Quick10K

DLH Holdings

Price	6.55		EPS	0
Shares	13		P/E	16
MCap	85		P/FCF	5
Net Debt	54		EBIT	9
TEV	140		TEV/EBIT	16
TTM 2019-09-30, in MM, except price, ratios

10-Q	2020-12-31	Filed 2021-02-02 Print
10-K	2020-09-30	Filed 2020-12-07 Print
10-Q	2020-06-30	Filed 2020-08-05 Print
10-Q	2020-03-31	Filed 2020-05-06 Print
10-Q	2019-12-31	Filed 2020-02-05 Print
10-K	2019-09-30	Filed 2019-12-11 Print
10-Q	2019-06-30	Filed 2019-08-05 Print
10-Q	2019-03-31	Filed 2019-05-07 Print
10-Q	2018-12-31	Filed 2019-02-13 Print
10-K	2018-09-30	Filed 2018-12-12 Print
10-Q	2018-06-30	Filed 2018-08-06 Print
10-Q	2018-03-31	Filed 2018-05-15 Print
10-Q	2017-12-31	Filed 2018-02-13 Print
10-K	2017-09-30	Filed 2017-12-12 Print
10-Q	2017-06-30	Filed 2017-08-10 Print
10-Q	2017-03-31	Filed 2017-05-11 Print
10-Q	2016-12-31	Filed 2017-02-09 Print
10-K	2016-09-30	Filed 2016-12-09 Print
10-Q	2016-06-30	Filed 2016-08-10 Print
10-Q	2016-03-31	Filed 2016-05-16 Print
10-Q	2015-12-31	Filed 2016-02-09 Print
10-K	2015-09-30	Filed 2015-12-16 Print
10-Q	2015-06-30	Filed 2015-08-05 Print
10-Q	2015-03-31	Filed 2015-05-06 Print
10-Q	2014-12-31	Filed 2015-02-04 Print
10-K	2014-09-30	Filed 2014-12-10 Print
10-Q	2014-06-30	Filed 2014-08-06 Print
10-Q	2014-03-31	Filed 2014-05-07 Print
10-Q	2013-12-31	Filed 2014-02-05 Print
10-K	2013-09-30	Filed 2013-12-10 Print
10-Q	2013-06-30	Filed 2013-08-13 Print
10-Q	2013-03-31	Filed 2013-05-14 Print
10-Q	2012-12-31	Filed 2013-02-12 Print
10-K	2012-09-30	Filed 2012-12-14 Print
10-Q	2012-03-31	Filed 2012-05-15 Print
10-Q	2011-12-31	Filed 2012-02-14 Print
10-K	2011-09-30	Filed 2011-12-02 Print
10-Q	2011-06-30	Filed 2011-08-15 Print
10-Q	2011-03-31	Filed 2011-05-16 Print
10-Q	2010-12-31	Filed 2011-02-17 Print
10-K	2010-09-30	Filed 2011-02-14 Print
10-Q	2010-06-30	Filed 2010-08-16 Print
10-Q	2010-03-31	Filed 2010-05-17 Print
10-Q	2009-12-31	Filed 2010-02-16 Print
10-K	2009-09-30	Filed 2010-01-19 Print

8-K	2021-02-02
8-K	2020-12-09
8-K	2020-12-04
8-K	2020-10-07
8-K	2020-10-01
8-K	2020-09-30
8-K	2020-09-15
8-K	2020-08-31
8-K	2020-08-05
8-K	2020-07-31
8-K	2020-07-21
8-K	2020-07-13
8-K	2020-05-06
8-K	2020-03-25
8-K	2020-03-17
8-K	2020-02-11
8-K	2020-02-05
8-K	2019-12-17
8-K	2019-12-16
8-K	2019-12-10
8-K	2019-10-21
8-K	2019-10-16
8-K	2019-10-15
8-K	2019-09-09
8-K	2019-07-31
8-K	2019-07-01
8-K	2019-06-10
8-K	2019-06-07
8-K	2019-05-06
8-K	2019-03-21
8-K	2019-03-21
8-K	2019-02-14
8-K	2018-12-28
8-K	2018-12-13
8-K	2018-11-15
8-K	2018-08-06
8-K	2018-06-04
8-K	2018-05-15
8-K	2018-05-10
8-K	2018-02-08
8-K	2018-02-06

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Balance Sheet	Income Statement	Cash Flow
CopyHistoryView Assets, Equity	CopyHistoryView Rev, G Profit, Net Income	CopyHistoryView Ops, Inv, Fin

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PART I — FINANCIAL INFORMATION

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The accompanying consolidated financial statements include the accounts of DLH Holdings Corp. and its subsidiaries (together with its subsidiaries, "DLH" or the "Company" and also referred to as "we," "us" and "our"), all of which are wholly owned. All significant intercompany balances and transactions have been eliminated in consolidation. The accompanying financial statements have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP") for interim financial information and with the instructions to Form 10-Q and Article 10 of 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 December 31, 2020 are not necessarily indicative of the results that may be expected for the year ending September 30, 2021. Amounts as of and for the periods ended December 31, 2020 and December 31, 2019 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, 2020 filed with the Securities and Exchange Commission on December 7, 2020.

The Company is a full-service provider of technology-enabled health and human services, providing solutions to three market focus areas: Defense and Veterans' Health Solutions, Human Solutions and Services, and Public Health and Life Sciences. We deliver domain-specific expertise, industry best-practices and innovations to customers across these markets leveraging seven core competencies: secure data analytics, clinical trials and laboratory services, case management, performance evaluation, system modernization, operational logistics and readiness, and strategic digital communications. The Company manages its operations from its principal executive offices in Atlanta, Georgia, and we have a complementary headquarters office in Silver Spring, Maryland. We employ over 2,200 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.

In June 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Updated ("ASU") 2016-13, Financial Instruments - Credit Losses, which requires companies to record an allowance for expected credit losses over the contractual term of certain financial assets, including short-term trade receivables and contract assets. Additionally, it expands disclosure requirements for credit quality of financial assets. ASU 2016-13 became effective for the Company in the first quarter of fiscal year 2021. The adoption of this standard did not have a material impact on our operating results, financial position, or cash flows. For further detail of our outstanding receivables see Note 7.

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848), which provides optional expedients and exceptions for the application of U.S. GAAP to contracts, hedging relationships, and other transactions that reference the London Interbank Offered Rate ("LIBOR") and other reference rates expected to be discontinued due to reference rate reform. ASU 2020-04 became effective on March 12, 2020 for all entities meeting certain criteria. The Company may elect to apply the amendments using a prospective approach through December 31, 2022. The Company is currently assessing the impact of electing this standard on its consolidated financial statements and related disclosures and does not expect the impact to be material.

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In April 2020, the FASB issued a Staff Q&A, Topic 842 and 840: Accounting For Lease Concessions Related to the Effects of the COVID-19 Pandemic in order to provide clarity regarding the accounting treatment for lease concessions provided as a result of COVID-19. Under existing lease guidance, changes to certain lease terms not specified in the original lease agreement require modification accounting treatment. To provide relief, the FASB Staff Q&A permits alternatives to modification accounting under Topic 842. For concessions related to the effects of the COVID-19 pandemic that do not result in a substantial increase in the rights of the lessor or our obligations as the lessee, we are not required to analyze each contract to determine whether enforceable rights and obligations for concessions exist in the lease agreement and can elect to apply or not apply the lease modification guidance in Topic 842. For the quarter ended December 31, 2020, we elected to account for lease concessions received for one of our operating leases as a resolution of a contingency, whereby we remeasured our lease liability and recorded the adjustment against the right-of-use asset, without reassessing lease classification or modifying the original discount rate. As a result of this election, our lease liability and right-of-use-asset decreased by less than $0.1 million.

In August 2020, the FASB issued ASU 2020-06, which amends the measurement and disclosure of convertible instruments, contracts in an entity's own equity, and EPS guidance. The guidance can be adopted using a modified retrospective method or a fully retrospective method. The amendments are effective for fiscal years beginning after December 15, 2021 for public entities, excluding those that are smaller reporting companies. For all other entities the amendments are effective for fiscal years beginning after December 15, 2023. The Company does not expect the update to have a material impact on its consolidated financial statements and related disclosures.

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 accounts receivable and deferred tax assets, and measurement of loss development on workers’ compensation claims. We evaluate these estimates and judgments on an ongoing basis and base our estimates on historical experience, current and expected future outcomes, third-party evaluations and various other assumptions that we believe are reasonable under the circumstances. The results of these estimates form the basis for making judgments about the carrying values of assets and liabilities as well as identifying and assessing the accounting treatment with respect to commitments and contingencies. We revise material accounting estimates if changes occur, such as more experience is acquired, additional information is obtained, or there is new information on which an estimate was or can be based. Actual results could differ from those estimates. In particular, a material reduction in the fair value of goodwill could have a material adverse effect on the Company’s financial position and results of operations. We account for the effect of a change in accounting estimate during the period in which the change occurs.

Fair Value of Financial Instruments

 

The carrying amounts of the Company's cash and cash equivalents, accounts receivable, accrued expenses, and accounts payable approximate fair value due to the short-term nature of these instruments. The fair values of the Company's debt instruments 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, 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 stated at cost. Depreciation and amortization are provided using the straight-line method over the estimated useful asset lives (3 to 7 years) and the shorter of the initial lease term or estimated useful life for leasehold improvements. Intangible assets (other than goodwill) are originally recorded at fair value and are amortized on a straight-line basis over their estimated useful lives of 10 years. Maintenance and repair costs are expensed as incurred.

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Leases

Right-of-use assets are measured at the present value of future minimum lease payments, including all probable renewals, plus lease payments made to the lessor before or at lease commencement and indirect costs paid, less incentives received. Our right-of-use assets include long-term leases for facilities and equipment and are amortized over their respective lease terms.

Goodwill

At September 30, 2020, we performed a goodwill impairment evaluation on the year-end carrying value of approximately $67 million. We performed a qualitative assessment of factors to determine whether it was necessary to perform the goodwill impairment test. Based on the results of the work performed, the Company has concluded that no impairment loss was warranted at September 30, 2020. For the three months ended December 31, 2020, the Company determined that no change in business conditions occurred which would have a material adverse effect on the valuation of goodwill. Our assessment incorporated effects of the COVID-19 pandemic, which is not expected to have a meaningful impact on our financial results. Notwithstanding this evaluation, factors including non-renewal of a major contract or other substantial changes in business conditions could have a material adverse effect on the valuation of goodwill in future periods and the resulting charge could be material to future periods’ results of operations.

Income Taxes

The Company accounts for income taxes in accordance with the liability method, whereby deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities, using enacted tax rates in effect for the year in which the differences are expected to reverse. Deferred tax assets are reflected on the consolidated balance sheet when it is determined that it is more likely than not that the asset will be realized. This guidance also requires that

deferred tax assets be reduced by a valuation allowance if it is more likely than not that some or all of the deferred tax asset will not be realized. We account for uncertain tax positions by recognizing the financial statement effects of a tax position only when, based upon the technical merits, it is "more-likely-than-not" that the position will be sustained upon examination. We had no uncertain tax positions at either December 31, 2020 or September 30, 2020. We report interest and penalties as a component of income tax expense. During the three months ended December 31, 2020 and December 31, 2019, we recognized no interest and no penalties related to income taxes.

Stock-Based Equity Compensation

The Company uses the fair value-based method for stock-based equity compensation. Options issued are designated as either an incentive stock 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 a Monte Carlo binomial and Black Scholes 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 and Cash Equivalents

We consider all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents. We maintain cash balances at financial institutions that are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000. Deposits held with financial institutions may exceed the $250,000 limit.

Earnings Per Share

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

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Treasury Stock

The Company periodically purchases its own common stock that is traded on public markets as part of announced stock repurchase programs. The repurchased common stock is classified as treasury stock on the consolidated balance sheets and held at cost. As of December 31, 2020 and September 30, 2020, the Company did not hold any treasury stock.

Preferred Stock

Our certificate of incorporation authorizes the issuance of "blank check" preferred stock with designations, rights and preferences as may be determined from time to time by our board of directors up to an aggregate of 5,000,000 shares of preferred stock. As of December 31, 2020 and September 30, 2020, the Company has not issued any preferred stock.

Interest Rate Swap

The Company uses derivative financial instruments to manage interest rate risk associated with its variable 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 industry, primarily through the introduction of additional regulations and restrictions. Due to the nature of our work, we believe that these impacts are mitigated and concluded that while it is reasonably possible that the virus could have a negative effect on the Company's financial position and the results of its operations, the specific impact is not readily determinable as of the date of these financial statements.

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 a cost-based input method 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. Contract costs are expensed as incurred. Estimated losses are recognized when identified.

Contract assets - Amounts are invoiced as work progresses in accordance with agreed-upon contractual terms. In part, revenue recognition occurs before we have the right to bill, resulting in contract assets. These contract assets are reported within receivables, net on our consolidated balance sheets and are invoiced in accordance with payment terms defined in each contract. Period end balances will vary from period to period due to agreed-upon contractual terms. Refer to the Liquidity and capital management located in Managements' Discussion and Analysis of Financial Condition and Results of Operations in this report for more information.

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Contract liabilities - Amounts are a result of billings in excess of costs incurred. These contract liabilities are reported within accounts payable, accrued expenses, and other current liabilities on our consolidated balance sheets.

    The following table summarizes the contract balances recognized on the Company's consolidated balance sheets:

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									(in thousands)
									December 31,						September 30,
									2020						2020
Contract assets									$	15,576					$	7,943
Contract liabilities									$	200					$	200

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 tables present our revenue disaggregated by these categories:

Revenue by customer:

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						(in thousands)
						Three Months Ended
						December 31,
						2020						2019
Department of Veterans Affairs						$	27,642					$	24,063
Department of Health and Human Services						20,163						24,089
Department of Defense						6,980						331
Other						3,067						3,755
Total revenue						$	57,852					$	52,238

Revenue by contract type:

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						(in thousands)
						Three Months Ended
						December 31,
						2020						2019
Time and materials						$	44,194					$	36,441
Cost reimbursable						11,721						14,617
Firm fixed price						1,937						1,180
Total revenue						$	57,852					$	52,238

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Revenue by whether the Company acts as a prime contractor or a subcontractor:

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						(in thousands)
						Three Months Ended
						December 31,
						2020						2019
Prime contractor						$	51,764					$	48,896
Subcontractor						6,088						3,342
Total revenue						$	57,852					$	52,238

We have leases for facilities and office equipment. Our lease liabilities are recognized as the present value of the future minimum lease payments over the lease term. Our right-of-use assets are recognized as the present value of the future minimum lease payments over the lease term less unamortized lease incentives and the balance remaining in deferred rent liability under ASC 840. Our lease payments consist of fixed and in-substance fixed amounts attributable to the use of the underlying asset over the lease term. Variable lease payments that do not depend on an index rate or are not in-substance fixed payments are excluded in the measurement of right-of-use assets and lease liabilities and are expensed in the period incurred. The incremental borrowing rate on our credit facility was used in determining the present value of future minimum lease payments. Some of our lease agreements include options to extend the lease term or terminate the lease. These options are accounted for in our right-of-use assets and lease liabilities when it is reasonably certain that the Company will extend the lease term or terminate the lease. The Company does not have any finance leases. As of December 31, 2020, operating leases for facilities and equipment have remaining lease terms of 1.0 to 10.3 years.

The following table summarizes lease balances in our consolidated balance sheets at December 31, 2020 and September 30, 2020:

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			(in thousands)
			December 31, 2020						September 30, 2020
Operating lease right-of-use assets			$	21,737					$	22,427
Operating lease liabilities, current			$	2,053					$	2,045
Operating lease liabilities - long-term			21,017						21,620
Total operating lease liabilities			$	23,070					$	23,665

The Company subleases a portion of one of its leased facilities. The sublease is classified as an operating lease with respect to the underlying asset. The sublease was assumed from the acquisition of Social & Scientific Systems, Inc. ("S3") in fiscal 2019. The sublease term is 5 years with two additional 1-year term extension options.

The Company's lease costs are included within contract costs in our Consolidated Statements of Operations. For the three months ended December 31, 2020 and December 31, 2019, total lease costs for our operating leases are as follows:

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			(in thousands)
			Three Months Ended
			December 31,
			2020						2019
Operating			$	970					$	1,312
Short-term			29						56
Variable			5						20
Sublease income			(95)						(49)
Total lease costs			$	909					$	1,339

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The Company's future minimum lease payments as of December 31, 2020 are as follows:

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For the Fiscal Year Ending September 30,			(in thousands)
2021 (remaining)			$	2,454
2022			3,501
2023			3,375
2024			3,251
2025			3,092
Thereafter			14,684
Total future lease payments			30,357
Less: imputed interest			(7,287)
Present value of future minimum lease payments			23,070
Less: current portion of operating lease liabilities			(2,053)
Long-term operating lease liabilities			$	21,017

Other information related to our leases are as follows:

			December 31, 2020
Weighted-average remaining lease term			8.9 years
Weighted-average discount rate			5.99		%

						(in thousands)
						Three Months Ended
						December 31, 2020
Cash paid for amounts included in the measurement of lease liabilities						$	881
Lease liabilities arising from obtaining right-of-use-assets						$	—

Accounts receivable

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									(in thousands)
									December 31,						September 30,
			Ref						2020						2020
Billed receivables									$	29,309					$	24,598
Contract assets									15,576						7,943
Total accounts receivable									44,885						32,541
Less: Allowance for doubtful accounts			(a)						—						—
Accounts receivable, net									$	44,885					$	32,541

Ref (a): Accounts receivable are non-interest bearing, unsecured and carried at net realizable value. We evaluate our receivables on a quarterly basis and determine whether an allowance is appropriate based on specific collection issues. No allowance for doubtful accounts was deemed necessary at either December 31, 2020 or September 30, 2020.

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Other current assets

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									(in thousands)
									December 31,						September 30,
									2020						2020
Prepaid insurance and benefits									$	431					$	665
Other receivables									1,617						1,363
Other prepaid expenses									1,420						1,471
Other current assets									$	3,468					$	3,499

Equipment and improvements, net

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									(in thousands)
									December 31,						September 30,
			Ref						2020						2020
Furniture and equipment									$	958					$	958
Computer equipment									1,212						1,171
Computer software									4,353						4,341
Leasehold improvements									1,595						1,595
Total equipment and improvements									8,118						8,065
Less accumulated depreciation and amortization									(5,142)						(4,726)
Equipment and improvements, net			(a)						$	2,976					$	3,339

Ref (a): Depreciation expense was $0.4 million and $0.7 million for the three months ended December 31, 2020 and 2019, respectively.

Intangible assets

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									(in thousands)
									December 31,						September 30,
			Ref						2020						2020
Intangible assets			(a)
Customer contracts and related customer relationships									$	62,281					$	45,600
Covenants not to compete									522						480
Trade name									3,051						2,109
Acquired intangibles - IBA acquisition			(b)						—						16,223
Total intangible assets									65,854						64,412
Less accumulated amortization
Customer contracts and related customer relationships									(12,707)						(11,150)
Covenants not to compete									(225)						(212)
Trade name									(514)						(438)
Total accumulated amortization									(13,446)						(11,800)
Intangible assets, net									$	52,408					$	52,612

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Ref (a): Intangible assets subject to amortization. The intangibles are amortized on a straight-line basis over their estimated useful lives of 10 years. The total amount of amortization expense was $1.6 million and $1.2 million for the three months ended December 31, 2020 and 2019, respectively.

Ref (b): Intangible assets reported at September 30, 2020 from the acquisition of IBA were based on an estimate and subject to revision. As of December 31, 2020, a third party valuation was completed and of the $17.7 million intangible assets acquired from the acquisition of IBA, $16.7 million was allocated to customer contracts and customer relationships, $0.1 million to covenants not to compete, and $0.9 million to trade name.

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Estimated amortization expense for future years:						(in thousands)
Remaining Fiscal 2021						$	4,939
Fiscal 2022						6,585
Fiscal 2023						6,585
Fiscal 2024						6,585
Fiscal 2025						6,585
Thereafter						21,129
Total amortization expense						$	52,408

    

Goodwill

The changes in the carrying amount of goodwill as of December 31, 2020 are as follows:

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						(in thousands)
			Ref			Total
Balance at September 30, 2019						$	52,758
Preliminary increase from IBA acquisition						14,386
Balance at September 30, 2020						67,144
Adjustment from IBA acquisition			(a)			(1,694)
Balance at December 31, 2020						$	65,450

Ref (a): The adjustment was determined based on third party valuation.

Accounts payable, accrued expenses, and other current liabilities

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									(in thousands)
									December 31,						September 30,
									2020						2020
Accounts payable									$	14,195					$	14,645
Accrued benefits									2,719						2,833
Accrued bonus and incentive compensation									591						2,340
Accrued workers' compensation insurance									6,067						5,529
Other accrued expenses									3,820						3,231
Accounts payable, accrued expenses, and other current liabilities									$	27,392					$	28,578

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Debt obligations

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									(in thousands)
									December 31,						September 30,
									2020						2020
Bank revolving line of credit									$	9,150					$	—
Bank term loan									68,250						70,000
Less unamortized deferred financing costs									(2,593)						(2,729)
Net bank debt obligations									74,807						67,271
Less current portion of bank debt obligations, net of deferred financing costs									(15,884)						(6,727)
Long-term portion of bank debt obligations, net of deferred financing costs									$	58,923					$	60,544

    

Interest expense

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									(in thousands)
									Three Months Ended
									December 31,
			Ref						2020						2019
Interest expense			(a)						$	(870)					$	(852)
Amortization of deferred financing costs			(b)						(210)						(210)
Other income (expense), net			(c)						—						121
Interest expense, net									$	(1,080)					$	(941)

Ref (a): Interest expense on borrowing

Ref (b): Amortization of expenses related to term loan and revolving line of credit

Ref (c): Gain on lease modification due to a lease amendment

A summary of this loan facility as of December 31, 2020, is as follows:

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($ in Millions)

As of December 31, 2020

Lender

Arrangement

Loan Balance

Interest

Maturity Date

First National Bank of Pennsylvania ("FNB")

Secured term loan (a)

$

68.3

LIBOR* + 3.5%

09/30/2025

First National Bank of Pennsylvania ("FNB")

Secured revolving line of credit (b)

$

9.2

LIBOR* + 3.5%

09/30/2025

*LIBOR rate as of December 31, 2020 was 0.15%. As of December 31, 2020, our LIBOR rate is subject to a minimum floor of 0.5%.

(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

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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 through September 2025. The annual amortization amounts are $7.0 million for fiscal years 2021 and 2022 and $8.75 million each for fiscal years 2023 - 2025. The quarterly payments are equal installments. 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 for the current fiscal year is $28.8 million and matures in 2024. The notional amount was $36 million in the prior fiscal year. 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 three months ended December 31, 2020, interest expense has been increased by less than $0.2 million.

(b) The secured revolving line of credit has a ceiling of up to $25.0 million. Borrowing on the line of credit is secured by liens on substantially all of the assets of the Company. The Company accessed funds from the revolving credit facility during the quarter and has an outstanding balance of $9.2 million at December 31, 2020.

The Company's total borrowing availability, based on eligible accounts receivables at December 31, 2020, 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.

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 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 December 31, 2020, there were 0.5 million shares available for grant.

Stock-based compensation expense, shown in the table below, is recorded in general and administrative expenses included in our Consolidated Statements of Operations:

Copy History

									(in thousands)
									Three Months Ended
			Ref						December 31,
									2020						2019
DLH employees			(a)						$	342					$	116
Non-employee directors			(b)						116						87
Total stock option expense									$	458					$	203

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Ref (a): Equity grants of restricted stock units were made in accordance with the DLH long-term incentive compensation policy for Named Executive Officers ("NEO") and totaled 147,431 restricted stock units issued and outstanding at December 31, 2020.

Ref (b): Equity grants of restricted stock units were made in accordance with DLH compensation policy for non-employee directors and totaled 63,177 restricted stock units issued and outstanding at December 31, 2020.

Unrecognized stock-based compensation expense

									(in thousands)
									December 31,
			Ref						2020
Unrecognized expense for DLH employees			(a)						$	3,445
Unrecognized expense for non-employee directors									351
Total unrecognized expense									$	3,796

Ref (a): Compensation expense for the portion of equity awards for which the requisite service has not been rendered is recognized as the requisite service is rendered. The compensation expense for that portion of awards has been based on the grant-date fair value of those awards as calculated for recognition purposes under applicable guidance. For options that vest based on the Company's common stock achieving and maintaining defined market prices, the Company values the awards with a Monte Carlo binomial model that utilizes various probability factors and other criterion in establishing fair value of the grant. The related compensation expense is recognized over the derived service period determined in the valuation. On a weighted average basis, this expense is expected to be recognized within the next 4.51 years.

Stock option activity for the three months ended December 31, 2020

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.

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																								(in years)
																								Weighted
																		Weighted						Average						(in thousands)
												(in thousands)						Average						Remaining						Aggregate
												Number of						Exercise						Contractual						Intrinsic
									Ref			Shares						Price						Term						Value
Options outstanding, September 30, 2020												2,129						$	6.14					7.4						$	6,593
Exercised												(62)						$	3.62					—						—
Granted									(a)			220						$	10.05					—						—
Options outstanding, December 31, 2020												2,287						$	6.95					7.7						$	10,261

Ref (a): The options granted in the first quarter of fiscal 2021 occurred at the end of the period and an amount of less than $0.1 million was accrued as stock compensation expense.

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Stock options shares outstanding, vested, and unvested for the periods ended

Copy History

									(in thousands)
									December 31,						September 30,
			Ref						2020						2020
Vested and exercisable			(a)						1,151						1,213
Unvested			(b)						1,136						916
Options outstanding									2,287						2,129

Ref (a): Weighted average exercise price of vested and exercisable shares was $2.18 and $2.25 at December 31, 2020 and September 30, 2020, respectively. Aggregate intrinsic value was approximately $8.2 million and $6.1 million at December 31, 2020 and September 30, 2020, respectively. Weighted average contractual term remaining was 3.8 and 4.6 years at December 31, 2020 and September 30, 2020, respectively.

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

 

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.

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						(in thousands)
						Three Months Ended
						December 31,
						2020						2019
Numerator:
Net income						$	1,814					$	1,551
Denominator:
Denominator for basic net income per share - weighted-average outstanding shares						12,498						12,088
Effect of dilutive securities:
Stock options and restricted stock						947						926
Denominator for diluted net income per share - weighted-average outstanding shares						13,445						13,014
Net income per share - basic						$	0.15					$	0.13
Net income per share - diluted						$	0.13					$	0.12

Contractual obligations as of December 31, 2020

Copy History

Payments Due Per Fiscal Year

(Remaining)

(Amounts in thousands)

Total

2021