DLHC 10-Q
DLH Holdings Corp. (DLHC)
10-Q
2022-08-02
For: 2022-06-30
View Original
Added on
April 08, 2026
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
For the quarterly period ended June 30, 2022
For the transition period from to
Commission File No. 0-18492
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | ||||||||||||||||
| | |||||||||||||||||
(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 | |||||||||
| 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 (§ 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 o | ☐ | Accelerated filer o | ||||||||||||
x | 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 ý
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 12,961,269 shares of Common Stock, par value $0.001 per share, were outstanding as of July 29, 2022.
DLH HOLDINGS CORP.
FORM 10-Q
Table of Contents
| Page No. | |||||
2
PART I — FINANCIAL INFORMATION
ITEM I: FINANCIAL STATEMENTS
DLH HOLDINGS CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
| (unaudited) | (unaudited) | |||||||||||||||||||||||||
| Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||
| June 30, | June 30, | |||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||
| Revenue | $ | $ | $ | $ | ||||||||||||||||||||||
| Cost of operations: | ||||||||||||||||||||||||||
| Contract costs | ||||||||||||||||||||||||||
| General and administrative costs | ||||||||||||||||||||||||||
| Corporate development costs | ||||||||||||||||||||||||||
| Depreciation and amortization | ||||||||||||||||||||||||||
| Total operating costs | ||||||||||||||||||||||||||
| Income from operations | ||||||||||||||||||||||||||
| Interest expense, net | ||||||||||||||||||||||||||
| Income before income taxes | ||||||||||||||||||||||||||
| Income tax expense | ||||||||||||||||||||||||||
| Net income | $ | $ | $ | $ | ||||||||||||||||||||||
| Net income per share - basic | $ | $ | $ | $ | ||||||||||||||||||||||
| Net income per share - diluted | $ | $ | $ | $ | ||||||||||||||||||||||
| Weighted average common stock outstanding | ||||||||||||||||||||||||||
| Basic | ||||||||||||||||||||||||||
| Diluted | ||||||||||||||||||||||||||
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)
| June 30, 2022 | September 30, 2021 | |||||||||||||
| (unaudited) | ||||||||||||||
| ASSETS | ||||||||||||||
| Current assets: | ||||||||||||||
| Cash | $ | $ | ||||||||||||
| Accounts receivable | ||||||||||||||
| Other current assets | ||||||||||||||
| Total current assets | ||||||||||||||
| Equipment and improvements, net | ||||||||||||||
| Operating lease right-of-use assets | ||||||||||||||
| Goodwill | ||||||||||||||
| Intangible assets, net | ||||||||||||||
| Other long-term assets | ||||||||||||||
| Total assets | $ | $ | ||||||||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||||||||
| Current liabilities: | ||||||||||||||
| Operating lease liabilities - current | $ | $ | ||||||||||||
| Accrued payroll | ||||||||||||||
| Deferred revenue | ||||||||||||||
| Accounts payable, accrued expenses, and other current liabilities | ||||||||||||||
| Total current liabilities | ||||||||||||||
| Long-term liabilities: | ||||||||||||||
| Deferred taxes, net | ||||||||||||||
| Operating lease liabilities - long-term | ||||||||||||||
| Debt obligations - long-term, net of deferred financing costs | ||||||||||||||
| Total long-term liabilities | ||||||||||||||
| Total liabilities | ||||||||||||||
| Shareholders' equity: | ||||||||||||||
Common stock, $ | ||||||||||||||
| Additional paid-in capital | ||||||||||||||
| Accumulated deficit | ( | ( | ||||||||||||
| Total shareholders’ equity | ||||||||||||||
| Total liabilities and shareholders' equity | $ | $ | ||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
4
DLH HOLDINGS CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
| (unaudited) | ||||||||||||||
| Nine Months Ended | ||||||||||||||
| June 30, | ||||||||||||||
| 2022 | 2021 | |||||||||||||
| Operating activities | ||||||||||||||
| Net income | $ | $ | ||||||||||||
| Adjustments to reconcile net income to net cash provided by (used in) operating activities: | ||||||||||||||
| Depreciation and amortization | ||||||||||||||
| Amortization of deferred financing costs charged to interest expense | ||||||||||||||
| Stock-based compensation expense | ||||||||||||||
| Deferred taxes, net | ( | |||||||||||||
| Changes in operating assets and liabilities | ||||||||||||||
| Accounts receivable | ( | ( | ||||||||||||
| Other current assets | ( | ( | ||||||||||||
| Accrued payroll | ( | |||||||||||||
| Deferred revenue | ( | |||||||||||||
| Accounts payable, accrued expenses, and other current liabilities | ||||||||||||||
| Other long-term assets and liabilities | ||||||||||||||
| Net cash provided by (used in) operating activities | ( | |||||||||||||
| Investing activities | ||||||||||||||
| Business acquisition adjustment, net of cash acquired | ||||||||||||||
| Purchase of equipment and improvements | ( | ( | ||||||||||||
| Net cash provided by (used in) investing activities | ( | |||||||||||||
| Financing activities | ||||||||||||||
| Proceeds from debt obligations | ||||||||||||||
| Repayments of debt obligations | ( | ( | ||||||||||||
| Payments of deferred financing costs | ( | |||||||||||||
| Proceeds from issuance of common stock upon exercise of options and warrants | ||||||||||||||
| Common stock surrendered for the exercise of stock options - tax obligations | ( | |||||||||||||
| Net cash used in financing activities | ( | ( | ||||||||||||
| Net change in cash | ( | ( | ||||||||||||
| Cash at beginning of period | ||||||||||||||
| Cash at end of period | $ | $ | ||||||||||||
| Supplemental disclosure of cash flow information | ||||||||||||||
| Cash paid during the period for interest | $ | $ | ||||||||||||
| Cash paid during the period for income taxes | $ | $ | ||||||||||||
| Supplemental disclosure of non-cash activity | ||||||||||||||
| Common stock surrendered for the exercise of stock options | $ | $ | ||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
5
DLH HOLDINGS CORP.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands)
(unaudited)
| Common Stock | Additional Paid-In Capital | Accumulated Deficit | Total Shareholders' Equity | |||||||||||||||||||||||||||||
| (unaudited) | Shares | Amount | ||||||||||||||||||||||||||||||
| Nine Months Ended June 30, 2022 | ||||||||||||||||||||||||||||||||
| Balance at September 30, 2021 | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||
| Expense related to director restricted stock units | — | — | — | |||||||||||||||||||||||||||||
| Expense related to employee stock-based compensation | — | — | — | |||||||||||||||||||||||||||||
| Exercise of stock options | — | — | ||||||||||||||||||||||||||||||
| Common stock surrendered for the exercise of stock options | ( | — | ( | — | ( | |||||||||||||||||||||||||||
| Exercise of stock warrants | — | — | ||||||||||||||||||||||||||||||
| Net income | — | — | — | |||||||||||||||||||||||||||||
| Balance at June 30, 2022 | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||
| Three Months Ended June 30, 2022 | ||||||||||||||||||||||||||||||||
| Balance at March 31, 2022 | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||
| Expense related to director restricted stock units | — | — | — | |||||||||||||||||||||||||||||
| Expense related to employee stock-based compensation | — | — | — | |||||||||||||||||||||||||||||
| Exercise of stock options | — | — | ||||||||||||||||||||||||||||||
| Common stock surrendered for the exercise of stock options | ( | — | ( | — | ( | |||||||||||||||||||||||||||
| Net income | — | — | — | |||||||||||||||||||||||||||||
| Balance at June 30, 2022 | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||
| Common Stock | Additional Paid-In Capital | Accumulated Deficit | Total Shareholders' Equity | |||||||||||||||||||||||||||||
| (unaudited) | Shares | Amount | ||||||||||||||||||||||||||||||
| Nine Months Ended June 30, 2021 | ||||||||||||||||||||||||||||||||
| Balance at September 30, 2020 | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||
| Expense related to director restricted stock units | — | — | ||||||||||||||||||||||||||||||
| Expense related to employee stock-based compensation | — | — | — | |||||||||||||||||||||||||||||
| Exercise of stock options | — | |||||||||||||||||||||||||||||||
| Net income | — | — | — | |||||||||||||||||||||||||||||
| Balance at June 30, 2021 | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||
| Three Months Ended June 30, 2021 | ||||||||||||||||||||||||||||||||
| Balance at March 31, 2021 | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||
| Expense related to director restricted stock units | — | — | — | |||||||||||||||||||||||||||||
| Expense related to employee stock-based compensation | — | — | — | |||||||||||||||||||||||||||||
| Net income | — | — | — | |||||||||||||||||||||||||||||
| Balance at June 30, 2021 | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
6
DLH HOLDINGS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2022
1. Basis of Presentation
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 U.S. 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 U.S. GAAP for complete financial statements.
In management's opinion, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the period ended June 30, 2022 are not necessarily indicative of the results that may be expected for the year ending September 30, 2022 or any future period. Amounts as of and for the periods ended June 30, 2022 and June 30, 2021 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, 2021 filed with the Securities and Exchange Commission on December 6, 2021.
2. Business Overview
The Company is a full-service provider of technology-enabled health and human services, providing solutions to three market focus areas: Defense and Veterans' Health Solutions, Human Solutions and Services, and Public Health and Life Sciences. The Company delivers domain-specific expertise, industry best-practices and innovations to customers across these markets leveraging seven core competencies: secure data analytics, clinical trials and laboratory services, case management, performance evaluation, system modernization, operational logistics and readiness, and strategic digital communications. The Company manages its operations from its principal executive offices in Atlanta, Georgia, and we have a complementary headquarters office in Silver Spring, Maryland. The Company employs over 2,400 skilled employees working in more than 30 locations throughout the United States and one location overseas.
At present, the Company derives 99 % of its revenue from agencies of the Federal government, primarily as a prime contractor but also as a subcontractor to other Federal prime contractors.
A major customer is defined as a customer from whom we derive at least 10% of our revenues. Our largest customers are the Department of Veteran Affairs ("VA"), the Department of Health and Human Services ("HHS"), the Department of Homeland Security ("DHS"), and the Department of Defense ("DoD"). Our contracts with the state of Alaska were task orders awarded under our Federal Emergency Management Agency ("FEMA") contract vehicle within DHS. The following table summarizes the revenues by customer for the nine months ended June 30, 2022 and 2021, respectively:
| Nine Months Ended | ||||||||||||||||||||
| June 30, | ||||||||||||||||||||
| 2022 | 2021 | |||||||||||||||||||
| (in thousands) | Revenue | Percent of total revenue | Revenue | Percent of total revenue | ||||||||||||||||
| Department of Homeland Security | $ | % | $ | % | ||||||||||||||||
| Department of Veterans Affairs | % | % | ||||||||||||||||||
| Department of Health and Human Services | % | % | ||||||||||||||||||
| Department of Defense | % | % | ||||||||||||||||||
| Other customers with less than 10% share of total revenue | % | % | ||||||||||||||||||
| Total Revenue | $ | % | $ | % | ||||||||||||||||
7
3. New Accounting Pronouncements
4. Significant Accounting Policies
Use of Estimates
Fair Value of Financial Instruments
The carrying amounts of the Company's cash, accounts receivable, accrued expenses, and accounts payable approximate fair value due to the short-term nature of these instruments. The face values of the Company's debt instruments approximated 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. 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.
8
Stock-based Equity Compensation
The Company uses the fair value-based method for stock-based equity compensation. Options issued are designated as either an incentive stock 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 to employees and non-employees are recorded at fair value on the date of the grant and expensed over the period of vesting. The Company uses Monte Carlo binomial option pricing models, as appropriate 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.
Cash
We maintain cash balances of $1.1 million and $24.1 million at June 30, 2022 and September 30, 2021, respectively, 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.
9
Interest Rate Swap
The Company uses derivative financial instruments to manage interest rate risk associated with its variable-rate 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 both 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 continues to evaluate the impact of the COVID-19 pandemic on the Company, primarily through the introduction of additional regulations and restrictions. While it is reasonably possible that the virus could have a negative effect on the Company's financial position and the results of its operations, we expect that impact to be largely mitigated by the nature of our work and our ability to modify performance to accommodate those restrictions.
5. Revenue Recognition
We recognize revenue over time when there is a continuous transfer of control to our customer. For our U.S. government contracts, this continuous transfer of control to the customer is supported by clauses in the contract that allow the U.S. government to unilaterally terminate the contract for convenience, pay us for costs incurred plus a reasonable profit and take control of any work in process. When control is transferred over time, revenue is recognized based on the extent of progress towards completion of the performance obligation. For services contracts, we satisfy our performance obligations as services are rendered. We use cost-based input and time-based output methods to measure progress.
Contract costs include labor, material, and allocable indirect expenses. For time-and-material contracts, we bill the customer per labor hour and per material, and revenue is recognized in the amount invoiced since the amount corresponds directly to the value of our performance to date. We consider control to transfer when we have a present right to payment. Essentially, all of our contracts satisfy their performance obligations over time. Contracts are often modified to account for changes in contract specifications and requirements. Contract modifications impact performance obligations when the modification either creates new or changes the existing enforceable rights and obligations. The effect of a contract modification on the transaction price and our measure of progress for the performance obligation to which it relates is recognized as an adjustment to revenue and profit cumulatively. Furthermore, a significant change in one or more estimates could affect the profitability of our contracts. We recognize adjustments in estimated profit on contracts in the period identified.
For time-and-materials contracts, revenue is recognized to the extent of billable rates times hours delivered plus materials and other reimbursable costs incurred. Revenue for cost-reimbursable contracts is recorded as reimbursable costs are incurred, including an estimated share of the applicable contractual fees earned. For firm-fixed-price contracts, the consideration received for our performance is set at a predetermined price. Revenue for our firm-fixed-price contracts is recognized over time using a straight-line measure of progress or using the percentage-of-completion method whereby progress toward completion is based on a comparison of actual costs incurred to total estimated costs to be incurred over the contract term. Contract costs are expensed as incurred. Estimated losses are recognized when identified.
Contract assets - Amounts are invoiced as work progresses in accordance with agreed-upon contractual terms. In part, revenue recognition occurs before we have the right to bill, resulting in contract assets. These contract assets are reported within receivables on our consolidated balance sheets and are invoiced in accordance with payment terms defined in each contract. Period end balances will vary from period to period due to agreed-upon contractual terms.
Contract liabilities - Amounts are a result of billings in excess of costs incurred.
The following table summarizes the contract balances recognized on the Company's consolidated balance sheets (in thousands):
| June 30, | September 30, | ||||||||||||||||
| Ref | 2022 | 2021 | |||||||||||||||
| Contract assets | $ | $ | |||||||||||||||
| Contract liabilities | (a) | $ | $ | ||||||||||||||
10
Revenue by customer (in thousands):
| Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||
| June 30, | June 30, | |||||||||||||||||||||||||
| Ref | 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||||
| Department of Homeland Security | (a) | $ | ( | $ | $ | $ | ||||||||||||||||||||
| Department of Veterans Affairs | ||||||||||||||||||||||||||
| Department of Health and Human Services | ||||||||||||||||||||||||||
| Department of Defense | ||||||||||||||||||||||||||
| Other | ||||||||||||||||||||||||||
| Total Revenue | $ | $ | $ | $ | ||||||||||||||||||||||
Ref (a): The results for the three months ended June 30, 2022 include final closeout activities related to the short-term FEMA COVID support contracts and the related agreements between DLH and its subcontractors. Reconciliation of estimated pass-through travel and accommodation expenses to the final reimbursable expenses resulted in a reduction to expenses, and a corresponding reduction to revenue, previously accrued and pending payment. This reduction reflected the value of in-kind expenses furnished by the State in support of the contract.
Revenue by contract type (in thousands):
| Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||
| June 30, | June 30, | |||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||
| Time and Materials | $ | $ | $ | $ | ||||||||||||||||||||||
| Cost Reimbursable | ||||||||||||||||||||||||||
| Firm Fixed Price | ||||||||||||||||||||||||||
| Total Revenue | $ | $ | $ | $ | ||||||||||||||||||||||
Revenue by whether the Company acts as a prime contractor or a subcontractor (in thousands):
| Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||
| June 30, | June 30, | |||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||
| Prime Contractor | $ | $ | $ | $ | ||||||||||||||||||||||
| Subcontractor | ||||||||||||||||||||||||||
| Total Revenue | $ | $ | $ | $ | ||||||||||||||||||||||
11
6. Leases
The following table summarizes lease balances in our consolidated balance sheets at June 30, 2022 and September 30, 2021 (in thousands):
| June 30, | September 30, | ||||||||||
| 2022 | 2021 | ||||||||||
| Operating lease right-of-use assets | $ | $ | |||||||||
| Operating lease liabilities, current | $ | $ | |||||||||
| Operating lease liabilities - long-term | |||||||||||
| Total operating lease liabilities | $ | $ | |||||||||
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.
For the three and nine months ended June 30, 2022 and 2021, total lease costs for our operating leases are as follows (in thousands):
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| June 30, | June 30, | ||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
| Operating | $ | $ | $ | $ | |||||||||||||||||||
| Short-term | |||||||||||||||||||||||
| Variable | |||||||||||||||||||||||
| Sublease income | ( | ( | ( | ( | |||||||||||||||||||
| Total lease costs | $ | $ | $ | $ | |||||||||||||||||||
12
The Company's future minimum lease payments as of June 30, 2022 are as follows:
| For the Fiscal Year Ending September 30, | (in thousands) | ||||
| 2022 (remaining) | $ | ||||
| 2023 | |||||
| 2024 | |||||
| 2025 | |||||
| 2026 | |||||
| Thereafter | |||||
| Total future lease payments | |||||
| Less: imputed interest | ( | ||||
| Present value of future minimum lease payments | |||||
| Less: current portion of operating lease liabilities | ( | ||||
| Long-term operating lease liabilities | $ | ||||
At June 30, 2022, the weighted-average remaining lease term and weighted-average discount rate are 7.7 years and 6.01 %, respectively. The calculation of the weighted-average discount rate was determined based on borrowing terms from our senior credit facility.
Other information related to our leases is as follows:
| Nine Months Ended | ||||||||||||||
| June 30, | ||||||||||||||
| 2022 | 2021 | |||||||||||||
| Cash paid for amounts included in the measurement of lease liabilities | $ | $ | ||||||||||||
7. Supporting Financial Information
Accounts receivable
| (in thousands) | ||||||||||||||
| June 30, | September 30, | |||||||||||||
| 2022 | 2021 | |||||||||||||
| Billed receivables | $ | $ | ||||||||||||
| Contract assets | ||||||||||||||
| Total accounts receivable | $ | $ | ||||||||||||
Accounts receivable are non-interest bearing, unsecured and carried at net realizable value. We evaluate our receivables on a quarterly basis and determine whether an allowance is appropriate based on specific collection issues. No
Other current assets
| (in thousands) | ||||||||||||||
| June 30, | September 30, | |||||||||||||
| 2022 | 2021 | |||||||||||||
| Prepaid insurance and benefits | $ | $ | ||||||||||||
| Other receivables | ||||||||||||||
| Prepaid licenses and other expenses | ||||||||||||||
| Other current assets | $ | $ | ||||||||||||
13
Equipment and improvements, net
| (in thousands) | |||||||||||||||||
| June 30, | September 30, | ||||||||||||||||
| Ref | 2022 | 2021 | |||||||||||||||
| Furniture and equipment | $ | $ | |||||||||||||||
| Computer equipment | |||||||||||||||||
| Computer software | |||||||||||||||||
| Leasehold improvements | |||||||||||||||||
| Total equipment and improvements | |||||||||||||||||
| Less: accumulated depreciation and amortization | (a) | ( | ( | ||||||||||||||
| Equipment and improvements, net | $ | $ | |||||||||||||||
Ref (a): Depreciation expense was $0.2 million and $0.4 million for the three months ended June 30, 2022 and 2021, respectively, and $0.8 million and $1.2 million, for the nine months ended June 30, 2022 and 2021, respectively.
Intangible assets
| (in thousands) | |||||||||||||||||
| June 30, | September 30, | ||||||||||||||||
| Ref | 2022 | 2021 | |||||||||||||||
| Intangible assets | (a) | ||||||||||||||||
| Customer contracts and related customer relationships | $ | $ | |||||||||||||||
| Covenants not to compete | |||||||||||||||||
| Trade name | |||||||||||||||||
| Total intangible assets | |||||||||||||||||
| Less: accumulated amortization | |||||||||||||||||
| Customer contracts and related customer relationships | ( | ( | |||||||||||||||
| Covenants not to compete | ( | ( | |||||||||||||||
| Trade name | ( | ( | |||||||||||||||
| Total accumulated amortization | ( | ( | |||||||||||||||
| Intangible assets, net | $ | $ | |||||||||||||||
Ref (a): Intangible assets (other than goodwill) are subject to amortization. These intangible assets are amortized on a straight-line basis over their estimated useful lives of 10 years. The total amount of amortization expense was $1.6 4.9 million for the nine months ended June 30, 2022 and 2021.
| Estimated amortization expense for the following fiscal years ending September 30: | (in thousands) | ||||
| 2022 (remaining) | $ | ||||
| 2023 | |||||
| 2024 | |||||
| 2025 | |||||
| 2026 | |||||
| Thereafter | |||||
| Total amortization expense | $ | ||||
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Accounts payable, accrued expenses, and other current liabilities
| (in thousands) | |||||||||||
| June 30, | September 30, | ||||||||||
| 2022 | 2021 | ||||||||||
| Accounts payable | $ | $ | |||||||||
| Accrued benefits | |||||||||||
| Accrued bonus and incentive compensation | |||||||||||
| Accrued workers' compensation insurance | |||||||||||
| Other accrued expenses | |||||||||||
| Accounts payable, accrued expenses, and other current liabilities | $ | $ | |||||||||
Debt obligations
| (in thousands) | |||||||||||||||||
| June 30, | September 30, | ||||||||||||||||
| Ref | 2022 | 2021 | |||||||||||||||
| Bank term loan | $ | $ | |||||||||||||||
| Less: unamortized deferred financing costs | ( | ( | |||||||||||||||
| Long-term portion of bank debt obligations, net of deferred financing costs | (a) | $ | $ | ||||||||||||||
Ref (a): As of June 30, 2022 and September 30, 2021, we had no outstanding balance on our revolving line of credit and have satisfied mandatory principal payments covering the following twelve months.
Interest income (expense)
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||||||||
| June 30, | June 30, | ||||||||||||||||||||||||||||
| (in thousands) | Ref | 2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||||||
| Interest expense | (a) | $ | ( | $ | ( | $ | ( | $ | ( | ||||||||||||||||||||
| Amortization of deferred financing costs | (b) | ( | ( | ( | ( | ||||||||||||||||||||||||
| Interest expense, net | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||||||||
Ref (a): Interest expense on borrowing
Ref (b): Amortization of expenses related to term loan and revolving line of credit
8. Credit Facilities
A summary of our loan facility as of June 30, 2022, is as follows:
| ($ in thousands) | ||||||||||||||||||||||||||
| As of June 30, 2022 | ||||||||||||||||||||||||||
| Lender | Arrangement | Loan Balance | Interest | Maturity Date | ||||||||||||||||||||||
| First National Bank of Pennsylvania ("FNB") | Secured term loan (a) | $ | LIBOR* + | 09/30/2025 | ||||||||||||||||||||||
| First National Bank of Pennsylvania ("FNB") | Secured revolving line of credit (b) | $ | LIBOR* + | 09/30/2025 | ||||||||||||||||||||||
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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 September 30, 2025.
The Credit Agreement requires compliance with a number of financial covenants and contains restrictions on our ability to engage in certain transactions. Among other matters, we must comply with limitations on the following: granting liens; incurring other indebtedness; maintenance of assets; investments in other entities and extensions of credit; mergers and consolidations; and changes in nature of business. The loan agreement also requires us to comply with certain quarterly financial covenants including: (i) a minimum fixed charge coverage ratio of at least 1.25 to 1.00, and (ii) a Funded Indebtedness to Adjusted EBITDA ratio not exceeding the ratio of 3.75 :1.0 to 2.75 :1.0 through maturity. Adjusted EBITDA ratio is calculated by dividing the Company's total interest-bearing debt by net income adjusted to exclude (i) interest and other expenses, (ii) provision for or benefit from income taxes, if any, (iii) depreciation and amortization, and (iv) non-recurring charges, losses or expenses to include transaction and non-cash equity expense. The term loan has an interest rate spread range from 2.5 % to 4.5 % depending on the funded indebtedness to adjusted EBITDA ratio. We are in compliance with all loan covenants and restrictions.
We are required to pay quarterly amortization payments, which commenced in December 2020. The annual amortization amounts are $7.0 8.75 9.0 million during the quarter ended June 30, 2022 bringing the total amount paid on the secured term loan to $41.5 million. We have satisfied mandatory principal amortization until loan maturity on September 30, 2025.
In addition to quarterly payments of the outstanding indebtedness, the loan agreement also requires annual payments of a percentage of excess cash flow, as defined in the loan agreement. The loan agreement states that an excess cash flow recapture payment must be made equal to (a) 75 % of the excess cash flow for the immediately preceding fiscal year in which indebtedness to consolidated EBITDA ratio is greater than or equal to 2.50 :1.0; (b) 50 % of the excess cash flow for the immediately preceding fiscal year in which the funded indebtedness to consolidated EBITDA Ratio is less than 2.50 :1.0 but greater than or equal to 1.5 :1.0; or (c) 0 % of the excess cash flow for the immediately preceding fiscal year in which the funded indebtedness to consolidated EBITDA Ratio is less than 1.5 :1.0. In addition, the Company must make additional mandatory prepayment of amounts outstanding based on proceeds received from asset sales and sales of certain equity securities or other indebtedness. For additional information regarding the schedule of future payment obligations, please refer to Note 11. Commitments and Contingencies.
On September 30, 2019, we executed a floating-to-fixed interest rate swap with First National Bank ("FNB") as counter party. The notional amount in the floating-to-fixed interest rate swap as of June 30, 2022 is $22.8 million and matures in 2024. The remaining outstanding balance of our term loan is subject to interest rate fluctuations. On the notional amount, the Company pays a base fixed rate of 1.61 %, plus applicable credit spread. As a result, for the nine months ended June 30, 2022, interest expense has been increased by approximately $0.2 million.
(b) The secured revolving line of credit has a ceiling of up to $25.0 million; as of June 30, 2022 we had unused borrowing capacity of $23.0 million, which is net of outstanding letters of credit. Borrowing on the line of credit is secured by liens on substantially all of the assets of the Company. The Company accessed funds from the revolving credit facility during the quarter, but had no outstanding balance at June 30, 2022.
The Company's total borrowing availability, based on eligible accounts receivables at June 30, 2022, was $25.0 million. As part of the revolving credit facility, the lenders agreed to a sublimit of $5 million for letters of credit for the account of the Company, subject to applicable procedures.
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9. Stock-Based Compensation and Equity Grants
Stock-based compensation expense
Options issued under equity incentive plans were designated as either incentive stock or non-statutory stock options. No option is 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 June 30, 2022, there were 1.4 million options available for grant.
Stock-based compensation expense, shown in the table below, is recorded in general and administrative expenses included in our Consolidated Statements of Operations:
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||||||||
| Ref | June 30, | June 30, | |||||||||||||||||||||||||||
| (in thousands) | 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||||
| DLH employees | (a) | $ | $ | $ | $ | ||||||||||||||||||||||||
| Non-employee directors | (b) | ||||||||||||||||||||||||||||
| Total stock option expense | $ | $ | $ | $ | |||||||||||||||||||||||||
Ref (a): Included in this amount are equity grants of restricted stock units to Named Executive Officers ("NEO"), which were issued in accordance with the DLH long-term incentive compensation policy in this fiscal year, and stock option grants to NEO and non-NEO company employees. The restricted stock units totaled 161,485 restricted stock units issued and outstanding at June 30, 2022.
Ref (b): Equity grants of restricted stock units were made in accordance with DLH compensation policy for non-employee directors and a total of 53,510 restricted stock units were issued and outstanding at June 30, 2022.
Unrecognized stock-based compensation expense (in thousands)
| June 30, | |||||||||||
| Ref | 2022 | ||||||||||
| Unrecognized expense for DLH employees | (a) | $ | |||||||||
| Unrecognized expense for non-employee directors | |||||||||||
| Total unrecognized expense | $ | ||||||||||
Ref (a): The remaining compensation expense is recognized as the requisite service is rendered. The compensation expense for that portion of awards has been based on the grant-date fair value of those awards as calculated for recognition purposes under applicable guidance. For options that vest based on the Company's common stock achieving and maintaining defined market prices, the Company values the awards with a Monte Carlo binomial model that utilizes various probability factors and other criterion in establishing fair value of the grant. The related compensation expense is recognized over the derived service period determined in the valuation. On a weighted average basis, this expense is expected to be recognized within the next 4.15 years.
Stock option activity for the nine months ended June 30, 2022
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| (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, 2021 | $ | $ | ||||||||||||||||||||||||
| Exercised | ( | $ | — | — | ||||||||||||||||||||||
| Granted | $ | — | $ | — | ||||||||||||||||||||||
| Options outstanding, June 30, 2022 | $ | $ | ||||||||||||||||||||||||
Stock options shares outstanding, vested and unvested for the periods ended (in thousands):
| Number of Shares | |||||||||||||||||
| June 30, | September 30, | ||||||||||||||||
| Ref | 2022 | 2021 | |||||||||||||||
| Vested and exercisable | (a) | ||||||||||||||||
| Unvested | (b) | ||||||||||||||||
| Options outstanding | |||||||||||||||||
Ref (a): Weighted average exercise price of vested and exercisable shares was $5.91 and $3.91 at June 30, 2022 and September 30, 2021, respectively. Aggregate intrinsic value was approximately $20.1 million and $13.9 million at June 30, 2022 and September 30, 2021, respectively. Weighted average contractual term remaining was 5.2 years and 4.0 years at June 30, 2022 and September 30, 2021, respectively.
Ref (b): Certain awards vest upon satisfaction of certain performance criteria.
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10. Earnings Per Share
Basic earnings per share is calculated by dividing income available to common shareholders by the weighted average number of common shares outstanding and restricted stock grants that vested or are likely to vest during the period. Diluted earnings per share is calculated by dividing income available to common shareholders by the weighted average number of basic common shares outstanding, adjusted to reflect potentially dilutive securities. Diluted earnings per share is calculated using the treasury stock method.
| (In thousands) | ||||||||||||||||||||||||||
| Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||
| June 30, | June 30, | |||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||
| Numerator: | ||||||||||||||||||||||||||
| Net income | $ | $ | $ | $ | ||||||||||||||||||||||
| Denominator: | ||||||||||||||||||||||||||
| Denominator for basic net income per share - weighted-average outstanding shares | ||||||||||||||||||||||||||
| Effect of dilutive securities: | ||||||||||||||||||||||||||
| Stock options and restricted stock | ||||||||||||||||||||||||||
| Denominator for diluted net income per share - weighted-average outstanding shares | ||||||||||||||||||||||||||
| Net income per share - basic | $ | $ | $ | $ | ||||||||||||||||||||||
| Net income per share - diluted | $ | $ | $ | $ | ||||||||||||||||||||||
11. Commitments and Contingencies
Contractual obligations as of June 30, 2022 (in thousands):
| Payments Due Per Fiscal Year | |||||||||||||||||||||||
| (Remaining) | |||||||||||||||||||||||
| Total | 2022 | 2023 | 2024 | 2025 | 2026 | Thereafter | |||||||||||||||||
| Debt obligations | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||
| Facility operating leases | |||||||||||||||||||||||
| Equipment operating leases | |||||||||||||||||||||||
| Total contractual obligations | $ | $ | $ | $ | $ | $ | $ | ||||||||||||||||
Worker's Compensation
We accrue worker's compensation expense based on claims submitted, applying actuarial loss development factors to estimate the costs incurred but not yet recorded. Our accrued liability for claims development as of June 30, 2022 and September 30, 2021 was $4.9 million and $7.0 million, respectively.
Legal Proceedings
As a commercial enterprise and employer, the Company is subject to various claims and legal actions in the ordinary course of business. These matters can include professional liability, 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.
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12. Related Party Transactions
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, 2021, 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 ongoing impact of the novel coronavirus (“COVID-19”) pandemic, including the measures to reduce its spread, and its impact on the economy and demand for our services, are uncertain, cannot be predicted, and may precipitate or exacerbate other risks and uncertainties; the risk that we will not realize the anticipated benefits of an acquisition; the challenges of managing larger and more widespread operations resulting from the acquisition; contract awards in connection with re-competes for present business and/or competition for new business; compliance with new 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 ability to successfully integrate the operations of future acquisitions; the impact of inflation and higher interest rates on our cost structure; 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, 2021, 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.
Business and Markets Overview
DLH is a provider of technology-enabled business process outsourcing and program management solutions, and public health research and analytics offerings. We are primarily focused on improving and better deploying large-scale federal health and human service initiatives. The Company derives 99% of its revenue from agencies of the Federal government, providing services to several agencies including the Department of Veteran Affairs ("VA"), Department of Health and Human Services ("HHS"), and the Department of Defense ("DoD"), and Department of Homeland Security ("DHS"). The Company contracts with its government customers through its subsidiaries.
In recent years, we have successfully completed acquisitions to increase future organic growth, diversify our customer base, and to expand into adjacent markets. On June 7, 2019 we acquired Social & Scientific Systems, Inc. ("S3") and on September 30, 2020, we acquired Irving Burton Associates, LLC ("IBA").
Our business offerings are aligned to three market focus areas within the federal health services market space.
•Defense and Veteran Health Solutions;
•Human Services and Solutions;
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•Public Health and Life Sciences;
The following table summarizes the revenues by market for the nine months ended June 30, 2022 and 2021, respectively:
| Nine Months Ended | ||||||||||||||||||||
| June 30, | ||||||||||||||||||||
| 2022 | 2021 | |||||||||||||||||||
| (in thousands) | Revenue | Percent of total revenue | Revenue | Percent of total revenue | ||||||||||||||||
| Human Services and Solutions | $ | 156,326 | 47.7 | % | $ | 26,711 | 14.8 | % | ||||||||||||
| Defense and Veteran Health Solutions | 117,497 | 35.8 | % | 105,539 | 58.3 | % | ||||||||||||||
| Public Health and Life Sciences | 54,117 | 16.5 | % | 48,663 | 26.9 | % | ||||||||||||||
| Total Revenue | $ | 327,940 | 100.0 | % | $ | 180,913 | 100.0 | % | ||||||||||||
Position and Distribution of Services and Solutions in Our Markets
The markets in which we compete and the manner in which we are positioned within them are characterized by a number of features including, but not limited to:
•specialized credentials and licenses held by a substantial component of our employee base;
•prime contractor position in contracts representing 93% of our revenue for the nine months ended June 30, 2022;
•strong past performance record, as evidenced by our VA customer scoring among the highest in overall satisfaction in the J.D. Power National Pharmacy Study over recent years; and
•targeted expansion in critical national priority markets with Federal budget stability and strong bipartisan support
We operate primarily through prime contracts awarded by the government through competitive bidding processes. We have a diverse mix of contract vehicles with various agencies of the United States Government, which supports our overall corporate growth strategy. Our revenue for the nine months ended June 30, 2022 is distributed to time and materials contracts (80%), cost reimbursable contracts (11%) and firm fixed price contracts (9%). We provide services under Indefinite Duration, Indefinite Quantity ("IDIQ") and government wide acquisition contracts, such as General Services Administration ("GSA") schedule contracts. The Company currently holds multiple GSA schedule contracts under which we provide services that constitute a significant percentage of our total revenue. These Federal contract schedules are renewed on a recurring basis for a multi-year period.
Major Customers
A major customer is defined as a customer from whom we derive at least 10% of our revenues. The following table summarizes the revenues by customer for the nine months ended June 30, 2022 and 2021, respectively:
| Nine Months Ended | ||||||||||||||||||||
| March 31, | ||||||||||||||||||||
| 2022 | 2021 | |||||||||||||||||||
| (in thousands) | Revenue | Percent of total revenue | Revenue | Percent of total revenue | ||||||||||||||||
| Department of Homeland Security | $ | 126,397 | 38.6 | % | $ | 523 | 0.3 | % | ||||||||||||
| Department of Veterans Affairs | 92,270 | 28.1 | % | 83,010 | 45.9 | % | ||||||||||||||
| Department of Health and Human Services | 78,452 | 23.9 | % | 66,748 | 36.9 | % | ||||||||||||||
| Department of Defense | 25,227 | 7.7 | % | 22,103 | 12.2 | % | ||||||||||||||
| Other customers with less than 10% share of total revenue | 5,594 | 1.7 | % | 8,529 | 4.7 | % | ||||||||||||||
| Total Revenue | $ | 327,940 | 100.0 | % | $ | 180,913 | 100.0 | % | ||||||||||||
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Major Contracts
The revenue attributable to the VA was derived from 16 separate contracts covering the Company's performance of pharmacy and logistics services in support of the VA's Consolidated Mail Outpatient Pharmacy ("CMOP") program. Nine contracts for pharmacy services, which represent revenues of approximately $51.2 million and $47.5 million for the nine months ended June 30, 2022 and 2021, are currently operating under a bridge contract through October 2022. The remaining seven contracts for logistics services, which represent approximately $41.1 million and $35.5 million of revenues for the nine months ended June 30, 2022 and 2021, are currently operating under a bridge contract through November 2022. The government has neither indicated nor announced its future procurement strategy with respect to these contracts. Due to the time required to conduct a procurement process, we expect these contracts to be further extended.
The Company's contract with HHS in support of its Head Start program generated $25.9 million and $21.4 million of its revenue for the nine months ended June 30, 2022 and 2021, respectively. This contract has a period of performance through April 2025.
As previously announced, we were awarded two short-term task orders under a FEMA contract to provide support for states seeking temporary medical staffing support and COVID-19 related community testing, vaccination and therapy. Those contracts generated $125.8 million of revenue for the nine months ended June 30, 2022. The contract to support COVID-19 related community testing, vaccination and therapy ended on December 31, 2021. The contract to provide temporary medical staffing support completed on March 20, 2022.
We remain dependent upon the continuation of our relationships with the VA and HHS. Our results of operations, cash flows, and financial condition would be materially adversely affected if we were unable to continue our relationship with either of these customers, if we were to lose any of our material current contracts, or if the amount of services we provide to them was to be materially reduced.
Backlog
Backlog represents total estimated contract value of predominantly multi-year government contracts and will vary depending upon the timing of new/renewal contract awards. Backlog is based upon customer commitments that the Company believes to be firm over the remaining performance period of our contracts. The value of multi-client, competitive Indefinite Delivery/Indefinite Quantity ("IDIQ") contract awards is included in backlog computation only when a task order is awarded or if the contract is a single award IDIQ contract. While no assurances can be given that existing contracts will result in earned revenue in any future period, or at all, the Company’s major customers have historically exercised their contractual renewal options. At June 30, 2022, our total backlog was approximately $509.7 million compared to $651.5 million as of September 30, 2021.
Backlog value is quantified from management's judgment and assumptions about the volume of services based on past volume trends and current planning developed with customers. Our backlog may consist of both funded and unfunded amounts under existing contracts including option periods. At June 30, 2022, our funded backlog was approximately $87.4 million, and our unfunded backlog was $422.3 million.
Forward Looking Business Trends
COVID-19 impact
We are exposed to and impacted by macroeconomic factors and U.S. government policies. Current general economic conditions, while improving, continue to be highly volatile due to the COVID-19 pandemic, which resulted in both market size contractions due to economic slowdowns and government restrictions on movement during the height of the pandemic. While the rollout of vaccines has positively correlated to an improvement in macroeconomic indicators, the lifting of various public health constraints, and a reduction of many restrictions on economic activity, there continues to be significant uncertainty as to the effects of the pandemic on the economy, which may impact our results of operations or cash flows in future periods. We have seen continued demand for the services we provide under our current contract portfolio as the services we provide are largely deemed essential. Although we have also been successful in winning new contracts tied to the need to support public health initiatives in response to the pandemic, as the public health situation improves, there may be fewer such opportunities in the future.
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General uncertainty related to the pandemic, the long-term efficacy of vaccines and the spread of new variants, may nonetheless cause reduced demand for certain services we provide, particularly if it results in a recessionary economic environment or the spending priorities of the U.S. government shift in ways adverse to our business focus. Our ability to continue to operate without any significant negative impacts will in part depend on our continued ability to protect our employees. We have endeavored to follow recommended actions of government and health authorities to protect our employees and have been able to broadly maintain our operations. Further, we have partnered with our clients to adopt particular measures to protect our employees at distribution centers, and we have been and expect to continue to execute on the remainder of our contracts through remote and teleworking arrangements. We continue to monitor the evolving situation related to the COVID-19 pandemic and intend to continue to work with government authorities and other stakeholders to assess further potential implications to us, continue with employee safety measures to ensure that we are able to continue our operations during the pandemic, and take other actions where appropriate to mitigate other adverse consequences. However, uncertainty resulting from the pandemic could result in an unforeseen disruption to our operations (for example a closure of a key distribution facility) that may not be fully mitigated. To date we have experienced continuity in the majority of our work for our government clients. While there have been postponements of events and challenges around some project work requiring travel, overall, our government clients have continued to require our services. We are unable to predict whether, and to what extent, this trend will continue. It would be reasonable to expect some restriction of certain client activities due to COVID-19.
Due to our ability to continue to perform on our contract portfolio and generate cash flow, we do not presently expect liquidity constraints related to COVID-19. We are presently in compliance with all covenants in our term loan and have access to a revolving line of credit to meet any short-term cash needs that cannot be funded by operations. As such, mandatory demands on our cash flow remain low. Further, we have not observed any material impairments of our assets or a significant change in the fair value of our assets due to the COVID-19 pandemic.
Federal budget outlook for 2023
The President’s budget proposal for fiscal year ("FY") 2023 outlines many initiatives that include investments to rebuild our country’s physical infrastructure, strengthen supply chains, combat inflation, expand economic opportunity, respond to the changing climate, sustain and strengthen national defense, and bolster America's public health infrastructure. Specifically, the investment in public health infrastructure involves improving the nation’s readiness for future pandemics and other biological threats, expanding access to vaccines and healthcare, and defeating diseases and epidemics such as, but not limited to, the opioid and HIV/AIDs epidemics. The budget's initiatives are further reflected in the budget requests for the Department of Health and Human Services, Department of Veterans Affairs, and Department of Defense.
Department of Health and Human Services
The FY 2023 budget request proposes $127.3 billion in discretionary budget authority for HHS and $1.7 trillion in mandatory funding for the department. The budget proposes $63 billion in discretionary and mandatory resources for NIH, an increase of $16 billion above FY 2022 enacted, to address the opioid crisis and end HIV, make new investments in pandemic preparedness and nutrition research, and drive biomedical innovations. The budget also requests $45 million for telehealth, which is $9 million above FY 2022 enacted, to promote health services with telehealth technologies. The budget also provides for investment in programs that improve the health and well-being of young children and their families. This includes $12.2 billion for the Office of Head Start, principally to expand eligibility for participation in the program.
Department of Veterans Affairs
The VA is requesting a total of $301.4 billion for FY 2023, an increase of $30.7 billion above the FY 2022 request. It includes $139.1 billion in discretionary funding, an increase of $21.9 billion, and $161.3 billion in mandatory funding, an increase of $8.6 billion from FY 2022 enacted. The VA research program is expected to allocate increased funding to advance the Department’s understanding of the impact of traumatic brain injury and toxic exposure(s) on long-term health outcomes, coronavirus related research and impacts, and precision oncology. The 2023 budget request for the VA's research enterprise is $916 million, an increase of $34 million from the 2022 budget, excluding mandatory funding. In addition, the 2023 budget estimates $4.8 billion will be spent on telehealth treatment in 2023, an increase of $622 million from the 2022 current estimate. The VA is continuing to expand this program because of its ability to leverage VA providers and provide better services to veterans.
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Department of Defense
The Military Health System ("MHS") is one of the largest health care systems, serving over 9 million beneficiaries. As a part of the DoD, the Defense Health Agency ("DHA") manages a global health care network of military and civilian medical professionals, military hospitals and clinics around the world, and supports the delivery of integrated health services to MHS beneficiaries. The funding and personnel to support MHS’s mission is referred to as the Unified Medical Budget ("UMB"). The FY 2023 UMB request for the Defense Health program is $36.9 billion, a decrease of $0.4 billion from FY 2022 enacted.
In June 2022, the House Appropriations Subcommittee on Defense approved the Defense Funding Bill for FY 2023, which would provide $38.1 billion in funding for medical and health care programs of DoD. Of this, approximately $1.1 billion would be made available to the Defense Health Agency to carry out congressionally directed medical research programs.
Industry consolidation among federal government contractors
There has been active consolidation and a strong increase in merger and acquisition activity among federal government contractors over the past few years that we expect to continue, fueled by public companies leveraging strong balance sheets. Companies often look to acquisitions that augment core capabilities, contracts, customers, market differentiators, stability, cost synergies, and higher margin and revenue streams.
Potential impact of Federal Contractual set-aside Laws and Regulations:
The Federal government has an overall goal of 23% of prime contracts flowing through small businesses. As previously reported, various agencies within the federal government have policies that support small business goals, including the adoption of the “Rule of Two” by the VA, which provides that the agency shall award contracts by restricting competition for the contract to service-disabled or other veteran owned businesses. To restrict competition pursuant to this rule, the contracting officer must reasonably expect that at least two of these businesses, which are capable of delivering the services, will submit offers and that the award can be made at a fair and reasonable price that offers best value to the United States. When two qualifying small businesses cannot be identified, the VA may proceed to award contracts following a full and open bid process.
The Company believes that its past performance in this market and track record of success provide a competitive advantage. However, the effect of set-aside provisions may limit our ability to compete for prime contractor positions on programs that we recompete or that we have targeted for growth. In these cases, the Company may elect to join a team with an eligible contractor as prime in support of such small businesses for specific pursuits that align with our core markets and corporate growth strategy.
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Results of Operations for the three months ended June 30, 2022 and 2021
The following table summarizes, for the periods indicated, consolidated statements of operations data expressed in dollars in thousands except for per share amounts, and as a percentage of revenue:
| Three Months Ended | ||||||||||||||||||||||||||||||||
| Consolidated Statements of Operations: | June 30, 2022 | June 30, 2021 | Change | |||||||||||||||||||||||||||||
| Revenue | $ | 66,440 | 100.0 | % | $ | 61,555 | 100.0 | % | $ | 4,885 | ||||||||||||||||||||||
| Cost of operations: | ||||||||||||||||||||||||||||||||
| Contract costs | 49,668 | 74.9 | % | 48,365 | 78.6 | % | 1,303 | |||||||||||||||||||||||||
| General and administrative costs | 7,535 | 11.3 | % | 6,237 | 10.1 | % | 1,298 | |||||||||||||||||||||||||
| Corporate development costs | 250 | 0.3 | % | — | — | % | 250 | |||||||||||||||||||||||||
| Depreciation and amortization | 1,873 | 2.8 | % | 2,014 | 3.3 | % | (141) | |||||||||||||||||||||||||
| Total operating costs | 59,326 | 89.3 | % | 56,616 | 92.0 | % | 2,710 | |||||||||||||||||||||||||
| Income from operations | 7,114 | 10.7 | % | 4,939 | 8.0 | % | 2,175 | |||||||||||||||||||||||||
| Interest expense, net | 512 | 0.8 | % | 893 | 1.5 | % | (381) | |||||||||||||||||||||||||
| Income before income taxes | 6,602 | 9.9 | % | 4,046 | 6.5 | % | 2,556 | |||||||||||||||||||||||||
| Income tax expense | 1,738 | 2.6 | % | 1,166 | 1.9 | % | 572 | |||||||||||||||||||||||||
| Net income | $ | 4,864 | 7.3 | % | $ | 2,880 | 4.6 | % | $ | 1,984 | ||||||||||||||||||||||
| Net income per share - basic | $ | 0.38 | $ | 0.23 | $ | 0.15 | ||||||||||||||||||||||||||
| Net income per share - diluted | $ | 0.34 | $ | 0.21 | $ | 0.13 | ||||||||||||||||||||||||||
Revenue
Revenue for the three months ended June 30, 2022 was $66.4 million, an increase of $4.9 million or 7.9% over the prior year period. The increase in revenue is primarily due to additional contracts awarded in late fiscal 2021 and increased volume on existing contracts.
Cost of Operations
Contract costs primarily include the costs associated with providing services to our customers. These costs are generally comprised of direct labor and associated fringe benefit costs, subcontract cost, other direct costs, and the related management and infrastructure costs. For the three months ended June 30, 2022, contract costs increased by approximately $1.3 million, principally due to new contract awards in late fiscal 2021 and increase volume on existing contracts
General and administrative costs are for those employees not directly providing services to our customers, to include but not limited to executive management, bid and proposal, accounting, and human resources. These costs increased as compared to the prior fiscal year period by $1.3 million, primarily due to increased stock compensation expense from recently awarded employee option grants, business development cost, external accounting fees, and corporate development costs.
For the three months ended June 30, 2022, depreciation and amortization costs were approximately $0.2 million and $1.6 million, respectively, as compared to approximately $0.4 million and $1.6 million for the prior fiscal year period.
Interest Expense, net
Interest expense, net, includes items such as interest expense and amortization of deferred financing costs on debt obligations.
For the three months ended June 30, 2022 and 2021, interest expense was approximately $0.5 million and $0.9 million, respectively. The decrease in interest expense was primarily due to the decreased balance on our term loan.
Income Tax Expense
For the three months ended June 30, 2022 and 2021, DLH recorded a $1.7 million and $1.2 million provision for tax expense, respectively. The effective tax rate for the three months ended June 30, 2022 and 2021 was 26% and 29%, respectively.
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Results of Operations for the nine months ended June 30, 2022 and 2021
The following table summarizes, for the periods indicated, consolidated statements of operations data expressed in dollars in thousands except for per share amounts, and as a percentage of revenue:
| Nine Months Ended | Change | |||||||||||||||||||||||||||||||
| Consolidated Statements of Operations: | June 30, 2022 | June 30, 2021 | $ | |||||||||||||||||||||||||||||
| Revenue | $ | 327,940 | 100.0 | % | $ | 180,913 | 100.0 | % | $ | 147,027 | ||||||||||||||||||||||
| Cost of Operations: | ||||||||||||||||||||||||||||||||
| Contract Costs | 271,184 | 82.7 | % | 143,092 | 79.1 | % | 128,092 | |||||||||||||||||||||||||
| General and administrative expenses | 22,178 | 6.8 | % | 18,522 | 10.2 | % | 3,656 | |||||||||||||||||||||||||
| Corporate development costs | 250 | 0.1 | % | — | — | % | 250 | |||||||||||||||||||||||||
| Depreciation and amortization | 5,740 | 1.8 | % | 6,105 | 3.4 | % | (365) | |||||||||||||||||||||||||
| Total operating costs | 299,352 | 91.3 | % | 167,719 | 92.7 | % | 131,633 | |||||||||||||||||||||||||
| Income from operations | 28,588 | 8.7 | % | 13,194 | 7.3 | % | 15,394 | |||||||||||||||||||||||||
| Interest | 1,739 | 0.5 | % | 2,977 | 1.6 | % | (1,238) | |||||||||||||||||||||||||
| Income before income taxes | 26,849 | 8.2 | % | 10,217 | 5.6 | % | 16,632 | |||||||||||||||||||||||||
| Income tax expense, net | 7,003 | 2.1 | % | 2,956 | 1.6 | % | 4,047 | |||||||||||||||||||||||||
| Net income | $ | 19,846 | 6.1 | % | $ | 7,261 | 4.0 | % | $ | 12,585 | ||||||||||||||||||||||
| Net income per share - basic | $ | 1.55 | $ | 0.58 | $ | 0.97 | ||||||||||||||||||||||||||
| Net income per share - diluted | $ | 1.40 | $ | 0.54 | $ | 0.86 | ||||||||||||||||||||||||||
Revenue
Revenue for the nine months ended June 30, 2022 was $327.9 million, an increase of $147.0 million or 81.3% over the prior year period. The increase in revenue is due primarily to the two task orders awarded under a FEMA contract to support Alaska with its response to COVID-19. The revenue contribution from those task orders was $125.8 million. The growth from the remaining contract portfolio was primarily due to additional contracts awarded in late fiscal 2021 and increased volume on existing contracts.
Cost of Operations
Contract costs primarily include the costs associated with providing services to our customers. These costs are generally comprised of direct labor and associated fringe benefit costs, subcontract cost, other direct costs, and the related management and infrastructure costs. For the nine months ended June 30, 2022, contract costs increased by approximately $128.1 million principally due to the direct costs associated with the two task orders awarded under a FEMA contract to support Alaska with its response to COVID-19.
General and administrative costs are for those employees not directly providing services to our customers, to include but not limited to executive management, bid and proposal, accounting, and human resources. These costs increased by approximately $3.7 million from the same period in the prior fiscal year. As a percent of revenue, general and administrative costs decreased from the prior fiscal year period, reflecting improved operating leverage derived from an expanded business base.
For the nine months ended June 30, 2022, depreciation and amortization costs were approximately $0.8 million and $4.9 million, respectively, as compared to approximately $1.2 million and $4.9 million for the prior fiscal year period.
Interest Expense, net
Interest expense, net, includes interest expense on the Company's term loan and amortization of deferred financing costs on debt obligations. For the nine months ended June 30, 2022 and 2021, interest expense, net was approximately $1.7 million and $3.0 million, respectively. The decrease in interest expense was primarily due to the decreased balance on our term loan.
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Income Tax Expense
For the nine months ended June 30, 2022 and 2021, DLH recorded a $7.0 million and $3.0 million provision for tax expense, respectively. The effective tax rate for the nine months ended June 30, 2022 and 2021 was 26% and 29%, respectively.
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) provision for or benefit from income taxes, if any, and (iii) depreciation and amortization.
On a non-GAAP basis, Earnings Before Interest, Tax, Depreciation, and Amortization ("EBITDA") for the three and nine months ended June 30, 2022 was approximately $9.0 million and $34.3 million, respectively. The increase of approximately $2.0 million and $15.0 million from the same periods in the prior fiscal year was principally due to the two task orders awarded under a FEMA contract to support Alaska with its response to COVID-19. Those contracts contributed a significant percentage of the growth we experienced for the year-to-date period, reflecting stronger margins than initially anticipated. The increased margins were achieved by effectively staffing the projects with internal resources, rather than subcontractors, where appropriate. For the three months ended June 30, 2022, EBITDA from the remaining contract portfolio was essentially flat, notwithstanding our increased revenue from that contract portfolio, principally due to our planned investment in human capital management and business development as we continue to build and strengthen our sustaining business.
The Company is presenting additional non-GAAP measures to describe the impact from two short-term FEMA task orders on its financial performance for the nine months ended June 30, 2022. The measures presented are revenue, operating income, net income, diluted earnings per share, and EBITDA for our enterprise contract portfolio less the respective performance on the FEMA task orders. These resulting measures present the remaining contract portfolio's quarterly financial performance compared to results delivered in the prior year period. Definitions of these additional non-GAAP measures are set forth in the footnotes to the reconciliation table below.
These non-GAAP measures of our performance are used by management to conduct and evaluate its business during its regular review of operating results for the periods presented. Management and our Board utilize these non-GAAP measures to make decisions about the use of our resources, analyze performance between periods, develop internal projections and measure management's performance. We believe that these non-GAAP measures are useful to investors in evaluating our ongoing operating and financial results and understanding how such results compare with our historical performance. By providing this non-GAAP measure as a supplement to GAAP information, we believe this enhances investors understanding of our business and results of operations.
Reconciliation of GAAP net income to EBITDA, a non-GAAP measure:
| Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||||||||||||
| June 30, | June 30, | |||||||||||||||||||||||||||||||||||||
| (in thousands) | 2022 | 2021 | Change | 2022 | 2021 | Change | ||||||||||||||||||||||||||||||||
| Net income | $ | 4,864 | $ | 2,880 | $ | 1,984 | $ | 19,846 | $ | 7,261 | $ | 12,585 | ||||||||||||||||||||||||||
| (i) Interest expense, net | 512 | 893 | (381) | 1,739 | 2,977 | (1,238) | ||||||||||||||||||||||||||||||||
| (ii) Provision for taxes | 1,738 | 1,166 | 572 | 7,003 | 2,956 | 4,047 | ||||||||||||||||||||||||||||||||
| (iii) Depreciation and amortization | 1,873 | 2,014 | (141) | 5,740 | 6,105 | (365) | ||||||||||||||||||||||||||||||||
| EBITDA | $ | 8,987 | $ | 6,953 | $ | 2,034 | $ | 34,328 | $ | 19,299 | $ | 15,029 | ||||||||||||||||||||||||||
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Reconciliation of GAAP revenue, operating income, net income, diluted earnings per share, and non-GAAP EBITDA reported for the three and nine months ended to the same metrics for our contract portfolio less the FEMA task orders:
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||||||||||||||||||||
| June 30, | June 30, | ||||||||||||||||||||||||||||||||||||||||
| (in thousands) | Ref | 2022 | 2021 | Change | 2022 | 2021 | Change | ||||||||||||||||||||||||||||||||||
| Revenue | |||||||||||||||||||||||||||||||||||||||||
| Total enterprise | $ | 66,440 | $ | 61,555 | $ | 4,885 | $ | 327,940 | $ | 180,913 | $ | 147,027 | |||||||||||||||||||||||||||||
| Less: FEMA task orders to support Alaska | (a) | (5,116) | — | (5,116) | 125,773 | — | 125,773 | ||||||||||||||||||||||||||||||||||
| Remaining contract portfolio | (a) | $ | 71,556 | $ | 61,555 | $ | 10,001 | $ | 202,167 | $ | 180,913 | $ | 21,254 | ||||||||||||||||||||||||||||
| Operating income | |||||||||||||||||||||||||||||||||||||||||
| Total enterprise | $ | 7,114 | $ | 4,939 | $ | 2,175 | $ | 28,588 | $ | 13,194 | $ | 15,394 | |||||||||||||||||||||||||||||
| Less: FEMA task orders to support Alaska | (b) | 608 | — | 608 | 12,479 | — | 12,479 | ||||||||||||||||||||||||||||||||||
| Remaining contract portfolio | (b) | $ | 6,506 | $ | 4,939 | $ | 1,567 | $ | 16,109 | $ | 13,194 | $ | 2,915 | ||||||||||||||||||||||||||||
| Net income | |||||||||||||||||||||||||||||||||||||||||
| Total enterprise | $ | 4,864 | $ | 2,880 | $ | 1,984 | $ | 19,846 | $ | 7,261 | $ | 12,585 | |||||||||||||||||||||||||||||
| Less: FEMA task orders to support Alaska | (c) | 450 | — | 450 | 9,235 | — | 9,235 | ||||||||||||||||||||||||||||||||||
| Remaining contract portfolio | (c) | $ | 4,414 | $ | 2,880 | $ | 1,534 | $ | 10,611 | $ | 7,261 | $ | 3,350 | ||||||||||||||||||||||||||||
| Diluted earnings per share | |||||||||||||||||||||||||||||||||||||||||
| Total enterprise | $ | 0.34 | $ | 0.21 | $ | 0.13 | $ | 1.40 | $ | 0.54 | $ | 0.86 | |||||||||||||||||||||||||||||
| Less: FEMA task orders to support Alaska | (d) | 0.03 | — | 0.03 | 0.64 | — | 0.64 | ||||||||||||||||||||||||||||||||||
| Remaining contract portfolio | (d) | $ | 0.31 | $ | 0.21 | $ | 0.10 | $ | 0.76 | $ | 0.54 | $ | 0.22 | ||||||||||||||||||||||||||||
| EBITDA | |||||||||||||||||||||||||||||||||||||||||
| Total enterprise | $ | 8,987 | $ | 6,953 | $ | 2,034 | $ | 34,328 | $ | 19,299 | $ | 15,029 | |||||||||||||||||||||||||||||
| Less: FEMA task orders to support Alaska | (e) | 608 | — | 608 | 12,479 | — | 12,479 | ||||||||||||||||||||||||||||||||||
| Remaining contract portfolio | (e) | $ | 8,379 | $ | 6,953 | $ | 1,426 | $ | 21,849 | $ | 19,299 | $ | 2,550 | ||||||||||||||||||||||||||||
Ref (a): Revenue for the Company’s remaining contract portfolio less the FEMA task orders represents our consolidated revenues less the revenues generated from the FEMA task orders. The results for the three and nine months ended June 30, 2022 include final closeout activities related to the short-term FEMA COVID support contracts and the related agreements between DLH and its subcontractors. Reconciliation of estimated pass-through travel and accommodation expenses to the final reimbursable expenses resulted in a reduction to expenses, and a corresponding reduction to revenue, previously accrued and pending payment. This reduction reflected the value of in-kind expenses furnished by the State in support of the contract.
Ref (b): Operating income attributable to the remaining contract portfolio less the FEMA task orders represents the Company’s consolidated operating income, determined in accordance with GAAP, less the operating income derived from the FEMA task orders. Operating income for the FEMA task orders is derived by subtracting from the revenue attributable to such task orders during the three months ended June 30, 2022 of ($5.1) million the contract costs of ($5.7) million. Similarly, for the nine months ended June 30, 2022 operating income for the FEMA task orders is derived by subtracting from the revenue attributable to the tasks orders of $125.8 million the following amounts associated with such task orders: contract costs $112.1 million and general & administrative costs of $1.2 million. Operating income for the remaining contract portfolio for the three and nine months ended June 30, 2022 represents the Company’s consolidated operating income for such period less the operating income attributable to the FEMA task orders for such period.
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Ref (c): Net income attributable to the remaining contract portfolio less the FEMA task orders represents the Company’s consolidated net income, determined in accordance with GAAP, less the net income derived from the FEMA task orders. Net income for the FEMA task orders is derived by subtracting from the revenue attributable to such task orders during the three months ended June 30, 2022 of ($5.1) million the following amounts associated with such task orders: contract costs of ($5.7) million and income tax expense of $0.2 million. Similarly, for the nine months ended June 30, 2022 net income for the FEMA task orders is derived by subtracting from the revenue attributable to the tasks orders of $125.8 million the following amounts associated with such task orders: contract costs $112.1 million, general & administrative costs of $1.2 million, and tax expense of $3.2 million. Net income for the remaining contract portfolio for the three and nine months ended June 30, 2022 represents the Company’s consolidated net income for such period less the net income attributable to the FEMA task orders for such period.
Ref (d): Diluted earnings per share (diluted EPS) for the FEMA task orders is calculated using the net income attributable to such task orders as opposed to GAAP net income. Diluted EPS for the remaining contract portfolio (total contract portfolio excluding the FEMA task orders) is calculated by subtracting the diluted EPS for the FEMA task orders from the Company's total diluted EPS.
Ref (e): EBITDA attributable to the FEMA tasks orders of $0.6 million and $12.5 million for the three and nine months ended June 30, 2022, respectively, is arrived at through the same calculation as operating income as there are not any depreciation and amortization costs attributable to the FEMA tasks orders. EBITDA for the remaining contract portfolio is calculated by subtracting the EBITDA attributable to the FEMA task orders from the Company’s total EBITDA.
Liquidity and capital management
As of June 30, 2022, the Company's immediate sources of liquidity include cash generated from operations, accounts receivable, and access to its secured revolving line of credit facility. This credit facility provides us with access of up to $25 million, subject to certain conditions including eligible accounts receivable. As of June 30, 2022, we have $25.0 million of available borrowing capacity on the revolving line of credit and do not have an outstanding balance.
The Company's present operating liabilities are largely predictable and consist of vendor and payroll related obligations. Our current investment and financing obligations are adequately covered by cash generated from profitable operations and planned operating cash flow should be sufficient to support the Company's operations for twelve months from issuance of these consolidated financial statements.
A summary of the change in cash is presented below (in thousands):
| Nine Months Ended | ||||||||||||||
| June 30, | ||||||||||||||
| 2022 | 2021 | |||||||||||||
| Net cash provided by (used in) operating activities | $ | (4,759) | $ | 15,388 | ||||||||||
| Net cash provided by (used in) investing activities | (244) | 6 | ||||||||||||
| Net cash used in financing activities | (17,988) | (16,012) | ||||||||||||
| Net change in cash | $ | (22,991) | $ | (618) | ||||||||||
For the nine months ended June 30, 2022, the Company used $4.8 million in cash flows from operations. The decrease of operating cash was primarily a result of performance of the deferred contract obligations of $22.3 million, for which an advance payment was received in fiscal 2021. Fiscal year to date, accounts receivable have increased by $16.9 million primarily driven by expanding revenue volume on existing contracts and normal fluctuations in the timing of customer payments.
Capital assets of $0.2 million were purchased during the nine months ended June 30, 2022. Cash used in financing activities was $18.0 million during the nine months ended June 30, 2022. We intend to continue using cash to make debt prepayments in future quarters subject to available cash.
Sources of cash
As of June 30, 2022, our immediate sources of liquidity include cash of approximately $1.1 million, accounts receivable, and access to our secured revolving line of credit facility. This credit facility provides us with access of up to $25.0 million, subject to certain conditions including eligible accounts receivable. As of June 30, 2022, we had unused borrowing capacity of $23.0
29
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.
Material Cash Requirements from Contractual Obligations
Credit Facility
A summary of our secured loan facility for the period ended June 30, 2022 is as follows:
| (in thousands) | ||||||||||||||||||||
| Arrangement | Loan Balance | Interest* | Maturity Date | |||||||||||||||||
| Secured term loan $70 million (a) | $ | 28,500 | LIBOR* + 2.5% | September 30, 2025 | ||||||||||||||||
| Secured revolving line of credit $25 million ceiling (b) | $ | — | LIBOR* + 2.5% | September 30, 2025 | ||||||||||||||||
*LIBOR rate as of June 30, 2022 was 1.06%. The credit facility has an interest rate spread range from 2.5% to 4.5% depending on the funded indebtedness to adjusted EBITDA ratio.
(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 September 30, 2025.
On September 30, 2019, we executed a floating-to-fixed interest rate swap with First National Bank ("FNB") as counter party. The notional amount in the floating-to-fixed interest rate swap as of June 30, 2022 is $22.8 million and matures in 2024. The remaining outstanding balance of our term loan is subject to interest rate fluctuations.
(b) The secured revolving line of credit has a ceiling of up to $25.0 million and a maturity date of September 30, 2025. The Company has accessed funds from the revolving credit facility during the quarter, but has no balance outstanding at June 30, 2022.
The Term Loan and Revolving Credit Facility are secured by liens on substantially all of the assets of the Company. The provisions of the Term Loan and Revolving Credit Facility are fully described in Note 8 to the consolidated financial statements.
Leases
As of June 30, 2022, our liabilities under our facility and equipment leases totaled approximately $24.2 million and $0.2 million, respectively. These balances represent our contractual obligation to make future payments on our leases, discounted to reflect our cost of borrowing. The majority of these leases are for real estate. See Note 6 to the Consolidated Financial Statements for information regarding our leases as of June 30, 2022.
Tabular Summary of Contractual Obligations as of June 30, 2022
| Payments Due by Period | |||||||||||||||||||||||||||||
| Next 12 | 2-3 | 4-5 | More than 5 | ||||||||||||||||||||||||||
| (in thousands) | Total | Months | Years | Years | Years | ||||||||||||||||||||||||
| Debt obligations | $ | 28,500 | $ | — | $ | — | $ | 28,500 | $ | — | |||||||||||||||||||
| Facility operating leases | 24,231 | 3,241 | 6,137 | 5,767 | 9,086 | ||||||||||||||||||||||||
| Equipment operating leases | 156 | 83 | 73 | — | — | ||||||||||||||||||||||||
| Total Contractual Obligations | $ | 52,887 | $ | 3,324 | $ | 6,210 | $ | 34,267 | $ | 9,086 | |||||||||||||||||||
Off-Balance Sheet Arrangements
The Company did not have any material off-balance sheet arrangements subsequent to, or upon the filing of our consolidated financial statements in our Annual Report as defined under SEC rules.
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Critical Accounting Policies and Estimates
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates include valuation of goodwill and intangible assets, interest rate swaps, stock-based compensation, right-of-use assets and lease liabilities, valuation allowances established against deferred tax assets, and measurement of loss development on workers' compensation claims. In addition, the Company estimates overhead charges and allocates such charges throughout the year. Actual results could differ from those estimates. In particular, a material reduction in the fair value of goodwill would have a material adverse effect on the Company’s financial position and results of operations. For a detailed discussion on the application of these and other accounting policies, you should review the discussion under the caption Significant Accounting Policies in Note 4 of the notes to our Consolidated Financial Statements contained elsewhere in this report on Form 10-Q.
Revenue Recognition
We recognize revenue over time when there is a continuous transfer of control to our customer. For our U.S. government contracts, this continuous transfer of control to the customer is supported by clauses in the contract that allow the U.S. government to unilaterally terminate the contract for convenience, pay us for costs incurred plus a reasonable profit and take control of any work in process. When control is transferred over time, revenue is recognized based on the extent of progress towards completion of the performance obligation. For services contracts, we satisfy our performance obligations as services are rendered. We use cost-based input and time-based output methods to measure progress.
For time-and-materials contracts, revenue is recognized to the extent of billable rates times hours delivered plus materials and other reimbursable costs incurred. Revenue for cost-reimbursable contracts is recorded as reimbursable costs are incurred, including an estimated share of the applicable contractual fees earned. For firm-fixed-price contracts, the consideration received for our performance is set at a predetermined price. Revenue for our firm-fixed-price contracts is recognized over time using a straight-line measure of progress or using the percentage-of-completion method whereby progress toward completion is based on a comparison of actual costs incurred to total estimated costs to be incurred over the contract term. Contract costs are expensed as incurred. Estimated losses are recognized when identified.
Refer to Note 5 of the accompanying notes to our Consolidated Financial Statements contained elsewhere in this report.
Long-lived Assets
Our long-lived assets include equipment and improvements, right-of-use assets, intangible assets, and goodwill. The Company continues to review its long-lived assets for possible impairment or loss of value at least annually or more frequently upon the occurrence of an event or when circumstances indicate that a reporting unit’s carrying amount is greater than its fair value.
Equipment and improvements are stated at cost. Depreciation and amortization are provided using the straight-line method over the estimated useful asset lives (3 to 7 years) and the shorter of the initial lease term or estimated useful life for leasehold improvements.
Costs incurred to place the asset in service are capitalized and costs incurred after implementation are expensed. Amortization expense is recorded when the software is placed in service on a straight-line basis over the estimated useful life of the software.
Right-of-use assets are measured at the present value of future minimum lease payments, including all probable renewals, plus lease payments made to the lessor before or at lease commencement and indirect costs, less incentives received. Our right-of-use assets include long-term leases for facilities and equipment and are amortized over their respective lease terms.
Intangible assets are originally recorded at fair value and amortized on a straight-line basis over their assessed useful lives. The assessed useful lives of the assets are 10 years.
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Goodwill
The Company continues to review its goodwill for possible impairment or loss of value at least annually or more frequently upon the occurrence of an event or when circumstances indicate that a reporting unit’s carrying amount is greater than its fair value. Based on the results of the work performed, the Company has concluded that no impairment loss was warranted, as no change in business conditions occurred which would have a material adverse effect on the valuation of goodwill.
Our assessment incorporated effects of the COVID-19 pandemic, which did not have a meaningful impact on our financial results. Notwithstanding this evaluation, factors including non-renewal of a major contract or other substantial changes in business conditions could have a material adverse effect on the valuation of goodwill in future periods and the resulting charge could be material to future periods’ results of operations.
Income Taxes
The Company accounts for income taxes in accordance with the liability method, whereby deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities, using enacted tax rates in effect for the year in which the differences are expected to reverse. Deferred tax assets are reflected on the consolidated balance sheet when it is determined that it is more likely than not that the asset will be realized. This guidance also requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some or all of the deferred tax asset will not be realized. The Company believes it has adequate sources of taxable income to fully utilize its net operating loss carryforwards before their expiration. The Company recorded no valuation allowance.
Stock-based Compensation
The Company uses the fair value-based method for stock-based compensation. Options issued are designated as either an incentive stock or a non-statutory stock option. No option may be granted with a term of more than 10 years from the date of grant. Option awards may depend on achievement of certain performance measures determined by the Compensation Committee of our Board. Shares issued upon option exercise are newly issued common shares. All awards to employees and non-employees are recorded at fair value on the date of the grant and expensed over the period of vesting. The Company uses a Monte Carlo binomial and Black Scholes option pricing models to estimate the fair value of each stock option at the date of grant. Any consideration paid by the option holders to purchase shares is credited to capital stock.
New Accounting Pronouncements
A discussion of recently issued accounting pronouncements is described in Note 3 of the accompanying Notes to our Consolidated Financial Statements contained elsewhere in this report, and we incorporate such discussion by reference.
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. On September 30, 2019, we executed a floating-to-fixed interest rate swap with FNB as counter party. The notional amount in the floating-to-fixed interest rate swap is $22.8 million for the current quarter and the remaining outstanding balance of our term loan is subject to interest rate fluctuations. We have determined that a 1.0% increase to the LIBOR rate would impact our interest expense by less than $0.1 million per year. As of June 30, 2022, the interest rate on the floating interest rate debt was 3.56%.
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ITEM 4: CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our CEO and President and Chief Financial Officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) or 15d-15(e) under the Exchange Act) as of the end of the period covered by this report, have concluded that, based on the evaluation of these controls and procedures, our disclosure controls and procedures were effective at the reasonable assurance level to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our CEO and President and Chief Financial Officer, to allow timely decisions regarding required disclosure.
Our management, including our CEO and President and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been detected. Our management, however, believes our disclosure controls and procedures are in fact effective to provide reasonable assurance that the objectives of the control system are met.
Changes in Internal Controls
There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) identified in connection with the evaluation of our internal control that occurred during the fiscal quarter ended June 30, 2022, 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, 2021 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, 2021. Other than as described in this report, 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, 2021.
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.
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Registrant Repurchases of Securities
In June 2022, in connection with exercise of employee stock options, a holder of options surrendered to the company a total of 31,119 shares of our common stock already owned by the holder in consideration of the payment of the exercise price of such options and related tax obligations. Such event is reflected on the table below.
| ($ in thousands) | ||||||||||||||||||||||||||
| Period | Total Number of Shares Purchased | Average Price Paid Per Share | Total Number of Shares Purchased As Part of Publicly Announced Programs | Dollar Value of Shares that May Yet Be Purchased Under the Plan or Program | ||||||||||||||||||||||
| April 2022 | — | $ | — | — | $ | — | ||||||||||||||||||||
| May 2022 | — | — | — | — | ||||||||||||||||||||||
| June 2022 | 31,119 | $ | 17.25 | — | — | |||||||||||||||||||||
| Total | 31,119 | $ | 17.25 | — | $ | — | ||||||||||||||||||||
ITEM 3: DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4: MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5: OTHER INFORMATION
None.
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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 Description | Form | Dated | Exhibit | Herewith | |||||||||||||||||||||||||||
| X | ||||||||||||||||||||||||||||||||
| X | ||||||||||||||||||||||||||||||||
| X | ||||||||||||||||||||||||||||||||
| X | ||||||||||||||||||||||||||||||||
| 101 | The following financial information from the DLH Holdings Corp. Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2022, 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. | X | ||||||||||||||||||||||||||||||
| 104 | Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101) | |||||||||||||||||||||||||||||||
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
| DLH HOLDINGS CORP. | |||||||||||
| By: | /s/ Kathryn M. JohnBull | ||||||||||
| Kathryn M. JohnBull | |||||||||||
| Chief Financial Officer | |||||||||||
| (On behalf of the registrant and as Principal Financial and Accounting Officer) | |||||||||||
| Date: August 2, 2022 | |||||||||||
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