DLH Holdings Corp

3. New Accounting Pronouncements

In November 2023, Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2023-07 "Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures" which provides guidance intended to improve reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses, and each reported measure of segment profit or loss. The ASU requires that a public entity that has a single reportable segment provide all the disclosures required by the amendments in this ASU and all existing segment disclosures in Topic 280. The amendments in this update are effective for all entities for fiscal years beginning after December 15, 2023 and interim periods beginning after December 15, 2024. We are currently evaluating the impacts of the single reportable segment disclosures.

In December 2023, FASB issued ASU 2023-09 "Income Taxes (Topic 740): Improvements to Income Tax Disclosures" which provides guidance on the requirements such as the requirement that public business entities on an annual basis (1) disclose specific categories in the rate reconciliation and (2) provide additional information for reconciling items that meet a quantitative threshold. DLH is a public company that reports income tax disclosures and therefore this ASU applies to the Company. ASU 2023-09 is effective for public business entities for fiscal years beginning after Dec. 15, 2024. We are currently evaluating the impacts of the improvements to income tax disclosure.

In March 2024, FASB issued ASU No. 2024-01, "Scope Application of Profits Interest and Similar Awards". The ASU clarifies how an entity determines whether a profits interest or similar award is (1) within the scope of ASC 718 or (2) not a share-based payment arrangement and therefore within the scope of other guidance. The guidance in ASU 2024-01 applies to all entities that issue profits interest awards as compensation to employees or non-employees in exchange for goods or services. We are currently evaluating the impacts of the improvements to our disclosure.

In March 2024, the Securities and Exchange Commission ("SEC") has released a final rule that requires registrants to provide comprehensive climate-related disclosures in their annual reports and registration statements, including those for IPOs, beginning with annual reports for the year ending December 31, 2027, for smaller reporting companies ("SRC"). Registrants must disclose climate-related financial metrics and impacts on their financial estimates and assumptions in a footnote to the audited financial statements. The disclosures will also need to be addressed as part of management’s internal control over financial reporting ("ICFR") and will be subject to the financial statement and ICFR audit (if applicable) of an independent registered public accounting firm. We are currently evaluating the impacts of the improvements to our disclosure.

4. Revenue Recognition

The following table summarizes the contract balances recognized in accounts receivable within the Company's consolidated balance sheets at September 30, 2024 and 2023 (in thousands):

The change from prior period is primarily due to invoice timing and increased revenue volume.

Disaggregation of revenue from contracts with customers

We disaggregate our revenue from contracts with customers by customer, contract type, as well as whether the Company acts as prime contractor or subcontractor. We believe these categories best depict how the nature, amount, timing and uncertainty of our revenue and cash flows are affected by economic factors. The following series of tables presents our revenue disaggregated by these categories:

Revenue by customer for the years ended September 30, 2024 and 2023 (in thousands):

Revenue by contract type for the years ended September 30, 2024 and 2023 (in thousands):

Revenue by whether the Company acts as a prime contractor or a subcontractor for the years ended September 30, 2024 and 2023 (in thousands):

5. Leases

The following table summarizes lease balances presented on our consolidated balance sheets at September 30, 2024 and 2023 (in thousands):

For the years ended September 30, 2024 and 2023, total lease costs for our operating leases are as follows (in thousands):

(a): The Company subleases a portion ofone 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 includestwo additional 1-year term extension options.

The Company's future minimum lease payments as of September 30, 2024 are as follows (in thousands):

At September 30, 2024, the weighted-average remaining lease term and weighted-average discount rate are 5.8 years and 6.3%, respectively. The calculation of the weighted-average discount rate was determined based on borrowing terms from our secured term loan.

Other information related to our leases is as follows for the years ending September 30, 2024 and 2023 (in thousands):

6. Supporting Financial Information

Accounts receivable

The following table summarizes accounts receivable presented on our consolidated balance sheets at September 30, 2024 and 2023 (in thousands):

Other current assets

The following table summarizes other current assets presented on our consolidated balance sheets at September 30, 2024 and 2023 (in thousands):

The balance of goodwill was $138,161 as of September 30, 2024 and September 30, 2023.

Intangible assets, net

The following table summarizes intangible assets, net presented on our consolidated balance sheets at September 30, 2024 and 2023 (in thousands):

Amortization expense for the years ended September 30, 2024 and 2023 was $16.5 million and $14.8 million, respectively.

As of September 30, 2024, the estimated annual amortization expense is as follows (in thousands):

At September 30, 2024, the weighted-average remaining amortization period in total was 7.4 years years At September 30, 2024, the weighted-average amortization period for customer contracts and related customer relationships, backlog, trade names and covenants-not-to-compete was 7.3 years,7.6 years,7.7 years,5.5 years respectively.

Equipment and improvements, net

The following table summarizes equipment and improvements, net presented on our consolidated balance sheets at September 30, 2024 and 2023 (in thousands):

Depreciation expense was $0.6 million and $0.8 million for the years ended September 30, 2024 and 2023, respectively.

Accounts payable and accrued liabilities

The following table summarizes accounts payable and accrued liabilities presented on our consolidated balance sheets at September 30, 2024 and 2023 (in thousands):

Accrued payroll

The following table summarizes accrued payroll presented on our consolidated balance sheets at September 30, 2024 and 2023 (in thousands):

Debt obligations

The following table summarizes debt obligations presented on our consolidated balance sheets at September 30, 2024 and 2023 (in thousands):

As of September 30, 2024, we have satisfied mandatory principal payments on our secured term loan.

(a) As of September 30, 2024, the current portion comprises the $12.1 million outstanding balance on the secured revolving line of credit. All fiscal 2025 mandatory loan amortization payments have been satisfied by voluntary prepayments.

Interest expense

The following table summarizes interest expense presented on our consolidated statements of operations for the years ended September 30, 2024 and 2023 (in thousands):

(a): Interest expense on borrowing

(b): Interest earned from customer payments received after the due date.

(c): Amortization of expenses related to secured term loan and secured revolving line of credit.

7. Credit Facilities

A summary of our credit facilities as presented on our consolidated balance sheets as follows (in millions):

1 Secured Overnight Financing Rate ("SOFR") as of September 30, 2024 and September 30, 2023 was 5.2% and 5.3%, respectively.

(a) Represents the principal amounts payable on our term loan, which is secured by liens on substantially all of the assets of the Company. The principal of the term loan is payable in quarterly installments with the remaining balance due on December 8, 2027.

On January 31, 2023, we executed a floating-to-fixed interest rate swap with First National Bank ("FNB") with FNB which has a notional amount of $80.0 millionat September 30, 2024, a fixed interest rate of 4.10% and a maturity date of January 31, 2026. As a result of entering interest rate swap agreements, for the twelve months ended September 30, 2024, interest expense has been decreased by $1.3 million, respectively.

The Credit Agreement requires compliance with a number of financial covenants and contains restrictions on our ability to engage in certain transactions. Among other matters, we must comply with limitations on: granting liens; incurring other indebtedness; maintenance of assets; investments in other entities and extensions of credit; mergers and consolidations; and changes in nature of business. The loan agreement also requires us to comply with certain quarterly financial covenants including: (i) a minimum fixed charge coverage ratio of at least 1.25 to 1.00, and (ii) a total leverage ratio not exceeding the ratio of 4.50:1.00 to 2.00:1.00 through maturity. The total leverage ratio is calculated by dividing the Company's total interest-bearing debt by net income adjusted to exclude (i) interest and other expenses, (ii) provision for or benefit from income taxes, if any, (iii) depreciation and amortization, and (iv) non-cash charges, losses or expenses, including stock-based compensation, and (v) non-recurring charges, losses or expenses to include transaction and non-cash equity expense. We are in compliance with all loan covenants and restrictions as of September 30, 2024.

We are required to pay quarterly amortization payments, which commenced in December 2022. The annual amortization amounts are $14.3 million for fiscal year 2024, $19.0 million each for fiscal years 2025 and 2026, and $23.8 million for fiscal year 2027, with the remaining unpaid loan balance due at maturity in December 2027. The quarterly payments are equal installments. The Company made voluntary prepayments of $19.0 million during the twelve months ended September 30, 2024 bringing the outstanding principal balance on the secured term loan to $142.5 million. We have satisfied the mandatory principal payments through 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 2.50:1.00; (b)50% of the excess cash flow for the immediately preceding fiscal year in which the funded indebtedness to consolidated EBITDA Ratio is less than 2.50:1.00 but greater than or equal to 1.50:1.00; or (c)0% of the excess cash flow for the immediately preceding fiscal year in which the funded indebtedness to consolidated EBITDA Ratio is less than 1.50:1.00. In addition, the Company must make additional mandatory prepayment of amounts outstanding based on proceeds received from asset sales and sales of certain equity securities or other indebtedness. Due to the voluntary prepayment of term debt, there was no excess cash flow payment required. For additional information regarding the schedule of future payment obligations, please refer to Note 10 Commitments and Contingencies.

(b) The secured revolving line of credit has a ceiling of up to $32.5 million; as of September 30, 2024, we had unused borrowing capacity of $18.1 million, which is net of outstanding letters of credit. Borrowing on the secured revolving line of credit is secured by liens on substantially all of the assets of the Company. The Company accessed funds from the secured revolving line of credit during the year, which had a $12.1 million outstanding balance at September 30, 2024. As part of the secured revolving line of credit, the lenders agreed to a sublimit of $10.0 million for letters of credit for the account of the Company, subject to applicable procedures.

8. Stock-based Compensation and Equity Grants

Stock-based compensation expense

Options issued under equity incentive plans were designated as either an incentive stock or a non-statutory stock option. No option was granted with a term of more than 10 years from the date of grant. Exercisability of option awards may depend on achievement of certain performance measures determined by the Compensation Committee of our Board. Shares issued upon option exercise are newly issued shares. As of September 30, 2024, there were 1.1 million shares available for grant.

Total stock-based compensation expense, presented in the table below, is recorded in general and administrative expenses included in our consolidated statements of operations for the years ended September 30, 2024 and 2023 (in thousands):

(a): Included in this amount are equity grants of restricted stock units ("RSU") to Executive Officers, which were issued in accordance with the DLH long-term incentive compensation policy in this fiscal year, and stock option grants to employees during prior fiscal years. The RSUs issued and outstanding totaled 316,863 and 211,228 at September 30, 2024 and 2023, respectively. During the fiscal year ended September 30, 2024,169,544 RSUs were granted to Executive Officers. Of the RSUs granted,84,773 have performance-based vesting criteria and the remaining 84,771 have service-based vesting criteria. At a 50% volatility and assumptions of a 3-year term and the performance vesting criteria results in an indicated a fair value. The RSUs granted during the fiscal year ended September 30, 2024, as follows using the Monte Carlo Method.

(b): Equity grants of RSUs were made in accordance with DLH compensation policy for non-employee directors and a total of 61,525 and 50,367 restricted stock units were issued and outstanding at September 30, 2024 and 2023, respectively. These grants have service-based vesting criteria and vest at the end of this fiscal year.

Unrecognized stock-based compensation expense

Unrecognized stock-based compensation expense is presented in the table below for the years ending September 30, 2024 and 2023 (in thousands):

(a): On a weighted average basis, this expense is expected to be recognized within the next 2.98 years.

Stock option activity for the year ended September 30, 2024:

The aggregate intrinsic value in the table below represents the total pretax intrinsic value (i.e., the difference between the Company’s closing stock price on the last trading day of the period and the exercise price, times the number of shares) that would have been received by the option holders had all option holders exercised their in the money options on those dates. This amount will change based on the fair market value of the Company’s stock. A summary of the Company's stock option awards is as follows:

Stock options shares outstanding, vested and unvested for the years ended September 30, 2024 and 2023 (in thousands):

(a): Certain awards vest upon satisfaction of certain performance criteria.

9. Earnings Per Share

Basic earnings per share is calculated by dividing income available to common shareholders by the weighted average number of common shares outstanding and restricted stock grants that vested or are likely to vest during the period. Diluted earnings per share is calculated by dividing income available to common shareholders by the weighted average number of basic common shares outstanding, adjusted to reflect potentially dilutive securities. Diluted earnings per share is calculated using the treasury stock method.

Earnings Per Share information is presented in the table below for the years ending September 30, 2024 and 2023 (in thousands except for per share amounts):

10. Commitments and Contingencies

Contractual Obligations as of September 30, 2024 (in thousands):

As a commercial enterprise and employer, the Company is subject to various claims and legal actions in the ordinary course of business. These matters can include professional liability, employment-relations issues, workers’ compensation, tax, payroll and employee-related matters, other commercial disputes arising in the course of its business, and inquiries and investigations by governmental agencies regarding our employment practices or other matters. The Company is not aware of any pending or threatened litigation that it believes is reasonably likely to have a material adverse effect on its results of operations, financial position or cash flows.

11. Related Party Transactions

The Company has determined that for the years ended September 30, 2024 and 2023 and through the filing date of this report, there were no related party transactions that have occurred which require disclosure through the date that these consolidated financial statements were issued.

12. Provision for Income Taxes

The significant components of provision for income taxes from continuing operations are summarized as follows for the years ending September 30, 2024 and 2023 (in thousands):

The following table presents the significant differences between our income taxes at the federal statutory rate and the Company's effective tax rate for continuing operations for the years ending September 30, 2024 and 2023 (in thousands):

An analysis of the Company's deferred tax assets and liabilities at September 30, 2024 and 2023 is as follows (in thousands):

13. Employee Benefit Plans

As of September 30, 2024, the Company maintains a 401(k) Plan (the "401(k) Plan"), a defined contribution and supplemental pension plan for the benefit of its eligible employees. The Company may provide a discretionary matching contribution of a participant's elective contributions under the 401(k) Plan. The Company recorded related expense of $3.4 million and $2.6 million for the years ending September 30, 2024 and 2023, respectively. Participants are always fully vested in their elective contributions and vest in Company matching contributions over afour-year period.

14. Subsequent Events

On November 6, 2024, the Company completed an amendment to its credit facility. The amendment modified certain financial covenants thresholds for future measurement periods. The modification did not change the financial covenants thresholds for September 30, 2024. The amendment was approved by the Company's Board of Directors and Executive Management and the credit facility lenders.