disclose any
inventions created during employment, to convey such rights to inventions to us, and to restrict any disclosure of proprietary information. Trade secrets are
generally difficult to protect. Although our employees are subject to confidentiality obligations, this protection may be inadequate to deter or prevent
misappropriation of our confidential information and/or the infringement of our trademarks and copyrights. Further, we may be unable to detect unauthorized
use of our intellectual property or otherwise take appropriate steps to enforce our rights. Failure to adequately protect, maintain, or enforce our intellectual
property rights may adversely limit our competitive position.
We may face from time to time, allegations that we or a supplier or customer have violated the intellectual property rights of third parties. If, with respect to any
claim against us for violation of third-party intellectual property rights, we are unable to prevail in the litigation or retain or obtain sufficient rights or develop
non-infringing intellectual property or otherwise alter our business practices on a timely or cost-efficient basis, our business and competitive position may be
adversely affected.
Any infringement, misappropriation or related claims, whether or not meritorious, are time consuming, divert technical and management personnel, and are
costly to resolve. As a result of any such dispute, we may have to develop non-infringing intellectual property, pay damages, enter into royalty or licensing
agreements, cease utilizing certain products or services, or take other actions to resolve the claims. These actions, if required, may be costly or unavailable on
terms acceptable to us.
Risks Relating to Acquisitions
We may have difficulty identifying and executing acquisitions on favorable terms and therefore may grow at slower than anticipated rates.
One of our potential paths to growth is to selectively pursue acquisitions. Through acquisitions, we may be able to expand our base of customers, increase the
range of solutions we offer to our customers and deepen our penetration of existing markets and customers. We may not identify and execute suitable
acquisitions. To the extent that management is involved in identifying acquisition opportunities or integrating new acquisitions into our business, our
management may be diverted from operating our core business. Without acquisitions, we may not grow as rapidly otherwise, which could cause our actual
results to differ materially and adversely from those anticipated.
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We may encounter other risks in regard to making acquisitions, including:
•
•
•
increased competition for acquisitions may increase the costs of our acquisitions;
non-discovery or non-disclosure of material liabilities during the due diligence process, including omissions by prior owners of any acquired businesses or
their employees in complying with applicable laws or regulations, or their inability to fulfill their contractual obligations to the federal government or other
customers; and
acquisition financing may not be available on reasonable terms or at all.
Any of these risks could cause our actual results to differ materially and adversely from those anticipated.
We may have difficulty integrating the operations of companies we acquire, which could cause actual results to differ materially and adversely from those
anticipated.
The success of a potential future acquisition strategy depends upon our ability to successfully integrate the businesses. We may have difficulty integrating a
business that we may acquire in the future. The integration of a business into our operations may result in unforeseen operating difficulties, absorb significant
management attention and require significant financial resources that would otherwise be available for the ongoing development of our business. These
integration difficulties include the integration of personnel with disparate business backgrounds, the transition to new information systems, coordination of
geographically dispersed organizations, loss of key employees of acquired companies, and reconciliation of different corporate cultures. For these or other
reasons, we may be unable to retain key customers of acquired companies. Moreover, any acquired business may not generate the revenue or net income we
expected or produce the efficiencies or cost-savings we anticipated. Any of these outcomes could cause our actual results to differ materially and adversely from
those anticipated.
We have a substantial amount of goodwill on our balance sheet. Future write-offs of goodwill may have the effect of decreasing our earnings or increasing
our losses.
We have obtained growth through acquisitions of other companies and businesses. Under existing accounting standards, we are required to periodically review
goodwill for possible impairment. In the event that we are required to write down the value of any assets under these pronouncements, it may materially and
adversely affect our earnings. See the more detailed discussion appearing as part of our Management's Discussion and Analysis of Financial Condition and
Results of Operations in Item 7 herein.
Risks Relating to Our Outstanding Indebtedness
We have incurred debt in connection with acquisitions and we must make the scheduled principal and interest payments on the facility and maintain
compliance with other debt covenants.
On September 30, 2020, we entered into an amended and restated credit agreement with First National Bank of Pennsylvania and certain other lenders (the
“Credit Agreement”). The Credit Agreement requires compliance with a number of financial covenants and contains restrictions on our ability to engage in
certain transactions, including limitations on: granting liens; incurring other indebtedness; disposing assets; making investments in other entities; and
completing other mergers and consolidations. Also, the Credit Agreement requires us to comply with certain financial covenants including a minimum fixed
charge coverage ratio and a maximum total leverage ratio. In addition, the Credit Agreement also requires prepayments of a percentage of excess cash flow.
Accordingly, a portion of our cash flow from operations was dedicated to the repayment of our indebtedness and we expect future cash flow to be used to
reduce our indebtedness. The loan agreement provides for customary events of default, including, among other things, a payment default, covenant default or
defaults on other indebtedness or judgments in excess of a stipulated amount, change of control events, suspension or disbarment from contracting with the
federal government and the material inaccuracy of our representations and warranties. If we are unable to make the scheduled principal and interest payments
on the Credit Agreement or maintain compliance with other debt covenants, we may be in default under the loan agreement, which if not waived, could cause
our debt to become immediately due and payable and enable the lenders to enforce their rights under the Credit Agreement. Such an event would likely have a
material adverse effect on our business, financial condition and results of operations.
In addition, a transition away from the London Interbank Offering Rate (“LIBOR”) as a benchmark for establishing the applicable interest rate may affect the
cost of servicing our debt under the Credit Agreement. The indebtedness outstanding under the Credit Agreement initially incurs interest based on LIBOR. In
March 2021, the Financial Conduct Authority of the
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United Kingdom has announced that LIBOR will no longer be provided for the one-week and two-month U.S. dollar settings after December 31, 2021 and that
publication of the U.S. dollar settings for the overnight, one-month, three-month, six-month and 12-month LIBOR rates will cease after June 30, 2023.
Although our Credit Agreement provides for an alternative base rate, the consequences of the phase out of LIBOR cannot be entirely predicted at this time. For
example, if any alternative base rate or means of calculating interest with respect to our outstanding indebtedness leads to an increase in the interest rates
charged, it could result in an increase in the cost of such indebtedness or otherwise have a material adverse impact on our business, financial condition and
results of operations.
Risks Relating to Our Corporate Structure and Capital Stock
Our stock price may be volatile and your investment in our common stock may suffer a decline in value.
The price of our common stock could be subject to fluctuations and may decline in the future due to risks defined herein, or due to factors beyond our control,
including changes in market conditions such as increased interest rates, a recession, or a change in Federal spending priorities. Stock markets in general have
experienced volatility that has often been unrelated to the operating performance of a particular company. These broad market fluctuations could adversely
affect the trading price of our common stock.
Since we have not paid dividends on our common stock, you cannot expect dividend income from an investment in our common stock.
We have not paid any dividends on our common stock since our inception and do not contemplate or anticipate paying any dividends on our common stock in
the foreseeable future. Current lenders do and future potential lenders may prohibit us from paying dividends without prior consent. Therefore, holders of our
common stock may not receive any dividends on their investment in us. Earnings, if any, may be retained and used to finance the development and expansion of
our business.
We may issue preferred stock with rights senior to our common stock, which may adversely impact the voting and other rights of the holders of our common
stock.
Our certificate of incorporation authorizes the issuance of "blank check" preferred stock with such designations, rights and preferences as may be determined
from time to time by our board of directors up to an aggregate of 5,000,000 shares of preferred stock. Accordingly, our board of directors is empowered, without
stockholder approval, to issue preferred stock with dividend, liquidation, conversion, voting or other rights, which would adversely affect the voting power or
other rights of the holders of our common stock. In the event of issuance, the preferred stock could be utilized, under certain circumstances, as a method of
discouraging, delaying or preventing a change in control of our Company, which could have the effect of discouraging bids for our Company and thereby
prevent stockholders from receiving the maximum value for their shares. Although we have no present intention to issue any shares of our preferred stock, in
order to discourage or delay a change of control of our Company, we may do so in the future. In addition, we may determine to issue preferred stock in
connection with capital raising efforts and the terms of the stock so issued could have special voting rights or rights related to the composition of our Board.
The exercise of our outstanding common stock options and warrants may depress our stock price and dilute your ownership of the Company.
To the extent that options and warrants are exercised or the restricted stock units vest, dilution to our shareholders will occur. We cannot foresee the impact of
any potential sales of our common shares on the market, but it is possible that if a significant percentage of such available shares were attempted to be sold
within a short period of time, the market for our shares would be adversely affected. It is also unclear whether or not the market for our common stock could
absorb a large number of attempted sales in a short period of time. Moreover, the terms upon which we will be able to obtain additional equity capital may be
adversely affected, since the holders of these securities can be expected to exercise them at a time when we would, in all likelihood, be able to obtain any
needed capital on terms more favorable to us than the exercise terms provided by those securities. To the extent that these securities are exercised, dilution to
our shareholders will occur. Moreover, the terms upon which we will be able to obtain additional equity capital may be adversely affected, since the holders of
these securities can be expected to exercise them at a time when we would, in all likelihood, be able to obtain any needed capital on terms more favorable to us
than the exercise terms provided by those securities.
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Anti-takeover provisions in our Articles of Incorporation make a change in control of our Company more difficult.
The provisions of our Articles of Incorporation and the New Jersey Business Corporation Act, together or separately, could discourage potential acquisition
proposals, delay or prevent a change in control and limit the price that certain investors might be willing to pay in the future for our common stock. Among
other things, these provisions:
•
•
require certain supermajority votes; and
establish certain advance notice procedures for nomination of candidates for election as directors and for shareholders' proposals to be considered at
shareholders' meetings.
In addition, the New Jersey Business Corporation Act contains provisions that, under certain conditions, prohibit business combinations with 10% shareholders
and any New Jersey corporation for a period of five years from the time of acquisition of shares by the 10% shareholder. The New Jersey Business Corporation
Act also contains provisions that restrict certain business combinations and other transactions between a New Jersey corporation and 10% shareholders.
Our executive officers, directors and significant stockholders will be able to influence matters requiring stockholder approval.
As of September 30, 2021, our executive officers, directors and largest shareholder (Wynnefield Capital, Inc. and its affiliates) own approximately 44% of our
outstanding common stock. Within this amount, Wynnefield Capital, Inc. and its affiliates own approximately 31% of our outstanding common stock. This
concentration of ownership may have the effect of delaying, preventing or deterring a change in control of the Company, could deprive our stockholders of an
opportunity to receive a premium for their common stock as part of a sale or merger of our company and may negatively affect the market price of our common
stock. These transactions might include proxy contests, tender offers, mergers or other purchases of common stock that could give our stockholders the
opportunity to realize a premium over the then-prevailing market price for shares of our common stock.
In addition, persons associated with Wynnefield Capital, Inc. currently serve on our Board of Directors. As a result of this share ownership and relationships on
our Board of Directors, our largest stockholder will be able to influence all affairs and actions of our company, including matters requiring stockholder approval
such as the election of directors and approval of significant corporate transactions. The interests of our principal stockholders may differ from the interests of
the other stockholders.
General Business Risks
We may experience fluctuations in our revenues and operating results from period to period.
Our revenue and operating results may fluctuate significantly and unpredictably in the future. We have expended, and will continue to expend, substantial
resources to enhance our health services offerings and expansion into the Federal health market. We may incur growth expenses before new business revenue is
realized, thus showing lower profitability in a particular period or consecutive periods. Other factors which may cause our cash flows and results of operations
to vary from quarter to quarter include: the terms and progress of contracts; expenses related to certain contracts which may be incurred in periods prior to
revenue being recognized; the commencement, completion or termination of contracts during any particular quarter; the timing and terms of award contracts;
and government budgetary delays or shortfalls. We may be unable to achieve desired levels of revenue growth due to circumstances that are beyond our control,
as already expressed regarding competition, government budgets, and the procurement process in general. In particular, if the federal government does not
adopt, or delays adoption of, a budget for each fiscal year beginning on October 1, or fails to pass a continuing resolution, federal agencies may be forced to
suspend our contracts and delay the award of new and follow-on contracts and orders due to a lack of funding. Also, some aspects of this work can be seasonal
with regard to resources and funding and it is difficult to predict the timing of when those resources will be expended. Although we continue to manage our
operating costs and expenses, there is no guarantee that we will significantly increase future revenue and profit in any particular future period. Revenue levels
achieved from our customers, the mix of solutions that we offer and our performance on future contracts will affect our financial results. Further, changes in the
volume of activity and the number of contracts commenced, completed or terminated during any quarter may cause significant variations in our cash flows and
results of operations. Therefore, period-to-period comparisons of our operating results may not be a good indication of our future performance.
18
Our profits and revenues could suffer if we are involved in legal proceedings, investigations, and disputes.
We are exposed to legal proceedings, investigations and disputes. In addition, in the ordinary course of our business we may become involved in legal disputes
regarding personal injury or employee disputes. While we provide for these types of incidents through commercial third-party insurance carriers, we often
defray these types of cost through higher deductibles. Any unfavorable legal ruling against us could result in substantial monetary damages by losing our
deductible portion of carried insurance. We maintain insurance coverage as part of our overall legal and risk management strategy to lower our potential
liabilities. If we sustain liabilities that exceed our insurance coverage or for which we are not insured, it could have a material adverse impact on our results of
operations, cash flows and financial condition, including our profits, revenues and liquidity.
We are dependent upon certain of our management personnel and do not maintain "key personnel" life insurance on our executive officers.
Our success to date has resulted in part from the significant contributions of our executive officers. Our executive officers are expected to continue to make
important contributions to our success. As of September 30, 2021, certain of our officers are under employment contracts. However, we do not maintain "key
personnel" life insurance on any of our executive officers. Loss for any reason of the services of our key personnel could materially affect our operations.
We may not be fully covered by the insurance we procure and our business could be adversely impacted if we were not able to renew all of our insurance
plans.
Although we carry multiple lines of liability insurance (including coverage for medical malpractice and workers' compensation), they may not be sufficient to
cover the total cost of any judgments, settlements or costs relating to any present or future claims, suits or complaints. If we are unable to secure renewal of our
insurance contracts or the renewal of such contracts with favorable rates and with competitive benefits, our business could be adversely affected. In addition,
sufficient insurance may not be available to us in the future on satisfactory terms or at all. Further, the fact that the majority of our employees are located at
customer locations increases our potential liability for negligence and professional malpractice and such liabilities may not become immediately apparent. Any
increase in our costs of insurance will impact our profitability to the extent that we cannot offset these increases into our costs of services. If the insurance we
carry is not sufficient to cover any judgments, settlements or costs relating to any present or future claims, suits or complaints, our business, financial condition,
results of operations and liquidity could be materially adversely affected.
Our financial condition may be affected by increases in employee healthcare claims and insurance premiums, and workers' compensation claims and
insurance rates.
Our current workers' compensation and medical plans are partially self-funded insurance programs. The Company currently pays base premiums plus actual
losses incurred, not to exceed certain individual and aggregate stop-loss limits. In addition, health insurance premiums, and workers' compensation rates for the
Company are in large part determined by our claims experience. These categories of expenditure comprise a significant portion of our direct costs. If we
experience a large increase in claim activity, our direct expenditures, health insurance premiums, unemployment taxes or workers' compensation rates may
increase. Although we employ internal and external risk management procedures in an attempt to manage our claims incidence and estimate claims expenses
and structure our benefit contracts to provide as much cost stability as reasonably possible given the self-funded nature of our plans, we may not be able to
prevent increases in claim activity, accurately estimate our claims expenses or pass the cost of such increases on to our clients. Since our ability to incorporate
such increases into our fees to our clients is constrained by contractual arrangements with our clients, a delay could occur before such increases could be
reflected in our fees, which may reduce our profit margin. As a result, such increases could have a material adverse effect on our financial condition, results of
operations and liquidity.
We may be subject to fines, penalties and other sanctions if we do not comply with laws governing our business.
Our business lines operate within a variety of complex regulatory schemes, including but not limited to the FAR, Federal Cost Accounting Standards, the Truth
in Negotiations Act, as well as the regulations governing accounting standards. If a government audit finds improper or illegal activities by us or we otherwise
determine that these activities have occurred, we may be subject to civil and criminal penalties and administrative sanctions, including termination of contracts,
forfeiture of profits, suspension of payments, fines and suspension or disqualification from doing business with the government. Any adverse determination
could adversely impact our ability to bid in response to RFPs in one or more jurisdictions. Further, as a government contractor subject to the types of regulatory
schemes described above, we are subject to an increased risk of investigations, criminal prosecution, civil fraud, whistleblower lawsuits and other legal actions
and liabilities to which private
19
sector companies are not, the result of which could have a material adverse effect on our operating results, cash flows and financial condition.
We are exposed to increased costs and risks associated with complying with increasing and new regulation of corporate governance and disclosure
standards.
Since the implementation of the Sarbanes-Oxley Act of 2002, we spend a significant amount of management's time and resources (both internal and external) to
comply with changing laws, regulations and standards relating to corporate governance and public disclosures. This compliance requires management's annual
review and evaluation of our internal control systems. This process has caused us to engage outside advisory services and has resulted in additional accounting
and legal expenses. We may encounter problems or delays in completing these reviews and evaluation and the implementation of improvements. If we are not
able to timely comply with the requirements set forth in the Sarbanes-Oxley Act of 2002, we might be subject to sanctions or investigation by regulatory
authorities. Any such action could materially adversely affect our business and our stock price.
ITEM 1B. UNRESOLVED STAFF COMMENTS
There are no unresolved staff comments.
ITEM 2. PROPERTIES
We do not own any real estate or other properties. As of September 30, 2021, we operate five locations in the United States and one location in Kampala,
Uganda; occupying a total of approximately 118 thousand square feet. The Company's corporate headquarters is located at 3565 Piedmont Road NE, Building 3
Suite 700, Atlanta, Georgia 30305, we presently maintain a National Capital Region office in Silver Spring, Maryland. All of our offices are in reasonably
modern and well-maintained buildings and we believe that our facilities are adequate for present operations and the foreseeable future. Our leases expire
between 2022 and 2031.
For the fiscal year ended September 30, 2021, the Company's total lease expense was approximately $3.5 million. See Note 6. Leases in the Consolidated
Financial Statements contained in the Annual Report on Form 10-K for additional information regarding our lease commitments.
ITEM 3. LEGAL PROCEEDINGS
As a commercial enterprise and employer, the Company is subject to various claims and legal actions in the ordinary course of business. These matters can
include professional liability, employment-relations issues, workers’ compensation, tax, payroll and employee-related matters, other commercial disputes
arising in the course of its business, and inquiries and investigations by governmental agencies regarding our employment practices or other matters. The
Company is not aware of any pending or threatened litigation that it believes is reasonably likely to have a material adverse effect on its results of operations,
financial position or cash flows.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
20
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES
Principal Market
Our common stock is currently traded on The Nasdaq Capital Market under the symbol "DLHC."
Dividends
The Company has not declared or paid any cash dividends on its common stock since inception and has no present intention of paying any cash dividends on its
common stock in the foreseeable future.
Approximate Number of Equity Security Holders
As of September 30, 2021, there were 12,714,269 shares of common stock outstanding held of record by approximately 93 persons. The number of stockholders
of record is not representative of the number of beneficial stockholders due to the fact that many shares are held by depositories, brokers, or nominees. As of
September 30, 2021, the Company estimates that there are approximately 1,300 beneficial owners of its common stock.
Sales of Unregistered Securities
During the period covered by this report, the Company did not issue any securities that were not registered under the Securities Act of 1933, as amended, except
as has been reported in previous filings with the SEC or as set forth elsewhere herein.
Registrant Repurchases of Securities
In August 2021, in connection with exercise of employee stock options, a holder of options surrendered to the company a total of 6,314 shares of our common
stock already held by him in partial consideration of the payment of the exercise price of such options. Such event is reflected on the table below.
Period
July 2021
August 2021
September 2021
Total
Total Number of Shares
Purchased
Average Price Paid Per
Share
— $
6,314
—
6,314
—
10.75
—
10.75
Total Number of Shares
Purchased As Part of
Publicly Announced
Programs
($ in thousands)
Dollar Value of Shares
that May Yet Be
Purchased Under the
Plan or Program
— $
—
—
— $
—
—
—
—
Securities Authorized for Issuance under Equity Compensation Plans
The Company presently utilizes one shareholder-approved equity compensation plan under which it makes equity compensation awards available to officers,
directors, employees and consultants. The table set forth below discloses outstanding and available awards under our equity compensation plans as of
September 30, 2021. All grants of equity securities made to executive officers and directors are presently made under the 2016 Omnibus Equity Incentive Plan
(the “2016 Plan”). Prior to the adoption of the 2016 Plan, awards of equity securities were made under the 2006 Long Term Incentive Plan.
21
Plan Category
Equity Compensation Plans Approved by Security Holders:
Employee stock options
Equity Compensation Plan Information
(a)
Number of Securities
to be issued
upon exercise of
outstanding options,
warrants and rights
(b)
Weighted Average
exercise price of
outstanding options,
warrants and rights
(or fair value at
date of grant)
(c)
Number of securities
remaining available for
future issuances under
equity compensation
plans (excluding securities
reflected in column (a))
2,373,500 $
7.77
1,730,850
ITEM 6. SELECTED FINANCIAL DATA
We are a "smaller reporting company" as defined by Regulation S-K and as such, are not required to provide the information contained in this item pursuant to
Regulation S-K.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward Looking and Cautionary Statements
You should read the following discussion in conjunction with the Consolidated Financial Statements and the notes to those statements included elsewhere in this
Annual Report on Form 10-K for the year ended September 30, 2021. This discussion contains certain statements that are forward-looking within the meaning
of the Private Securities Litigation Reform Act of 1995. Certain statements contained in this Management’s Discussion and Analysis are forward-looking
statements that involve risks and uncertainties. In addition, any statements that refer to expectations, projections or other characterizations of future events or
circumstances are forward-looking statements. The forward-looking statements are not historical facts, but rather are based on current expectations, estimates,
assumptions and projections about our industry and business. Our actual results could differ materially from the results contemplated by these forward-looking
statements.
Business Overview:
We are a provider of technology-enabled business process outsourcing and program management solutions, and public health research and analytics; primarily
focused to improve and better deploy large-scale federal health and human service initiatives. 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").
In recent years we have successfully completed acquisitions to increase future organic growth, diversify our customer base, and to expand into adjacent markets.
On June 7, 2019 we acquired Social & Scientific Systems, Inc. ("S3") and on September 30, 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;
• Human Services and Solutions;
• Public Health and Life Sciences.
22
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.
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. Our primary focus within the defense agency markets
include military service members' and veterans' requirements for telehealth services, behavioral healthcare, medication therapy management, process
management, clinical systems support, and healthcare delivery. Our primary focus within the civilian agency markets includes healthcare and social programs
delivery and readiness. These include compliance monitoring on large scale programs, technology-enabled program management, consulting, and digital
communications solutions ensuring that education, health, and social standards are being achieved within underserved and at-risk populations. 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.
Federal budget outlook for fiscal year 2022:
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.
While Congress has not completed the final appropriation bills for the government’s 2022 fiscal year, the Company continues to believe that its key programs
benefit from bipartisan support and does not expect a material impact on its current business base from budget negotiations. If the appropriations bills are not
timely enacted, government agencies operate under a continuing resolution ("CR"), which may negatively impact our business due to delays in new program
starts, delays in contract award decisions, and other factors. On December 2, 2021, Congress passed and, on December 3, 2021, the President signed, a CR
providing funds to the federal government through February 18, 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. 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.
23
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. 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.
Industry consolidation among federal government contractors:
There has been active consolidation and a strong increase in merger and acquisition activity among federal government contractors over the past few years that
we expect to continue, fueled by public companies leveraging strong balance sheets. Companies often look to acquisitions that augment core capabilities,
contracts, customers, market differentiators, stability, cost synergies, and higher margin and revenue streams.
Potential impact of federal contractual set-aside laws and regulations:
The Federal government has an overall goal of 23% of prime contracts flowing through small businesses. As previously reported, various agencies within the
federal government have policies that support small business goals, including the adoption of the “Rule of Two” by the VA, which provides that the agency shall
award contracts by restricting competition for the contract to service-disabled or other veteran owned businesses. To restrict competition pursuant to this rule,
the contracting officer must reasonably expect that at least two of these businesses, which are capable of delivering the services, will submit offers and that the
award can be made at a fair and reasonable price that offers best value to the United States. When two qualifying small businesses cannot be identified, the VA
may proceed to award contracts following a full and open bid process.
24
The Company believes that its past performance in this market and track record of success provide a competitive advantage. 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.
25
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:
Consolidated Statement of Operations:
Revenue
Cost of operations
Contract costs
General and administrative costs
Corporate development costs
Depreciation and amortization
Total operating costs
Income from operations
Interest expense, net
Income before income taxes
Income tax expense
Net income
Net income per share - basic
Net income per share - diluted
Revenue
Year Ended
Change in
September 30, 2021
September 30, 2020
$
246,094
100.0 % $
209,185
100.0 % $
194,614
25,054
1,088
8,115
228,871
17,223
3,784
13,439
3,294
10,145
0.81
0.75
$
$
$
79.1 %
10.2 %
0.4 %
3.3 %
93.0 %
7.0 %
1.6 %
5.4 %
1.3 %
4.1 % $
$
$
163,596
24,195
930
7,003
195,724
13,461
3,441
10,020
2,906
7,114
0.58
0.54
78.2 %
11.6 %
0.5 %
3.3 %
93.6 %
6.4 %
1.6 %
4.8 %
1.4 %
3.4 % $
$
$
% of Rev
— %
0.9 %
(1.4) %
(0.1) %
— %
(0.6) %
0.6 %
— %
0.6 %
(0.1) %
0.7 %
$
36,909
31,018
859
158
1,112
33,147
3,762
343
3,419
388
3,031
0.23
0.20
For the year ended September 30, 2021 revenue was $246.1 million, an increase of $36.9 million or 17.6% 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.
Cost of Operations
Contract costs primarily include the costs associated with providing services to our customers. 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.
General and administrative costs are for those employees not directly providing services to our customers, including but not limited to executive management,
bid and proposal, accounting, and human resources. These costs increased as compared to the prior fiscal year by $0.9 million to approximately $25.1 million
primarily from the growth in revenues. As a percent of revenue, general and administrative costs decreased as we were able to increase operating leverage due
to the acquisition and integration of IBA into the corporate structure.
Corporate development costs are incremental due diligence costs, such as legal and accounting fees. Fiscal year 2021 costs were due to a transaction that was
evaluated but was not executed. Costs incurred in fiscal year 2020 were due to the IBA acquisition.
For the year ended September 30, 2021, depreciation and amortization costs were approximately $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.
26
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. The
effective tax rate was 24.5% and 29% for the fiscal years ending September 30, 2021 and 2020 respectively.
Non-GAAP Financial Measures for Fiscal 2021 and 2020
The Company uses EBITDA as a supplemental non-GAAP measures of our performance. The Company defines EBITDA as net income excluding (i) interest
expense, (ii) provision for or benefit from income taxes, if any, and (iii) depreciation and amortization.
On a non-GAAP basis, Earnings Before Interest Taxes Depreciation and Amortization (“EBITDA”) for the year ended September 30, 2021 was approximately
$25.3 million, an increase of approximately $4.9 million, or 23.8%, 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.
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. 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):
Net income
(i) Interest expense, net:
(ii) Provision for taxes
(iii) Depreciation and amortization
EBITDA
2021
10,145 $
3,784
3,294
8,115
25,338 $
$
$
Year Ended
September 30,
2020
7,114 $
3,441
2,906
7,003
20,464 $
Change
3,031
343
388
1,112
4,874
27
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):
Net income
Corporate development costs
Tax effect of excluding corporate development costs
Net income adjusted for corporate development costs
Net income per diluted share
Impact of corporate development costs, net
Net income per diluted share adjusted for corporate development costs
Liquidity and Capital Management
Year Ended
September 30,
2020
2021
Change
$
$
$
$
10,145 $
1,088
(267)
10,966 $
0.75 $
0.06
0.81 $
7,114 $
930
(270)
7,774 $
0.54 $
0.05
0.59 $
3,031
158
3
3,192
0.21
0.01
0.22
For the year ended September 30, 2021, the Company generated operating income of approximately $17.2 million and net income of approximately $10.1
million. Cash flows from operations totaled approximately $45.7 million and $19.5 million for the years ended September 30, 2021 and 2020, 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.
We used less than $0.1 million and $32.8 million of cash in investing activities during fiscal years 2021 and 2020, 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. 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):
Net cash provided by operating activities
Net cash used in investing activities
Net cash (used in) provided by financing activities
Net change in cash and cash equivalents
Sources of Cash and Cash Equivalents
Year Ended
September 30,
2021
2020
$
$
45,665 $
(44)
(22,927)
22,694 $
19,451
(32,830)
12,946
(433)
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. This credit facility provides us with access of up to $25.0 million, subject to certain conditions including
eligible accounts receivable. As of September 30, 2021, we had unused borrowing capacity of $25.0 million. The Company's present operating liabilities are
largely predictable and consist of vendor and payroll related obligations. We believe that our current investment and financing obligations are adequately
covered by cash generated from profitable operations and that planned operating cash flow should be sufficient to support our operations for twelve months
from the date of issuance of these consolidated financial statements.
28
Loan Facility
A summary of our loan facilities and subordinated debt financing as of September 30, 2021 is as follows:
Lender
First National Bank of Pennsylvania
First National Bank of Pennsylvania
Arrangement
Secured term loan (a)
Secured revolving line of credit (b)
($ in Millions)
As of September 30, 2021
Loan Balance
$
$
46.8
—
Interest *
LIBOR* + 3.5%
LIBOR* + 3.5%
Maturity Date
09/30/25
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 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.
29
(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.
Contractual Obligations as of September 30, 2021
(Amounts in thousands)
Debt Obligations
Facility Operating Leases
Equipment Operating Leases
Total Obligations
Total
46,750 $
27,701
218
74,669 $
$
$
Off-Balance Sheet Arrangements
Next 12
Months
Payments Due By Period
4-5
2-3
Years
Years
More than 5
Years
— $
3,418
83
3,501 $
8,250 $
6,507
135
14,892 $
38,500 $
6,285
—
44,785 $
—
11,491
—
11,491
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.
Critical Accounting Policies and Estimates
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates include valuation of goodwill and intangible
assets, 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. 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.
30
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.
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.
Refer to Note 5 of the accompanying notes to our Consolidated Financial Statements contained elsewhere in this Annual Report on Form 10-K for discussion
relative to the Company's revenue recognition in accordance with ASC-606.
Long-lived Assets
Our long-lived assets include equipment and improvements, right-of-use assets, intangible assets, and goodwill. The Company 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.
Costs incurred to place the asset in service are capitalized and costs incurred after implementation are expensed. Amortization expense is recorded when the
software is placed in service on a straight-line basis over the estimated useful life of the software.
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, less incentives received. Our right-of-use assets include long-term leases for facilities and equipment
and are amortized over their respective lease terms.
Intangible assets are originally recorded at fair value and amortized on a straight-line basis over their assessed useful lives. The assessed useful lives of the
assets are 10 years.
Goodwill
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. 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 did
not have a meaningful impact on our financial results. Notwithstanding this evaluation, factors including non-renewal of a major contract or other substantial
changes in business conditions could have a material adverse effect on the valuation of goodwill in future periods and the resulting charge could be material to
future periods’ results of operations.
31
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. The Company has fully utilized its net operating loss carryforwards.
Stock-based Equity Compensation
The Company uses the fair value-based method for stock-based equity compensation. Options issued are designated as either an incentive stock or a non-
statutory stock option. No option may be granted with a term of more than 10 years from the date of grant. Option awards may depend on achievement of
certain performance measures determined by the Compensation Committee of our Board. Shares issued upon option exercise are newly issued common shares.
All awards to employees and non-employees are recorded at fair value on the date of the grant and expensed over the period of vesting. The Company uses a
Monte Carlo binomial and Black Scholes option pricing models to estimate the fair value of each stock option at the date of grant. Any consideration paid by
the option holders to purchase shares is credited to capital stock.
New Accounting Pronouncements
A discussion of recently issued accounting pronouncements is described in Note 3 of the accompanying notes to our Consolidated Financial Statements
contained elsewhere in this Annual Report, and we incorporate such discussion by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Except as described in this Item 7A, the Company has not engaged in trading practices in securities or other financial instruments and therefore does not have
any material exposure to interest rate risk, foreign currency exchange rate risk, commodity price risk or other similar risks, which might otherwise result from
such practices. The Company has limited foreign operations and therefore is not materially subject to fluctuations in foreign exchange rates, commodity prices
or other market rates or prices from market sensitive instruments. On September 30 2019, we executed a floating-to-fixed interest rate swap with 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. The remaining outstanding balance
of our term loan is subject to interest rate fluctuations. The Company has determined that a 1.0% increase to the LIBOR rate would incrementally impact our
interest expense by approximately $0.2 million per year. As of September 30, 2021, the interest rate was 3.58%.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
See attached Consolidated Financial Statements beginning on page F-1 attached to this Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
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.
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:
PART III
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.
2.1
2.2
3.1
3.2
3.3
3.4
3.5
4.1
4.2
4.3
10.1
10.2
10.3
10.4
10.5
10.6
10.7
Description
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).
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).
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).
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).
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).
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).
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).
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.)
Form of Warrant issued to Subordinated Lenders (filed as Exhibit 4.4 to Current Report on Form 8-K filed May 6, 2016).
* Description of Securities (filed as Exhibit 4.3 to Annual Report on Form 10-K filed on December 7, 2020).
#
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).
Employment Agreement between the Company and Kevin Wilson (filed as Exhibit 10.1 to Current Report on Form 8-K dated October 3,
2013).
2006 Long Term Incentive Plan, as amended (filed as Annex A to the Company’s Proxy Statement dated January 3, 2014).
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)
#
#
# Amendment to Employment Agreement with Kevin Wilson (filed as Exhibit 10.1 to Current Report on Form 8-K filed October 2, 2015).
#
2016 Omnibus Equity Incentive Plan, as amended (incorporated by reference to Appendix A to the Company’s definitive Proxy Statement
dated January 28, 2021).
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
#
10.9
10.10
10.11
10.12
10.13
10.14
10.15
10.16
10.17
10.18
10.19
10.20
10.21
21.00
23.10
31.10
31.20
32.10
101.0
104.0
#
#
#
#
#
#
#
#
#
#
*
*
*
*
*
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).
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).
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).
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).
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).
Form of Restricted Stock Unit for non-employee directors under the 2016 Omnibus Equity Incentive Plan.
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).
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).
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).
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).
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)
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).
Employment Offer Letter between the Company and G. Maliek Ferebee
Change in Control, Severance and Covenant Agreement between the Company and G. Maliek Ferebee
Subsidiaries of Registrants.
Consent of WithumSmith+Brown, PC
Certification of Chief Executive Officer pursuant to Section 17 CFR 240.13a-14(a) or 17 CFR 240.15d-14(a).
Certification of Chief Financial Officer pursuant to Section 17 CFR 240.13a-14(a) or 17 CFR 240.15d-14(a).
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.
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.
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.
By:
/s/ KATHRYN M. JOHNBULL
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
Frederick G. Wasserman
Chairman of the Board
December 6, 202
/s/ JAMES P. ALLEN
James P. Allen
/s/ MARTIN J. DELANEY
Martin J. Delaney
/s/ ELDER GRANGER
Elder Granger
/s/ FRANCES MURPHY
Frances Murphy
/s/ AUSTIN J. YERKS III
Austin J. Yerks III
/s/ STEPHEN J. ZELKOWICZ
Stephen J. Zelkowicz
/s/ ZACHARY C. PARKER
Zachary C. Parker
/s/ KATHRYN M. JOHNBULL
Kathryn M. JohnBull
Director
Director
Director
Director
Director
Director
December 6, 202
December 6, 202
December 6, 202
December 6, 202
December 6, 202
December 6, 202
Chief Executive Officer, President and Director
December 6, 202
Chief Financial Officer and Principal Accounting Officer
December 6, 202
38
DLH Holdings Corp. and Subsidiaries
Index to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Statements of Operations for the years ended September 30, 2021 and 2020
Consolidated Balance Sheets as of September 30, 2021 and 2020
Consolidated Statements of Cash Flows for the years ended September 30, 2021 and 2020
Consolidated Statements of Changes in Shareholders' Equity for the years ended September 30, 2021 and 2020
Notes to Consolidated Financial Statements
Page
F-2
F-3
F-4
F-5
F-6
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)
Revenue
Cost of Operations
Contract costs
General and administrative costs
Corporate development costs
Depreciation and amortization
Total operating costs
Income from operations
Interest expense, net
Income before income taxes
Income tax expense
Net income
Net income per share - basic
Net income per share - diluted
Weighted average common shares outstanding
Basic
Diluted
The accompanying notes are an integral part of these consolidated financial statements.
F-5
Year Ended
September 30,
2021
2020
$
246,094 $
209,185
194,614
25,054
1,088
8,115
228,871
17,223
3,784
13,439
3,294
10,145 $
0.81 $
0.75 $
12,549
13,597
163,596
24,195
930
7,003
195,724
13,461
3,441
10,020
2,906
7,114
0.58
0.54
12,282
13,105
$
$
$
DLH HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands except par value of shares)
ASSETS
Current assets:
Cash and cash equivalents
Accounts receivable
Other current assets
Total current assets
Equipment and improvements, net
Operating lease right-of-use-assets
Deferred taxes, net
Goodwill
Intangible assets, net
Other long-term assets
Total assets
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Debt obligations - current, net of deferred financing costs
Operating lease liabilities - current
Accrued payroll
Deferred revenue
Accounts payable, accrued expenses, and other current liabilities
Total current liabilities
Long-term liabilities:
Deferred taxes, net
Operating lease liabilities - long-term
Debt obligations - long-term, net of deferred financing costs
Total long-term liabilities
Total liabilities
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
Additional paid-in capital
Accumulated deficit
Total shareholders’ equity
Total liabilities and shareholders' equity
The accompanying notes are an integral part of these consolidated financial statements.
F-6
September 30,
2021
September 30,
2020
$
$
$
$
24,051 $
33,447
4,265
61,763
1,912
19,919
—
65,643
47,469
464
197,170 $
— $
2,261
9,125
22,273
32,717
66,376
1,176
19,374
44,636
65,186
131,562
13
87,893
(22,298)
65,608
197,170 $
1,357
32,541
3,499
37,397
3,339
22,427
37
67,144
52,612
606
183,562
6,727
2,045
10,611
—
28,578
47,961
—
21,620
60,544
82,164
130,125
12
85,868
(32,443)
53,437
183,562
DLH HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
Year Ended
September 30,
2021
2020
Operating activities
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
$
10,145 $
Depreciation and amortization
Amortization of deferred financing costs charged to interest expense
Stock based compensation expense
Deferred taxes, net
Gain from lease modification
Changes in operating assets and liabilities
Accounts receivable
Other current assets
Accrued payroll
Deferred revenue
Accounts payable, accrued expenses, and other current liabilities
Other long-term assets and liabilities
Net cash provided by operating activities
Investing activities
Business acquisition, net of cash acquired
Purchase of equipment and improvements
Net cash used in investing activities
Financing activities
Proceeds from debt obligations
Repayment of debt obligations
Repurchase of common stock
Payment of deferred financing costs
Proceeds from issuance of common stock upon exercise of options
Net cash (used in)/provided by financing activities
Net change in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Supplemental disclosures of cash flow information
Cash paid during the year for interest
Cash paid during the year for income taxes
Supplemental disclosures of non-cash activity
Non-cash cancellation of common stock
The accompanying notes are an integral part of these consolidated financial statements.
F-7
8,115
792
1,660
1,213
—
(906)
(766)
(1,486)
22,273
4,139
486
45,665
59
(103)
(44)
—
(23,250)
—
(43)
366
(22,927)
22,694
1,357
24,051 $
2,941 $
936 $
68 $
$
$
$
$
7,114
7,003
721
910
2,308
(121)
(5,408)
(1,592)
489
—
7,188
839
19,451
(32,678)
(152)
(32,830)
33,000
(19,000)
(211)
(898)
55
12,946
(433)
1,790
1,357
2,806
917
211
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
Shares
Amount
Shares
Amount
Additional
Paid-In
Capital
Accumulated
Deficit
Total Shareholders'
Equity
Year Ended September 30, 2021
Balance at September 30, 2020
Expense related to director restricted stock units
Expense related to employee stock options
Exercise of stock options
Repurchase of common stock
Cancellation of common stock
Net income
Balance at September 30, 2021
12,404 $
141
—
175
—
(6)
—
12,714 $
12
—
—
1
—
—
—
13
— $
—
—
—
—
—
—
— $
— $
—
—
—
—
—
—
— $
Common Stock
Treasury Stock
Shares
Amount
Shares
Amount
85,868 $
467
1,193
433
—
(68)
—
87,893 $
Additional
Paid-In
Capital
(32,443) $
—
—
—
—
—
10,145
(22,298) $
53,437
467
1,193
434
—
(68)
10,145
65,608
Accumulated
Deficit
Total Shareholders'
Equity
Year Ended September 30, 2020
Balance at September 30, 2019
Cumulative-effect adjustment for adoption of
ASC 842
Expense related to director restricted stock units
Expense related to employee stock options
Exercise of stock options
Repurchase of common stock
Cancellation of common stock
Net income
Balance at September 30, 2020
12,036 $
—
90
—
395
—
(117)
—
12,404 $
12
—
—
—
—
—
—
—
12
— $
— $
85,114 $
(39,555) $
—
—
—
—
28
(28)
—
— $
—
—
—
—
(113)
113
—
— $
—
347
563
55
—
(211)
—
85,868 $
(2)
—
—
—
—
—
7,114
(32,443) $
45,571
(2)
347
563
55
(113)
(98)
7,114
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:
(Amounts in thousands)
Department of Veterans Affairs
Department of Health and Human Services
Department of Defense
Customers with less than 10% share of total revenue
Total revenue
3. New Accounting Pronouncements
Year Ended
September 30,
2021
2020
Revenue
Percent of total
revenue
Revenue
Percent of total
revenue
$
$
110,078
91,543
30,930
13,543
246,094
45 % $
37 %
13 %
5 %
100 % $
100,204
95,026
1,303
12,652
209,185
48 %
45 %
1 %
6 %
100 %
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
F-9
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.
F-10
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
F-11
at cost. As of September 30, 2021, the Company did not hold any treasury stock.
Preferred Stock
Our certificate of incorporation authorizes the issuance of "blank check" preferred stock with such designations, rights and preferences as may be determined
from time to time by our board of directors up to an aggregate of 5,000,000 shares of preferred stock. As of September 30, 2021, the Company has not issued
any preferred stock.
Interest Rate Swap
The Company uses derivative financial instruments to manage interest rate risk associated with its variable debt. The Company's objective in using these interest
rate derivatives is to manage its exposure to interest rate movements and reduce volatility of interest expense. The gains and losses due to changes in the fair
value of the interest rate swap agreements completely offset changes in the fair value of the hedged portion of the underlying debt. Offsetting changes in fair
value of both the interest rate swaps and the hedged portion of the underlying debt are recognized in interest expense in the Consolidated Statements of
Operations. The Company does not hold or issue any derivative instrument for trading or speculative purposes.
Risks & Uncertainties
Management continues to evaluate the impact of the COVID-19 pandemic on the industry and has concluded
that while it is reasonably possible that the virus could have a negative effect on the Company’s financial position and the
results of its operations, the specific impact is not readily determinable as of the date of these financial statements. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
5. Revenue Recognition
We recognize revenue over time when there is a continuous transfer of control to our customer. For our U.S. government contracts, this continuous transfer of
control to the customer is supported by clauses in the contract that allow the U.S. government to unilaterally terminate the contract for convenience, pay us for
costs incurred plus a reasonable profit and take control of any work in process. When control is transferred over time, revenue is recognized based on the extent
of progress towards completion of the performance obligation. For services contracts, we satisfy our performance obligations as services are rendered. We use
cost-based input and time-based output methods to measure progress.
Contract costs include labor, material and allocable indirect expenses. For time-and-material contracts, we bill the customer per labor hour and per material, and
revenue is recognized in the amount invoiced since the amount corresponds directly to the value of our performance to date. We consider control to transfer
when we have a present right to payment. Essentially, all of our contracts satisfy their performance obligations over time. Contracts are often modified to
account for changes in contract specifications and requirements. Contract modifications impact performance obligations when the modification either creates
new or changes the existing enforceable rights and obligations. The effect of a contract modification on the transaction price and our measure of progress for the
performance obligation to which it relates is recognized as an adjustment to revenue and profit cumulatively. Furthermore, a significant change in one or more
estimates could affect the profitability of our contracts. We recognize adjustments in estimated profit on contracts in the period identified.
For time-and-materials contracts, revenue is recognized to the extent of billable rates times hours delivered plus materials and other reimbursable costs incurred.
Revenue for cost-reimbursable contracts is recorded as reimbursable costs are incurred, including an estimated share of the applicable contractual fees earned.
For firm-fixed-price contracts, the consideration received for our performance is set at a predetermined price. Revenue for our firm-fixed-price contracts is
recognized over time using a straight-line measure of progress or using the percentage-of-completion method whereby progress toward completion is based on a
comparison of actual costs incurred to total estimated costs to be incurred over the contract term. Contract costs are expensed as incurred. Estimated losses are
recognized when identified.
Contract assets - Amounts are invoiced as work progresses in accordance with agreed-upon contractual terms. In part, revenue recognition occurs before we
have the right to bill, resulting in contract assets. These contract assets are reported within receivables, net on our consolidated balance sheets and are invoiced
in accordance with payment terms defined in each contract. Period end balances will vary from period to period due to agreed-upon contractual terms.
Contract liabilities - Amounts are a result of billings in excess of costs incurred.
F-12
The following table summarizes the contract balances recognized within the Company's consolidated balance sheets (in thousands):
Contract assets
Contract liabilities
September 30,
2021
Ref
September 30,
2020
$
$
(a)
7,307 $
22,473 $
7,943
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):
Department of Veterans Affairs
Department of Health and Human Services
Department of Defense
Other
Total Revenue
Revenue by contract type (in thousands):
Time and Materials
Cost Reimbursable
Firm Fixed Price
Total Revenue
Revenue by whether the Company acts as a prime contractor or a subcontractor (in thousands):
Prime Contractor
Subcontractor
Total Revenue
F-13
Year Ended
September 30,
2021
2020
110,078 $
91,543
30,930
13,543
246,094 $
100,204
95,026
1,303
12,652
209,185
Year Ended
September 30,
2021
2020
185,656 $
48,101
12,337
246,094 $
147,509
58,091
3,585
209,185
Year Ended
September 30,
2021
2020
215,241 $
30,853
246,094 $
193,448
15,737
209,185
$
$
$
$
$
$
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):
Operating lease right-of-use assets
Operating lease liabilities, current
Operating lease liabilities, long-term
Total operating lease liabilities
September 30,
2021
September 30,
2020
19,919 $
22,427
2,261 $
19,374
21,635 $
2,045
21,620
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):
Operating
Short-term
Variable
Sublease income
Total lease costs
Year Ended
September 30,
2021
2020
$
$
3,653 $
103
81
(302)
3,535 $
4,236
155
63
(271)
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):
Cash paid for amounts included in the measurement of lease liabilities
New lease liabilities, net of new right-of-use-assets
Lease liabilities arising from obtaining right-of-use-assets
Year Ended
September 30,
2021
2020
$
$
$
3,306 $
— $
— $
3,586
229
7,822
F-14
The Company's future minimum lease payments as of September 30, 2021 are as follows:
For the Fiscal Year Ending September 30,
2022
2023
2024
2025
2026
Thereafter
Total future minimum lease payments
Less: imputed interest
Present value of future minimum lease payments
Less: current portion of operating lease liabilities
Long-term operating lease liabilities
(in thousands)
3,501
3,391
3,251
3,092
3,193
11,491
27,919
(6,284)
21,635
(2,261)
19,374
$
$
7. Supporting Financial Information
Accounts receivable
Billed receivables
Contract assets
Total accounts receivable
Less: Allowance for doubtful accounts
Accounts receivable, net
(in thousands)
September 30,
2021
Ref
September 30,
2020
$
$
(a)
26,140 $
7,307
33,447
—
33,447 $
24,598
7,943
32,541
—
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
Prepaid insurance and benefits
Other receivables
Prepaid expenses
Other current assets
(in thousands)
September 30,
September 30,
2021
2020
$
$
655 $
995
2,615
4,265 $
665
1,363
1,471
3,499
F-15
Equipment and improvements, net
Furniture and equipment
Computer equipment
Computer software
Leasehold improvements
Total equipment and improvements
Less accumulated depreciation and amortization
Equipment and improvements, net
(in thousands)
September 30,
September 30,
Ref
$
(a) $
2021
2020
958 $
1,262
4,353
1,595
8,168
(6,256)
1,912 $
958
1,171
4,341
1,595
8,065
(4,726)
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
Intangible assets
Customer contracts and related customer relationships
Covenants-not-to-compete
Trade name
Acquired intangibles - IBA acquisition
Total intangible assets
Less accumulated amortization
Customer contracts and related customer relationships
Covenants-not-to-compete
Trade name
Total accumulated amortization
Intangible assets, net
(in thousands)
September 30,
2021
September 30,
2020
Ref
$
(a) $
62,281 $
522
3,051
—
65,854
(17,378)
(264)
(743)
(18,385)
47,469 $
45,600
480
2,109
16,223
64,412
(11,150)
(212)
(438)
(11,800)
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:
Fiscal 2022
Fiscal 2023
Fiscal 2024
Fiscal 2025
Fiscal 2026
Thereafter
Total amortization expense
F-16
(in thousands)
6,585
6,585
6,585
6,585
5,851
15,278
47,469
$
$
Goodwill
The changes in the carrying amount of goodwill for the years ended September 30, 2021 and 2020 are as follows:
(in thousands)
Total
Ref
$
$
(a)
52,758
14,386
67,144
(1,501)
65,643
(in thousands)
September 30,
2021
September 30,
2020
16,684 $
2,916
2,381
7,014
3,722
32,717 $
14,645
2,833
2,340
5,529
3,231
28,578
(in thousands)
September 30,
2021
September 30,
2020
46,750 $
(2,114)
44,636
—
44,636 $
70,000
(2,729)
67,271
(6,727)
60,544
(in thousands)
Year Ended
September 30,
2021
2020
(2,992) $
(792)
—
(3,784) $
(2,841)
(721)
121
(3,441)
$
$
$
$
$
$
Ref
(a)
(b)
(c)
Balance at September 30, 2019
Preliminary increase from IBA acquisition
Balance at September 30, 2020
Total adjustments from IBA acquisition
Balance at September 30, 2021
Ref (a): The adjustments were determined based on third party valuations.
Accounts payable, accrued expenses, and other current liabilities
Accounts payable
Accrued benefits
Accrued bonus and incentive compensation
Accrued workers' compensation insurance
Other accrued expenses
Accounts payable, accrued expenses, and other current liabilities
Debt obligations
Bank term loan
Less: unamortized deferred financing costs
Net bank debt obligations
Less: current portion of bank debt obligations, net of deferred financing costs
Long-term portion of bank debt obligations, net of deferred financing costs
Interest expense
Interest expense
Amortization of deferred financing costs
Other income (expense), net
Interest expense, net
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
F-17
8. Credit Facilities
A summary of our loan facility as of September 30, 2021 is as follows:
Lender
First National Bank of
Pennsylvania
First National Bank of
Pennsylvania
Arrangement
Secured term loan (a)
Secured revolving line of credit (b)
Loan Balance
Interest
Maturity Date
$
$
46.8
LIBOR* + 3.5%
—
LIBOR* + 3.5%
09/30/25
09/30/25
($ in Millions)
As of September 30, 2021
*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.
F-18
(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:
DLH employees
Non-employee directors
Total stock option expense
(in thousands)
Year Ended
September 30,
2021
2020
1,193 $
467
1,660 $
563
347
910
Ref
(a)
(b)
$
$
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
Unrecognized expense for DLH employees
(in thousands)
Year Ended
September 30,
Ref
(a)
$
2021
2020
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
F-19
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.
Options outstanding, September 30, 2020
Granted
Exercised
Cancelled
Options outstanding, September 30, 2021
Ref
(a)
(in thousands)
Number of
Shares
2,129
455
(175)
(35)
2,374
Weighted
Average
Exercise
Price
$6.14
$10.47
$2.48
$7.36
$7.77
(in years)
Weighted
Average
Remaining
Contractual
Term
7.4
7.7
—
—
—
$
$
(in thousands)
Aggregate
Intrinsic
Value
6,583
—
—
—
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.
Grant Date
Strike
Price
Stock
Price
Vesting
Threshold
Price
December 15, 2020 $
July 30, 2021 $
10.05 $
10.75 $
10.05 $
10.75 $
13.00
14.00
Volatility
50%
Calculated
Fair Value
$
$
5.83
5.83
Expected
Term
(Years)
10
10
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):
Vested and exercisable
Unvested
Options outstanding
Ref
(a)
(b)
Number of Shares
September 30,
2021
2020
1,662
712
2,374
1,213
916
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.
Numerator:
Net income
Denominator:
Denominator for basic net income per share - weighted-average outstanding shares
Effect of dilutive securities:
Stock options and restricted stock
Denominator for diluted net income per share - weighted-average outstanding shares
Net income per share - basic
Net income per share - diluted
11. Commitments and Contingencies
Contractual Obligations as of September 30, 2021 (in thousands):
(in thousands)
Year Ended
September 30,
2021
2020
$
$
$
10,145 $
7,114
12,549
1,048
13,597
0.81 $
0.75 $
12,282
823
13,105
0.58
0.54
Debt obligations
Facility leases
Equipment operating leases
Total contractual obligations
Workers' Compensation
Payments Due Per Fiscal Year
Total
2022
2023
2024
2025
2026
Thereafter
$
$
46,750 $
27,701
218
74,669 $
— $
3,418
83
3,501 $
— $
3,308
83
3,391 $
8,250 $
3,199
52
11,501 $
38,500 $
3,092
—
41,592 $
— $
3,193
—
3,193 $
—
11,491
—
11,491
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):
Current expense
Deferred expense
Total expense
Year Ended
September 30,
2021
2020
$
$
2,081 $
1,213
3,294 $
598
2,308
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):
Federal statutory rate
State taxes, net
Other permanent items
Deferred tax estimate adjustment
Total
An analysis of the Company's deferred tax assets and liabilities is as follows (in thousands):
Deferred income tax assets:
Net operating loss carry forwards, net
Stock based compensation
Accrued expenses
Other items, net
Total deferred tax asset
Deferred tax liability:
Equipment and intangible assets
Right of use liability
Total deferred tax liability
Net deferred tax (liability)/asset
F-22
Year Ended
September 30,
2021
2020
2,822 $
376
96
—
3,294 $
2,104
554
160
88
2,906
Year Ended
September 30,
2021
2020
29 $
508
1,944
—
2,481
(3,507)
(150)
(3,657)
(1,176) $
1,554
140
1,698
258
3,650
(3,613)
—
(3,613)
37
$
$
$
$
14. Quarterly Financial Data (Unaudited)
A summary of quarterly information is as follows (in thousands, except per share data)
Revenue
Income from operations
Interest expense, net
Income before income taxes
Income tax expense
Net income
Earnings per share:
Basic
Diluted
Revenue
Income from operations
Interest expense, net
Income before income taxes
Income tax expense
Net income
Earnings per share:
Basic
Diluted
Ref
First
Second
Third
Fourth
2021 Quarters
(a)
$
$
$
$
$
$
$
$
57,852 $
3,635
(1,080)
2,555
741
1,814 $
0.15 $
0.13 $
61,506 $
4,620
(1,004)
3,616
1,049
2,567 $
0.20 $
0.19 $
2020 Quarters
61,555 $
4,939
(893)
4,046
1,166
2,880 $
0.23 $
0.21 $
65,182
4,030
(808)
3,222
339
2,883
0.23
0.21
First
Second
Third
Fourth
52,238 $
3,126
(941)
2,185
634
1,551 $
0.13 $
0.12 $
54,798 $
3,837
(906)
2,931
855
2,076 $
0.17 $
0.16 $
51,459 $
3,800
(813)
2,987
863
2,124 $
0.17 $
0.16 $
50,691
2,698
(781)
1,917
554
1,363
0.11
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
www.dlhcorp.com
September 30, 2021
G. Maliek Ferebee
Dear Maliek,
Exhibit 10.20
We are delighted to add your talent and energy to the DLH Executive Leadership Team!
On behalf of DLH Holdings Corp. (“DLH”, or the “Company”), I am pleased to extend to you an offer of employment in the position of Chief
Human Resources Officer. Your role reports directly to me as CEO and you will be a Named Executive Officer (NEO) of the company and
member of the DLH corporate Executive Leadership Team (ELT). In this role you will have responsibility, authority, and accountability for
managing the Company’s human resources function and developing and implementing the Company’s strategic plans for its workforce, subject to
the direction of the CEO. As discussed, your start date is expected to be November 8, 2021.
Additionally, as an ELT member and NEO, you will participate in periodic Board of Directors (BoD) presentations, Annual Shareholders
meetings and other executive engagements. This will include leading the Human Resources team to attract, retain and develop the employees of
DLH in pursuit of its corporate objectives, evaluating acquisition candidates, and other high impact decisions. You agree to devote your full
business time and best efforts in the performance of your duties for DLH and its subsidiaries. You understand that you will need to undertake
regular travel to our executive and operational offices, and such other occasional travel within or outside the United States. All such travel shall
be at the sole cost and expense of the Company and shall be in accordance with government Joint Travel Regulations (JTR) and current Company
policy, which will include reasonable lodging and food costs incurred by you while traveling.
Cash Compensation. The Company will pay you an initial salary at the rate of $300,000 per year, less applicable Federal, state, local and
elected withholdings, which will be paid in accordance with the Company’s normal payroll procedures. This salary will be subject to adjustment
pursuant to the Company’s employee compensation policies and directions from the Management Resources & Compensation Committee of the
Board (the “MRC Committee”). During your employment hereunder, the MRC Committee will review your performance and consider
adjustments to your compensation as part of its annual merit increase process for the Company’s senior management team.
Guaranteed Bonus. In recognition of your relinquishment of certain incentive opportunities, you will be issued a signing bonus of $75,000
payable at 90 days following your start date.
Incentive Compensation. In addition, you will be eligible to be considered for short term and long term incentive compensation arrangements,
subject to the discretion of the MRC Committee. Beginning in fiscal year 2022, you will be eligible for a cash-based incentive bonus for each
fiscal year of the Company during your employment. This bonus opportunity will be awarded based on objective and/or subjective criteria
established by the MRC Committee, in consultation with me. Subject to the MRC Committee’s approval, you will have an opportunity to earn a
cash bonus of up to 50% of your annual base salary based on the Company’s completion of preset goals as will be set forth in an annual
management bonus
opportunity plan. In addition, subject to the approval of the MRC Committee, you will be eligible for a grant of performance-based restricted
stock units (“Performance RSUs”). It is anticipated that the value of the Performance RSUs will be based on a percentage of your base salary and
vest upon the achievement of performance metrics, including revenue and stock price targets, over a multi-year performance period, as
determined by the MRC Committee.
Equity Compensation. Subject to MRC Committee approval, you will be granted an option to purchase 250,000 shares of DLH Holdings Corp.
Common Stock pursuant to the Company’s 2016 Omnibus Equity
Atlanta HQ
3565 Piedmont Road NE
Tower 3, Suite 700
Atlanta, GA 30305
National Capital Region HQ
8757 Georgia Ave
Suite 1200
Silver Spring, MD 20910
1
www.dlhcorp.com
Incentive Plan (the “Plan”) (the “Options”). The exercise price of the Options shall be equal to the fair market value of the Company’s Common
Stock on the grant date, as determined in accordance with the Plan. The Options shall be subject to vesting requirements, with 50,000 options
vesting on the first anniversary of the grant date and the remainder vesting as follows: (i) 66,667 shares if the closing price of the Company’s
Common Stock equals or exceeds a price that is a 50% increase over the exercise price of such Options for ten consecutive trading days; (ii)
66,667 shares if the closing price of the Company’s Common Stock equals or exceeds a price that is a 75% increase over the exercise price for ten
consecutive trading days; and (iii) 66,666 shares if the closing price of the Company’s Common Stock equals or exceeds a price that is a 100%
increase over the exercise price for ten consecutive trading days. The Options will have a ten (10) year term from their date of grant in which they
can be exercised (subject to your continued service and the vesting provisions described above) and will be subject to the terms and conditions of
the Plan and option agreement between and the Company in the form approved by the MRC Committee.
Employee Benefit Program. As a DLH executive, you will be eligible for all employee benefits afforded regular fulltime DLH employees, for
which details will be provided separately. (See outline below):
Insurance: Medical, Dental, and Vision plans
•
Life insurance: Company-paid coverage
•
•
Short-term and long-term disability insurance
• Voluntary life insurance: Employee-paid coverage
•
Paid Time Off (PTO): 25 days of paid leave (PTO) for your first year of employment, accrued from the date of employment, on a
prorated basis proportionate to the actual number of hours worked
Paid holidays: 6 named holidays and 3 floating holidays per year. Floating holidays will be prorated in your first year of employment
based on your date of hire
Eligibility to participate in the Company’s 401(k) plan
•
•
Such benefits are subject to change, and may be supplemented, altered, or eliminated, in part or entirely. Any eligibility to participate in such
benefit plans, as well as the terms thereof, shall be as set forth in the governing documents for such plans, or if there are no such governing
documents, in the Company’s policies. Eligibility for the Healthcare Plan, Life Insurance and Voluntary Life benefits are detailed in your benefits
package. Your wellness benefits commence on the first day of the month following your date of hire.
Severance and Change in Control. As an executive of the Company, you will be eligible to receive severance and change of control benefits
under certain circumstances pursuant to the Change in Control, Severance and Covenant Agreement, to be provided to you separately (the
“Severance Agreement”). Accordingly, your potential severance and change of control benefits and the terms and conditions thereof shall be set
forth in the Severance Agreement.
At-will Employment. Also, it is corporate policy to review performance on an annual basis. Employment is for no specified period of time and
“at-will”. DLH is an “at-will” employer and employees have the right to resign their position at any time, with or without notice, and with or
without cause. As an “at-will” employer, DLH can terminate its employment relationship with our employees at any time, with or without notice,
and with or without cause.
Company Policies. As a Company employee, you will be expected to abide by Company rules and regulations. You will be specifically required
to sign an acknowledgement that you have read and understand the Company rules of conduct which will be included in an Employee Handbook
which the Company will distribute to you on your date of hire.
Clawback. Notwithstanding any other provision herein to the contrary, you agree and acknowledge that any incentive-based compensation, or
any other compensation, paid or payable to you which is subject to recoupment or clawback under any applicable law, government regulation, or
stock exchange listing
Atlanta HQ
3565 Piedmont Road NE
Tower 3, Suite 700
Atlanta, GA 30305
National Capital Region HQ
8757 Georgia Ave
Suite 1200
Silver Spring, MD 20910
2
www.dlhcorp.com
requirement, including without limitation, the Dodd-Frank Wall Street Reform and Consumer Protection Act and such regulations as may be
promulgated thereunder by the Securities and Exchange Commission, will be subject to such deductions and clawback (recovery) as may be, but
solely to the extent, required to be made pursuant to applicable law, regulation, stock exchange listing requirement or any policy of the Company
mandated in accordance with any such law, government regulation, or stock exchange listing requirement. This section shall survive the
termination of your employment for a period of three (3) years.
Contingencies. As a condition of employment, you will be required to sign a confidentiality agreement (attached), as well as pass a background
check.
Entire Agreement; Amendments. This letter, together with the above-referenced confidentiality and severance agreements sets forth the entire
agreement between the parties and supersedes all prior agreements, letters and understandings between the parties, whether oral or written prior
to the date of this letter, except for the terms of employee stock option plans, restricted stock grants and option certificates (unless otherwise
expressly stated herein). No modification, amendment or waiver of the terms of this letter shall be binding on the parties unless executed in
writing by the parties to this letter. No waiver of any of the provisions of this letter shall be deemed to or shall constitute a waiver of any other
provisions hereof, nor shall such waiver constitute a continuing waiver unless otherwise expressly provided.
Interpretation and Review. The parties agree that they have both had the opportunity to review and negotiate this offer letter, and that any
inconsistency or dispute related to the interpretation of any of the terms of this offer letter shall not be construed against either party. You have
been advised and have had the opportunity to consult with an attorney or other advisor prior to executing this letter. You understand and agree
that counsel to the Company (Becker & Poliakoff, LLP) has not acted and is not acting as your counsel and that you have not relied upon any
legal advice except as provided by your own counsel.
Governing Law. This letter has been negotiated and executed in the State of Georgia which shall govern its construction and validity.
Execution. This letter may be executed in two or more counterparts, which when taken together shall be considered one and the same agreement
and shall become effective when counterparts have been signed by each party and delivered to the other party, it being understood that both
parties need not sign the same counterpart. In the event that any signature is delivered by facsimile transmission or by e-mail delivery of a “.pdf”
format data file, such signature shall create a valid and binding obligation of the party executing it with the same force and effect as if such
facsimile or “.pdf” signature page was an original. To indicate your acceptance of this offer letter, please sign this letter in the space provided
below and return it to me.
Atlanta HQ
3565 Piedmont Road NE
Tower 3, Suite 700
Atlanta, GA 30305
National Capital Region HQ
8757 Georgia Ave
Suite 1200
Silver Spring, MD 20910
3
www.dlhcorp.com
Maliek, we believe your contributions to DLH will be invaluable. We look forward to our future together.
Sincerely,
DLH Holdings Corp.
Agreed and accepted as of the date set forth above:
By:
/s/ Zachary C. Parker
Name:
Title:
Zachary C. Parker
Chief Executive Officer and President
By:
/s/ G. Maliek Ferebee
G. Maliek Ferebee
Atlanta HQ
3565 Piedmont Road NE
Tower 3, Suite 700
Atlanta, GA 30305
National Capital Region HQ
8757 Georgia Ave
Suite 1200
Silver Spring, MD 20910
4
Exhibit 10.21
CHANGE IN CONTROL, SEVERANCE AND COVENANT AGREEMENT
This Change in Control, Severance and Covenant Agreement (the “Agreement”) is made and entered into by and between G. Maliek Ferebee
(“Employee”) and DLH Holdings Corp., a New Jersey corporation (the “Company”), effective as of November 1, 2021 (the “Effective Date”).
Recitals
WHEREAS, Employee is the Chief Human Resources Officer of the Company pursuant to an employment offer letter executed as of the date first set
forth above (the “Offer Letter”), and in connection with the commencement of her employment with the Company, the Employee entered into that certain
Employee Invention Assignment and Confidentiality Agreement executed on the date first set forth above (the “Assignment and Confidentiality Agreement”);
WHEREAS, the Management Resources and Compensation Committee (the “Committee”) of the Company’s Board of Directors (the “Board”)
believes that it is in the best interests of the Company and its stockholders (i) to assure that the Company will have the continued dedication and objectivity of
Employee, notwithstanding the possibility, threat, or occurrence of a Change in Control and (ii) to provide Employee with an incentive to continue Employee’s
employment prior to a Change in Control and to motivate Employee to maximize the value of the Company upon a Change in Control for the benefit of its
stockholders; and
WHEREAS, the Committee believes that it is in the best interests of the Company to provide Employee with certain severance benefits upon
Employee’s termination of employment under certain circumstances. These benefits will provide Employee with enhanced financial security and incentive and
encouragement to remain with the Company, notwithstanding the possibility of a Change in Control.
NOW, THEREFORE, in consideration of the mutual promises and covenants contained herein, and in consideration of your continuing employment by
the Company, the adequacy and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:
Agreement
1. Term of Agreement. This Agreement will have an initial term of two years commencing on the Effective Date (the “Initial Term”). On the second
anniversary of the Effective Date and each anniversary thereafter, this Agreement will renew automatically for additional one (1) year terms (each an
“Additional Term”), unless either party provides the other party with written notice of non-renewal at least 60 days prior to the date of automatic renewal. If a
Change in Control occurs when there are fewer than 90 days remaining during the Initial Term or an Additional Term, the term of this Agreement will extend
automatically through the date that is 90 days following the effective date of the Change in Control. In the event that the Company elects not to renew this
Agreement for an Additional Term, such election will be treated as a termination of Employee’s employment without Cause, with applicability under Section
3(a) and Section 3(b), dependent on whether the Company’s election not to renew occurs during a Change in Control Period. Accordingly, Employee will be
eligible under such circumstances for severance benefits under either Section 3(a) or Section 3(b) of this Agreement, as the case may be. Certain capitalized
terms used in the Agreement are defined in Section 10 below.
2. At-Will Employment. The Company and Employee acknowledge that Employee’s employment is and will continue to be at-will, as defined under
applicable law. As an at-will employee, either the Company or the Employee may terminate the employment relationship at any time, with or without Cause.
3. Severance Benefits.
a. Termination without Cause or for Good Reason. If the Company terminates Employee’s employment with the Company without Cause
(excluding death or Disability) or if Employee resigns from such employment for Good Reason, and in each case such termination occurs outside of the Change
in Control Period, then subject to Section 4, Employee will receive the following:
(i) Accrued Compensation. The Company will pay Employee all accrued but unpaid vacation, expense reimbursements, wages, unpaid bonuses
and incentive compensation earned and awarded prior to the date of termination, and other benefits due to Employee under any Company-provided plans,
policies, and arrangements (the “Accrued Compensation”). Accrued Compensation shall be paid within five (5) business days after the Termination Date (or
earlier, if required by applicable law).
(ii) Severance Payments. Employee will be paid continuing payments of severance pay at a rate equal to Employee’s base salary rate, as in
effect immediately before the Termination Date, for twelve months from the date of such termination of employment (the “Severance Period”), to be paid
periodically in
{N0362619 }
accordance with the Company’s normal payroll policies. Severance payments during the Severance Period will not commence until the first Company payroll
following the Release Deadline (as defined below), or, if later, such time as required by Section 9(a). Except as required by Section 9(a), any installment
payments that would have been made to Employee during the 60-day period immediately following Employee’s separation from service but for the preceding
sentence will be paid to Employee on the first Company payroll following the Release Deadline and the remaining payments will be made as provided in this
Agreement.
(iii) Continuation Coverage. The Company will provide the Continuation Benefits, as defined below, for the period of time specified in the
definition of such term, as set forth in Section 10(e).
b. Termination without Cause or for Good Reason in Connection with a Change in Control. If the Company terminates Employee’s employment
with the Company without Cause (excluding death or Disability) or if Employee resigns from such employment for Good Reason, and, in each case, such
termination occurs during the Change in Control Period, then subject to Section 4, Employee will receive the following:
(i) Accrued Compensation. The Company will pay Employee the Accrued Compensation within five (5) business days after the Termination
Date (or earlier, if required by applicable law).
(ii) Severance Payment. Employee will receive a lump-sum payment (less applicable withholding taxes) equal to 12 months of Employee’s
annual base salary as in effect immediately prior to Employee’s termination date. Payment of the severance payment pursuant this Section 3(b)(ii) shall be made
within 10 days of the Release Deadline or according to a payment schedule agreed upon by the Company and the Employee, or such later time as required by
Section 9(a).
(iii) Continuation Coverage. The Company will provide the Continuation Benefits, as defined below, for the period of time specified in the
definition of such term, as set forth in Section 10(e).
c. Voluntary Resignation; Termination for Cause. If Employee’s employment with the Company terminates (i) voluntarily by Employee (other than
for Good Reason) or (ii) for Cause by the Company, then Employee will only receive the Accrued Compensation. Employee will not be entitled to receive
severance or other benefits except for those (if any) as may then be established under the Company’s then existing severance and benefits plans and practices or
pursuant to other written agreements with the Company.
d. Disability; Death. If the Company terminates Employee’s employment as a result of Employee’s Disability, or Employee’s employment
terminates due to Employee’s death, then Employee (or his or her estate) will be entitled to receive the Accrued Compensation and the Continuation Benefits
(for the period of time specified in Section 10(e)), but will not be entitled to receive any other severance or other benefits, except for those (if any) as may then
be established under the Company’s then existing written severance and benefits plans and practices or pursuant to other written agreements with the Company.
e. Exclusive Remedy. In the event of a termination of Employee’s employment as set forth in Section 3(a) or (b) of this Agreement, the provisions
of Section 3 are intended to be and are exclusive and in lieu of any other rights or remedies to which Employee or the Company otherwise may be entitled,
whether at law, tort or contract, in equity, or under this Agreement (other than the payment of accrued but unpaid wages, as required by law, and any
unreimbursed reimbursable expenses). Employee will be entitled to no benefits, compensation or other payments or rights upon a termination of employment
other than those benefits expressly set forth in Section 3 of this Agreement.
f. Equity Awards. In the event of a termination of Employee’s employment with the Company:
(i) pursuant to Section 3(a), Section 3(b), or a voluntary termination by Employee without Good Reason, Equity Awards held by
Employee as of the date hereof or subsequently granted to Employee, solely to the extent vested as of the Termination Date, shall remain exercisable in
accordance with the Plan (as defined below), but in no event after the expiration of the exercise period specified in such Equity Award(s) (it being agreed and
acknowledged that unvested options shall be void immediately upon the Termination Date);
(ii) due to the Employee’s death, or Disability, the Employee’s (or his estate’s or legal representative’s) right to purchase shares of Common
Stock of the Company pursuant to any Equity Awards held by Employee as of the date hereof or subsequently granted to Employee, solely to the extent vested
as of the Termination Date, shall remain exercisable in accordance with the Plan, but in no event after the expiration of the exercise period specified in such
Equity Award(s) (it being agreed and acknowledged that unvested options shall be void immediately upon the Termination Date); and
2
(iii) for Cause, Equity Awards that have not been exercised as of the Termination Date shall terminate immediately and be null and void.
g. The Employee shall not be required to mitigate the amount of any payment provided for in this Agreement by seeking other employment or
otherwise and no such payment shall be offset or reduced by the amount of any compensation or benefits provided to the Employee in any subsequent
employment, except with respect to Continuation Benefits.
4. Conditions to Receipt of Severance. The receipt of any severance payments or benefits (other than the Accrued Compensation) pursuant to this
Agreement is subject to the occurrence of all of the following subparagraphs:
a. Employee signing and not revoking the Company’s customary separation and release of claims agreement (the “Release”), which must become
effective and irrevocable no later than the 60th day following Employee’s termination of employment (the “Release Deadline”). If the Release does not become
effective and irrevocable by the Release Deadline, Employee will forfeit any right to severance payments or benefits under this Agreement. In no event will
severance payments or benefits be paid or provided until the Release actually becomes effective and irrevocable.
b. Employee’s resignation from all positions with the Company and its subsidiaries, including service on the board of directors thereof.
c. Employee’s receipt of any payments or benefits under Section 3 (other than the Accrued Compensation) will be subject to Employee continuing to
comply with (x) the Release, (y) the terms of Sections 6 and 7 of this Agreement and (z) the terms of any other agreement entered into hereafter between the
Employee and Company providing for confidentiality protection of the Company’s Proprietary Information, assignment of work product and covenants against
competing with the Company, as the Release, this Agreement or such other agreement may be amended from time to time.
5. Limitations on Payments. In the event that the severance and other benefits provided for in this Agreement, either alone or together with other payments
which the Employee has the right to receive from the Company, would constitute an “excess parachute payment” as defined in Section 280G of the Code, the
aggregate of such credits or payments under this Agreement and other agreements shall be reduced to the largest amount as will result in no portion of such
aggregate payments being subject to the excise tax imposed by Section 4999 of the Code. The priority of the reduction of excess parachute payments shall be in
the discretion of the Employee. The Company shall give notice to the Employee as soon as practicable after its determination that Change in Control payments
and benefits are subject to the excise tax, but no later than ten (10) days in advance of the due date of such Change in Control payments and benefits, specifying
the proposed date of payment and the Change in Control benefits and payments subject to the excise tax. Employee shall exercise his option under this Section 5
by written notice to the Company within five (5) days in advance of the due date of the Change in Control payments and benefits specifying the priority of
reduction of the excess parachute payments.
6. Confidentiality, Intellectual Property Rights and Restrictive Covenants. Employee agrees that the Assignment and Confidentiality Agreement, and
the parties’ rights, remedies and obligations thereunder, shall remain in full force and effect in accordance with its terms, as if set forth in full herein and
Employee shall abide by the provisions thereof.
7. Equitable Relief. Employee hereby acknowledges that the covenants and agreements set forth in the Assignment and Confidentiality Agreement
are reasonable and valid in all respects and that the Company is entering into this Agreement, inter alia, on such acknowledgement. If Employee breaches, or
threatens to commit a breach, of the Assignment and Confidentiality Agreement, the Company shall have the following rights and remedies, each of which
rights and remedies shall be independent of the other and severally enforceable, and all of which shall be in addition to, and not in lieu of, any other rights and
remedies available to the Company pursuant to the Assignment and Confidentiality Agreement, or under law or in equity: the right and remedy to have the
Assignment and Confidentiality Agreement specifically enforced by any court having equity jurisdiction, it being acknowledged and agreed that any such
breach or threatened breach will cause irreparable injury to the Company and that money damages will not provide an adequate remedy to the Company; and
the right and remedy to require Employee to account for and pay over to the Company such damages as are recoverable at law as the result of any transactions
constituting a breach of the Assignment and Confidentiality Agreement. The parties intend to and hereby confer jurisdiction to enforce the Assignment and
Confidentiality Agreement upon the courts of any jurisdiction within the relevant geographical scope contemplated by such agreement. If the courts of any one
or more such jurisdictions hold the Assignment and Confidentiality Agreement wholly unenforceable by reason of the breadth of such scope or otherwise, it is
the intention of the parties that such determination not bar or in any way affect the Company’s right to the relief provided above in the courts of any other
jurisdiction within the geographical
3
scope of the Assignment and Confidentiality Agreement, as to breaches of such agreement in such other jurisdictions, as they relate to each jurisdiction being,
for this purpose, severable into diverse and independent covenants.
8. Reserved.
9. Section 409A of the Code.
a. To the extent applicable, it is intended that any amounts payable under this Agreement shall either be exempt from Section 409A of the Code or
shall comply with Section 409A (including Treasury regulations and other published guidance related thereto) so as not to subject Employee to payment of any
additional tax, penalty or interest imposed under Section 409A of the Code. The provisions of this Agreement shall be construed and interpreted to the
maximum extent permitted to avoid the imputation of any such additional tax, penalty or interest under Section 409A of the Code yet preserve (to the nearest
extent reasonably possible) the intended benefit payable to Employee. Notwithstanding the foregoing, the Company makes no representations regarding the tax
treatment of any payments hereunder, and the Employee shall be responsible for any and all applicable taxes, other than the Company’s share of employment
taxes on the severance payments provided by the Agreement. Employee acknowledges that Employee has been advised to obtain independent legal, tax or other
counsel in connection with Section 409A of the Code.
b. Notwithstanding any provisions of this Agreement to the contrary, if Employee is a “specified employee” (within the meaning of Section 409A
of the Code and the regulations adopted thereunder) at the time of Employee’s separation from service and if any portion of the payments or benefits to be
received by Employee upon separation from service would be considered deferred compensation under Section 409A of the Code and the regulations adopted
thereunder (“Nonqualified Deferred Compensation”), amounts that would otherwise be payable pursuant to this Agreement during the six-month period
immediately following Employee’s separation from service that constitute Nonqualified Deferred Compensation and benefits that would otherwise be provided
pursuant to this Agreement during the six-month period immediately following Employee’s separation from service that constitute Nonqualified Deferred
Compensation will instead be paid or made available on the earlier of (i) the first business day of the seventh month following the date of Employee’s separation
from service and (ii) Employee’s death. Notwithstanding anything in this Agreement to the contrary, distributions upon termination of Employee’s employment
shall be interpreted to mean Employee’s “separation from service” with the Company (as determined in accordance with Section 409A of the Code and the
regulations adopted thereunder). Each payment under this Agreement shall be regarded as a “separate payment” and not of a series of payments for purposes of
Section 409A of the Code.
c. Except as otherwise specifically provided in this Agreement, if any reimbursement to which the Employee is entitled under this Agreement would
constitute deferred compensation subject to Section 409A of the Code, the following additional rules shall apply: (i) the reimbursable expense must have been
incurred, except as otherwise expressly provided in this Agreement, during the term of this Agreement; (ii) the amount of expenses eligible for reimbursement
during any taxable year will not affect the amount of expenses eligible for reimbursement in any other taxable year; (iii) the reimbursement shall be made as
soon as practicable after Employee’s submission of such expenses in accordance with the Company’s policy, but in no event later than the last day of
Employee’s taxable year following the taxable year in which the expense was incurred; and (iv) the Employee’s entitlement to reimbursement shall not be
subject to liquidation or exchange for another benefit.
10. Definition of Terms. The following terms referred to in this Agreement will have the following meanings:
a.
Cause. “Cause” means any of the following: (i) an act of dishonesty made by Employee in connection with Employee’s
responsibilities as an employee; (ii) Employee’s conviction of, or plea of nolo contendere to, a felony or any crime involving fraud, embezzlement or a similar
crime; (iii) conduct by Employee amounting to fraud, gross negligence, willful misconduct or recurring insubordination; (iv) Employee’s willful disobedience
of a material and lawful instruction of the Chief Executive Officer or the Board of Directors of the Company, including Employee’s continued failure to perform
his employment duties, or Employee’s willful breach of any material obligations under any written agreement or covenant with the Company; or (v) excessive
absences from work by Employee, other than for illness or Disability. Notwithstanding the foregoing, however, that the Company shall not have the right to
terminate the employment of Employee pursuant to the foregoing clauses (i), (iii), (iv), and (v) above unless written notice specifying such breach shall have
been given to the Employee and, in the case of breach which is capable of being cured, the Employee shall have failed to cure such breach within thirty (30)
days after his receipt of such notice.
b. Change in Control. “Change in Control” means the occurrence of any of the following events:
4
i.
An acquisition (other than directly from the Company) of any voting securities of the Company (the “Voting Securities”) by
any “Person” (as the term person is used for purposes of Section 13(d) or 14(d) of the Securities Exchange Act of 1934, as amended (the “1934 Act”))
immediately after which such Person has “Beneficial Ownership” (within the meaning of Rule 13d-3 promulgated under the 1934 Act) of twenty percent (20%)
or more of the combined voting power of the Company’s then outstanding Voting Securities (49% if such Person is Wynnefield Capital Inc. and its affiliates);
provided, however, that in determining whether a Change in Control has occurred, Voting Securities which are acquired in a “Non-Control Acquisition” (as
defined below) shall not constitute an acquisition which would cause a Change in Control. A “Non-Control Acquisition” shall mean an acquisition by (1) an
employee benefit plan (or a trust forming a part thereof) maintained by (x) the Company or (y) any corporation or other Person of which a majority of its voting
power or its equity securities or equity interest is owned directly or indirectly by the Company (a “Subsidiary”), or (2) the Company or any Subsidiary.
Notwithstanding the foregoing, a Change in Control shall not be deemed to occur solely because a Person (the “Subject Person”) gained Beneficial Ownership
of more than the permitted amount of the outstanding Voting Securities as a result of the acquisition of Voting Securities by the Company which, by reducing
the number of Voting Securities outstanding, increases the proportional number of shares Beneficially Owned by the Subject Person, provided that if a Change
in Control would occur (but for the operation of this sentence) as a result of the acquisition of Voting Securities by the Company, and after such share
acquisition by the Company, the Subject Person becomes the Beneficial Owner of any additional Voting Securities which increases the percentage of the then
outstanding Voting Securities Beneficially Owned by the Subject Person, then a Change in Control shall occur.
ii.
The individuals who, as of the date this Agreement is approved by the Board, are members of the Board (the “Incumbent
Board”), cease for any reason to constitute at least two-thirds of the Board; provided, however, that if the election, or nomination for election by the Company’s
stockholders, of any new director was approved by a vote of at least two-thirds of the Incumbent Board, such new director shall, for purposes of this Agreement,
be considered and defined as a member of the Incumbent Board; and provided, further, that no individual shall be considered a member of the Incumbent Board
if such individual initially assumed office as a result of either an actual “Election Contest” (as described in Rule 14a-11 promulgated under the 1934 Act) or
other solicitation of proxies or consents by or on behalf of a Person other than the Board (a “Proxy Contest”); or
iii.
Approval by the Company’s stockholders of either: (A) a merger, consolidation or reorganization involving the Company,
unless: (1) the stockholders of the Company, immediately before such merger, consolidation or reorganization, own, directly or indirectly immediately
following such merger, consolidation or reorganization, at least sixty percent (60%) of the combined voting power of the outstanding voting securities of the
corporation resulting from such merger or consolidation or reorganization (the “Surviving Corporation”) in substantially the same proportion as their ownership
of the Voting Securities immediately before such merger, consolidation or reorganization, (2) the individuals who were members of the Incumbent Board
immediately prior to the execution of the agreement providing for such merger, consolidation or reorganization constitute at least two-thirds of the members of
the board of directors of the Surviving Corporation, and (3) no Person (other than the Company, any Subsidiary, any employee benefit plan (or any trust forming
a part thereof) maintained by the Company, the Surviving Corporation or any Subsidiary) becomes Beneficial Owner of twenty percent (20%) or more of the
combined voting power of the Surviving Corporation’s then outstanding voting securities as a result of such merger (49% if such Person is Wynnefield Capital
Inc. and its affiliates), consolidation or reorganization, a transaction described in clauses (1) through (3) shall herein be referred to as a “Non-Control
Transaction”; or (B) an agreement for the sale or other disposition of all or substantially all of the assets of the Company, to any Person, other than a transfer to
a Subsidiary, in one transaction or a series of related transactions; or (C) the Company’s stockholders approve any plan or proposal for the liquidation or
dissolution of the Company.
iv.
Notwithstanding anything herein to the contrary, if the Employee’s employment is terminated prior to a Change in Control
and the Employee reasonably demonstrates that such termination (i) was at the request of a third party who has indicated an intention or taken steps reasonably
calculated to effect a Change in Control (a “Third Party”) or (ii) otherwise occurred in connection with, or in anticipation of, a Change in Control, then for all
purposes of this Agreement, the date of a Change in Control with respect to the Employee shall mean the date immediately prior to the date of such termination
of the Employee’s employment.
c.
days following, a Change in Control.
d.
Code. “Code” means the Internal Revenue Code of 1986, as amended.
Change in Control Period. “Change in Control Period” means the period beginning ninety (90) days prior to, and ending ninety (90)
e.
Continuation Benefits. “Continuation Benefits” shall be the continuation of the benefits, as detailed in the Offer Letter, for the period
commencing on the Termination Date and terminating 12 months thereafter, or such other period as specifically stated herein (the “Continuation Period”) at the
Company’s expense on behalf of the Employee and his dependents; and the level and availability of benefits provided during the Continuation Period shall at all
times be subject to the post-employment conversion or portability provisions of the
5
benefit plans. The Company’s obligation hereunder with respect to the foregoing benefits shall also be limited to the extent that if the Employee is eligible to
obtain any such benefits pursuant to a subsequent employer’s benefit plans, the Company may reduce the coverage of any benefits it is required to provide the
Employee hereunder as long as the aggregate coverage and benefits of the combined benefit plans is no less favorable to the Employee than the coverage and
benefits required to be provided hereunder. This definition of Continuation Benefits shall not be interpreted so as to limit any benefits to which the Employee,
his dependents or beneficiaries may be entitled under any of the Company’s employee benefit plans, programs or practices following the Employee’s
termination of employment, including, without limitation, retiree medical and life insurance benefits.
Disability. “Disability” shall mean a physical or mental infirmity which impairs the Employee’s ability to substantially perform his
duties with the Company for a period of ninety (90) consecutive days and the Employee has not returned to his full-time employment prior to the Termination
Date as stated in the “Notice of Termination” (as defined below).
f.
stock units, performance shares, performance stock units and any other Company equity compensation awards.
Equity Awards. “Equity Awards” means Employee’s outstanding stock options, stock appreciation rights, restricted stock, restricted
Good Reason. “Good Reason” means Employee’s voluntary termination, within 30 days following the expiration of any Company
cure period (discussed below) following the occurrence of one or more of the following, without Employee’s consent: (a) a material breach of any provision of
this Agreement by the Company; (b) failure by the Company to pay when due any compensation to the Employee; (c) a reduction in the Employee’s base salary
(as set forth in the Offer Letter); (d)(i) failure by the Company to maintain the Employee in the position referred to in the Offer Letter or (ii) assignment to the
Employee of any duties materially inconsistent with the Employee’s positions, authority, duties, responsibilities, powers, functions, reporting relationship or title
or any other action by the Company that results in a material diminution of such positions, authority, duties, responsibilities, powers, functions, reporting
relationship or title, as contemplated by the Offer Letter; excluding in either case of clause (i) or (ii) of this Section 10(h)(d), a reduction or change following an
internal corporate restructuring or Change in Control due to the Company being part of a larger entity, and in either case where Employee assumes similar
functional duties; or (e) a Change in Control, where the successor to the Company does not assume this Agreement, but provided that the event on which the
Change of Control is predicated occurs within 90 days of the service of the Notice of Termination by the Employee; and provided further, however, that the
Employee agrees not to terminate his employment for Good Reason pursuant to clauses (a) through (e) unless (i) the Employee has given the Company at least
30 days’ prior written notice of his intent to terminate his employment for Good Reason, which notice shall specify the facts and circumstances constituting
Good Reason; and (ii) the Company has not remedied such facts and circumstances constituting Good Reason to the reasonable and good faith satisfaction of
the Employee within the cure period after receipt of such notice.
i.
Notice of Termination. A “Notice of Termination” shall mean a written notice from the Company or Employee of termination of the
Employee’s employment which indicates the provision in this Agreement relied upon, if any and which sets forth in reasonable detail the facts and
circumstances claimed to provide a basis for termination of the Employee’s employment under the provision so indicated. A Notice of Termination served by
the Company shall specify the effective date of termination.
and adopted by the shareholders of the Company, pursuant to which employees of the Company may acquire equity securities of the Company.
Plan. The “Plan” means the Company’s 2016 Omnibus Equity Incentive Plan, as amended, or another plan, approved by the Board
Termination Date. “Termination Date” shall mean the date specified in the Notice of Termination which (a) in the case of the
Employee’s death, shall be his date of death; (b) in the case of Disability, the Employee shall not have returned to the full-time performance of his duties within
30 days from the date such Notice of Termination is given; (c) in the case of a termination by the Company (other than a termination for Cause), shall not be
less than 30 days from the date such Notice of Termination is given; and (d) in the case of a termination by Employee, shall not be less than 15 nor more than 30
days from the date such Notice of Termination is given (provided, however, if Employee seeks to terminate employment for Good Reason, then such notice
must be at least 30 days from the date the Notice of Termination is given to the Company, and provided further that the Company has not remedied such facts
and circumstances constituting Good Reason to the reasonable and good faith satisfaction of the Employee).
g.
h.
j.
k.
11. Successors.
a. The Company’s Successors. Any successor to the Company (whether direct or indirect and whether by purchase, merger, consolidation,
liquidation or otherwise) to all or substantially all of the
6
Company’s business and/or assets will assume the obligations under this Agreement and agree expressly to perform the obligations under this Agreement in the
same manner and to the same extent as the Company would be required to perform such obligations in the absence of a succession. For all purposes under this
Agreement, the term “Company” will include any successor to the Company’s business and/or assets or which becomes bound by the terms of this Agreement
by operation of law.
b. Employee’s Successors. The terms of this Agreement and all rights of Employee hereunder will inure to the benefit of, and be enforceable by,
Employee’s personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees.
12. Notice.
a. General. Notices and all other communications contemplated by this Agreement will be in writing and will be deemed to have been duly given when
sent electronically or personally delivered when mailed by U.S. registered or certified mail, return receipt requested and postage prepaid or when delivered by a
nationally-recognized private courier service that has tracking capability. In the case of Employee, notices will be sent to the e-mail address or addressed to
Employee at the home address, in either case which Employee most recently communicated to the Company in writing. In the case of the Company, electronic
notices will be sent to the e-mail addresses of the Chief Executive Officer and mailed notices will be addressed to its corporate headquarters, and all notices will
be directed to the attention of its Chief Executive Officer.
b. Notice of Termination. Any termination of Employee’s employment will be communicated by delivery of a Notice of Termination to the other
party in accordance with Section 12(a) of this Agreement. Such notice will indicate the specific termination provision in this Agreement relied upon, will set
forth in reasonable detail the facts and circumstances claimed to provide a basis for termination under the provision so indicated, and will specify the
termination date in accordance with Section 10(k).
13. Resignation. Upon the termination of Employee’s employment for any reason, Employee will be deemed to have resigned from all officer and/or
director positions held at the Company and its affiliates voluntarily, without any further required action by Employee, as of the end of Employee’s employment
and Employee, at the Board’s request, will execute any documents reasonably necessary to reflect Employee’s resignation.
14. Arbitration. Any controversy, dispute or claim arising out of or relating to this Agreement or breach thereof, with the sole exception of any claim,
breach, or violation arising the Assignment and Confidentiality Agreement, shall be shall first be settled through good faith negotiation. If the dispute cannot be
settled through negotiation, the parties agree to attempt in good faith to settle the dispute by mediation administered by JAMS. If the parties are unsuccessful at
resolving the dispute through mediation, the parties agree to final and binding arbitration before a single arbitrator in the State of Georgia in accordance with the
Rules of the American Arbitration Association. The arbitrator shall be selected by the Association and shall be an attorney-at-law experienced in the field of
corporate law. Any judgment upon any arbitration award may be entered in any court, federal or state, having competent jurisdiction of the parties.
15. Miscellaneous Provisions.
a. Amendments and Waiver. No provision of this Agreement will be amended, modified, waived or discharged unless the amendment,
modification, waiver or discharge is agreed to in writing and signed by Employee and by an authorized officer of the Company (other than Employee). No
waiver by either party of any breach of, or of compliance with, any condition or provision of this Agreement by the other party will be considered a waiver of
any other condition or provision or of the same condition or provision at another time. Any failure to insist upon strict compliance with any of the terms and
conditions of this Agreement shall not be deemed a waiver of any such terms or conditions.
b. Headings. All captions and section headings used in this Agreement are for convenient reference only and do not form a part of this Agreement.
c. Entire Agreement. This Agreement, together with the Assignment and Confidentiality Agreement and Offer Letter, constitutes the entire
agreement of the parties hereto and supersedes in their entirety all prior representations, understandings, undertakings or agreements (whether oral or written
and whether expressed or implied) of the parties with respect to the subject matter hereof, including, but not limited to, any prior severance agreement and/or
any accelerated vesting terms set forth in an individual equity award agreement. Notwithstanding the foregoing, however, nothing herein shall be interpreted to
supersede or otherwise reduce or limit the (i) specific compensation arrangements (including the bonus and equity award) and (ii) eligibility for benefits, in each
case as set forth in the Offer Letter.
7
d. Choice of Law. The validity, interpretation, construction and performance of this Agreement will be governed by the laws of the State of Georgia (with
the exception of its conflict of laws provisions).
e. Severability. The invalidity or unenforceability of any provision or provisions of this Agreement will not affect the validity or enforceability of any
other provision hereof, which will remain in full force and effect. If any provision is held invalid or unenforceable with respect to particular circumstances, it
shall remain in full force and effect in all other circumstances.
f. Withholding. All payments made pursuant to this Agreement will be subject to withholding of applicable income, employment and other taxes.
g. Execution. This Agreement may be executed in two or more counterparts, all of which when taken together shall be considered one and the same
agreement and shall become effective when counterparts have been signed by each party and delivered to the other party, it being understood that both parties
need not sign the same counterpart. In the event that any signature is delivered by facsimile transmission or by e-mail delivery of a “.pdf” format data file, such
signature shall create a valid and binding obligation of the party executing (or on whose behalf such signature is executed) with the same force and effect as if
such facsimile or “.pdf” signature page was an original thereof.
h. Interpretation and Independent Representation. The parties agree that they have both had the opportunity to review and negotiate this
Agreement, and that any inconsistency or dispute related to the interpretation of any of the provisions of this Agreement shall not be construed against either
party. The headings used in this Agreement are for convenience only and are not to be considered in construing or interpreting this Agreement. The Employee
has been advised and had the opportunity to consult with an attorney or other advisor prior to executing this agreement. The Employee understands, confirms
and agrees that counsel to the Company (Becker & Poliakoff LLP) has not acted and is not acting as counsel to the Employee and that Employee has not relied
upon any legal advice except as provided by its own counsel.
Remainder of page intentionally left blank; signature page follows.
8
IN WITNESS WHEREOF, each of the parties has executed this Agreement, in the case of the Company by its duly authorized officer, as of the
Effective Date.
DLH Holdings Corp.
By:
/s/ Zachary C. Parker
Zachary C. Parker
Chief Executive Officer and President
Employee
By:
/s/ G. Maliek Ferebee
G. Maliek Ferebee
[signature page of the Change in Control, Severance and Covenant Agreement]
9
EXHIBIT 21
Name*
Jurisdiction of Incorporation/Organization
DLH HOLDINGS CORP.
SUBSIDIARIES OF REGISTRANT
DLH Solutions, Inc.
Danya International, LLC
Social & Scientific Systems, Inc.
Irving Burton Associates, LLC
Georgia
Maryland
Delaware
Virginia
* In accordance with Item 601(b)(21) of Regulation S-K, the Company has omitted from this Exhibit the names of its subsidiaries which, considered in the
aggregate or as a single subsidiary, do not constitute a significant subsidiary as defined in Rule 1-02(w) of Regulation S-X.
CONSENT OF REGISTERED INDEPENDENT PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference of our report dated December 5, 2021 relating to the consolidated financial statements of DLH
Holdings Corp. (the “Company”) as of and for the years ended September 30, 2021 and 2020 included in this Annual Report on Form 10-K into the Company’s
previously filed Registration Statements on Form(s) S-3 (File Nos. 333-238882, 333-215405, 333-184912, 333-74478 and 333-120423) and Form(s) S-8 (File
Nos. 333-256329, 333-212702, 333-197374, 333-178830, 333-73426, 333-143951 and 333-225153).
EXHIBIT 23.1
/s/ WithumSmith+Brown, PC
New York, New York
December 5, 2021
EXHIBIT 31.1
Certification
I, Zachary C. Parker, certify that:
1
2
3
4
I have reviewed this Annual Report on Form 10-K of DLH Holdings Corp.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the
period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have:
a)
b)
c)
d)
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the period in which this report is being prepared;
designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this
report based on such evaluation; and
disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5
The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent
functions):
a)
b)
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting
which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial
information; and
any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant's internal control over financial reporting.
Date: December 6, 2021
/s/ Zachary C. Parker
Zachary C. Parker
Chief Executive Officer
(Principal Executive Officer)
Certification
I, Kathryn M. JohnBull, certify that:
EXHIBIT 31.2
1
2
3
4
I have reviewed this Annual Report on Form 10-K of DLH Holdings Corp.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with
respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this
report;
The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act
Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)
b)
c)
d)
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the period in which this report is being prepared;
designed such internal control over financial reporting, or caused such internal control over financial reporting to be
designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this
report based on such evaluation; and
disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the
registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially
affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5
The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the
equivalent functions):
a)
b)
all significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report
financial information; and
any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant's internal control over financial reporting.
Date: December 6, 2021
/s/ Kathryn M. JohnBull
Kathryn M. JohnBull
Chief Financial Officer
(Principal Accounting Officer)
Certification of Chief Executive Officer and Chief Financial Officer
Pursuant to 18 U.S.C Section 1350,
As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
EXHIBIT 32
In connection with the Fiscal Year End Report of DLH Holdings Corp. (the “Company”) on Form 10-K for the period ending September 30, 2021, as filed with
the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned, being, Zachary C. Parker, Chief Executive Officer, and Kathryn M.
JohnBull, Chief Financial Officer and Principal Accounting Officer, certify, pursuant to 18 U.S.C. ss.1350, as adopted pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002, that:
(1)
(2)
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations
of the Company.
Dated: December 6, 2021
/s/ Zachary C. Parker
Zachary C. Parker
Chief Executive Officer
(Principal Executive Officer)
/s/ Kathryn M. JohnBull
Kathryn M. JohnBull
Chief Financial Officer
(Principal Accounting Officer)
A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to
the Securities and Exchange Commission or its staff upon request.