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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended
March 31, 2024
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 22-1899798
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3565 Piedmont Road, Building 3, 30305
Suite 700
Atlanta, Georgia (Zip code)
(Address of principal executive offices)
(
770
)
554-3545
(Registrant's telephone number, including area code)
Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Trading Symbol(s) Name of each exchange on which registered
Common Stock DLHC Nasdaq Capital Market
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 of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes
No
o
Indicate by check mark whether the registrant has submitted electronically
every Interactive Data File required to be submitted pursuant to Rule 405 of
Regulation S-T ((s) 232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit such
files).
Yes
No
o
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, smaller reporting company, or an
emerging growth company. See the definitions of "large accelerated filer,"
"accelerated filer," "smaller reporting company," and "emerging growth
company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer Accelerated filer
Non-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 accounting standards provided pursuant to Section 13(a)
of the Exchange Act.
o
Indicate by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act). Yes
No
y
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
14,232,891
shares of Common Stock, par value $0.001
per share, were outstanding as of April 30, 2024.
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
DLH HOLDINGS CORP.
FORM 10-Q
TABLE OF CONTENTS
Page No.
PART I FINANCIAL INFORMATION 3
ITEM I: FINANCIAL STATEMENTS 3
CONSOLIDATED STATEMENTS OF OPERATIONS 3
CONSOLIDATED BALANCE SHEETS 4
CONSOLIDATED STATEMENTS OF CASH FLOWS 5
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 21
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 30
ITEM 4: CONTROLS AND PROCEDURES 30
PART II OTHER INFORMATION 31
ITEM 1: LEGAL PROCEEDINGS 31
ITEM 1A: RISK FACTORS 31
ITEM 2: UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS 31
ITEM 3: DEFAULTS UPON SENIOR SECURITIES 31
ITEM 4: MINE SAFETY DISCLOSURES 31
ITEM 5: OTHER INFORMATION 31
ITEM 6: EXHIBITS 33
SIGNATURE 34
2
-------------------------------------------------------------------------------
PART I FINANCIAL INFORMATION
ITEM I: FINANCIAL STATEMENTS
DLH HOLDINGS CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited, in thousands, except per share amounts)
Three Months Ended Six Months Ended
March 31, March 31,
2024 2023 2024 2023
Revenue $ 101,007 $ 99,417 $ 198,857 $ 172,155
Cost of operations:
Contract costs 79,112 78,238 158,193 135,494
General and administrative costs 11,710 10,693 19,407 18,117
Corporate development costs - - - 1,735
Depreciation and amortization 4,243 4,535 8,496 6,937
Total operating costs 95,065 93,466 186,096 162,283
Income from operations 5,942 5,951 12,761 9,872
Interest expenses 4,190 4,765 8,848 6,595
Income before provision for income tax 1,752 1,186 3,913 3,277
Provision for income tax (benefit) expense ( 381 ( 925
60 50
) )
Net income $ 1,812 $ 805 $ 3,963 $ 2,352
Net income per share - basic $ 0.13 $ 0.06 $ 0.28 $ 0.17
Net income per share - diluted $ 0.12 $ 0.06 $ 0.27 $ 0.16
Weighted average common stock outstanding
Basic 14,205 13,759 14,118 13,530
Diluted 14,946 14,600 14,823 14,447
The accompanying notes are an integral part of these consolidated financial
statements.
3
-------------------------------------------------------------------------------
DLH HOLDINGS CORP.
CONSOLIDATED BALANCE SHEETS
(in thousands, except par value of shares)
March 31, September 30,
2024 2023
(unaudited)
ASSETS
Current assets:
Cash $ 238 $ 215
Accounts receivable 55,457 59,119
Other current assets 2,221 3,067
Total current assets 57,916 62,401
Goodwill 138,161 138,161
Intangible assets, net 116,549 124,777
Operating lease right-of-use assets 8,315 9,656
Deferred taxes, net 3,028 3,070
Equipment and improvements, net 1,787 1,590
Other long-term assets 186 186
Total assets $ 325,942 $ 339,841
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 23,035 $ 29,704
Debt obligations - current, net of deferred financing costs 17,178 17,188
Accrued payroll 11,756 13,794
Operating lease liabilities - current 3,242 3,463
Other current liabilities 996 638
Total current liabilities 56,207 64,787
Long-term liabilities:
Debt obligations - long-term, net of deferred financing costs 147,610 155,147
Operating lease liabilities - long-term 14,242 15,908
Other long-term liabilities 1,133 1,560
Total long-term liabilities 162,985 172,615
Total liabilities 219,192 237,402
Shareholders' equity:
Common stock, $ 14 14
0.001
par value;
40,000
shares authorized;
14,230
and
13,950
shares issued and outstanding at March 31, 2024 and September 30, 2023, respectively
Additional paid-in capital 100,322 99,974
Retained earnings 6,414 2,451
Total shareholders' equity 106,750 102,439
Total liabilities and shareholders' equity $ 325,942 $ 339,841
The accompanying notes are an integral part of these consolidated financial
statements.
4
-------------------------------------------------------------------------------
DLH HOLDINGS CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
Six Months Ended
March 31,
2024 2023
Operating activities
Net income $ 3,963 $ 2,352
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 8,496 6,937
Amortization of deferred financing costs charged to interest expense 1,040 904
Stock-based compensation expense 1,573 1,352
Deferred taxes, net 42 -
Changes in operating assets and liabilities:
Accounts receivable 3,662 (
1,057
)
Other assets 2,187 719
Accounts payable and accrued liabilities ( (
6,669 4,757
) )
Accrued payroll ( 8
2,038
)
Other liabilities ( 404
1,955
)
Net cash provided by operating activities 10,301 6,862
Investing activities
Business acquisition, net of cash acquired - (
180,711
)
Purchase of equipment and improvements ( (
466 463
) )
Net cash (used in) investing activities ( (
466 181,174
) )
Financing activities
Proceeds from revolving line of credit 161,555 32,594
Repayment of revolving line of credit ( (
157,079 11,264
) )
Proceeds from debt obligations - 168,000
Repayments of debt obligations ( (
13,063 7,125
) )
Payments of deferred financing costs - (
7,622
)
Proceeds from issuance of common stock upon exercise of options and warrants 261 287
Payment of tax obligations resulting from net exercise of stock options ( (
1,486 649
) )
Net cash (used in) provided by financing activities ( 174,221
9,812
)
Net change in cash 23 (
91
)
Cash - beginning of period 215 228
Cash - end of period $ 238 $ 137
Supplemental disclosure of cash flow information
Cash paid during the period for interest $ 7,873 $ 5,714
Cash paid during the period for income taxes $ 1,798 $ 3,202
Supplemental disclosure of non-cash activity
Common stock surrendered for the exercise of stock options $ 2,324 $ 238
The accompanying notes are an integral part of these consolidated financial
statements.
5
-------------------------------------------------------------------------------
DLH HOLDINGS CORP.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(unaudited, in thousands, except for per share data)
Common Stock Additional Retained Earnings Total Shareholders' Equity
Paid-In
Capital
Shares Amount
Balance at 13,950 $ 14 $ 99,974 $ 2,451 $ 102,439
September 30, 2023
Expense related to director - - 259 - 259
restricted stock units
Expense related to employee - - 1,314 - 1,314
stock-based compensation
Exercise of 535 - 261 - 261
stock options
Common stock surrendered for ( - ( - (
the exercise of stock options 255 1,486 1,486
) ) )
Net income - - - 3,963 3,963
Balance at 14,230 $ 14 $ 100,322 $ 6,414 $ 106,750
March 31, 2024
Balance at December 31, 2023 14,105 $ 14 $ 100,186 $ 4,602 $ 104,802
Expense related to director restricted stock units - - 180 - 180
Expense related to employee stock-based compensation - - 774 - 774
Exercise of stock options 315 - - - -
Common stock surrendered for the exercise of stock options ( - ( - (
190 818 818
) ) )
Net income - - - 1,812 1,812
Balance at March 31, 2024 14,230 $ 14 $ 100,322 $ 6,414 $ 106,750
Common Stock Additional Retained Earnings Total Shareholders' Equity
Paid-In
Capital
Shares Amount
Balance at 13,047 $ 13 $ 91,057 $ 990 $ 92,060
September 30, 2022
Issuance and fair value adjustment of 527 1 6,538 - 6,539
common stock in business combination
Expense related to director - - 359 - 359
restricted stock units
Expense related to employee - - 993 - 993
stock-based compensation
Exercise of 286 - 287 - 287
stock options
Common stock surrendered for ( - ( - (
the exercise of stock options 67 650 650
) ) )
Net income - - - 2,352 2,352
Balance at 13,793 $ 14 $ 98,584 $ 3,342 $ 101,940
March 31, 2023
Balance at 13,757 $ 14 $ 97,958 $ 2,537 $ 100,509
December 31, 2022
Issuance and fair value adjustment of - - ( - (
common stock in business combination 461 461
) )
Expense related to director - - 179 - 179
restricted stock units
Expense related to employee - - 621 - 621
stock-based compensation
Exercise of 36 - 287 - 287
stock options
Net income - - - 805 805
Balance at 13,793 $ 14 $ 98,584 $ 3,342 $ 101,940
March 31, 2023
The accompanying notes are an integral part of these consolidated financial
statements.
6
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DLH HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
March 31, 2024
1.
Basis of Presentation and Principles of Consolidation
The accompanying consolidated financial statements include the accounts of DLH
Holdings Corp. and its wholly-owned subsidiaries (together with its
subsidiaries, "DLH" or the "Company" and also referred to as "we," "us" and
"our"). All significant intercompany balances and transactions have been
eliminated in consolidation. The accompanying financial statements have been
prepared in accordance with United States generally accepted accounting
principles ("GAAP") for interim financial information and with the
instructions to Form 10-Q and Regulation S-X. Accordingly, these statements do
not include all of the information and footnotes required by GAAP for complete
financial statements.
Operating results for the six months ended March 31, 2024 are not necessarily
indicative of the results that may be expected for the year ending September
30, 2024 or any future period. Amounts as of March 31, 2024 and for the six
and three months ended March 31, 2024 are unaudited. For further information,
refer to the consolidated financial statements and footnotes thereto included
in the Company's Annual Report on Form 10-K for the year ended September 30,
2023 filed with the Securities and Exchange Commission on December 6, 2023.
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 estimating costs including overhead and
its allocation, valuing and determining the amortization periods for
long-lived intangible assets, interest rate swaps, stock-based compensation,
and right-of-use assets and lease liabilities. 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.
7
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Contract modifications impact performance obligations when the modification
either creates new or changes the existing enforceable rights and obligations.
The effect of a contract modification on the transaction price and our measure
of progress for the performance obligation to which it relates is recognized
as an adjustment to revenue and profit cumulatively. Furthermore, a
significant change in one or more estimates could affect the profitability of
our contracts. We recognize adjustments in estimated profit on contracts in
the period identified.
For 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 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.
Fair Value of Financial Instruments
The carrying amounts of the Company's cash, accounts receivable, contract
assets, accrued expenses, and accounts payable approximate fair value due to
the short-term nature of these instruments. The fair values of the Company's
debt instruments approximate fair value because the underlying interest rates
approximate market rates that the Company could obtain for similar instruments
at the balance sheet dates.
Long-Lived Assets
Our long-lived assets include equipment and improvements, intangible assets,
right-of-use assets, and goodwill. The Company continues to review 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 recorded at cost, less accumulated depreciation
and amortization. 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. Maintenance and repair costs are expensed as incurred.
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.
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.
8
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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.
Goodwill
The Company reviews goodwill for impairment on an annual basis and on a
quarterly basis the Company assesses the impact of any macroeconomic changes
that may impact the business conditions to determine if these changes have any
adverse impact to 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. The Company determined that no change in
business conditions occurred which would have a material adverse effect on the
valuation of goodwill.
Income Tax
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 sheets when it is determined that it is
more likely than not that the asset will be realized. This guidance also
requires that deferred tax assets be reduced by a valuation allowance if it is
more likely than not that some or all of the deferred tax asset will not be
realized. We account for uncertain tax positions by recognizing the financial
statement effects of a tax position only when, based upon the technical
merits, it is more likely than not that the position will be sustained upon
examination.
We had
no
uncertain tax positions at either March 31, 2024 or September 30, 2023. We
report interest and penalties as a component of provision for income taxes.
During the six months ended March 31, 2024 and 2023, 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 compensation.
Options issued are designated as either an incentive stock option or a
non-statutory stock option. No option may be granted with a term of more than
10
years from the date of grant. Option awards may depend on achievement of
certain performance measures determined by the Compensation Committee of our
Board. Shares issued upon option exercise are newly issued common shares. All
awards t
o employees and non-
employee
s are reco
rded 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 common stock.
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 compensation expense is recognized over
the service period.
9
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Cash
The Company considers 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 up to $
250,000
. Deposits held with financial institutions may exceed the $
250,000
limit.
Accounts Receivable
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 includes costs and fees, and are generally
expected to be billed and received within a single year. We evaluate our
receivables for expected credit losses on a quarterly basis and determine
whether an allowance for expected credit losses is appropriate based on
specific collection issues.
No
allowance for doubtful accounts was deemed necessary at either March 31, 2024
or September 30, 2023.
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 March 31, 2024 and September 30, 2023, the
Company did
not
hold any treasury stock.
Preferred Stock
Our certificate of incorporation authorizes the issuance of "blank check"
preferred stock with 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 March 31, 2024 and September 30, 2023, 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 instruments 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 March 31, 2024, there was no
indication of any global or economic impacts to our industry.
3.
New Accounting Pronouncements
In November 2023, Financial Accounting Standards Board ("FASB") issued
Accounting Standards Update ("ASU") 2023-07 "Segment reporting (Topic 280):
Improvements to Reportable Segment Disclosures" which provides guidance
intended to improve reportable segment disclosure requirements, primarily
through enhanced disclosures about significant segment expenses, and each
reported measure of segment profit or loss. The ASU requires that a public
entity that has a single reportable segment provide all the disclosures
required by the amendments in this ASU and all existing segment disclosures in
Topic 280.
10
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The amendments in this update are effective for all entities for its annual
filings occurring after December 31, 2023, and interim periods after December
15, 2024. We are currently evaluating the impacts of the single reportable
segment disclosures.
In December 2023, FASB issued ASU 2023-09 "Income taxes (Topic 740):
Improvements to Income Tax Disclosures" which provides guidance on the
requirements such as the requirement that public business entities on an
annual basis (1) disclose specific categories in the rate reconciliation and
(2) provide additional information for reconciling items that meet a
quantitative threshold. DLH is a public company that reports income tax
disclosures and therefore this ASU applies to the Company. The amendments in
this update are effective for all entities for its annual filings occurring
after December 31, 2023. We are currently evaluating the impacts of the
improvements to income tax disclosure.
In March 2024, FASB issued ASU No. 2024-01, "Scope Application of Profits
Interest and Similar Awards". The ASU clarifies how an entity determines
whether a profits interest or similar award is (1) within the scope of ASC 718
or (2) not a share-based payment arrangement and therefore within the scope of
other guidance. The guidance in ASU 2024-01 applies to all entities that issue
profits interest awards as compensation to employees or non-employees in
exchange for goods or services. We are currently evaluating the impacts of the
improvements to our disclosure.
In March 2024, the Securities and Exchange Commission ("SEC") has released a
final rule that requires registrants to provide comprehensive climate-related
disclosures in their annual reports and registration statements, including
those for IPOs, beginning with annual reports for the year ending December 31,
2027, for smaller reporting companies ("SRC"). Registrants must disclose
climate-related financial metrics and impacts on their financial estimates and
assumptions in a footnote to the audited financial statements. The disclosures
will also need to be addressed as part of management's internal control over
financial reporting ("ICFR") and will be subject to the financial statement
and ICFR audit (if applicable) of an independent registered public accounting
firm. We are currently evaluating the impacts of the improvements to our
disclosure.
4.
Revenue Recognition
The following table summarizes the contract balances recognized on the
Company's consolidated balance sheets as follows (in thousands):
March 31, September 30,
2024 2023
Contract assets $ 21,835 $ 20,542
Contract assets are included as part of the accounts receivable on the
consolidated balances sheets. Contract liabilities had
no
balance as of March 31, 2024 and September 30, 2023.
Disaggregation of Revenue from Contracts with Customers
We disaggregate our revenue from contracts with customers by customer,
contract type, as well as whether the Company acts as prime contractor or
subcontractor. We believe these categories best depict how the nature, amount,
timing and uncertainty of our revenue and cash flows are affected by economic
factors.
The following series of tables present our revenue disaggregated by these
categories:
Revenue by customer was as follows (in thousands):
Three Months Ended Six Months Ended
March 31, March 31,
2024 2023 2024 2023
Department of Health and Human Services $ 47,349 $ 38,204 $ 91,636 $ 65,509
Department of Veterans Affairs 35,616 34,883 70,296 68,591
Department of Defense 16,412 18,972 33,283 29,235
Other 1,630 7,358 3,642 8,820
Total $ 101,007 $ 99,417 $ 198,857 $ 172,155
11
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Revenue by contract type was as follows (in thousands):
Three Months Ended Six Months Ended
March 31, March 31,
2024 2023 2024 2023
Time and Materials $ 55,487 $ 53,803 $ 110,276 $ 102,794
Cost Reimbursable 21,326 17,260 41,077 29,840
Firm Fixed Price 24,194 28,354 47,504 39,521
Total $ 101,007 $ 99,417 $ 198,857 $ 172,155
Revenue by whether the Company acts as a prime contractor or a subcontractor
was as follows (in thousands):
Three Months Ended Six Months Ended
March 31, March 31,
2024 2023 2024 2023
Prime Contractor $ 90,696 $ 93,826 $ 178,318 $ 161,807
Subcontractor 10,311 5,591 20,539 10,348
Total $ 101,007 $ 99,417 $ 198,857 $ 172,155
5.
Leases
The following table summarizes lease balances presented on our consolidated
balance sheets as follows (in thousands):
March 31, September 30,
2024 2023
Operating lease right-of-use assets $ 8,315 $ 9,656
Operating lease liabilities, current $ 3,242 $ 3,463
Operating lease liabilities - long-term 14,242 15,908
Total operating lease liabilities $ 17,484 $ 19,371
As of March 31, 2024, operating leases for facilities and equipment have
remaining lease terms of less than
1
year to
7.3
years.
Total lease costs for our leases was as follows (in thousands):
Three Months Ended Six Months Ended
March 31, March 31,
2024 2023 2024 2023
Operating $ 883 $ 1,098 $ 3,884 $ 2,045
Short-term 50 27 266 70
Variable 37 32 148 63
Sublease income (a) ( ( ( (
67 71 273 142
) ) ) )
Total lease costs $ 903 $ 1,086 $ 4,025 $ 2,036
(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.
12
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The Company's future minimum lease payments as of March 31, 2024 were as
follows (in thousands):
Fiscal year ending:
2024 (remaining) $ 3,296
2025 3,928
2026 3,700
2027 2,627
2028 2,377
Thereafter 5,024
Total future lease payments 20,952
Less: imputed interest (
3,468
)
Present value of future minimum lease payments 17,484
Less: current portion of operating lease liabilities (
3,242
)
Long-term operating lease liabilities $ 14,242
At March 31, 2024, the weighted-average remaining lease term and weighted-averag
e discount rate were
5.8
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 for the six months ended March 31,
2024 and 2023 was as follows (in thousands):
2024 2023
Cash paid for amounts included in the measurement of lease liabilities $ 2,364 $ 2,171
Lease liabilities arising from obtaining right-of-use assets - 3,541
Other lease information $ 2,364 $ 5,712
6.
Supporting Financial Information
Accounts receivable
The following table summarizes accounts receivable presented on our
consolidated balance sheets as follows (in thousands):
March 31, September 30,
2024 2023
Billed receivables $ 33,622 $ 38,577
Contract assets 21,835 20,542
Allowance for doubtful accounts - -
Accounts receivable $ 55,457 $ 59,119
13
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Other current assets
The following table summarizes other current assets presented on our
consolidated balance sheets as follows (in thousands):
March 31, September 30,
2024 2023
Prepaid insurance and benefits $ 1,614 $ 1,330
Prepaid licenses and other expenses 139 743
Other receivables 468 994
Other current assets $ 2,221 $ 3,067
Goodwill
There were no activities in Goodwill for the six months ended March 31, 2024,
the balance of Goodwill was $
138,161
as of March 31, 2024.
Intangible assets
The following table summarizes intangible assets, net presented on our
consolidated balance sheets as follows (in thousands):
March 31, September 30,
2024 2023
Intangible assets
Customer contracts and related customer relationships $ 113,622 $ 113,622
Covenants not to compete 637 637
Trade name 13,034 13,034
Backlog 37,249 37,249
Total intangible assets 164,542 164,542
Less: accumulated amortization
Customer contracts and related customer relationships ( (
35,613 29,929
) )
Covenants not to compete ( (
410 378
) )
Trade name ( (
2,836 2,185
) )
Backlog ( (
9,134 7,273
) )
Total accumulated amortization ( (
47,993 39,765
) )
Intangible assets, net $ 116,549 $ 124,777
Amortization expense was $
4.1
million and $
4.3
million for the three months ended March 31, 2024 and 2023, respectively, and $
8.2
million and $
6.5
million for the six months ended March 31, 2024 and 2023, respectively.
As of March 31, 2024, the estimated amortization expense per fiscal year was
as follows (in thousands):
Fiscal year ending:
2024 (remaining) $ 8,226
2025 16,456
2026 15,722
2027 14,694
2028 14,694
Thereafter 46,757
Total amortization expense $ 116,549
At March 31, 2024, the weighted-average remaining amortization period in total
was
7.8
years. The weighted-average amortization period for customer contracts and
related customer relationships, backlog, trade names and covenants not to
14
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compete was
7.7
years,
8.1
years,
8.2
years,
5.7
years, respectively.
Equipment and improvements, net
The following table summarizes equipment and improvements, net presented on
our consolidated balance sheets as follows (in thousands):
March 31, September 30,
2024 2023
Furniture and equipment $ 2,316 $ 1,790
Computer equipment and software 6,418 6,479
Leasehold improvements 1,614 1,614
Total equipment and improvements 10,348 9,883
Less: accumulated depreciation ( (
8,561 8,293
) )
Equipment and improvements, net $ 1,787 $ 1,590
Depreciation expense was $
0.1
million and $
0.2
million for the three months ended March 31, 2024 and 2023, respectively, $
0.3
million and $
0.4
million for the six months ended March 31, 2024 and 2023, respectively.
Accounts payable and accrued liabilities
The following table summarizes accounts payable and accrued liabilities
presented on our consolidated balance sheets as follows (in thousands):
March 31, September 30,
2024 2023
Accounts payable $ 13,398 $ 12,603
Accrued benefits 4,269 6,414
Accrued workers' compensation insurance 1,999 2,369
Accrued bonus and incentive compensation 2,250 4,719
Accrued interest 1,267 1,309
Other accrued expenses ( 2,290
148
)
Accounts payable and accrued liabilities $ 23,035 $ 29,704
Accrued payroll
The following table summarizes accrued payroll presented on our consolidated
balance sheets as follows (in thousands):
March 31, September 30,
2024 2023
Accrued leave $ 7,975 $ 9,621
Accrued payroll 2,558 2,487
Accrued payroll taxes 1,025 1,173
Accrued severance 198 513
Total accrued payroll $ 11,756 $ 13,794
15
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Debt obligations
The following table summarizes debt obligations presented on our consolidated
balance sheets as follows (in thousands):
March 31, September 30,
2024 2023
Secured term loan $ 156,750 $ 169,813
Secured revolving line of credit 14,022 9,546
Less: unamortized deferred financing costs ( (
5,984 7,024
) )
Net bank debt obligations 164,788 172,335
Less: current portion of debt obligations, net of deferred financing costs (a) ( (
17,178 17,188
) )
Long-term portion of debt obligations, net of deferred financing costs $ 147,610 $ 155,147
As of March 31, 2024, we have satisfied mandatory principal payments on our
secured term loan.
(a) As of March 31, 2024, the current portion comprises term loan amortization
of $
4.8
million and the $
14.0
million outstanding balance on the secured revolving line of credit, net of $
1.6
million of unamortized deferred financing costs.
Interest expense
The following table summarizes interest expense presented on our consolidated
statements of operations as follows (in thousands):
Three Months Ended Six Months Ended
March 31, March 31,
2024 2023 2024 2023
Interest expense (a) $ 3,821 $ 4,160 $ 7,831 $ 5,714
Interest income (b) $ ( $ - $ ( $ -
28 23
) )
Amortization of deferred financing costs (c) 397 605 1,040 881
Interest expense $ 4,190 $ 4,765 $ 8,848 $ 6,595
(a) Interest expense on borrowing.
(b) Interest earned from customer payments received after the due date.
(c) Amortization of expenses related to secured term loan and secured
revolving line of credit.
7.
Credit Facilities
A summary of our credit facilities as presented on our consolidated balance
sheets as follows (in millions):
March 31, 2024 September 30, 2023
Arrangement Loan Balance Interest Arrangement Loan Balance Interest
Secured term loan (a) $ 156,750 SOFR Secured term loan (a) $ 169,813 SOFR
due December 8, 2027 1 due December 8, 2027 1
+ +
4.1 4.1
% %
Secured revolving line of $ 14,022 SOFR Secured revolving line of $ 9,546 SOFR
credit (b) due December 8, 2027 1 credit (b) due December 8, 2027 1
+ +
4.1 4.1
% %
1
Secured Overnight Financing Rate ("SOFR") as of March 31, 2024 and September
30, 2023 were
5.3
% and
5.3
% respectively.
(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.
On September 19, 2019, we executed a floating-to-fixed interest rate swap with
First National Bank ("FNB") as counterparty. The swap has a notional amount of
$
9.0
million at March 31, 2024, a fixed interest rate of
1.61
% and a maturity date of June 7,
16
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2024. On January 31, 2023, we executed an additional floating-to-fixed
interest rate swap with FNB which has a notional amount of
$
80.0
million
at
March 31, 2024
, a fixed interest rate of
4.10
% and a maturity date of
January 31, 2026. As a result of entering these agreements, for the three and
six months ended March 31, 2024, interest expense has been decreased by
approximately $
0.3
million and $
0.7
million , respectively.
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 income taxes (benefit)
expense, 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 March 31, 2024.
We are required to pay quarterly amortization payments, which commenced in
December 2022. The annual amortization amounts are $
14.3
million for fiscal year 2024, $
19.0
million each for fiscal years 2025 and 2026, and $
23.75
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 voluntary prepayments of $
5.9
million during six months ended March 31, 2024 bringing the outstanding
principal balance on the secured term loan to $
156.8
million. We have satisfied the mandatory principal payments through the end of
calendar 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
2.5
:1; (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
2.5
:1 but greater than or equal to
1.5
:1; or (c)
0
% of the excess cash flow for the immediately preceding fiscal year in which
the funded indebtedness to consolidated EBITDA Ratio is less than
1.5
:1. 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 10. Commitments and Contingencies
.
(b) The secured revolving line of credit has a ceiling of up to $
70.0
million; as of March 31, 2024, we had unused borrowing capacity of $
22.5
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 $
14.0
million outstanding balance at March 31, 2024. 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.
8.
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 March 31, 2024, there were
0.8
million shares available for grant.
17
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Stock-based compensation expense shown in the table below, is recorded in
general and administrative expenses in our consolidated statements of
operations as follows (in thousands):
Three Months Ended Six Months Ended
March 31, March 31,
2024 2023 2024 2023
DLH employees (a) $ 774 $ 621 $ 1,314 $ 993
Non-employee directors (b) 180 179 259 359
Total stock option expense $ 954 $ 800 $ 1,573 $ 1,352
(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, including both
RSU and stock option grants to employees during prior fiscal years. The RSUs
issued and outstanding totaled
429,320
and
337,578
at March 31, 2024 and 2023, respectively. During the three months ended March
31, 2024, there was
no
grant awarded to Executive Officers. For the six months ended March 31, 2024,
169,544
RSUs were granted to Executive Officers. Of the RSUs granted,
84,773
have performance-based vesting criteria and the remaining
84,771
have service-based vesting criteria. The RSUs granted during the six months
ended March 31, 2024, were valued as follows using the Monte Carlo Method, and
will be amortized over the
3
-year measurement period.
(b) Equity grants of RSUs were made in accordance with DLH compensation policy
for non-employee directors and a total of
61,525
and
50,367
restricted stock units were issued and outstanding at March 31, 2024 and 2023,
respectively. These grants have service-based vesting criteria and vest at the
end of this fiscal year.
The fair value of RSUs issued during the six months ended March 31, 2024 is
presented in the table below:
Volatility
50
%
Grant Date Performance Vesting Base Performance (Years) Fair Value
Vesting Criteria
December 15, 2023 Revenue Revenue increase at the end of the performance period 3 $ 3.82
as compared to the year ended September 30, 2023
December 15, 2023 Stock price Stock price 3 $ 5.36
is at least $
25.65
per share average for the 30 days prior
to the end of the performance period
Notes:
Results based on 100,000 simulations
Unrecognized stock-based compensation expense
Unrecognized stock-based compensation expense is presented in the table below
(in thousands):
March 31,
2024 2023
Unrecognized expense for DLH employees (a) $ 7,026 $ 8,575
Unrecognized expense for non-employee directors 359 359
Total unrecognized expense $ 7,385 $ 8,934
(a) On a weighted average basis, the unrecognized expense as of March 31, 2024
is expected to be recognized within the next
3.29
years.
18
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Stock option activity for the six months ended March 31, 2024
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:
(in years)
Weighted
Weighted Average (in thousands)
(in thousands) Average Remaining Aggregate
Number of Exercise Contractual Intrinsic
Shares Price Term Value
Options outstanding, September 30, 2023 2,278 $ 8.40 5.80 $ 8,693
Granted - - - -
Exercised ( 5.03 - -
535
)
Cancelled ( 11.66 - -
25
)
Options outstanding, March 31, 2024 1,718 $ 9.40 6.00 $ 7,450
Vested and exercisable, March 31, 2024 1,458 $ 8.31 5.70 $ 7,374
Stock option shares outstanding, vested and unvested balance as follows (in
thousands):
March 31, September 30,
2024 2023
Vested and exercisable 1,458 1,608
Unvested (a) 260 670
Options outstanding 1,718 2,278
(a) Certain awards vest upon satisfaction of certain performance criteria.
19
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9.
Earnings Per Share
Basic earnings per share is calculated by dividing income available to common
shareholders by the weighted average number of common shares outstanding and
restricted stock grants that vested or are likely to vest during the period.
Diluted earnings per share is calculated by dividing income available to
common shareholders by the weighted average number of basic common shares
outstanding, adjusted to reflect potentially dilutive securities. Diluted
earnings per share is calculated using the treasury stock method.
Earnings per share information is presented in the table below (in thousands
except for per share amounts):
Three Months Ended Six Months Ended
March 31, March 31,
2024 2023 2024 2023
Numerator:
Net income $ 1,812 $ 805 $ 3,963 $ 2,352
Denominator:
Denominator for basic net income per share 14,205 13,759 14,118 13,530
- weighted-average outstanding shares
Effect of dilutive securities:
Stock options and 741 841 705 917
restricted stock
Denominator for diluted net income per share 14,946 14,600 14,823 14,447
- weighted-average outstanding shares
Net income per $ 0.13 $ 0.06 $ 0.28 $ 0.17
share - basic
Net income per $ 0.12 $ 0.06 $ 0.27 $ 0.16
share - diluted
10.
Commitments and Contingencies
Contractual obligations as of March 31, 2024 are as follows (in thousands):
Payments Due Per Fiscal Year
(Remaining)
Total 2024 2025 2026 2027 2028 Thereafter
Debt obligations $ 170,772 $ 14,022 $ 14,250 $ 19,000 $ 23,750 $ 99,750 $ -
Facility operating leases 20,947 3,291 3,928 3,700 2,627 2,377 5,024
Equipment operating leases 5 5 - - - - -
Total contractual obligations $ 191,724 $ 17,318 $ 18,178 $ 22,700 $ 26,377 $ 102,127 $ 5,024
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.
11.
Related Party Transactions
The Company has determined that for the six months ended March 31, 2024 and
2023 there were no significant related party transactions that have occurred
which require disclosure through the date that these consolidated financial
statements were issued.
20
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12.
Subsequent Events
Management has evaluated subsequent events through the date that the Company's
unaudited consolidated financial statements were issued. Based on this
evaluation, the Company has determined that no subsequent events have occurred
which require disclosure through the date that these consolidated financial
statements were issued.
ITEM 2: 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 Quarterly Report on Form 10-Q, as well as our Annual Report on Form 10-K
for the year ended September 30, 2023, and in other reports we have
subsequently filed with the SEC. This Quarterly Report on Form 10-Q 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. Any statements that refer to expectations,
projections or other characterizations of future events or circumstances or
that are not statements of historical fact (including without limitation
statements to the effect that the Company or its management "believes",
"expects", "anticipates", "plans", "intends" and similar expressions) should
be considered forward-looking statements that involve risks and uncertainties
which could cause actual events or DLH's actual results to differ materially
from those indicated by the forward-looking statements. Forward-looking
statements in this report include, among others, statements regarding benefits
of the acquisition, estimates of future revenues, operating income, earnings,
earnings per share, backlog, and cash flows. These statements reflect our
belief and assumptions as to future events that may not prove to be accurate.
Our actual results may differ materially from such forward-looking statements
made in this report due to a variety of factors, including: the failure to
achieve the anticipated benefits of any future acquisition (including
anticipated future financial operating performance and results); the diversion
of management's attention from normal daily operations of the business and the
challenges of managing larger and more widespread operations; the inability to
retain employees and customers; contract awards in connection with re-competes
for present business and/or competition for new business; our ability to
manage our increased debt obligations; compliance with bank financial and
other covenants; changes in client budgetary priorities; government contract
procurement (such as bid and award protests, small business set asides, loss
of work due to organizational conflicts of interest, etc.) and termination
risks; the impact of inflation and higher interest rates; and other risks
described in our SEC filings. For a discussion of such risks and uncertainties
which could cause actual results to differ from those contained in the
forward-looking statements, see "Risk Factors" in the Company's periodic
reports filed with the SEC, including our Annual Report on Form 10-K for the
fiscal year ended September 30, 2023, as well as interim quarterly filings
thereafter. The forward-looking statements contained herein are not historical
facts, but rather are based on current expectations, estimates, assumptions
and projections about our industry and business. Such forward-looking
statements are made as of the date hereof and may become outdated over time.
The Company does not assume any responsibility for updating forward-looking
statements.
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.
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.
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.
21
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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"), 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 (55.4%), firm fixed price contracts (23.9%), and
cost reimbursable contracts (20.7%).
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 National Institutes of Health ("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.
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
22
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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 revenue by customer as
follows (in thousands and percent):
Six Months Ended
March 31,
2024 2023
Revenue Percent of total revenue Revenue Percent of total revenue
Department of Health $ 91,636 46.1 % $ 65,509 38.1 %
and Human Services
Department of 70,296 35.4 % 68,591 39.8 %
Veterans Affairs
Department 33,283 16.7 % 29,235 17.0 %
of Defense
Other customers with less than 3,642 1.8 % 8,820 5.1 %
10% share of total revenue
Total revenue $ 198,857 100.0 % $ 172,155 100.0 %
We remain dependent upon the continuation of our relationships with our major
customers as a significant portion of our revenue is concentrated in each of
them. Our results of operations, cash flows and financial condition would be
materially adversely affected if we were unable to continue our relationship
with any 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.
Major Contracts
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 orders for pharmacy services, which represent approximately $39.1 million
and $39.4 million of revenues for the six months ended March 31, 2024 and
2023, respectively, and operated under a bridge contract through April 30,
2024.
.
Seven orders for logistics services represent approximately $31.2 million and
$29.2 million of revenues for the six months ended March 31, 2024 and 2023,
respectively, and operated under a bridge contract through April 30, 2024.
.
As discussed below, the Company has received a new Indefinite-Delivery
Indefinite-Quantity ("IDIQ") contract to continue providing prime contractor
services at all eight CMOP locations while the pending procurements are
evaluated. The ceiling value of the IDIQ contract is $200.0 million with the
initial tasking through July 31, 2024. These initial task orders provide
adequate funding to support the expected service volume of approximately $35.0
million for the three month period. Additional task orders may be issued under
this IDIQ contract until the end of its period of performance.
The VA has issued eight separate requests for proposals for healthcare
logistics and pharmacy services for each of its eight CMOP locations.
Each of the eight procurements are being evaluated separately and may be
subject to differing timelines for award.
The procurements were set-aside for a service-disabled veteran owned small
business ("SDVOSB") as the prime contractor. DLH responded to each request for
proposal as a joint venture partner with an SDVOSB prime contractor. While the
acquisition process is being conducted, DLH continues to operate as the prime
contractor for all CMOP locations.
23
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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.
As disclosed in the Company's Form 8-K filings during the quarter ended March
31, 2024, the VA has begun the process of evaluating the proposals for the
eight solicitations mentioned above. We were advised that the VA had made an
award decision for the Chelmsford CMOP Staffing Services location to an SDVOSB
unrelated to DLH. Between the announcement of the award and the commencement
of the contract, Federal acquisition guidelines provide each of the 17
competitors for this contract the right to a debriefing to explain the
results. Based on the debriefing, a bidder may then contest the decision. Our
joint venture continues to pursue its remedies under the Federal acquisition
regulations. A final award decision on this proposal has not yet been made.
Following the award notice for the Chelmsford location, the VA had apparently
reconsidered its options for achieving the transition of CMOP operations to an
SDVOSB provider through five-year contracts and issued Notices of Intent to
Award Sole Source Procurements for healthcare logistics and pharmacy services
by location to various SDVOSBs, including the joint venture between DLH and
its SDVOSB partner, for durations of up to three months. These notices were
subsequently cancelled by the VA. Accordingly, DLH expects that it will
continue providing healthcare logistics and pharmacy services until award
decisions on the five-year contracts are completed.
In support of DLH's continuing performance as the prime contractor during the
ongoing acquisition evaluation, the VA awarded us a sole-source IDIQ contract
effective May 1, 2024. The IDIQ has a ceiling value of $200 million and a
period of performance extendable through April 30, 2025 with the potential for
orders placed within that period to extend performance for up to 180 days
through October 2025. Initial task orders have been issued for DLH's prime
contractor performance through July 31, 2024.
Backlog
At March 31, 2024, our backlog was approximately $736.2 million, of which
$106.9 million was funded backlog. At September 30, 2023, our backlog was
approximately $704.8 million, of which $169.9 million was funded backlog.
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 Congress often appropriates funding for
contracts on a yearly or quarterly 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.
24
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Forward-Looking Business Trends
Our mission is to expand our position as a trusted provider of technology-enable
d 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 2025
:
The President's budget proposal for fiscal year ("FY") 2025 outlines
initiatives for the federal government in its next operating year. The
proposal includes key investments for our customers.
Department of Veterans Affairs
The VA is requesting a total of $369.3 billion for FY 2025, an increase of
$32.9 billion above the FY 2024 enacted level. It includes $134.0 billion in
discretionary funding, a decrease of $8.9 billion, and $235.3 billion in
mandatory funding, an increase of $41.8 billion from FY 2024 budget request.
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 2025 budget request for the VA's
research enterprise is $2.3 billion, which includes investments in
understanding traumatic brain injuries, improving infectious and pandemic
preparedness, and preventing suicide.
Department of Health and Human Services
The FY 2025 budget request proposes $1.8 trillion in budget authority for HHS
and $1.7 trillion in mandatory funding for the department comprised mainly of
spending on Medicare and Medicaid. The budget proposes $46.4 billion in
discretionary and mandatory resources for NIH, an increase of $0.9 billion
above FY 2024 enacted, to continue making investments in mental health, gun
violence research, and women's health research. The budget also requests $15.7
billion for the Centers for Disease Control and Prevention ("CDC"), an
increase of $1.0 billion. The budget also provides for investment in programs
that improve the health and well-being of young children and their families.
This includes $12.5 billion for the Office of Head Start, principally to
expand eligibility for participation in the program.
Department of Defense
The Military Health System ("MHS") is one of the largest health care systems,
serving over 9.5 million beneficiaries. As a part of the DoD, the Defense
Health Agency ("DHA") manages a global health care network of military and
civilian medical professionals, military hospitals and clinics around the
world, and supports the delivery of integrated health services to MHS
beneficiaries. The funding and personnel to support MHS's mission is referred
to as the Unified Medical Budget ("UMB"). The FY 2025 UMB request for the
Defense Health Program ("DHP") is $61.4 billion, an increase of 4.6% from FY
2024 enacted.
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.
25
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Results of Operations
The following table summarizes results of operations for the three months
ended March 31, 2024 and 2023 (in thousands except for per share amounts, and
percentage of revenue):
Three Months Ended
March 31,
Consolidated Statements of Operations: 2024 2023 Change
Revenue $ 101,007 100.0 % $ 99,417 100.0 % $ 1,590
Cost of operations:
Contract costs 79,112 78.3 % 78,238 78.7 % 874
General and administrative costs 11,710 11.6 % 10,693 10.8 % 1,017
Depreciation and amortization 4,243 4.2 % 4,535 4.6 % (292)
Total operating costs 95,065 94.1 % 93,466 94.0 % 1,599
Income from operations 5,942 5.9 % 5,951 6.0 % (9)
Interest expense 4,190 4.1 % 4,765 4.8 % (575)
Income before provision for income tax 1,752 1.7 % 1,186 1.2 % 566
Provision for income tax (benefit) expense (60) (0.1) % 381 0.4 % (441)
Net income $ 1,812 1.8 % $ 805 0.8 % $ 1,007
Net income per share - basic $ 0.13 $ 0.06 $ 0.07
Net income per share - diluted $ 0.12 $ 0.06 $ 0.06
Revenue
Revenue increased $1.6 million for the three months ended March 31, 2024 over
2023,
r
eflecting growth across the Company's programs, particularly in public health
and IT services, offset in part by national security contracts converting to
small business set-aside companies.
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. Contract costs increased $0.9
million for the three months ended March 31, 2024 over 2023, the increase was
primarily due to the increase in revenue
General and administrative costs are for those employees not directly
providing services to our customers, to include but not limited to executive
management, business development accounting, and human resources. These costs
increased $1.0 million for the three months ended March 31, 2024 over 2023. As
a percentage of revenue general administrative costs increased to 11.6% from
10.8%, the increase as a percentage of revenue was primarily due to increase
in legal costs associated with customer procurements and strategic corporate
planning costs.
For the three months ended March 31, 2024, depreciation and amortization
expense were approximately $0.1 million and $4.1 million, respectively, as
compared to approximately $0.2 million and $4.3 million for the three months
ended March 31, 2023, respectively.
26
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Interest Expense, net
Interest expense, net, includes interest expense on the Company's term loan
and amortization of deferred financing costs on debt obligations. Interest
expense decreased $0.6 million for the three months ended March 31, 2024 over
2023, primarily due to the prepayment of debt resulting in reduced interest
payments.
Provision for Income Tax Expense and Benefit
Provision for income tax expense and benefit decreased $0.4 million for the
three months ended March 31, 2024 over 2023. The effective tax rate for the
three months ended March 31, 2024 and 2023 was (3.4)% and 32.1%, respectively.
The decrease in the tax provision is primarily due to the beneficial impact of
stock-based compensation expense as options are exercised.
The following table summarizes results of operations for the six months ended
March 31, 2024 and 2023 (in thousands except for per share amounts, and
percentage of revenue):
Six Months Ended
March 31,
Consolidated Statements of Operations: 2024 2023 Change
Revenue $ 198,857 100.0 % $ 172,155 100.0 % $ 26,702
Cost of operations:
Contract costs 158,193 79.6 % 135,494 78.7 % 22,699
General and administrative costs 19,407 9.8 % 18,117 10.5 % 1,290
Corporate development costs - - % 1,735 1.0 % (1,735)
Depreciation and amortization 8,496 4.3 % 6,937 4.0 % 1,559
Total operating costs 186,096 93.6 % 162,283 94.2 % 23,813
Income from operations 12,761 6.4 % 9,872 5.7 % 2,889
Interest expense 8,848 4.4 % 6,595 3.8 % 2,253
Income before provision for income tax 3,913 2.0 % 3,277 1.9 % 636
Provision for income tax (benefit) expense (50) - % 925 0.5 % (975)
Net income $ 3,963 2.0 % $ 2,352 1.4 % $ 1,611
Net income per share - basic $ 0.28 $ 0.17 $ 0.11
Net income per share - diluted $ 0.27 $ 0.16 $ 0.11
Revenue
Revenue increased $26.7 million for the six months ended March 31, 2024 over
2023 . The increase in revenue is primarily due to the December 2022
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. Contract costs increased $22.7
million for the six months ended March 31, 2024 over 2023. The increase in
costs is primarily due to increased revenue.
General and administrative costs are for those employees not directly
providing services to our customers, to include but not limited to executive
management, business development, accounting, and human resources. These costs
increased $1.3 million for the six months ended March 31, 2024 over 2023. As a
percentage of revenue general administrative costs decreased to 9.8% from
10.5%. The decrease was primarily due to increased operating leverage and
timing of strategic corporate planning and business development expenses.
27
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For the six months ended March 31, 2024, depreciation and amortization expense
were approximately $0.3 million and $8.2 million, respectively, as compared to
approximately $0.4 million and $6.5 million for the six months ended March 31,
2023, respectively.
Interest Expense, net
Interest expense, net, includes interest expense on the Company's term loan
and amortization of deferred financing costs on debt obligations. Interest
expense increased $2.3 million for six months ended March 31, 2024 over 2023,
primarily due to the borrowing required to finance the December 2022
acquisition.
Provision for Income Tax Expense and Benefit
Provision for income tax expense and benefit decreased $1.0 million for the
six months ended March 31, 2024 over 2023. The effective tax rate for the six
months ended March 31, 2024 and 2023 was (1.3)% and 28.2%, respectively. The
decrease in the tax provision is primarily due to the beneficial impact of
stock based compensation expense as options are exercised..
Non-GAAP Financial Measures
The Company uses EBITDA as a supplemental non-GAAP measure of our performance.
DLH defines EBITDA as net income excluding (i) interest expense, (ii) income
tax expense and benefit, and (iii) depreciation and amortization.
On a non-GAAP basis, Earnings Before Interest, Tax, Depreciation, and
Amortization ("EBITDA") for the six months ended March 31, 2024 and 2023 was
approximately $21.3 million and $16.8 million, respectively. The increase was
principally due to the contribution of the December 2022 acquisition.
This non-GAAP measure of our performance is used by management to conduct and
evaluate its business during its regular review of operating results for the
periods presented. Management and our Board utilize this non-GAAP measure to
make decisions about the use of our resources, analyze performance between
periods, develop internal projections and measure management's performance. We
believe that this non-GAAP measure is useful to investors in evaluating our
ongoing operating and financial results and understanding how such results
compare with our historical performance. By providing this non-GAAP measure as
a supplement to GAAP information, we believe this enhances investors
understanding of our business and results of operations. EBITDA is not a
recognized measurement under accounting principles generally accepted in the
United States, or GAAP, and when analyzing our performance investors should
(i) evaluate adjustments in our reconciliation to the nearest GAAP financial
measures and (ii) use non-GAAP measures in addition to, and not as an
alternative to, measures of our operating results as defined under GAAP.
Reconciliation of GAAP net income to EBITDA, a non-GAAP measure
(in thousands):
Three Months Ended Six Months Ended
March 31, March 31,
2024 2023 Change 2024 2023 Change
Net income $ 1,812 $ 805 $ 1,007 $ 3,963 $ 2,352 $ 1,611
(i) Interest expense, net 4,190 4,765 (575) 8,848 6,595 2,253
(ii) Provision for income tax (benefit) expense (60) 381 (441) (50) 925 (975)
(iii) Depreciation and amortization 4,243 4,535 (292) 8,496 6,937 1,559
EBITDA $ 10,185 $ 10,486 $ (301) $ 21,257 $ 16,809 $ 4,448
28
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Liquidity and capital management
The following table summarizes changes in available liquidity (in thousands):
March 31, 2024 September 30, 2023 Change
Cash $ 238 $ 215 $ 23
Credit facility 22,511 31,964 (9,453)
Total available liquidity $ 22,749 $ 32,179 $ (9,430)
A summary of the change in cash is presented as follows (in thousands):
Six Months Ended
2024 2023 Change
Net cash provided by operating activities $ 10,301 $ 6,862 $ 3,439
Net cash used in investing activities (466) (181,174) 180,708
Net cash (used in) provided by financing activities (9,812) 174,221 (184,033)
Net change in cash $ 23 $ (91) $ 114
Cash flows provided by operating activities totaled approximately $10.3
million and $6.9 million for the six months ended March 31, 2024 and 2023,
respectively. The increase in cash from operations was principally due to a
improvement in the collection cycle for accounts receivable.
Cash used in investing activities totaled $0.5 million and $181.2 million for
the six months ended March 31, 2024 and 2023, respectively. The cash utilized
in the prior fiscal year period was predominantly due to the December 2022
acquisition.
Cash used in and provided by financing activities during the six months ended
March 31, 2024 and 2023 were approximately $9.8 million and $174.2 million,
respectively, was principally due to retiring outstanding term debt while in
the six months ended March 31, 2023 the cash provided was to finance the
December 2022 acquisition.
Sources of cash
As of March 31, 2024, our immediate sources of liquidity include cash of
approximately $0.2 million, accounts receivable, and access to our secured
revolving line of credit facility. This credit facility provides us with
access of up to $70.0 million, subject to certain conditions including
eligible accounts receivable. As of March 31, 2024, we had unused borrowing
capacity of
$22.5 million,
which is net of outstanding letters of credit. 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 for the period ended March 31, 2024 is as
follows (in thousands):
Arrangement Loan Balance Interest* Maturity Date
Secured term loan (a) due December 8, 2027 $ 156,750 SOFR December 8, 2027
1
+ 4.1%
Secured revolving line of credit (b) due December 8, 2027 $ 14,022 SOFR December 8, 2027
1
+ 4.1%
1
Secured Overnight Financing Rate ("SOFR") as of March 31, 2024 wa
s 5.3%.
On September 19, 2019, we executed a floating-to-fixed interest rate swap with
First National Bank ("FNB") as counter party. The swap has a notional of $9.0
million at March 31, 2024, a fixed interest rate of 1.61% and a maturity date
of June 7, 2024. On January 31, 2023, we executed an additional floating-to-fixe
d interest rate swap with FNB which has a notional amount of
$80.0 million at March 31, 2024, a
fixed interest rate is 4.10% and a maturity date of January 31, 2026. As a
result of entering these agreements, for the six months ended March 31, 2024,
interest expense has been decreased by approximately $0.7 million.
29
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(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
(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 has accessed funds from
the revolving credit facility during the quarter and has a balance outstanding
at March 31, 2024 of $14.0 million
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 our
credit facilities are fully described in
Note 7. Credit Facilities
to the consolidated financial statements.
Contractual Obligations
Contractual obligations as of March 31, 2024 are as follows (in thousands):
Payments Due by Period
Next 12 2-3 4-5 More than 5
Total Months Years Years Years
Debt obligations $ 170,772 $ 18,772 $ 40,375 $ 111,625 $ -
Facility operating leases 20,947 3,236 7,682 5,004 5,024
Equipment operating leases 5 5 - - -
Total contractual obligations $ 191,724 $ 22,013 $ 48,057 $ 116,629 $ 5,024
Critical Accounting Policies and Estimates
Our critical accounting policies and estimates are disclosed in the Critical
Accounting Policies and Estimates section in Part II, "Item 7. Management's
Discussion of our Annual Report on Form 10-K for the year ended September 30,
2023. There have been no significant changes to the Company's critical
accounting policies as disclosed in our Annual Report on Form 10-K for the
year ended September 30, 2023. For a detailed discussion on the application of
accounting policies, refer to
Note 2. Significant Accounting Policies
.
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Except as described elsewhere in this report, 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. We have executed a set of floating-to-fixed interest
rate swaps with a total notional amount of $89 million at March 31, 2024. The
remaining balance of our debt is subject to floating interest rates.
We have determined that a 1.0% increase to SOFR would impact our interest
expense by approximately $0.8 million per year. As of March 31, 2024, the
interest rate on the floating interest rate debt was 9.4%.
ITEM 4: CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our CEO and President and Chief Financial Officer, evaluated 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 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 (i) is 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 Chief Financial Officer, to allow timely decisions regarding
required disclosure.
30
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Our management, including our CEO and President and Chief Financial Officer,
does not expect that our disclosure controls and procedures or our internal
controls will prevent all errors and all fraud. A control system, no matter
how well conceived and operated, can provide only reasonable, not absolute,
assurance that the objectives of the control system are met. Further, the
design of a control system must reflect the fact that there are resource
constraints, and the benefits of controls must be considered relative to their
costs. Because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within our company have been detected. Our
management, however, believes our disclosure controls and procedures are in
fact effective to provide reasonable assurance that the objectives of the
control system are met.
Changes in Internal Control over Financial Reporting
There were 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 controls
that occurred during the fiscal quarter ended March 31, 2024, that materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
PART II OTHER INFORMATION
ITEM 1: 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, 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 1A: RISK FACTORS
Our operating results and financial condition have varied in the past and may
in the future vary significantly depending on a number of factors. In addition
to the other information set forth in this report, you should carefully
consider the factors discussed in the "Risk Factors" section in our Annual
Report on Form 10-K for the year ended September 30, 2023, in our Quarterly
Report on Form 10-Q for the quarter ended December 31, 2023, and in our other
reports filed with the SEC concerning the risks associated with our business,
financial condition and results of operations. These factors, among others,
could materially and adversely affect our business, results of operations,
financial condition or liquidity and cause our actual results to differ
materially from those contained in statements made in this report and
presented elsewhere by management from time to time. The risks we have
identified in our reports are not the only risks facing us. Additional risks
and uncertainties not currently known to us or that we currently believe are
immaterial may also materially adversely affect our business, results of
operations, financial condition or liquidity.
See Item 1A, Risk Factors, in our Annual Report on Form 10-K for the fiscal
year ended
September 30, 2023
. We believe that there have been no material changes from the risk factors
described in our Annual Report on Form 10-K for the fiscal year ended
September 30, 2023.
ITEM 2: UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
During the period covered by this report, the Company did not issue any
securities that were not registered under the Securities Act of 1933, as
amended, except as has been reported in previous filings with the SEC or as
set forth elsewhere herein.
ITEM 3: DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4: MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5: OTHER INFORMATION
31
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(a) None
(b) None
(c) During the three months ended March 31, 2024, no director or office of the
Company
adopted
or
terminated
a "rule 10b5-1 trading arrangement" or "non-rule 10b5-1 trading arrangement,"
as each term is defined in Item 408 (a) of Regulation S-K.
32
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ITEM 6: EXHIBITS
Exhibits to this report which have previously been filed with the Commission
are incorporated by reference to the document referenced in the following
table. The exhibits designated with a number sign (#) indicate a management
contract or compensation plan or arrangement.
Exhibit Incorporated by Reference Filed
Number Exhibit Form Dated Exhibit Herewith
Description
31.1 Certification X
of Chief
Executive Officer
pursuant to
Section 17 CFR
240.13a-14(a)
or 17 CFR
240.15d-14(a)
31.2 Certification X
of Chief
Financial Officer
pursuant to
Section 17 CFR
240.13a-14(a)
or 17 CFR
240.15d-14(a)
32 Certification of Chief X
Executive Officer and Chief
Financial Officer pursuant
to 17 CFR 240.13a-14(b)
or 17 CFR 240.15d-14(b)
and Section 1350 of
Chapter 63 of Title 18 of
the United States Code
101.0 The following financial information from the DLH Holdings X
Corp. Quarterly Report on Form 10-Q for the fiscal
quarter ended March 31, 2024, 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; and,
(iv) the Notes to the Consolidated Financial Statements.
104.0 Cover Page Interactive Data File (formatted
as inline XBRL and contained in Exhibit 101)
33
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SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized
DLH HOLDINGS CORP.
By: /s/ Kathryn M. JohnBull
Kathryn M. JohnBull
Chief Financial Officer
(On behalf of the Registrant and as
Principal Financial and Accounting Officer)
Dated: May 01, 2024
34
EXHIBIT 31.1 Certification I, Zachary C. Parker, certify that: 1. I have
reviewed this quarterly report on Form 10-Q of DLH Holdings Corp.; 2. Based on
my knowledge, this report does not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements made,
in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report; 3. Based on my
knowledge, the financial statements, and other financial information included
in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and
for, the periods presented in this report; 4. The registrant's other
certifying officers and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)
and 15d-15(e)) and internal control over financial reporting (as defined in
Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a)
designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared; b)
designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles; c)
evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and d) disclosed in
this report any change in the registrant's internal control over financial
reporting that occurred during the registrant's most recent fiscal quarter
(the registrant's fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and 5. The
registrant's other certifying officer(s) and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions): a) all significant
deficiencies and material weaknesses in the design or operation of internal
control over financial reporting which are reasonably likely to adversely
affect the registrant's ability to record, process, summarize and report
financial information; and b) any fraud, whether or not material, that
involves management or other employees who have a significant role in the
registrant's internal control over financial reporting. Date: May 1, 2024 /s/
Zachary C. Parker_____ Zachary C. Parker Chief Executive Officer (Principal
Executive Officer)
-------------------------------------------------------------------------------
EXHIBIT 31.2 Certification I, Kathryn M. JohnBull, certify that: 1. I have
reviewed this quarterly report on Form 10-Q of DLH Holdings Corp.; 2. Based on
my knowledge, this report does not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements made,
in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report; 3. Based on my
knowledge, the financial statements, and other financial information included
in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and
for, the periods presented in this report; 4. The registrant's other
certifying officers and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)
and 15d-15(e)) and internal control over financial reporting (as defined in
Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a)
designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared; b)
designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles; c)
evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this report based on such evaluation; and d) disclosed in
this report any change in the registrant's internal control over financial
reporting that occurred during the registrant's most recent fiscal quarter
(the registrant's fourth fiscal quarter in the case of an annual report) that
has materially affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and 5. The
registrant's other certifying officer(s) and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions): a) all significant
deficiencies and material weaknesses in the design or operation of internal
control over financial reporting which are reasonably likely to adversely
affect the registrant's ability to record, process, summarize and report
financial information; and b) any fraud, whether or not material, that
involves management or other employees who have a significant role in the
registrant's internal control over financial reporting. Date: May 1, 2024 /s/
Kathryn M. JohnBull________ Kathryn M. JohnBull Chief Financial Officer
(Principal Accounting Officer)
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EXHIBIT 32 Certification of Chief Executive Officer and Chief Financial
Officer Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002 In connection with the Quarterly Report of
DLH Holdings Corp. (the "Company") on Form 10-Q for the period ended March 31,
2024 as filed with the Securities and Exchange Commission on the date hereof
(the "Report"), the undersigned, being, Zachary C. Parker, Chief Executive
Officer, and Kathryn M. JohnBull, Chief Financial Officer and Principal
Accounting Officer, certify, pursuant to 18 U.S.C. ss.1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The
Report fully complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934; and (2) The information contained in the
Report fairly presents, in all material respects, the financial condition and
result of operations of the Company. Dated: May 1, 2024 /s/ Zachary C.
Parker_____ /s/ Kathryn M. JohnBull ________ Zachary C. Parker Kathryn M.
JohnBull Chief Executive Officer (Principal Executive Officer) Chief Financial
Officer (Principal Accounting Officer) A signed original of this written
statement required by Section 906 has been provided to the Company and will be
retained by the Company and furnished to the Securities and Exchange
Commission or its staff upon request.
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