ANNUAL REPORT
FY23
Your Mission is Our Passion.
www.dlhcorp.com
TO OUR FELLOW SHAREHOLDERS:
In Fiscal 2023, DLH continued to deliver solid financial results, producing revenue
from a diverse, stable portfolio of contracts, industry leading profitability, and strong
cash flow generation. We focused on deleveraging our balance sheet following our
December 2022 acquisition, and plan to continue to use free cash flow to reduce
future acquisition debt and provide additional opportunities to invest in our company.
Our financial performance demonstrates the value of our long-term strategy to
transform DLH into a premier technology provider. Our highly qualified workforce
remains at the forefront of driving innovative solutions in the expansive federal health
and cyber markets, benefiting millions of Americans, including Veterans, Military
Service Members, individuals dealing with chronic or infectious diseases, underserved
communities, and more.
Recognizing that the key to sustaining uninterrupted support
for critical missions lies in attracting and retaining top-tier
talent, DLH continues to make substantial investments in
our workforce. Our employees solve challenging, complex
problems, and their excellence in program execution results in
top-of-the-line customer satisfaction. This year, DLH obtained
Great Place to Work® certification, an award based entirely on
what current employees say about their work experience. This
achievement is a sign to customers, partners, and prospective
new hires that DLH creates an outstanding employee experience. We’re tremendously
proud of this accomplishment.
process and package over
125M vital prescriptions
to Veterans across the
VETERANS
Our team utilized data
advanced systems to
analysis, continuous
improvement, and
country.
Our technology platform opens the door to high value growth opportunities. To that
end, we have increasingly organized our business around a capability-based go-to
market strategy. Our services and solutions are grouped into three broad categories,
aligned with the long-term needs of our customers:
Digital Transformation
and Cyber Security
Science Research and
Development
Systems Engineering
and Integration
We expect our significant investments in technology, credentials, and capabilities to
deliver value to our customers and shareholders. Following the successful execution
of an acquisition strategy focused on market access and capability expansion, our
solution set now includes artificial intelligence and machine learning, cloud enablement,
DLH www.dlhcorp.com TO OUR FELLOW SHAREHOLDERS:
cybersecurity ecosystem, big data analytics, modeling
and simulation, and more. Our employees leverage these
tools and processes to devise intelligent, scalable systems
that combine human knowledge and observations with
machine learning and data, to modernize obsolete
systems, protect sensitive information, manage large
datasets, and enhance operational efficiency on behalf
of our customers. This year, DLH announced multiple
awards from Institutes within NIH to leverage digital
transformation and cybersecurity capabilities to advance
our customers’ vital health and scientific missions. This
critical, complex work exemplifies the broad range of
customer needs that DLH is now able to address.
MILITARY SERVICE
MEMBERS
DLH drove rapid progress in
defense health. Highlights:
DLH performed market research
into integration of biomedical
engineering, unmanned systems
(UMS) robotics, and autonomous
devices to evaluate products and
capabilities for integration into
military medical battlefield systems.
Supported research into first
ever live tissue study with robotic
platform to overcome signal latency
Many of our customer relationships span decades, and
we leverage this customer intimacy to shape solutions
and expand our contract portfolio through new business
opportunities and growth on existing programs. In recent
years, we have significantly diversified our revenue
sources, reducing concentration risks and broadening
our ability to serve our customers’ needs. As government customers continue to
expand their commitment to cybersecurity and AI – emphases which align with DLH’s
technology strength areas – our addressable markets grow.
applications for medics teaming
limited pilot project focusing on
Collaborated with partners on a
with autonomous casualty care
By fusing our highly differentiated digital transformation and IT modernization
capabilities with our renowned research portfolio domain expertise, the full DLH
enterprise serves as a platform to address a broader range of client solution needs than
ever before. To award work, our customers increasingly
utilize multi-award professional services contracts.
DLH has already won seats on many of these vehicles
and is well positioned to win awards on other strategic
priority contract vehicles which remain pending.
UNDERSERVED
COMMUNITIES
A DLH-supported virtual critical care
network recognized for reaching
out to the most underserved and
vulnerable communities during
COVID-19 pandemic
Built a cloud-based enterprise
web-based application to help a
customer access the quality of
service its grantees provide. In FY23,
DLH monitoring conducted reviews
effecting approximately
255,000 students.
As we embrace our role as marketplace leader, we know
that we must remain committed to our fundamental
values: Integrity and Trust. Performance Excellence.
Agility. Diversity and Inclusion. Our Corporate Social
Responsibility (CSR) ecosystem includes initiatives
focused on civic engagement, Diversity, Equity,
Inclusion, and Belonging (DEIB), and sustainability
efforts. We believe that these initiatives will result in
an empowered workforce, a responsible operating
structure, and an environment in which individual and
FY23 Annual Report
corporate growth can flourish.
I am confident that our strong record, advanced
technology, proven methodology, and unwavering
commitment to solving the complex problems faced
by civilian and military customers alike position our
company to succeed in the years ahead. I cannot wait
to see what lies ahead for our company.
Thank you for your
continued support of DLH.
Zach Parker
PRESIDENT & CEO
DLH Holdings Corp.
THOSE AFFLICTED WITH
INFECTIOUS AND CHRONIC
DISEASES
DLH supports research on topics
spanning cancer, cardiovascular
disease, diabetes, environmental
exposures, and beyond, publishing
dozens of peer reviewed
manuscripts annually.
Highlights include:
Implemented automation and Cloud
technologies that allow researchers
to advance their scientific research
in secure environments
Investigated links between high air
pollution levels and an increase in
breast cancer
Probed the impact of nicotine
exposure on COVID-19 mortalities
DLH www.dlhcorp.com
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, 2023
☐
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)
Name of each exchange on which registered
DLHC
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 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 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
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
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
Non-accelerated filer
☐
☐
Accelerated filer
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 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. ☒
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error
to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive
officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
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, 2023, was $91,396,871.
As of December 4, 2023 there were 14,067,732 shares of the Registrant’s common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
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, 2023.
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
Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
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 9C.
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
2
PAGE
3
9
21
21
22
22
23
23
24
34
35
59
59
60
60
60
60
60
61
61
61
63
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 failure to achieve the anticipated benefits of our recent acquisition or any future acquisition (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; the inability to retain employees and customers; contract awards in connection with re-competes for
present business and/or competition for new business; significant delays or reductions in appropriations for our programs, broader changes in United States
("U.S.") government funding and spending patterns or the inability of the U.S. government to approve new appropriations legislation and avoid a shutdown of
its operations; the risks and uncertainties associated with customer interest in and purchases of new services; our ability to manage our increased debt
obligations; compliance with new bank financial and other covenants; changes in customer 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; regional and national economic conditions in the U.S. and globally, including but not limited to: terrorist
activities or war, changes in interest rates, and significant fluctuations in the equity markets; the impact of inflation and higher interest rates; the impact of any
epidemic, pandemic or health emergency, including the measures to mitigate its effects, and its impact on the economy and demand for our services; 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 and Background
DLH Holdings Corp. ("DLH") delivers improved health and cyber readiness solutions for federal government customers through digital transformation, science
research and development, and systems engineering and integration. We bring a unique combination of government sector experience, proven methodology, and
unwavering commitment to solve the complex problems faced by civilian and military customers alike, doing so by leveraging multiple capabilities, including
cyber technology, artificial intelligence, advanced analytics, cloud-based applications, and telehealth systems.
DLH is a holding company operating through a number of operating subsidiaries. In December 2022, we acquired Grove Resource Solutions, LLC, which
provides research and development, systems engineering and integration, and digital transformations solutions to federal agencies, notably the National
Institutes of Health ("NIH"), U.S. Navy and U.S. Marine Corps.
Competitive Advantages
We believe we are advantageously positioned within our markets through a number of features including, but not limited to:
•
•
•
•
highly credentialed workforce;
predominantly performing as the prime contractor;
strong past performance record across our government contracts; and
strong bipartisan support for our key contracts.
3
We have invested in leading credentials and capabilities that we expect will deliver value to our customers. These investments include development of secure
Information Technology ("IT") platforms; sophisticated data analytic tools and techniques; and implementation process improvement and quality assurance
programs and techniques. We are actively pursuing additional credentials that will support our customers' ever evolving missions.
Solutions and Services
We primarily focus on improved deployment of large-scale health and defense initiatives for multiple agencies within the federal government, including the
Department of Health and Human Services ("HHS"), the Department of Veterans Affairs ("VA"), Department of Defense ("DoD"), Department of Homeland
Security ("DHS"), and many of their sub-agencies.
We deliver services primarily through prime contracts awarded by the federal government through competitive bidding processes. We have a diverse mix of
contract vehicles with various agencies of the federal government, which supports our overall corporate growth strategy. Our revenue is distributed to time and
materials contracts (56%), firm fixed price contracts (22%), and cost reimbursable contracts (22%).
We provide the following services and solutions, which are aligned with the long-term needs of our customers:
• Digital Transformation and Cyber Security;
Science Research and Development; and
•
Systems Engineering and Integration
•
Digital Transformation and Cyber Security
We provide critical digital transformation and cyber security solutions across the federal civilian and cyber defense communities, leveraging advanced
technology to modernize obsolete systems, protect sensitive information, manage large datasets, and enhance operational efficiency. Our suite of tools includes
artificial intelligence and machine learning, cloud enablement, cybersecurity ecosystem, big data analytics, and modeling and simulation.
IT modernization and cyber security maturity are priority initiatives throughout our customer set. Our customers, including numerous institutes and centers
within the NIH, the Defense Health Agency ("DHA"), Tele-medicine and Advanced Technology Research Center ("TATRC"), and US Navy Naval Information
Warfare Center ("NIWC"), rely on our information technology support to enable their vital missions. We work with these customers to reduce risk and build
resilience to cyber and physical threats to the federal government’s infrastructure, providing the full spectrum of cyber capabilities, cryptographic and true cyber
engineering, Certified Information Security Officer ("CISO") / Information System Security Officer ("ISSO") support, risk management frameworks, Continuity
of Operations ("COOP") / Disaster Recovery, and enterprise infrastructure and cloud governance focused on designing and implementing zero trust architecture.
Science Research and Development
We advance scientific knowledge and understanding through our extensive research portfolio and domain expertise. We primarily provide large-scale data
analytics, testing and evaluation, clinical trials research services, and epidemiology studies to support multiple operating divisions within HHS, including NIH
and the Center for Disease Control and Prevention ("CDC"), as well as the Military Health System.
Our employees support innovative, cutting-edge 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 transformative R&D support services. Our decades of experience designing,
conducting, and analyzing studies for our diverse customer base, and our full-service clinical research solutions are designed for each customer’s specific
research development program. Our employees provide expert knowledge and experience that supports our customers’ missions.
System Engineering and Integration
Our employees specialize in delivering engineering solutions that support our customers' evolving needs by rapidly deploying resources, solutions, and services.
This includes specialized engineering expertise, encompassing areas of pharmaceutical delivery logistics, fire protection engineering, biomedical equipment,
and technology engineering on behalf of the VA, NIWC, HHS and other federal customers.
4
We utilize automation to accelerate infrastructure innovation and help customers define a lifecycle for automation assets, as well as set standards for version
control, testing, and release processes that proved a robust foundation for their customers. DLH delivers IT operational resilience and efficiency in parallel with
technology innovation integration, via hybrid and multi-cloud solutions, leveraging integrated services, process automation, advanced tool stacks, and mature
quality processes. Our employees engineer, implement, and operate solutions that demonstrate measurable results to satisfy our customer’s management
requirements, thus helping customers to confidently deploy secure platforms and technologies that reduce operational costs. We have invested in agile software
development credentials for our technical staff, and have achieved Capability Maturity Model Integration ("CMMI") level 3. Our enterprise lifecycle logistics
support services encompass military systems deployed worldwide, as well as scientific and IT systems and peripherals for Federal civilian agencies.
Major Customers
Our revenues are from agencies of the U.S. Federal government. 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, 2023 and 2022, respectively (in thousands):
Department of Health and Human Services
Department of Veterans Affairs
Department of Defense
Department of Homeland Security
Customers with less than 10% share of total revenue
Revenue
Major Contracts
2023
2022
Revenue
Percent of total
revenue
Revenue
Percent of total
revenue
$
$
161,311
138,862
70,325
919
4,455
375,872
42.9 % $
37.0 %
18.7 %
0.2 %
1.2 %
100.0 % $
102,201
126,106
33,612
126,576
6,678
395,173
25.9 %
31.9 %
8.5 %
32.0 %
1.7 %
100.0 %
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 U.S. government, which supports our overall corporate growth strategy. A major contract is defined as a contract or set of contracts
from which we derive at least 10% of our revenues.
The revenue attributable to the VA was derived from 16 separate contracts covering the Company's performance of pharmacy and logistics services in support
of the VA's Consolidated Mail Outpatient Pharmacy ("CMOP") program.
• Nine contracts for pharmacy services, which represent approximately $79.6 million and $70.4 million of revenues for the years ended September 30,
•
2023 and 2022, respectively, are currently operating under a bridge contract through December 31, 2023.
Seven contracts for logistics services represent approximately $59.2 million and $55.7 million of revenues for the years ended September 30, 2023 and
2022, respectively, are currently operating under a bridge contract through December 31, 2023.
The VA has issued a request for proposal for healthcare logistics and pharmacy services for each CMOP location. The procurements were set-aside for a
service-disabled veteran owned small business ("SDVOSB") as the prime contractor. DLH maintains relationships with SDVOSB partners. Should the new
contracts for performance of these services be awarded to a partner of DLH, the Company expects to continue to perform a significant amount of the contract’s
volume of business as a subcontractor. Should the VA conclude that an award to an SDVOSB prime contractor is not in the best interest of the government, they
may reissue a solicitation in an unrestricted competition. DLH believes that its service excellence over many years on the program would provide an advantage
in any competition.
Backlog
At September 30, 2023, our backlog was approximately $704.8 million, of which $169.9 million was funded backlog. At September 30, 2022 our backlog was
$482.5 million, of which $98.9 million was funded backlog.
5
We define backlog as our estimate of remaining future revenue from existing signed contracts, assuming the exercise of all options relating to such contracts and
including executed task orders issued under Indefinite Quantity/Indefinite Delivery ("IDIQ") contracts or if the contract is a single award IDIQ contract.
We define funded backlog as the portion of backlog for which funding is appropriated and allocated to the contract by the customer and authorized for payment
by the customer, once specified work is completed. Funded backlog does not include the full contract value as funding for contracts occurs on a periodic basis.
Circumstances and events may cause changes in the amount of our backlog and funded backlog, including the execution of new contracts, extension of existing
contracts, non-renewal or completion of current contracts, early termination, and adjustments to estimates. Changes in funded backlog may be affected by the
funding cycles of the government. 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.
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.
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 predominantly are the prime contractor on our contracts with federal government customers and compete with several large and small-business
companies in pursuit of acquiring new business. In some cases, we seek to partner with other companies on new business pursuits to improve our competitive
positioning with the customer.
Our competitors include operating units within: Deloitte, Booz Allen Hamilton Holding Corp., CACI International, Inc., BAE Systems, ICF International, Inc.,
Leidos Holdings, Inc., Mantech International Corp., Aglient Technologies Inc., MAXIMUS, Inc., UnitedHealth Group, Inc. operating under Optum, and Westat,
Inc.
®
We compete with these companies by leveraging our differentiating suite of tools and uniquely integrating people and processes and a solid track record of past
performance, resulting in highly competitive proposals. 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 customers (both government and industry partners).
®
®
Additionally, the Federal government may elect to restrict certain procurement activity, 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 efforts, we would be limited to a subcontractor role.
Seasonality
The U.S. government's fiscal year ends on September 30 each year. It is not uncommon for U.S. government agencies to award extra tasks or complete other
contract actions within this timeframe leading up to the fiscal year end in order to avoid losses of unexpended fiscal year funds.
6
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 customers 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 our
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.
Intellectual Property
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 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.
®
®
®
Human Capital Management and Employee Relations
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 customers.
As of September 30, 2023, we employed approximately 3,200 employees performing throughout the U.S. and one location overseas. Management believes that
it has good relations with its employees.
Vision and Values
DLH’s vision is to be the most trusted provider of technology solutions and readiness enhancement services to Federal civilian and military agencies. Through
our work, DLH supports Military Service Members, Veterans, children and families, and other at-risk and underserved communities. As a market influencer and
emerging leader, DLH strives to shape and enhance the sustainability and readiness posture of those we serve, delivering value to our customers and
stakeholders.
DLH stands on strong values including:
•
•
Integrity and Trust - We establish relationships throughout our organization and with customers and partners that are built on a foundation of mutual
trust and respect, which exemplifies the way DLH does business. We are committed to the highest standards of ethical conduct during the course of all
business.
Performance Excellence - We are focused on achieving all requirements, with a passion for continuous improvement in the quality of our services and
products. We strive to be our customers' "best value" provider and attain the highest measure of customer and shareholder satisfaction.
• Diversity and Inclusion - We create and sustain a corporate culture that fosters inclusion of all employees and values each individual's unique talents
and perspectives. We leverage the value of our diversity into every aspect of our business.
• Agility - As we grow, we continue to evolve in a manner that maintains our flexibility and agility. This allows us to anticipate and respond to ever-
changing government service requirements while delivering maximum value to customers and shareholders.
7
Talent Acquisition, Development, and Retention
Our success depends in large part on our ability to attract talent to meet the needs of our customers. To ensure we have the talent to meet the needs of our
customers, we employ broad recruiting and outreach efforts to enable us to attract an inclusive pool of highly qualified candidates. As demand for talent is
highly competitive, we continue to invest in our employees through a variety of benefits and overall program enhancements. We continually review and adapt
our recruiting, hiring, and training efforts to respond to market imperatives and the needs of our customers.
We seek to attract and cultivate high performing talent by providing opportunities for career growth, skills development, and recognition for their contributions
as they work to serve our customers. We provide competitive compensation programs to compete and reward our talented employees. In addition to base
compensation, additional compensatory benefits may include bonus programs and participation in a 401(k) Plan. We have used targeted equity-based grants
with performance and service based vesting conditions to facilitate attracting and retaining key personnel. We also invest in talent development initiatives
including industry-leading learning management solutions, professional credentialing, and licensures. These benefits will further enhance our talented employee
base and augment our efforts to infuse proven best practices into our operations through world-class talent acquisition and talent management tools.
Employee Safety and Health
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 arrangements to address healthcare needs, including health insurance benefits, health savings and flexible
spending accounts, paid time off, family leave, and family care resources.
Company Website and Information
Our corporate headquarters are located at 3565 Piedmont Road NE, Building 3 Suite 700, Atlanta, Georgia 30305. Our telephone number is (770) 554-3545.
Our website is www.dlhcorp.com. The website contains information about our company and operations. Links to the Investor Relations section of our website,
copies of our filings with the U.S. Securities and Exchange Commission ("SEC") on Forms 10-K, 10-Q, 8-K, and all amendments to those reports, can be
viewed and downloaded free of charge as soon as reasonably practicable after the reports and amendments are electronically filed with or furnished to the SEC.
In addition, the SEC maintains a website (www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that
file electronically with the SEC, including DLH. The information on our website is not incorporated by reference into and is not part of this Annual Report on
Form 10-K.
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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, 2023, have affected,
and in some cases could affect, our actual results of operations and cause our results to differ materially from those anticipated in forward looking statements
made herein. Our business, results of operations, cash flows and financial condition may be materially and adversely affected due to any of the following risks.
The risks described below are not the only ones we face. Additional risks we are not presently aware of or that we currently believe are immaterial may also
impair our business operations. The trading price of our common stock could decline due to any of these risks. In assessing these risks, you should also refer to
the other information contained or incorporated by reference in this Annual Report on Form 10-K, including our consolidated financial statements and related
notes.
Risks Relating to Our Business and the Industry in which we Compete
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, 2023 and 2022. We expect that Federal government contracts will continue to be our primary source of revenue for the foreseeable future. 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 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 expected to be 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.
The U.S. government may prefer veteran-owned, minority-owned, women-owned 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 procurement activity 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 U.S. 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.
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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. 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 or actions
taken to address government budget deficits, the national debt, and/or prevailing economic conditions, could directly affect our financial performance. Further,
congressional seats may change during election years, and the balance of spending priorities may change along with them.
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.
VA programs, which accounted for approximately 36.9% and 31.9% of Company revenue for the years ended September 30, 2023 and 2022, respectively, were
exempt from the spending caps established under Federal government sequestration targets enacted in 2013.
Because we depend on U.S. government contracts, a delay in the completion of the U.S. government's budget and appropriations process could delay
procurement of the services we provide and adversely affect our future revenues.
The funding of U.S. government programs is subject to an annual congressional budget authorization and appropriations process. In years when the U.S.
government does not complete its appropriations before the beginning of the new fiscal year on October 1, government operations are typically funded pursuant
to a "continuing resolution," which allows federal government agencies to operate at spending levels approved in the previous appropriations cycle but does not
authorize new spending initiatives. Currently, the government is currently operating under a continuing resolution (CR) which expires on January 19, 2024 for
certain departments and February 2, 2024 for others. When the U.S. government operates under a CR, delays can occur in the procurement of the services and
solutions that we provide and may result in new initiatives being canceled. 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. A federal government shutdown could, however, result in our incurrence of substantial labor or other costs without
reimbursement under customer contracts, the delay or cancellation of programs or the delay of contract payments, which could have a negative effect on our
cash flows and adversely affect our future results of operations.
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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 many 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 customer bases and greater
brand recognition. Our competitors, individually or through relationships with third parties, may be able to provide customers 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 customers.
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 customers 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 customers 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 or change the basis upon which it
reimburses our compensation and other expenses or otherwise limit such reimbursements. These changes could impair our ability to obtain new contracts or win
re-competed contracts or adversely affect our future profit margin. 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. Any costs found to
be improperly allocated or assigned to contracts will not be reimbursed, and any such costs already reimbursed must be refunded and certain penalties may be
imposed. Moreover, if any of the administrative processes and systems are found not to comply with requirements, we may be subjected to increased
government scrutiny and approval that could delay or otherwise adversely affect our ability to compete for or perform contracts or collect our revenues in a
timely manner. Therefore, an unfavorable outcome of an audit could cause actual results to differ materially and adversely from those anticipated. 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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Certain contracts also contain organizational conflict of interest (OCI) clauses that limit our ability to compete for or perform certain other contracts. OCIs arise
any time we engage in activities that (i) make us unable or potentially unable to render impartial assistance or advice to the government; (ii) impair or might
impair our objectivity in performing contract work; or (iii) provide us with an unfair competitive advantage. For example, when we work on the design of a
particular system, we may be precluded from competing for the contract to develop and install that system. Depending upon the value of the matters affected, an
OCI issue that precludes our participation in or performance of a program or contract could cause our actual results to differ materially and adversely from those
anticipated.
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 regard 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 customer 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, 2023, our backlog includes cost reimbursable, time-and-materials, and firm-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.
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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 customers' 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.
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 employees 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. Competition for qualified employees is intense and 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 customers, 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 customers.
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.
The federal government’s appropriation process and other factors may delay the collection of our receivables, and our business may be adversely affected if
we cannot collect our receivables in a timely manner.
We depend on the collection of our receivables to generate cash flow, provide working capital, pay debt and continue our business operations. If the federal
government or any prime contractor for whom we are a subcontractor fails to pay or delays the payment of their outstanding invoices for any reason, our
business and financial condition may be materially and adversely affected. The government may fail to pay outstanding invoices for a number of reasons,
including lack of appropriated funds or lack of an approved budget. Contracting officers have the authority to impose contractual withholdings, which can also
adversely affect our ability to collect timely. If we experience difficulties collecting receivables, it could cause our actual results to differ materially and
adversely from those anticipated. In addition, from time to time, when we are awarded a contract, we incur significant expenses before we receive any contract
payments. These expenses include leasing and outfitting office space, purchasing office equipment, and hiring personnel. In other situations, contract terms
provide for billing upon achievement of specified project milestones. In these situations, we are required to expend significant sums of money before receiving
related contract payments. In addition, payments due to us from government agencies may be delayed due to billing cycles or as a result of failures by the
government to approve governmental budgets in a timely manner. In addition to these factors, poor execution on project startups could impact us by increasing
our use of cash. In certain circumstances, we may defer recognition of costs incurred at the inception of a contract. Such action assumes that we will be able to
recover these costs over the life of the contract. To the extent that a project does not perform as anticipated, these deferred costs may not be considered
recoverable resulting in an impairment charge.
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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 customer 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, storms, flood, power loss,
telecommunication outages, physical break-ins, cyber-attack, ransomware, and similar events. If our information systems become inoperable, or are otherwise
unavailable, these functions would have to be accomplished manually, which in turn could impact our financial viability, due to the increased cost associated
with performing these functions manually.
Our systems and networks may be subject to cybersecurity breaches.
Many of our operations rely heavily upon technology systems and networks to receive, input, maintain and communicate participant and customer 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 customers, and we could suffer reputational damage and a loss of confidence from prospective and existing customers. 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 customers, 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
customers, 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.
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Risks Relating to Acquisitions
In connection with acquisitions, we may be required to take write-downs or write-offs, restructuring and impairment, or other charges that could negatively
affect our business, assets, liabilities, prospects, outlook, financial condition, and results of operations.
Although we conduct extensive due diligence in connection with an acquisition, we cannot assure that this diligence revealed all material issues that may be
present, that it would be possible to uncover all material issues through customary due diligence, or that factors outside of our control will not later arise. We
have also purchased representations and warranties insurance in connection with the acquisition, but there is no assurance that those policies will cover any
losses we might experience from breaches of the sellers’ representations and warranties or otherwise arising from the acquisition. Even if our due diligence
successfully identifies certain risks, unexpected risks may arise and previously known risks may materialize in a manner not consistent with our preliminary risk
analysis. Further, as a result of the acquisition, purchase accounting, and the operation of the combined company after closing, we may be required to take
write-offs or write-downs, restructuring and impairment or other charges that could negatively affect business, assets, liabilities, prospects, outlook, financial
condition and results of operations.
We may have difficulty identifying and executing other acquisitions on favorable terms and therefore may grow at slower than anticipated rates.
One of our potential paths to growth is to selectively pursue acquisitions. Through acquisitions, we may be able to expand our base of customers, increase the
range of solutions we offer to our customers and deepen our penetration of existing markets and customers. We may not identify and execute suitable
acquisitions. To the extent that management is involved in identifying acquisition opportunities or integrating new acquisitions into our business, our
management may be diverted from operating our core business. Without acquisitions, we may not grow as rapidly otherwise, which could cause our actual
results to differ materially and adversely from those anticipated.
We may encounter other risks in regard to making acquisitions, including:
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•
•
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. Further, the integration
process could take longer than anticipated and could result in the loss of key employees, the disruption of each company’s ongoing businesses, result in tax costs
or inefficiencies, or inconsistencies in standards, controls, information technology systems, procedures and policies, any of which could materially adversely
affect our ability to maintain relationships with customers, employees or other third parties, or our ability to achieve the anticipated benefits of the transactions,
and could harm our financial performance. 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.
With respect to our acquisition of Grove Resource Solutions (GRSi) in December 2022, the benefits of the acquisition will depend, in part, on our ability to
successfully combine our businesses and realize the anticipated benefits, including business
16
opportunities and growth prospects from combining our businesses. We may not achieve these objectives within the anticipated time frame or may never realize
these benefits and the value of our common stock may be harmed. The acquisition involves the integration of GRSi’s business with our existing business, which
has been a costly and time-consuming process. If we are unable to successfully or timely integrate our operations with those of GRSi, we may incur
unanticipated liabilities and be unable to realize the revenue growth, synergies, and other anticipated benefits resulting from the acquisition, and our business,
results of operations, and financial condition could be materially adversely affected.
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.
Following our acquisition of Grove Resource Solution, LLC ("GRSi") in December 2022, we amended and restated our credit agreement with First National
Bank of Pennsylvania and certain other lenders (the “Credit Agreement”) and incurred additional indebtedness. 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.
Our increased indebtedness could adversely affect us in a number of other ways, including:
• causing us to be less able to take advantage of business opportunities, such as other acquisition opportunities, and to react to changes in market or
industry conditions;
• increasing our vulnerability to adverse economic, industry, or competitive developments;
• affecting our ability to pay or refinance debts as they become due during adverse economic, financial market, and industry conditions;
• requiring us to use a larger portion of cash flow for debt service, reducing funds available for other purposes;
• decreasing our profitability and/or cash flow;
• causing us to be disadvantaged compared to competitors with less leverage; and
• limiting our ability to borrow additional funds in the future to fund working capital, capital expenditures, and other general corporate purposes.
17
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 or vesting of our outstanding common stock options and restricted stock units may depress our stock price and dilute your ownership of the
Company.
To the extent that options are exercised or 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.
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.
18
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, 2023, 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 26% 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 matters 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 the 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.
An increase in the prices of goods and services could raise the costs associated with providing our services, diminish our ability to compete for new
contracts or task orders and/or reduce customer buying power.
We may experience an increase in the costs in our supply and labor markets due to global inflationary pressures and other various geopolitical factors. We
generate a portion of our revenues through various fixed price and multi-year government contracts which anticipate moderate increases in costs over the term
of the contract. With the current pace of inflation our standard approach to moderate annual price escalations in our bids for multi-year work may be insufficient
to counter inflationary cost pressures. This could result in reduced profits, or even losses, as inflation increases, particularly for fixed priced contracts and our
longer-term multi-year contracts. In the competitive environment in which we operate as a government contractor, the lack of pricing leverage and ability to
renegotiate long-term, multi-year contracts, could reduce our profits, disrupt our business, or otherwise materially adversely affect our results of operations.
19
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, 2023, 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 customers. Since our ability to
incorporate such increases into our fees to our customers is constrained by contractual arrangements with our customers, 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
20
sector companies are not, the result of which could have a material adverse effect on our operating results, cash flows and financial condition.
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 regulations.
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.
Our results of operations could in the future be materially adversely impacted by global, macroeconomic events, such health epidemics, pandemics and
other outbreaks, and the response to contain it.
We face various risks related to health epidemics, pandemics, and similar outbreaks, including the coronavirus (COVID-19) pandemic. The COVID-19
pandemic and the mitigation efforts to control its spread have created significant volatility, uncertainty and economic disruption and adversely impacted the U.S.
and global economies. The extent to which the coronavirus pandemic and recovery activity further 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 which may continue to be taken in response to the pandemic, including our ability to fully perform on our contracts
as a result of government actions; the impact of the pandemic on economic activity and actions taken in response; the effect on our customers and customer
demand for our services and solutions; our ability to sell and provide our services and solutions; and any closures of our and our customers’ 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. Government agencies are our primary customers and the long-term impact of increased government spending in response to
COVID-19 remains uncertain. We continue to monitor the effect of COVID-19 on our business, but for the reasons stated above, we cannot predict the full
impact of COVID-19. Any of these events could materially adversely affect our business, financial condition, results of operations and the market price of our
common stock.
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, 2023, we operate eight locations in the U.S. and one location in Kampala, Uganda:
occupying a total of approximately 99.3 thousand square feet. The Company's corporate headquarters is located at 3565 Piedmont Road NE, Building 3 Suite
700, Atlanta, Georgia 30305, and we presently maintain a National Capital Region office in Bethesda, 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. For the fiscal year ended
September 30, 2023, our total lease expense was approximately $4.0 million. See Note 6. Leases in Part II of this Annual Report on Form 10-K for additional
information.
21
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.
22
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."
Equity Holders
As of September 30, 2023, the number of shareholders of our common stock of record was approximately 88 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.
Dividends
We have not declared or paid any cash dividends on its common stock since inception. We do not intend to pay any cash dividends at this time or in the
foreseeable future.
Recent Sales of Unregistered Securities
None.
Repurchase of Equity Securities
None.
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, 2023. 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.
Equity Compensation Plan Information
Plan Category
Equity Compensation Plans Approved by Security Holders:
Employee stock options
ITEM 6. RESERVED
(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))
2,278,000 $
8.40
1,008,676
23
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, 2023. This discussion contains certain statements that are forward-looking within the meaning
of the Private Securities Litigation Reform Act of 1995. Certain statements contained in this Management’s Discussion and Analysis are forward-looking
statements that involve risks and uncertainties. In addition, any statements that refer to expectations, projections or other characterizations of future events or
circumstances are forward-looking statements. The forward-looking statements are not historical facts, but rather are based on current expectations, estimates,
assumptions and projections about our industry and business. Our actual results could differ materially from the results contemplated by these forward-looking
statements.
Business Overview:
DLH is a holding company operating through a number of operating subsidiaries. In December 2022, we acquired Grove Resource Solutions, LLC ("GRSi"),
which provides research and development, systems engineering and integration, and digital transformations solutions to federal agencies, notably the National
Institutes of Health ("NIH"), U.S. Navy and U.S. Marine Corps. We deliver improved health and cyber readiness solutions for federal government customers
through digital transformation, science research and development, and systems engineering and integration.
We derive 99% of our revenue from agencies of the Federal government, providing services to several agencies including the HHS, VA, DoD, and DHS. The
following table summarizes the revenues by customer for the years ended September 30, 2023 and 2022, respectively (in thousands):
Department of Health and Human Services
Department of Veterans Affairs
Department of Defense
Department of Homeland Security
Customers with less than 10% share of total revenue
Revenue
2023
2022
Revenue
Percent of total
revenue
Revenue
Percent of total
revenue
$
$
161,311
138,862
70,325
919
4,455
375,872
42.9 % $
37.0 %
18.7 %
0.2 %
1.2 %
100.0 % $
102,201
126,106
33,612
126,576
6,678
395,173
25.9 %
31.9 %
8.5 %
32.0 %
1.7 %
100.0 %
The following table summarizes revenues by our markets for the years ended September 30, 2023 and 2022, respectively (in thousands):
Defense and Veteran Health Solutions
Human Services and Solutions
Public Health and Life Sciences
Revenue
2023
2022
Revenue
Percent of total
revenue
Revenue
Percent of total
revenue
$
$
209,187
110,068
56,617
375,872
24
55.7 % $
29.3 %
15.0 %
100.0 % $
159,719
165,970
69,484
395,173
40.4 %
42.0 %
17.6 %
100.0 %
Forward Looking Business Trends:
Our mission is to expand our position as a trusted provider of technology-enabled healthcare and public health services, medical logistics, and readiness
enhancement services to active duty personnel, veterans, and civilian populations and communities. Our primary focus within the defense agency markets
includes cyber security, military service members' and veterans' requirements for telehealth services, behavioral healthcare, medication therapy management,
process management, clinical systems support, and healthcare delivery. Our primary focus within the civilian agency markets includes digital transformation, IT
modernization, 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.
Federal budget outlook for fiscal year 2024:
The President’s budget proposal for fiscal year ("FY") 2024 outlines many initiatives that include investments to rebuild our country’s physical infrastructure,
strengthen supply chains, combat inflation, expand economic opportunity, respond to the changing climate, sustain and strengthen national defense, and bolster
America's public health infrastructure. Specifically, the investment in public health infrastructure involves improving the nation’s readiness for future pandemics
and other biological threats, expanding access to vaccines and healthcare, and defeating diseases and epidemics such as, but not limited to, the opioid and
HIV/AIDS epidemics. The budget's initiatives are further reflected in the budget requests for the HHS, VA, and DoD.
While Congress has not completed the final appropriation bills for the government’s 2024 fiscal year, the Company continues to believe that its key programs
benefit from bipartisan support and does not expect a material impact on its current business base from budget negotiations. If the appropriations bills are not
timely enacted, government agencies operate under a continuing resolution ("CR"), which may negatively impact our business due to delays in new program
starts, delays in contract award decisions, and other factors. On November 16, 2023, the President signed a CR providing funds to the federal government
through January 19, 2024 for several agencies and through February 2, 2024 for the remaining. 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.
Department of Veterans Affairs
The VA is requesting a total of $325.1 billion for FY 2024, an increase of $16.6 billion above the FY 2023 enacted level. It includes $142.8 billion in
discretionary funding, an increase of $3.0 billion, and $182.3 billion in mandatory funding, an increase of $13.6 billion from FY 2023 enacted. The VA research
program is expected to allocate increased funding to advance the Department’s understanding of the impact of traumatic brain injury and toxic exposure(s) on
long-term health outcomes, coronavirus related research and impacts, and precision oncology. The FY 2024 budget request for the VA's research enterprise is
$938.0 million, an increase of $22.0 million from the FY 2023 budget, excluding mandatory funding. In addition, the FY 2024 budget estimates $4.9 billion will
be spent on telehealth treatment in FY 2024, an increase of $78.0 million from the FY 2023 estimate. The VA is continuing to expand this program because of
its ability to leverage VA providers and provide better services to veterans.
Department of Health and Human Services
The FY 2024 budget request proposes $144.3 billion in discretionary budget authority for HHS and $1.7 trillion in mandatory funding for the department. The
budget proposes $48.6 million in discretionary and mandatory resources for NIH, an increase of $920.0 million above FY 2023 enacted, to address the opioid
crisis and ending HIV crises, make new investments in pandemic preparedness and nutrition research, and drive biomedical innovations. The budget also
requests $45.0 million for telehealth, which is an increase of $7.0 million above FY 2023 enacted, to promote health services with telehealth technologies. The
budget also provides for investment in programs that improve the health and well-being of young children and their families. This includes $13.1 billion for the
Office of Head Start, principally to expand eligibility for participation in the program.
25
Department of Defense
The Military Health System ("MHS") is one of the largest health care systems, serving over 9.5 million beneficiaries. As a part of the DoD, the Defense Health
Agency ("DHA") manages a global health care network of military and civilian medical professionals, military hospitals and clinics around the world, and
supports the delivery of integrated health services to MHS beneficiaries. The funding and personnel to support MHS’s mission is referred to as the Unified
Medical Budget ("UMB"). The FY 2024 UMB request for the Defense Health Program ("DHP") is $58.7 billion, an increase of 0.5% from FY 2023 enacted. It
is anticipated that COVID-19 costs will decrease in FY 2024, driving a reduction in the budget request for DHP In Direct Care and Private Sector Care.
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 U.S, When two qualifying small businesses cannot be identified, the VA may
proceed to award contracts following a full and open bid process.
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 for specific pursuits that align with our core markets and corporate growth strategy.
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Results of Operations
Fiscal Year Ended September 30, 2023 as Compared to Fiscal Year Ended September 30, 2022
The following table summarizes, for the years indicated, consolidated statements of operations data expressed (in thousands except for per share amounts, and
as percentages of revenue):
Revenue
Cost of operations
Contract costs
General and administrative costs
Impairment loss of long-lived asset
Corporate development costs
Depreciation and amortization
Total operating costs
Income from operations
Interest expense
Income before provision for income tax (benefit) expense
Provision for income tax (benefit) expense
Net income
Net income per share - basic
Net income per share - diluted
Revenue
Year Ended September 30,
2023
2022
Change
$
375,872
100.0 % $
395,173
100.0 % $
(19,301)
296,016
37,795
7,673
1,735
15,562
358,781
17,091
16,271
820
(641)
1,461
0.11
0.10
$
$
$
78.8 %
10.1 %
2.0 %
0.5 %
4.1 %
95.5 %
4.5 %
4.3 %
0.2 %
(0.2) %
0.4 % $
$
$
322,886
30,730
—
614
7,665
361,895
33,278
2,215
31,063
7,775
23,288
1.82
1.64
81.8 %
7.8 %
— %
0.1 %
1.9 %
91.6 %
8.4 %
0.6 %
7.8 %
2.0 %
5.8 % $
$
$
(26,870)
7,065
7,673
1,121
7,897
(3,114)
(16,187)
14,056
(30,243)
(8,416)
(21,827)
(1.71)
(1.54)
For the year ended September 30, 2023 revenue was $375.9 million, a decrease of $19.3 million or 4.9% over the prior year period. The decrease in revenue is
due primarily to the completion of two task orders awarded under a FEMA contract to support Alaska with its response to COVID-19. The revenue contribution
from those task orders in fiscal year 2022 was $125.8 million. Included in fiscal 2023 revenue is $107.0 million contributed from GRSi subsequent to the
acquisition.
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, 2023,
the contract costs decreased as compared to the prior fiscal year by $26.9 million to approximately $296.0 million primarily due to completion of the FEMA
task orders, offset by the contribution from the acquisition of GRSi.
General and administrative costs are for employees and third parties not directly providing services to our customers, including but not limited to executive
management, bid and proposal, accounting, and human resources. These costs increased as compared to the prior fiscal year by $7.1 million to approximately
$37.8 million primarily due to the acquisition of GRSi.
Impairment loss of long-lived assets is a loss associated with a reduction of the fair value of an asset during the fourth quarter of fiscal 2023, DLH reduced its
leased office space requirement by consolidating underutilized premises as part of a facility rationalization effort, to accurately reflect the operational needs of
the business. As a result, the Company has determined that its Right of Use Assets experienced a reduction in fair value below its associated carrying value of
$7.7 million.
Corporate development costs are incremental due diligence costs, such as legal and accounting fees. Fiscal year 2023 and 2022 costs were associated with the
acquisition of GRSi.
27
For the year ended September 30, 2023, depreciation and amortization costs were approximately $0.8 million and $14.8 million, respectively, as compared to
approximately $1.1 million and $6.6 million, respectively for the prior fiscal year, an aggregate increase of $7.9 million which is primary due to the acquisition
of GRSi during the fiscal year.
Interest Expense
Interest expense includes items such as interest expense and amortization of deferred financing costs on debt obligations. For the year ended September 30,
2023, interest expense was $16.3 million compared to interest expense, net of $2.2 million in the prior year, an increase of approximately $14.1 million over the
prior year period. The increase in interest expense was primarily due to the increase in long-term debt associated with the acquisition of GRSi during the fiscal
year.
Provision for Income Taxes
Provision for Income taxes for the fiscal year ended September 30, 2023 was a reduction of tax by $0.6 million, a decrease of approximately $8.4 million from
the prior fiscal year. The effective tax rate was a negative 72.2% for the fiscal year ending September 30, 2023 and 24.8% for the fiscal year ending
September 30, 2022.
Non-GAAP Financial Measures for Fiscal 2023 and 2022
The Company is presenting certain non-GAAP measures regarding its financial performance for the fiscal years ended September 30, 2023 and 2022. The
measures presented are Adjusted Revenue, Adjusted Operating Income, Adjusted Net Income, Adjusted Diluted Earnings Per Share ("EPS"), Earnings Before
Interest Taxes Depreciation and Amortization (“EBITDA”), EBITDA Margin on Revenue, Adjusted EBITDA, and Adjusted EBITDA Margin on Adjusted
Revenue. In calculating these measures, we have added the corporate development costs associated with completing the GRSi acquisition to our results for
fiscal year 2023 and 2022, removed the impairment loss on certain real estate assets, and removed the contribution from the FEMA task orders from the results
for fiscal year 2022. These resulting measures present our financial performance compared to results delivered in the prior year period. Definitions of these
additional non-GAAP measures are set forth below.
We have prepared these additional non-GAAP measures to eliminate the impact of items that we do not consider indicative of ongoing operating performance
due to their inherently unusual or extraordinary nature. These non-GAAP measures of performance are used by management to conduct and evaluate its
business during its review of operating results for the periods presented. Management and the Company's Board utilize these non-GAAP measures to make
decisions about the use of the Company's resources, analyze performance between periods, develop internal projections and measure management performance.
We believe that these non-GAAP measures are useful to investors in evaluating the Company's ongoing operating and financial results and understanding how
such results compare with the Company's historical performance.
These supplemental performance measurements may vary from and may not be comparable to similarly titled measures by other companies in our industry.
Adjusted Revenue, Adjusted Operating Income, Adjusted Net Income, Adjusted Diluted EPS, EBITDA, Adjusted EBITDA, EBITDA Margin on Revenue, and
Adjusted EBITDA Margin on Adjusted Revenue are not recognized measurements under accounting principles generally accepted in the United States, or
GAAP, and when analyzing our performance investors should (i) evaluate each adjustment in our reconciliation to the nearest GAAP financial measures and (ii)
use the aforementioned non-GAAP measures in addition to, and not as an alternative to, revenue, operating income, net income or diluted EPS, as measures of
operating results, each as defined under GAAP. We have defined these non-GAAP measures as follows:
“Adjusted Revenue” represents revenue less the contribution to revenue from the short-term FEMA task orders.
“Adjusted Operating Income” represents operating income plus the corporate development costs associated with completing the GRSi acquisition in fiscal 2023
and 2022 and the impairment loss on the right of use asset incurred only in fiscal 2023, less the contribution from the FEMA task orders, which occurred only in
fiscal 2022.
“Adjusted Net Income” represents net income including the corporate development costs associated with completing the acquisition, the impairment loss on the
right of use asset, as well as the FEMA task orders.
“Adjusted Diluted EPS” represents diluted EPS calculated using Adjusted Net Income as opposed to net income.
"EBITDA" represents net income before income taxes, interest, depreciation and amortization.
28
“Adjusted EBITDA” represents net income before income taxes, interest, depreciation and amortization and the corporate costs associated with completing the
acquisition, and the impairment loss on the right of use asset less the contribution from FEMA task orders.
“Adjusted EBITDA Margin on Adjusted Revenue” is calculated as Adjusted EBITDA divided by Adjusted Revenue.
Below is a reconciliation of Adjusted Revenue, Adjusted Operating Income, Adjusted Net Income, Adjusted Diluted EPS, EBITDA, Adjusted
EBITDA, EBITDA Margin on Revenue and Adjusted EBITDA Margin on Adjusted Revenue reported for the fiscal years ended September 30, 2023
and 2022 compared to the most directly comparable financial measure calculated and presented in accordance with GAAP as follows (in thousands,
except for per share amounts):
29
Adjusted Revenue
Revenue
Less: FEMA task orders to support Alaska (a)
Adjusted Revenue
Adjusted Operating Income
Operating Income
Impairment loss of long-lived asset (c)
Corporate development costs (b)
Less: FEMA task orders to support Alaska (d)
Adjusted Operating Income
Adjusted Net income (e)
Net Income
Impairment loss of long-lived asset (c)
Corporate development costs (b)
Less: FEMA task orders to support Alaska (d)
Adjustment for tax effect (g)
Adjusted Net Income
Adjusted Diluted Earnings Per Share (f)
Weighted average diluted shares outstanding
Diluted earnings per share
Adjusted Diluted Earnings Per Share
EBITDA, Adjusted EBITDA, EBITDA Margin on Revenue & Adjusted EBITDA Margin on
Adjusted Revenue
Net Income
Interest expense
Depreciation and amortization
Provision for income taxes
EBITDA
Corporate development costs (b)
Impairment loss of long-lived asset (c)
Less: FEMA task order to support Alaska (d)
Adjusted EBITDA
Net income margin on Revenue
EBITDA Margin on Revenue
Adjusted EBITDA Margin on Adjusted Revenue
$
$
$
$
$
$
$
$
$
$
$
2023
2022
Change
$
$
$
$
$
$
$
$
$
$
375,872
—
375,872
17,091
7,673
1,735
—
26,499
1,461
7,673
1,735
—
(2,993)
7,876
14,431
0.10
0.55
1,461
16,271
15,562
(641)
32,653
1,735
7,673
—
42,061
0.4%
8.7%
11.2%
(19,301)
(125,773)
106,472
(16,187)
7,673
1,121
(12,479)
5,086
(21,827)
7,673
1,121
(12,479)
(6,000)
(6,554)
252
(1.54)
(0.46)
(21,827)
14,056
7,897
(8,416)
(8,290)
1,121
7,673
(12,479)
12,983
$
$
$
$
$
$
$
$
$
$
$
395,173
125,773
269,400
33,278
—
614
12,479
21,413
23,288
—
614
12,479
3,007
14,430
14,179
1.64
1.01
23,288
2,215
7,665
7,775
40,943
614
—
12,479
29,078
5.9%
10.4%
10.8%
(a): Represents revenue adjusted to exclude revenue from the short-term FEMA task orders during the fiscal year ended September 30, 2022.
30
(b): Represents corporate development costs we incurred to complete the GRSi transaction. These costs primarily include legal counsel, financial due
diligence, customer market analysis and representation and warranty insurance premiums.
(c): Represents impairment loss of certain long-lived real estate assets associated with a reduction of the fair value of an asset prompted by a triggering
event. During the fourth quarter of fiscal 2023, DLH reduced its leased office space requirement by consolidating underutilized premises as part of an
ongoing facility rationalization effort, to accurately reflect the operational needs of the business. As a result, the Company has determined that its Right
of Use Assets experienced a reduction in fair value below its associated carrying value and recorded a $7.7 million loss of fair value.
(d):Adjusted operating income represents the Company’s consolidated operating income, determined in accordance with GAAP, adjusted to add the
corporate development costs associated with the GRSi acquisition for fiscal year 2023, adjusted to add back the impairment loss of certain real estate
assets and adjusted to exclude the operating income derived from the FEMA task orders. Operating income for the FEMA task orders for the fiscal year
ended September 30, 2022, is derived by subtracting from the revenue attributable to the tasks orders of $125.8 million the following amounts
associated with such task orders: contract costs $112.1 million and general & administrative costs of $1.2 million.
(e) Adjusted net income represents the Company’s consolidated net income, determined in accordance with GAAP, adding back the impairment loss of
long-lived assets and corporate development costs as defined, less the net income derived from the FEMA task orders. There was no net income derived
from the FEMA task orders during the fiscal year ended September 30, 2023. For the fiscal year ended September 30, 2022, net income for the FEMA
task orders is derived by subtracting from the revenue attributable to the tasks orders of $125.8 million the following amounts associated with such task
orders: contract costs of $112.1 million, general & administrative costs of $1.2 million, and provision for income taxes of $3.2 million.
(f) Adjusted diluted earnings per share (adjusted diluted EPS) is calculated by adding back the effect on the Company's diluted EPS determined in
accordance with GAAP, of the impairment loss of long-lived assets and corporate development costs as defined, as well as their tax effect as defined,
and subtracting the effect on diluted EPS for the FEMA task orders.
(g) Tax effect is the impact the tax expense per the tax provision
Liquidity and Capital Management
The Company generated operating income of approximately $17.1 million and $33.3 million for the years ended September 30, 2023 and 2022, respectively and
net income of approximately $1.5 million and $23.3 million for the years ended September 30, 2023 and 2022 respectively. Cash flows from operations totaled
approximately $31.0 million and $1.2 million for the years ended September 30, 2023 and 2022, respectively. The increase in cash from operations was
principally a result of a decrease in accounts receivable.
We used $181.2 million and $0.9 million of cash in investing activities during fiscal years 2023 and 2022, respectively. The cash utilized was predominantly due
to the acquisition of GRSi and capital expenditures in fiscal years 2023 and 2022, respectively.
Cash used provided by financing activities during the fiscal year ended September 30, 2023 was approximately $150.2 million and cash used in financing
activities during the fiscal year ended September 30, 2022 was $24.2 million, respectively. The cash provided by financial activities during the fiscal year ended
September 30, 2023, was primarily due to the debt incurred to finance the acquisition of GRSi during the fiscal year. The activity in the fiscal year ended
September 30, 2022 was primarily due to the early repayment of principal on our secured term loan. During the years ended September 30, 2023 and 2022, the
Company repaid approximately $20.2 million and $24.8 million of secured term loan principal, respectively. We expect to continue to use the operating cash
flow to pay outstanding debt.
31
A summary of the change in cash is presented below for the years ended September 30, 2023 and 2022 (in thousands):
Net cash provided by operating activities
Net cash used in investing activities
Net cash provided by (used in) financing activities
Net change in cash
Sources of Cash
2023
2022
$
$
31,033 $
(181,197)
150,151
(13) $
1,243
(872)
(24,194)
(23,823)
As of September 30, 2023, our immediate sources of liquidity include cash of approximately $0.2 million, accounts receivable, and access to our secured
revolving line of credit. This credit facility provides us with access of up to $70.0 million, subject to certain conditions including eligible accounts receivable.
As of September 30, 2023, we had unused borrowing capacity of $32.0 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.
Credit Facilities
A summary of our credit facilities as of September 30, 2023 is as follows (in millions):
Lender
First National Bank of Pennsylvania
First National Bank of Pennsylvania
Arrangement
Secured term loan (a)
Secured revolving line of credit (b)
Loan Balance
169.8
$
9.5
$
Interest *
1
SOFR + 4.1%
1
SOFR + 4.1%
Maturity Date
December 8, 2027
December 8, 2027
1
Secured Overnight Financing Rate ("SOFR") as of September 30, 2023 was 5.3%.
On September 30, 2019, we executed a floating-to-fixed interest rate swap with First National Bank ("FNB") as counter party. The notional amount in
the floating-to-fixed interest rate swap on September 30, 2023 is $16.2 million and matures in 2024 and the fixed rate of 1.61%. On January 31, 2023,
we executed an additional floating-to-fixed interest rate swap with FNB; the notional amount as of September 30, 2023 is $96.0 million, it matures in
January 2026, and the fixed rate is 4.10%. The total floating-to-fixed swap balance as of September 30, 2023 is $112.2 million. The remaining
outstanding balance of our secured term loan is subject to interest rate fluctuations.
(a) Represents the principal amounts payable on our secured term loan, which is secured by liens on substantially all of the assets of the Company. The
principal of the secured term loan is payable in quarterly installments with the remaining balance due on December 8, 2027.
(b) The secured revolving line of credit has a ceiling of up to $70.0 million and a maturity date of December 8, 2027. The Company accessed funds
from the secured revolving line of credit during the year, but had $9.5 million outstanding balance at September 30, 2023.
The secured term loan and secured revolving line of credit are secured by liens on substantially all of the assets of the Company. The provisions of the
secured term loan and secured revolving line of credit, including financial covenants, are fully described in Note 8 to the consolidated financial
statements.
32
Contractual Obligations as of September 30, 2023
(Amounts in thousands)
Total
Next 12
Months
Payments Due By Period
4-5
2-3
Years
Years
More than 5
Years
Debt obligations
Facility operating leases
Equipment operating lease
Contractual obligations
$
$
179,359 $
23,489
50
202,898 $
8,313 $
3,501
50
11,864 $
38,000 $
7,962
—
45,962 $
133,046 $
5,668
—
138,714 $
—
6,358
—
6,358
Critical Accounting Policies and Estimates
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the U.S.requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period. Significant estimates include valuation of goodwill and intangible assets, and stock-
based compensation. In addition, the Company estimates overhead charges and allocates such charges throughout the year. Actual results could differ from those
estimates.
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 service 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. 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, less accumulated depreciation and amortization. Depreciation and amortization are provided using the straight-
line method over the estimated useful asset lives (P3Y to P7Y) and the shorter of the initial lease term or estimated useful life for leasehold improvements.
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.
33
Intangible assets are originally recorded at fair value and amortized on a straight-line basis over their assessed useful lives. The assessed useful lives of the
assets are P10Y.
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, 2023, we performed an internal goodwill
impairment evaluation with 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, 2023, as no change in business conditions
occurred which would have a material adverse effect on the valuation of goodwill.
Provision for Income Taxes
The Company accounts for income taxes in accordance with the liability method, whereby deferred tax assets and liabilities are determined based on the
difference between the financial statement and tax bases of assets and liabilities, using enacted tax rates in effect for the year in which the differences are
expected to reverse. 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
assets 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 P10Y from the date of grant. Option awards may depend on the 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 method to estimate the fair value of each stock option at the date of grant. Any consideration paid by the option holders to purchase shares is
credited to capital stock.
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 First National
Bank ("FNB") as counter party. The notional amount in the floating-to-fixed interest rate swap on September 30, 2023 is $16.2 million and matures in 2024 and
the fixed rate of 1.61%. On January 31, 2023, we executed an additional floating-to-fixed interest rate swap with FNB; the notional amount as of September 30,
2023 is $96.0 million, it matures in January 2026, and the fixed rate is 4.10%. The total floating-to-fixed swap balance as of September 30, 2023 is
$112.2 million. As interest rates rise due to inflation-related pressures in the economy, we expect to continue to use interest rate swaps to mitigate our cash risk
of rising rates. The Company has determined that a 1.0% increase to the SOFR rate would incrementally impact our interest expense by approximately
$0.7 million per year. As of September 30, 2023, the interest rate was 9.51%.
34
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm (PCAOB ID Number 100)
Consolidated Statements of Operations for the years ended September 30, 2023 and 2022
Consolidated Balance Sheets as of September 30, 2023 and 2022
Consolidated Statements of Cash Flows for the years ended September 30, 2023 and 2022
Consolidated Statements of Changes in Shareholders' Equity for the years ended September 30, 2023 and 2022
Notes to Consolidated Financial Statements
35
Page
36
39
40
41
42
43
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of DLH Holdings Corp.
Opinion on the Consolidated Financial Statements and Internal Control Over Financial Reporting
We have audited the accompanying consolidated balance sheets of DLH Holdings Corp. and Subsidiaries (the “Company”) as of September 30, 2023 and 2022,
the related consolidated statements of operations, cash flows, and changes in shareholders’ equity for each of the years in the two-year period ended September
30, 2023, and the related notes (collectively referred to as the "consolidated financial statements"). We also have audited the Company’s internal control over
financial reporting as of September 30, 2023, based on the criteria established in 2013 Internal Control—Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (“COSO”).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company and its
subsidiaries as of September 30, 2023 and 2022, and the results of their operations and their cash flows for each of the years in the two-year period ended
September 30, 2023, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company
maintained, in all material respects, effective internal control over financial reporting as of September 30, 2023, based on criteria established in 2013 Internal
Control—Integrated Framework issued by COSO.
Basis for Opinion
The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and
for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying management’s report on internal control over
financial reporting. Our responsibility is to express an opinion on the Company’s consolidated financial statements and an opinion on the Company’s internal
control over financial reporting 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 audits to obtain reasonable
assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal
control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the financial statements,
whether due to error or fraud, and performing procedures that responds to those risks. Such procedures included examining, on a test basis, evidence regarding
the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant
estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over
financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing
and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures
as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. A
company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable
detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded
as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that
receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) 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.
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.
36
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.
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 liability
represents management’s estimate of future amounts necessary to pay claims and related expenses related to workplace injuries that have occurred as of the
balance sheet date. The estimated liability of workers’ compensation claims is based on an evaluation of information provided by the Company’s third-party
administrators, coupled with an actuarial estimate of reported and incurred but not reported claims (together, IBNR). The process of arriving at an estimate of
unpaid claims and estimated future losses 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. 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, 2023 required an increased audit effort. As a result, we identified the
Company’s workers’ compensation claims liability 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 obtained an understanding, evaluated the design and tested the
operating effectiveness of the controls over the Company’s accounting for workers’ compensation under accounting principles generally accepted in the United
States of America. 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 parties 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 liability. We
compared prior years' estimated losses to the subsequent actual losses by insurance year to evaluate the Company's estimation process. We tested the
mathematical accuracy of the accrual as of September 30, 2023. We reviewed supporting vendor documentation related to the current year’s base premiums. We
analyzed the qualifications of the Company’s third-party administrators for their expertise in this area.
Business Combination
Critical Audit Matter Description
As disclosed in Note 4 to the consolidated financial statements, effective December 8, 2022, the Company acquired the business operations of Grove Resource
Solutions Inc. (“GRSi”). The Company applied the acquisition method of accounting for the GRSi business combination. This methodology requires the
Company to record assets acquired and liabilities assumed at their respective fair values at the date of acquisition. Any amount of the purchase price paid that is
in excess of the estimated fair value of the net assets acquired is recorded as goodwill. We identified the Company's business combination as a critical audit
matter because of the significant estimates and judgment used in determining the fair values assigned to acquired assets, especially those utilizing management’s
assumptions in determining estimated future cash flows, and the significant auditor effort to audit these assumptions. The Company determines fair value using
widely accepted valuation techniques, primarily discounted cash flow models and market-multiple analyses. These types of analyses require assumptions and
estimates regarding industry and economic factors, the profitability of future business strategies, discount rates, weighted average cost of capital, weighted
average return analysis, contributory asset charges, as well as future revenue, including revenue growth rates, gross margins, operating expenses, and cash
flows.
Response:
37
The following are the primary procedures we performed to address this critical audit matter. We obtained an understanding, evaluated the design and tested the
operating effectiveness of the controls over the Company’s accounting for the business combination under accounting principles generally accepted in the
United States of America, and tested the estimates of the fair value of the acquired assets and assumed liabilities. We determined that the business combination
was accounted for in accordance with accounting principles generally accepted in the United States of America. We obtained a schedule of, and related
documentation for, the allocation of the purchase price to the assets acquired and liabilities assumed, including amounts assigned to goodwill and intangible
assets, and performed a test of details on the underlying key data and information related to the business combination and fair value estimates. We evaluated the
appropriateness of specific key inputs supporting management’s estimates, comprising estimated future revenue, including revenue growth rates, gross margins,
operating expenses, and cash flows. Additionally, with the assistance of our internal valuation specialists, we evaluated the appropriateness of unobservable
inputs such as weighted average cost of capital, weighted average return analysis, discount rates, and contributory asset charges.
/s/ WithumSmith+Brown, PC
We have served as the Company's auditor since 2007.
East Brunswick, New Jersey
December 6, 2023
PCAOB ID Number 100
38
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
Impairment loss of long-lived asset
Corporate development costs
Depreciation and amortization
Total operating costs
Income from operations
Interest expense
Income before provision for income taxes
Provision for income tax (benefit) 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.
39
Year Ended
September 30,
2023
2022
$
375,872 $
395,173
296,016
37,795
7,673
1,735
15,562
358,781
17,091
16,271
820
(641)
1,461 $
0.11 $
0.10 $
13,704
14,431
322,886
30,730
—
614
7,665
361,895
33,278
2,215
31,063
7,775
23,288
1.82
1.64
12,830
14,179
$
$
$
DLH HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands except par value of shares)
ASSETS
Current assets:
Cash
Accounts receivable
Other current assets
Total current assets
Goodwill
Intangible assets, net
Operating lease right-of-use assets
Deferred taxes, net
Equipment and improvements, net
Other long-term assets
Total assets
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued liabilities
Debt obligations - current, net of deferred financing costs
Accrued payroll
Operating lease liabilities - current
Other current liabilities
Total current liabilities
Long-term liabilities:
Debt obligations - long-term, net of deferred financing costs
Operating lease liabilities - long-term
Deferred taxes, net
Other long-term liabilities
Total long-term liabilities
Total liabilities
Shareholders' equity:
Common stock, $0.001 par value; authorized 40,000 shares; issued and outstanding 13,950 and
13,047 at September 30, 2023 and 2022, respectively
Additional paid-in capital
Retained earnings
Total shareholders’ equity
Total liabilities and shareholders' equity
The accompanying notes are an integral part of these consolidated financial statements.
40
September 30,
2023
September 30,
2022
$
$
$
$
215 $
59,119
3,067
62,401
138,161
124,777
9,656
3,070
1,590
186
339,841 $
29,704 $
17,188
13,794
3,463
638
64,787
155,147
15,908
—
1,560
172,615
237,402
14
99,974
2,451
102,439
339,841 $
228
40,496
2,878
43,602
65,643
40,884
16,851
—
1,704
328
169,012
26,862
—
9,444
2,235
—
38,541
20,416
16,461
1,534
—
38,411
76,952
13
91,057
990
92,060
169,012
DLH HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
Operating activities
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
Amortization of deferred financing costs charged to interest expense
Stock-based compensation expense
Deferred taxes, net
Impairment loss of long-lived asset
Changes in operating assets and liabilities
Accounts receivable
Other assets
Accrued payroll
Deferred revenue
Accounts payable and accrued liabilities
Other 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 revolving line of credit
Repayment of revolving line of credit
Proceeds from debt obligations
Repayments of debt obligations
Payments of deferred financing costs
Proceeds from issuance of common stock upon exercise of options and warrants
Payment of tax obligations resulting from net exercise of stock options
Net cash provided by (used in) financing activities
Net change in cash
Cash - beginning of year
Cash - 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
Common stock surrendered for the exercise of stock options
The accompanying notes are an integral part of these consolidated financial statements.
41
Year Ended
September 30,
2023
2022
$
1,461 $
23,288
15,562
2,182
1,922
(4,604)
7,673
6,845
1,757
(3,477)
—
(75)
1,787
31,033
(180,572)
(625)
(181,197)
205,268
(195,721)
168,000
(20,188)
(7,666)
1,108
(650)
150,151
(13)
228
215 $
14,153 $
5,604 $
238 $
$
$
$
$
7,665
664
2,608
358
—
(7,049)
1,387
319
(22,273)
(5,855)
131
1,243
—
(872)
(872)
—
—
17,000
(41,750)
—
837
(281)
(24,194)
(23,823)
24,051
228
1,528
9,282
256
DLH HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the years ended September 30, 2023 and 2022
(Amounts in thousands)
Year Ended September 30, 2023
Balance at September 30, 2022
Issuance and fair value adjustment of common stock in business combination
Expense related to director restricted stock units
Expense related to employee stock-based compensation
Stock issued for director restricted stock units
Exercise of stock options
Common stock surrendered for the exercise of stock options
Net income
Balance at September 30, 2023
Year Ended September 30, 2022
Balance at September 30, 2021
Expense related to director restricted stock units
Expense related to employee stock options
Stock issued for director restricted stock units
Exercise of stock options
Common stock surrendered for the exercise of stock options
Exercise of stock warrants
Net income
Balance at September 30, 2022
Common Stock
Shares
Amount
Additional
Paid-In
Capital
Retained Earnings
(Accumulated
Deficit)
Total
Shareholders'
Equity
13,047 $
527
—
—
50
393
(67)
—
13,950 $
13 $
1
—
—
—
—
—
—
14 $
91,057 $
6,538
718
1,204
—
1,107
(650)
—
99,974 $
990 $
—
—
—
—
—
1,461
2,451 $
92,060
6,539
718
1,204
—
1,107
(650)
1,461
102,439
Common Stock
Shares
Amount
Additional
Paid-In
Capital
Accumulated
Deficit
Total
Shareholders'
Equity
12,714 $
—
—
53
257
(31)
54
—
13,047 $
13 $
—
—
—
—
—
—
—
13 $
87,893 $
648
1,960
—
637
(281)
200
—
91,057 $
(22,298) $
—
—
—
—
—
—
23,288
990 $
65,608
648
1,960
—
637
(281)
200
23,288
92,060
The accompanying notes are an integral part of these consolidated financial statements.
42
DLH HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2023
1. Basis of Presentation and Principles of Consolidation
The accompanying consolidated financial statements include the accounts of DLH Holdings Corp. and 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. Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of
assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses
during the reporting periods. The most significant of these estimates and assumptions relate to costs including overhead and its allocation, assessing fair value of
acquired assets and liabilities accounted for through business acquisitions, valuing and determining the amortization periods for long-lived intangible assets,
interest rate swaps, stock-based compensation, right-of-use assets and leases liabilities, and 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.
Revenue
The Company's revenues from contracts with customers are derived from offerings that include technology-enabled business process outsourcing, program
management solutions, and public health research and analytics, substantially within the U.S. government and its agencies. The Company has various types of
contracts including time-and-materials contracts, cost-reimbursable contracts, and firm-fixed-price contracts.
We consider a contract with a customer to exist when there is a commitment by both parties (customer and Company), payment terms are determinable, there is
commercial substance, and collectability is probably in accordance with Accounting Standards Codification ("ASC") No. 606, "Revenue from Contracts with
Customers" ("Topic 606").
We recognize revenue over time when there is a continuous transfer of control to our customer as performance obligations are satisfied. For our U.S.
government contracts, this continuous transfer of control to the customer is transferred over time and revenue is recognized based on the extent of progress
toward completion of the performance obligation. We consider control to transfer when we have a right to payment. In some instances, the Company
commences providing services prior to formal approval to begin work from the customer. The Company considers these factors, the risks associated with
commencing work, and legal enforceability in determining whether a contract exists under Topic 606.
Contract modification can occur throughout the life of the contract and can affect the transaction price, extend the period of performance, adjust funding, or
create new performance obligations. We review each modification to assess the impact of these contract changes to determine if it should be treated as part of
the original performance obligation or as a separate contract. 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.
43
For service contracts, we satisfy our performance obligations as services are rendered. We use cost-based input and time-based output methods to measure
progress based on the contract type.
•
•
•
Time and material - We bill the customer per labor hour and per material, and revenue is recognized in the amount invoiced as the amount corresponds
directly to the value of our performance to date. Revenue is recognized to the extent of billable rates times hours delivered plus materials and other
reimbursable costs incurred.
Cost reimbursable - We record reimbursable costs as incurred, including an estimated share of the contractual fee earned.
Firm fixed price - We recognize revenue over time using a straight-line measure of progress.
Contract costs generally include direct costs such as labor, materials, subcontract costs, and indirect costs identifiable with or allocable to a specific contract.
Costs are expensed as incurred and include an estimate of the contractual fees earned. Contract costs incurred for U.S. government contracts, including indirect
costs, are subject to audit and adjustment by various government audit agencies. Historically, our adjustments have not been material.
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 Accounts receivable, 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 or prepayment for services to be rendered.
Fair Value of Financial Instruments
The carrying amounts of the Company's cash and cash equivalents, accounts receivable, contract assets, contract liabilities, 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.
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. 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.
Lease Liabilities
The Company has 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 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 secured term loan 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, 2023, operating leases for facilities and equipment have remaining lease terms of less than 1 year to 8 years.
44
Goodwill
At September 30, 2023, we performed an internal goodwill impairment evaluation on the year-end carrying value of approximately $138.2 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, 2023, as no change in business conditions occurred which
would have a material adverse effect on the valuation of goodwill. 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, 2022.
Provision for Income Taxes
The Company accounts for income taxes in accordance with the asset and 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
assets 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, 2023
and 2022. We report interest and penalties as a component of provision for income taxes. For the years ended September 30, 2023 and 2022, we recognized no
interest and no penalties related to income taxes.
Stock-based 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 the 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 the
Monte Carlo method to estimate the fair value of each stock option at the date of grant. Any consideration paid by the option holders to purchase shares is
credited to capital stock.
Stock-based Compensation Expense
Stock-based 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 stock-based 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 method that utilizes various probability factors and other criterion in establishing fair value of the grant.
The related stock-based compensation expense is recognized over the service period. Stock based compensation is reliant on continued employment with the
Company. These arrangements are forfeited upon employee separation and accounted for as they occur.
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.
Receivables
Receivables include amounts billed and currently due from customers where the right to consideration is unconditional and amounts unbilled. Both billed and
unbilled amounts are non-interest bearing, unsecured, and recognized at an estimated realizable value that include costs and fees, and are generally expected to
be billed and received within a single year. We evaluate our receivables for expected credit losses and estimate expected credit losses if appropriate based on
customers collections. No allowance for doubtful accounts was deemed necessary at either September 30, 2023 or September 30, 2022.
45
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 at cost. As of September 30, 2023 and 2022, 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, 2023 and 2022, 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 evaluates the impact of global markets and economic factors on our industry and the potential for adverse effects on the Company's consolidated
financial position and its operations. As of September 30, 2023, there was no indication of any global or economic impacts to our industry.
3. New Accounting Pronouncements
In March 2020 and January 2021, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2020-04, "Reference Rate
Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting” and ASU No. 2021-01, “Reference Rate Reform (Topic 848):
Scope,” respectively (collectively, “Topic 848”). Topic 848 provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships
and other transactions that reference the London Interbank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued because of reference
rate reform. In December 2022, FASB issued ASU 2022-06 "Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848" which defers the
end date for electing the relief provided in Topic 848 from December 31, 2022 to December 31, 2024. In the first quarter of fiscal 2023, the Company adopted
the optional expedients and exceptions provided in Topic 848. The adoption did not have a material impact on the Company’s consolidated financial statements.
DLH adopted the standard in fiscal year 2023 by virtue of the loan modification on December 8, 2022 that converted the basis of the interest rate from LIBOR
to Secured Overnight Financing Rate ("SOFR"). DLH had no other contracts or offerings that used LIBOR as a basis for rates.
4. Business Combination
Acquisition of Grove Resource Solutions, LLC
On December 8, 2022, the Company acquired 100% of the equity interests of GRSi for a purchase price of $188 million, inclusive of the working capital
adjustment completed and paid. The acquisition was financed through a combination of:
46
•
•
borrowings of $181.5 million under the Company’s amended and restated credit facility; and
common stock issued of approximately 0.5 million shares, which were valued at $6.5 million in the aggregate, based on the shares issued to the previous
owners as determined by the equity purchase agreement and the stock price on the acquisition date.
The acquisition of GRSi was consistent with the Company’s growth strategy, as it provided contract diversification, expansion of key capabilities and increased
presence in the military health market. The goodwill derived from this transaction is primarily due to these attributes.
The Company has used the acquisition method of accounting for this transaction, whereby the assets acquired and liabilities assumed are recognized based upon
their estimated fair values at the acquisition date.
The purchase price for GRSi was $188 million adjusted to reflect acquired cash, assumed liabilities and net working capital adjustments.
The Purchase Agreement contains customary representations, warranties and covenants by the parties. Subject to certain limitations and conditions, the seller
and the equity holders of the seller do not have indemnity obligation for damages resulting from breaches or inaccuracies of the representations, warranties, and
covenants of the seller, GRSi and the equity holders as set forth in the Purchase Agreement. The Purchase Agreement also provided for the establishment of an
escrow account in order to satisfy (i) any downward adjustment of the purchase price base on GRSi's net working capital at the closing and (ii) certain specified
indemnification obligations of the seller and equity holders that may arise following the closing. The escrow account is funded by an aggregate amount of
approximately $4.3 million and the stock consideration. A representations and warranties insurance policy has been purchased by the Company in connection
with the Purchase Agreement, under which the Company may seek recourse for breaches of the representations and warranties of the seller, GRSi and the equity
holders. The representations and warranties insurance policy is subject to certain customary exclusions and a deductible.
In accordance with ASU 2017-01, the Company evaluated the transaction as an acquisition of a business. The Company has assessed the acquisition price to the
fair value of the assets and liabilities of GRSi at the acquisition date. We accounted for the total acquisition consideration and allocation of fair value of the
related assets and liabilities at December 8, 2022 as follows (in thousands):
Purchase price for GRSi
Purchase price allocation:
Cash
Accounts receivable
Other current assets
Equipment and improvements, net
Intangible assets
Accounts payable and accrued expenses
Payroll liabilities
Other current liabilities
Other long-term assets and liabilities
Identifiable net assets acquired
Goodwill
$
187,997
747
25,468
1,354
463
98,688
(2,449)
(7,826)
(325)
(781)
115,339
72,658
$
All operating units are aggregated into a single reportable segment. The acquisition of GRSi did not create an additional reportable segment as all operations
report to a single Chief Operating Decision Maker (CODM), serve a similar customer base, and provide similar services within a common regulatory
environment. The goodwill represents intellectual capital and the acquired workforce, of which both do not qualify as a separate intangible asset.
During the year ended September 30, 2023, following the completion of the acquisition, GRSi contributed approximately $107.0 million of revenue and $4.4
million of income from operations, which includes $8.2 million of non-cash intangible asset amortization expense.
47
The unaudited pro forma information below is presented for informational purposes only and is not necessarily indicative of our results if the acquisition had
taken place on that date. The pro forma information was prepared by combining our reported historical results with the historical results of GRSi for the pre-
acquisition periods. In addition, the reported historical amounts were adjusted for the following items, net of associated tax effects:
•
•
•
•
The impact of recording GRSi's intangible asset amortization.
The impact of interest expense for the new credit facility.
The removal of legacy GRSi director's fees.
The removal of transaction costs for the acquisition incurred by GRSi.
The following table presents certain unaudited results for the year ended September 30, 2023 as though the acquisition of GRSi had occurred on October 1,
2022 (in thousands):
Pro forma results
Revenue
Net income
Number of shares outstanding - basic
Number of shares outstanding - diluted
Basic earnings per share
Diluted earnings per share
5. Revenue Recognition
Twelve Months Ended
September 30,
2023
2022
$
402,958 $
2,054
13,704
14,431
$0.15
$0.14
507,251
18,912
12,830
14,179
$1.47
$1.33
The following table summarizes the contract balances recognized within the Company's consolidated balance sheets at September 30, 2023 and 2022 (in
thousands):
Contract assets
Disaggregation of revenue from contracts with customers
2023
2022
$
20,542 $
7,682
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 presents our revenue disaggregated by these categories:
Revenue by customer for the years ended September 30, 2023 and 2022 (in thousands):
Department of Health and Human Services
Department of Veterans Affairs
Department of Defense
Department of Homeland Security
Other
Revenue
48
2023
2022
$
$
161,311 $
138,862
70,325
919
4,455
375,872 $
102,201
126,106
33,612
126,576
6,678
395,173
Revenue by contract type for the years ended September 30, 2023 and 2022 (in thousands):
Time and Materials
Cost Reimbursable
Firm Fixed Price
Revenue
2023
2022
$
$
209,951 $
81,797
84,124
375,872 $
308,944
46,231
39,998
395,173
Revenue by whether the Company acts as a prime contractor or a subcontractor for the years ended September 30, 2023 and 2022 (in thousands):
Prime Contractor
Subcontractor
Revenue
6. Leases
2023
2022
$
$
356,792 $
19,080
375,872 $
366,571
28,602
395,173
The following table summarizes lease balances presented on our consolidated balance sheets at September 30, 2023 and 2022 (in thousands):
Operating lease right-of-use assets (a)
Operating lease liabilities, current
Operating lease liabilities, long-term
Operating lease liabilities
2023
2022
9,656 $
16,851
3,463 $
15,908
19,371 $
2,235
16,461
18,696
$
$
$
(a) Impairment loss of long-lived assets is a loss associated with a reduction of the fair value of an asset prompted by a triggering event. During the fourth
quarter of fiscal 2023, DLH reduced its leased office space requirement by consolidating underutilized premises as part of an ongoing facility rationalization
effort, to accurately reflect the operational needs of the business. As a result, the Company has determined that its Right of Use Assets experienced a reduction
in fair value below its associated carrying value and recorded a $7.7 million loss of fair value.
For the years ended September 30, 2023 and 2022, total lease costs for our operating leases are as follows (in thousands):
Operating
Short-term
Variable
Sublease income (a)
Lease costs
2023
2022
3,911 $
287
95
(282)
4,011 $
3,548
114
120
(258)
3,524
$
$
(a): 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 includes two additional 1-year term extension options.
49
The Company's future minimum lease payments as of September 30, 2023 are as follows (in thousands):
For the Fiscal Year Ending September 30,
2024
2025
2026
2027
2028
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
$
$
$
$
4,612
3,928
3,700
2,627
2,377
6,295
23,539
(4,168)
19,371
(3,463)
15,908
At September 30, 2023, the weighted-average remaining lease term and weighted-average discount rate are 6.3 years and 6.3%, respectively. The calculation of
the weighted-average discount rate was determined based on borrowing terms from our secured term loan.
Other information related to our leases is as follows for the years ending September 30, 2023 and 2022 (in thousands):
Cash paid for amounts included in the measurement of lease liabilities
New lease liabilities, net of new right-of-use-assets
Other lease information
7. Supporting Financial Information
Accounts receivable
2023
2022
$
$
4,468 $
120
4,588 $
3,411
—
3,411
The following table summarizes accounts receivable presented on our consolidated balance sheets at September 30, 2023 and 2022 (in thousands):
Billed receivables
Contract assets
Allowance for doubtful accounts
Accounts receivable
Other current assets
2023
2022
38,577 $
20,542
—
59,119 $
32,814
7,682
—
40,496
$
$
The following table summarizes other current assets presented on our consolidated balance sheets at September 30, 2023 and 2022 (in thousands):
Prepaid licenses and other expenses
Prepaid insurance and benefits
Other receivables
Other current assets
2023
2022
1,330 $
743
994
3,067 $
1,196
737
945
2,878
$
$
50
Goodwill
The change in the carrying amount of goodwill as follows presented on our consolidated balance sheets at September 30, 2023 and 2022 (in thousands):
Balance at September 30, 2022
Increase from GRSi acquisition (a)
Tax Adjustment GRSI acquisition
Goodwill
$
$
65,643
72,658
(140)
138,161
Ref (a); The Company has completed its valuation assessment of the GRSi acquisition. Please refer to Note 4 for more information.
Intangible assets, net
The following table summarizes intangible assets, net presented on our consolidated balance sheets at September 30, 2023 and 2022 (in thousands):
2023
2022
Intangible assets
Customer contracts and related customer relationships
Backlog
Trade names
Covenants-not-to-compete
Total intangible assets
Less accumulated amortization:
Customer contracts and related customer relationships
Backlog
Trade names
Covenants-not-to-compete
Total accumulated amortization
Intangible assets, net
$
$
$
$
113,622 $
37,249
13,034
637
164,542 $
(29,929)
(7,273)
(2,185)
(378)
(39,765) $
124,777 $
Total amount of amortization expense for each of the years ended September 30, 2023 and 2022 was $14.8 million and $6.6 million, respectively.
As of September 30, 2023, the estimated annual amortization expense is as follows (in thousands):
For the Fiscal Year Ending September 30,
2024
2025
2026
2027
2028
Thereafter
Amortization expense
51
$
$
47,044
15,237
3,051
522
65,854
(19,731)
(3,875)
(1,048)
(316)
(24,970)
40,884
16,456
16,456
15,721
14,694
14,694
46,756
124,777
At September 30, 2023, the weighted-average remaining amortization period in total was 8.3 years. At September 30, 2023, the weighted-average amortization
period for customer contracts and related customer relationships, backlog, trade names and covenants-not-to-compete was 8.2 years, 8.3 years, 8.7 years, 6
years, respectively.
Equipment and improvements, net
The following table summarizes equipment and improvements, net presented on our consolidated balance sheets at September 30, 2023 and 2022 (in
thousands):
Furniture and equipment
Computer equipment and software
Leasehold improvements
Total equipment and improvements
Less: accumulated depreciation and amortization
Equipment and improvements, net
2023
2022
$
$
$
1,790 $
6,479
1,614
9,883 $
(8,293)
1,590 $
893
6,723
1,614
9,230
(7,526)
1,704
Depreciation and amortization was $0.8 million and $1.1 million for the years ended September 30, 2023 and 2022, respectively.
Accounts payable and accrued liabilities
The following table summarizes accounts payable and accrued liabilities presented on our consolidated balance sheets at September 30, 2023and 2022 (in
thousands):
Accounts payable
Accrued benefits
Accrued bonus and incentive compensation
Accrued workers' compensation insurance
Accrued Interest
Other accrued expenses
Accounts payable and accrued liabilities
Accrued payroll
2023
2022
$
$
12,603 $
6,414
4,719
2,369
1,309
2,290
29,704 $
The following table summarizes accrued payroll presented on our consolidated balance sheets at September 30, 2023 and 2022 (in thousands):
Accrued Leave
Accrued payroll
Accrued payroll taxes
Accrued severance
Accrued payroll
2023
2022
$
$
9,621 $
2,487
1,173
513
13,794 $
52
11,886
3,857
3,625
4,880
—
2,614
26,862
6,345
1,946
411
742
9,444
Debt obligations
The following table summarizes debt obligations presented on our consolidated balance sheets at September 30, 2023 and 2022 (in thousands):
Secured revolving line of credit
Secured term loan
Less: unamortized deferred financing costs
Net bank debt obligations
Less: current portion of debt obligations, net of deferred financing costs (a)
Long-term portion of debt obligations, net of deferred financing costs
2023
2022
$
$
$
9,546 $
169,813
(7,024)
172,335 $
(17,188)
155,147 $
—
22,000
(1,584)
20,416
—
20,416
As of September 30, 2023, we have satisfied mandatory principal payments on our secured term loan.
(a) Current portion comprises term loan amortization of $8.3 million and the $9.5 million outstanding balance on the secured revolving line of credit, net of
$7.0 million of unamortized deferred financing costs.
Interest expense
The following table summarizes interest expense presented on our consolidated statements of operations for the years ended September 30, 2023 and 2022 (in
thousands):
Interest expense (a)
Interest income (b)
Amortization of deferred financing costs (c)
Interest expense
(a): Interest expense on borrowing
(b): Interest income
(c): Amortization of expenses related to secured term loan and secured revolving line of credit.
8. Credit Facilities
2023
2022
$
$
14,153 $
(64)
2,182
16,271 $
1,574
(23)
664
2,215
A summary of our credit facilities as of September 30, 2023 and 2022 is as follows (in millions):
Arrangement
Secured term loan (a) due
December 8, 2027
Secured revolving line of credit
(b) due December 8, 2027
$
$
2023
Loan Balance
Interest
169.8
1
SOFR + 4.1%
9.5
1
SOFR + 4.1%
Arrangement
Secured term loan (a) due
September 30, 2025
Secured revolving line of credit
(b) due September 30, 2025
$
$
2022
Loan Balance
Interest
22.0
2
LIBOR + 2.5%
—
2
LIBOR + 2.5%
1
Secured Overnight Financing Rate ("SOFR") as of September 30, 2023 was 5.3%.
2
LIBOR rate as of September 30, 2022 was 2.52%.
(a) Represents the principal amounts payable on our term loan, which 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 December 8, 2027.
53
On September 30, 2019, we executed a floating-to-fixed interest rate swap with First National Bank ("FNB") as counter party. The notional amount in the
floating-to-fixed interest rate swap on September 30, 2023 is $16.2 million and matures in 2024 and the fixed rate of 1.61%. On January 31, 2023, we executed
an additional floating-to-fixed interest rate swap with FNB; the notional amount as of September 30, 2023 is $96.0 million, it matures in January 2026, and the
fixed rate is 4.10%. The total floating-to-fixed swap balance as of September 30, 2023 is $112.2 million. As a result of entering these agreements, for the twelve
months ended September 30, 2023, interest expense has been decreased by approximately $0.9 million.
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 total leverage ratio not exceeding the ratio of
4.50:1.00 to 2.00:1.00 through maturity. The total leverage 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-cash charges,
losses or expenses, including stock-based compensation, and (v) non-recurring charges, losses or expenses to include transaction and non-cash equity expense.
We are in compliance with all loan covenants and restrictions as of September 30, 2023.
We are required to pay quarterly amortization payments, which commenced in December 2022. The annual amortization amounts are $14.3 million each for
fiscal years 2023 and 2024, $19.0 million each for fiscal years 2025 and 2026, and $23.8 million for fiscal year 2027, with the remaining unpaid loan balance
due at maturity in December 2027. The quarterly payments are equal installments. The Company made a mandatory payment of $3.6 million and voluntary
prepayments of $5.9 million during the quarter ended September 30, 2023 bringing the outstanding principal balance on the secured term loan to $169.8 million.
We have satisfied the mandatory principal payment the quarter ended December 31, 2023 and partially satisfied the mandatory prepayment for the quarter ended
March 31, 2024.
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 2.50:1.00; (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 2.50:1.00 but greater than or equal to
1.50:1.00; 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 1.50:1.00. 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.
(b) The secured revolving line of credit has a ceiling of up to $70.0 million; as of September 30, 2023, we had unused borrowing capacity of $32.0 million,
which is net of outstanding letters of credit. Borrowing on the secured revolving line of credit is secured by liens on substantially all of the assets of the
Company. The Company accessed funds from the secured revolving line of credit during the year, which had a $9.5 million outstanding balance at
September 30, 2023. As part of the secured revolving line of credit, the lenders agreed to a sublimit of $10.0 million for letters of credit for the account of the
Company, subject to applicable procedures.
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, 2023, there were 1.0 million shares
available for grant.
Total stock-based compensation expense, presented in the table below, is recorded in general and administrative expenses included in our consolidated
statements of operations for the years ended September 30, 2023 and 2022 (in thousands):
54
DLH employees (a)
Non-employee directors (b)
Stock option expense
2023
2022
$
$
1,204 $
718
1,922 $
1,960
648
2,608
(a): Included in this amount are equity grants of restricted stock units ("RSU") to Executive Officers, which were issued in accordance with the DLH long-term
incentive compensation policy in this fiscal year, and stock option grants to employees during prior fiscal years. The RSUs issued and outstanding totaled
211,228 and 140,404 at September 30, 2023 and 2022, respectively. During the fiscal year ended September 30, 2023, 197,174 RSUs were granted to Executive
Officers. Of the RSUs granted, 141,892 have performance-based vesting criteria and the remaining 55,282 have service-based vesting criteria. At a 50%
volatility and assumptions of a 3-year term and the performance vesting criteria results in an indicated a fair value. The RSUs granted during the fiscal year
ended September 30, 2023, as follows using the Monte Carlo Method.
Grant Date
Performance Vesting
Base
January 27, 2023
Revenue
January 27, 2023
Notes: Results based on 100,000 simulations
Stock price
Performance Vesting Criteria
Revenue increase at the end of the performance period as compared to the
year ended September 30, 2022
Stock price is at least $33.21 per share average for the 30 days prior to the
end of the performance period
(Years)
3
3
$
$
Volatility
50%
Calculated Fair
Value
3.51
2.92
(b): Equity grants of RSUs were made in accordance with DLH compensation policy for non-employee directors and a total of 50,367 and 53,510 restricted
stock units were issued and outstanding at September 30, 2023 and 2022, respectively. These grants have service-based vesting criteria and vest at the end of
this fiscal year.
Unrecognized stock-based compensation expense
Unrecognized stock-based compensation expense is presented in the table below for the years ending September 30, 2023 and 2022 (in thousands):
Unrecognized expense for DLH employees (a)
Unrecognized expense
2023
2022
$
$
7,107 $
7,107 $
5,214
5,214
(a): On a weighted average basis, this expense is expected to be recognized within the next 4.20 years.
Stock option activity for the year ended September 30, 2023:
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. A summary of the
Company's stock option awards is as follows:
55
Outstanding, September 30, 2022
Granted (a)
Exercised
Cancelled
Outstanding, September 30, 2023
Vested and exercisable, September 30, 2023
Weighted
Average
Exercise
Price
Number of
Shares
(in thousands)
2,392 $
470
(393)
(191)
2,278 $
1,608 $
7.05
11.57
3.42
9.54
8.40
6.43
Weighted
Average
Remaining
Contractual
Term
(in years)
5.4
—
—
—
5.8
4.3
Aggregate
Intrinsic
Value
(in thousands)
$
$
$
13,566
—
—
—
8,693
8,648
(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, 2023, as follows using the Monte Carlo method:
Grant Date
Strike
Price
Stock
Price
Vesting
Threshold
Price
January 26, 2023 $
August 31, 2023 $
August 31, 2023 $
11.66 $
11.08 $
11.08 $
11.66 $
11.08 $
11.08 $
15.00
14.25
16.50
Expected
Term
(Years)
10
10
10
$
$
$
Note: Results based on 100,000 simulations
Stock options shares outstanding, vested and unvested for the years ended September 30, 2023 and 2022 (in thousands):
Calculated
Fair Value
Vested and exercisable
Unvested (a)
Options outstanding
(a): Certain awards vest upon satisfaction of certain performance criteria.
10. Earnings Per Share
Number of Shares
2023
2022
1,608
670
2,278
7.41
7.41
7.41
2,117
275
2,392
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.
Earnings Per Share information is presented in the table below for the years ending September 30, 2023 and 2022 (in thousands except for per share amounts):
56
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, 2023 (in thousands):
2023
2022
1,461 $
23,288
13,704
727
14,431 $
0.11 $
0.10 $
12,830
1,349
14,179
1.82
1.64
$
$
$
$
Payments Due Per Fiscal Year
Total
2024
2025
2026
2027
2028
Thereafter
$
$
179,359 $
23,489
50
202,898 $
8,313 $
4,560
50
12,923 $
19,000 $
3,928
—
22,928 $
19,000 $
3,700
—
22,700 $
23,750 $
2,627
—
26,377 $
109,296 $
2,377
—
111,673 $
—
6,297
—
6,297
Debt obligations
Facility operating leases
Equipment operating leases
Contractual obligations
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.
12. Related Party Transactions
The Company has determined that for the years ended September 30, 2023 and 2022 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.
57
13. Provision for Income Taxes
The significant components of provision for income taxes from continuing operations are summarized as follows for the years ending September 30, 2023 and
2022 (in thousands):
Current expense
Deferred expense
Income tax (benefit) expense
2023
2022
$
$
3,823 $
(4,464)
(641) $
7,351
424
7,775
The following table presents the significant differences between our income taxes at the federal statutory rate and the Company's effective tax rate for
continuing operations for the years ending September 30, 2023 and 2022 (in thousands):
Income taxes at the federal statutory rate
State taxes, net
Other permanent items
Income tax (benefit) expense
2023
2022
187 $
(536)
(292)
(641) $
6,523
1,158
94
7,775
$
$
An analysis of the Company's deferred tax assets and liabilities at September 30, 2023 and 2022 is as follows (in thousands):
Deferred tax assets:
Net operating loss carry forwards, net
Stock based compensation
Accrued compensation
Capitalized transaction costs
Right of use asset/liability
Interest limitation
Total deferred tax assets
Less: valuation allowance
Total deferred tax assets, net
Deferred tax liabilities:
Depreciation on fixed assets
Amortization on identified intangibles and goodwill
Accrued expenses
Right of use liability
Total deferred tax liabilities
Net deferred tax assets (liabilities)
14. Employee Benefit Plans
2023
2022
$
$
$
$
$
855 $
708
2,094
973
1,669
2,601
8,900 $
(847)
8,053 $
(418)
(4,050)
(515)
—
(4,983) $
3,070 $
296
668
2,108
—
—
—
3,072
(262)
2,810
(458)
(3,375)
(407)
(104)
(4,344)
(1,534)
As of September 30, 2023, the Company maintains 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 $2.6 million and $2.2 million for the years ending September 30, 2023 and 2022, respectively. Participants are always
fully vested in their elective contributions and vest in Company matching contributions over a four-year period.
58
15. 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.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our Chief Executive Officer ("CEO") and President and Chief Financial Officer ("CFO"), after evaluating the effectiveness of our disclosure controls and
procedures (as defined in Rule 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this Annual Report.
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 Securities Exchange Act of 1934 is (i) recorded, processed,
summarized and reported, within the time periods specified in the SEC’s rules and forms and (ii) that such information is accumulated and communicated to our
management, including our CEO and President and CFO, to allow timely decisions regarding required disclosure.
Our management, including our CEO and President and CFO, 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 CEO and CFO, 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 CEO and CFO, conducted an evaluation of the effectiveness of our internal control over financial reporting as of September 30,
2023. 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, 2023.
59
Due to 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.
WithumSmith+Brown, PC, an independent registered public accounting firm, has audited the Company's consolidated financial statements and has reported on
the Company's internal control over financial reporting as of September 30, 2023. The audit report can be found in Part II, Item 8 of this Annual Report on
Form 10-K.
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 Securities Exchange Act of
1934) identified in connection with the evaluation of our internal control that occurred during the fourth quarter of our fiscal year ended September 30, 2023,
that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
Not applicable.
PART III
The Information required by Items 10, 11, 12, 13 and 14 of Part III of Form 10-K has been omitted in reliance on General Instruction G(3) and is incorporated
herein by reference to our proxy statement to be filed with the SEC pursuant to Regulation 14A promulgated under the Securities Exchange Act of 1934, as
amended, as set forth below:
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this Item with respect to our executive officers, directors, board committees, and corporate governance matters will be set forth in
our definitive Proxy Statement under the captions "Executive Officers," "Election of Directors," and "Corporate Governance" of the Proxy Statement, to be filed
within 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K, and is incorporated herein by reference to our Proxy Statement.
We have adopted a written code of business conduct and ethics, which applies to our principal executive officer, principal financial or accounting officer or
person serving similar functions and all of our other employees and members of our board of directors. We did not waive any provisions of the code of business
ethics during the year ended September 30, 2023. 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.
60
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.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)
(1) Financial Statements
PART IV
The financial statements and schedules of the Company are included in Part II, Item 8 of this report beginning on page 33.
(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 listed in the Exhibit Index immediately below are filed as part of this Annual Report on Form 10-K or are incorporated by reference herein to the
document referenced in brackets following the descriptions of such exhibits.
Exhibit No.
2.1
†
3.1
3.2
3.3
3.4
3.5
4.1
4.2
10.1
10.2
10.3
10.4
10.5
Description
Equity Purchase Agreement among DLH Holdings Corp., Grove Resource Solutions, LLC, the Equity holders, Omega D and D
Corporation, and the Representative of the Equity holders (filed as Exhibit 2.1 to Current Report on Form 8-K filed on December 14, 2022).
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.)
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).
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)
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).
#
#
#
#
61
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13
10.14
10.15
10.16
10.17
10.18
10.19
21.00
23.10
31.10
31.20
32.10
97
101.0
104.0
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).
#
#
#
#
†† Second Amended and Restated Credit Agreement among DLH Holdings Corp., DLH Solutions, Inc., Danya International, LLC, Social &
Scientific Systems, Inc., Irving Burton Associates, LLC, Grove Resource Solutions, LLC, First National Bank of Pennsylvania, as
Administrative Agent and other lenders party thereto.
Employment Agreement between the Company and Zachary C. Parker dated as of September 30, 2022 (filed as Exhibit 10.1 to Current
Report on 8-K filed on October 6, 2022).
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).
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).
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 (filed as Exhibit 10.20 to Annual Report on Form 10-K for the
fiscal year ended September 30, 2021)
Change in Control, Severance and Covenant Agreement between the Company and G. Maliek Ferebee (filed as Exhibit 10.21 to Annual
Report on Form 10-K for the fiscal year ended September 30, 2021)
Form of performance-based restricted stock unit award granted January 27, 2023 (filed as Exhibit 10.1 to Quarterly Report on Form 10-Q
for the fiscal quarter ended March 31, 2023).
Form of time-based restricted stock unit award granted January 27, 2023 (filed as Exhibit 10.1 to Quarterly Report on Form 10-Q for the
fiscal quarter ended March 31, 2023).
#
#
#
#
#
#
*
*
*
*
*
*
Employment agreement between the Company and Kathryn M JohnBull dated September 21, 2023 (filed as Exhibit 10.1 to Current Report
on Form 8-K filed on September 25, 2023).
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.
Policy Relating to Recovery of Erroneously Awarded Compensation
The following financial information from the DLH Holdings Corp. Annual Report on Form 10-K for the fiscal year ended September 30,
2023, 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)
* Indicates exhibit is filed electronically herewith.
# Denotes a management contract or compensation plan or arrangement.
† Schedules and other similar attachments have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The registrant hereby undertakes to furnish
supplemental copies of any of the omitted schedules and other similar attachments upon request by the SEC.
62
†† Schedules omitted pursuant to Item 601(a)(5) of Regulation S-K. The Company agrees to furnish a copy of any omitted schedule to the Securities and
Exchange Commission upon request.
ITEM 16. FORM 10-K SUMMARY
None.
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.
Signatures
DLH HOLDINGS CORP.
By:
/s/ KATHRYN M. JOHNBULL
Kathryn M. JohnBull
Chief Financial Officer
(Principal Accounting Officer)
Dated: December 6, 2023
______________________________________________________________________________________________________
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
Signature
Capacity
Date
/s/ Frederick G. Wasserman
Frederick G. Wasserman
/s/ Judith L. Bjornaas
Judith L. Bjornaas
/s/ Martin J. Delaney
Martin J. Delaney
/s/ Elder Granger, M.D.
Elder Granger, M.D.
/s/ Frances Murphy, M.D.
Frances Murphy, M.D.
/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
Chairman of the Board
December 6, 2023
Director
Director
Director
Director
Director
Director
December 6, 2023
December 6, 2023
December 6, 2023
December 6, 2023
December 6, 2023
December 6, 2023
Chief Executive Officer, President and Director
December 6, 2023
Chief Financial Officer and Principal Accounting Officer
December 6, 2023
63
BOARD OF DIRECTORS
Frederick G. Wasserman
Chairman of the Board
President
FGW Partners, LLC
Zachary C. Parker
President and Chief Executive Officer
DLH Holdings Corp.
Judith J. Bjornaas
Former Chief Financial Officer
ManTech
Martin J. Delaney
Former Chief Executive Officer,
Winthrop University Hospital
Elder Granger, M.D., M.G., USA
Chief Executive Officer
The 5 Ps LLC
Frances M. Murphy, M.D.
Chief Executive Officer
Sigma Health Consulting, LLC
Austin J. Yerks, III
President
AJY III Government Strategies, LLC
Stephen J. Zelkowicz
Equity Research Analyst
Wynnefield Capital, Inc.
FY23 Annual Report SHAREHOLDER INFORMATION
DLH Corporate Headquarters
DLH Holdings Corp.
3565 Piedmont Road, NE
Building 3, Suite 700
Atlanta, GA 30305
Stock Listing
DLHC: DLH common stock is traded on the Nasdaq Capital Market under the symbol
DLHC
A copy of our Form 10-K, including exhibits, for the period ended September 30,
2023, as filed with the Securities and Exchange Commission, is available without
charge upon request or can be accessed at https://investors.dlhcorp.com.
TRANSFER AGENT AND REGISTRAR
Continental Stock Transfer & Trust Company
One State Street, 30th Floor
New York, NY 10004
(212) 509-4000
www.continentalstock.com
INDEPENDENT REGISTERED PUBLIC ACCOUNTANTS
Withum Smith + Brown, PC
Whippany, New Jersey
IR CONTACT
Chris Witty, DLH Investor Relations
cwitty@darrowir.com
DLH www.dlhcorp.com
FORWARD-LOOKING STATEMENT
All statements and assumptions contained in this Annual Report that do not relate
to historical facts constitute “forward-looking statements.” These statements can be
identified by the fact that they do not relate strictly to historical or current facts.
Forward-looking statements often include the use of words such as “may,” “will,”
“expect,” “intend,” “anticipate,” “believe,” “estimate,” “plan,” and words and terms
of similar substance in connection with discussions of future events, situations, or
financial performance. While these statements represent our current expectations, no
assurance can be given that the results or events described in such statements will
be achieved. These forward-looking statements are inherently subject to risks and
uncertainties, and actual results and outcomes may differ materially from the results
and outcomes we anticipate. These and other risk factors are more fully discussed in
the section entitled “Risk Factors” in DLH’s Annual Report on Form 10-K previously
filed with the Securities and Exchange Commission and in our other filings with the
SEC. We urge you to not place undue reliance on these forward-looking statements,
which speak only as of the date of this Annual Report. We undertake no obligation to
update any forward-looking statement made herein following the date of this Annual
Report, whether as a result of new information, subsequent events or circumstances,
changes in expectation or otherwise.
FY23 Annual Report www.dlhcorp.com