What changed in this filing

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Item 9A. Controls and Procedures

2020-12-07 compared with 2019-12-11 · 395 added, 263 removed, 544 unchanged (55% of the section changed)

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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, has 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 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.

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Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within our company have been detected.

Our management, however, believes our disclosure controls and procedures are in fact effective to provide reasonable assurance that the objectives of the control system are met.

management, however, believes our disclosure controls and procedures are in fact effective to provide reasonable assurance that the objectives of the control system are met.

Management’s Report on Internal Control over Financial Reporting

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Changes in Internal Controls over Financial Reporting

As previously reported, in June 2019, the Company acquired S3.

Since the closing of that transaction, the Company has been integrating S3 into its existing controls environment.

Other than the integration of S3, there have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) identified in connection with the evaluation of our internal control that occurred during the fourth fiscal quarter of our fiscal year ended September 30, 2019, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) identified in connection with the evaluation of our internal control that occurred during the fourth quarter of our fiscal year ended September 30, 2020, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

OTHER INFORMATION

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EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(1) Financial Statements

(a) (1) Financial Statements

The financial statements and schedules of the Company are included in Part II, Item 8 of this report beginning on page F-1.

(2) Financial Statement Schedule

(a) (2) Financial Statement Schedule

All schedules have been omitted since the required information is not applicable or because the information required is included in the Consolidated Financial Statements or the notes thereto.

(a) (3) Exhibits

The exhibits designated with an asterisk (*) are filed herewith.

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The exhibits designated with a number sign (#) indicate a management contract or compensation plan or arrangement.

Equity Purchase Agreement among the Company, Danya International LLC,.

DI Holdings, Inc.

and the owners named therein (filed as Exhibit 2.1 to Current Report on Form 8-K filed May 6, 2016)

Stock Purchase Agreement among the Company, Social & Scientific Systems, Inc., and Social & Scientific Systems, Inc.

Employee Stock Ownership Trust (filed as Exhibit 2.1 to Current Report on Form 8-K filed June 13, 2019).

Equity Purchase Agreement among DLH Holdings Corp., Irving Burton Associates, LLC, Project Insight Holdings, Inc., the Owners of the Seller and Anna L.

Ryan as the Sellers' Representative (filed as Exhibit 2.1 to Current Report on Form 8-K filed October 6, 2020).

Amended and Restated Certificate of Incorporation (filed as Exhibit A to Definitive Proxy Statement dated May 1, 2000 as filed with the Securities and Exchange Commission).

Amended By-Laws of Registrant adopted as of May 15, 2001 (filed as Exhibit 3.4 to the Registration Statement on Form S-4 File No.

Amended By-Laws of Registrant adopted as of August 29, 2001 (filed as Exhibit 3.5 to the Registrant's Form S-3 filed on December 19, 2001).

Amendment to By-Laws of Registrant adopted November 8, 2007 (filed as Exhibit 3.1 to the Registrant's Current Report on Form 8-K filed on November 13, 2007).

Amended and Restated By-Laws of Registrant adopted as of August 27, 2020 (filed as Exhibit 3.1 to the Current Report on Form 8-K filed August 31, 2020).

Amendment to Amended and Restated Certificate of Incorporation of the Company (filed as Exhibit B to Definitive Proxy Statement dated March 13, 2008 as filed with the Securities and Exchange Commission) .

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# 2016 Omnibus Equity Incentive Plan, as amended (incorporated by reference to Appendix A to the Company’s definitive Proxy Statement dated December 29, 2017).

Non-Competition Agreement between the Company and Jeffrey Hoffman (filed as Exhibit 10.2 to Current Report on Form 8-K filed May 6, 2016).

# Form of Stock Option Award Agreement under the 2016 Omnibus Equity Incentive Plan (filed as Exhibit 10.8 to Quarterly Report on Form 10-Q filed May 16, 2016).

Registration Rights Agreement dated September 29, 2016 (filed as Exhibit 10.2 to Current Report on 8-K filed on October 4, 2016).

Employment Agreement between the Company and Kathryn M.

JohnBull dated July 5, 2017 (filed as Exhibit 10.1 to Current Report on Form 8-K filed on July 5, 2017).

# Change in Control, Severance and Covenant Agreement with Helene Fisher, dated June 4, 2018 (filed as Exhibit 10.2 to Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2018, filed August 6, 2018).

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First Amendment to Credit Agreement among DLH Holdings Corp., DLH Solutions, Inc., Danya International, LLC, Social & Scientific Systems, Inc., First National Bank of Pennsylvania, as Administrative Agent and other lenders party thereto (filed as Exhibit 10.1 to Current Report on Form 8-K filed on September 12, 2019).

Amended and Restated Credit Agreement among DLH Holdings Corp., DLH Solutions, Inc., Danya International, LLC, Social & Scientific Systems, Inc., Irving Burton Associates, LLC, First National Bank of Pennsylvania, as Administrative Agent and other lenders party thereto (filed as Exhibit 10.1 to Current Report on Form 8-K filed October 6, 2020).

# Employment Agreement between the Company and Zachary C.

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# Form of Restricted Stock Unit for non-employee directors under the 2016 Omnibus Equity Incentive Plan.

# Employment Offer Letter between the Company and Jeanine M.

Christian (filed as Exhibit 10.1 to Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2020, filed August 5, 2020).

# Employment Offer Letter between the Company and Jacqueline S.

Everett (filed as Exhibit 10.2 to Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2020, filed August 5, 2020).

# Change in Control, Severance and Covenant Agreement between the Company and Jeanine M.

Christian (filed as Exhibit 10.3 to Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2020, filed August 5, 2020).

# Change in Control, Severance and Covenant Agreement between the Company and Jacqueline S.

Everett (filed as Exhibit 10.4 to Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2020, filed August 5, 2020).

# Letter Agreement dated July 15, 2020 between the Company and Kevin H.

Beverly (filed as Exhibit 10.5 to Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2020, filed August 5, 2020).

# Employment agreement between the Company and Kathryn M JohnBull dated September 14, 2020 (filed as Exhibit 10.1 to Current Report on Form 8-K filed on September 15, 2020)

* Subsidiaries of Registrants.

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101.0 The following financial information from the DLH Holdings Corp.

Annual Report on Form 10-K for the fiscal year ended September 30, 2019, formatted in XBRL (eXtensible Business Reporting Language) and filed electronically herewith:

Annual Report on Form 10-K for the fiscal year ended September 30, 2020, formatted in iXBRL (Inline eXtensible Business Reporting Language) and filed electronically herewith:

(i) the Consolidated Balance Sheets;

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Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:

Signature Capacity Date

/s/ FREDERICK G.

Chairman of the Board

December 11, 2019

/s/ FRANCES MURPHY

December 11, 2019

Frances Murphy

/s/ MARTIN J.

December 11, 2019

/s/ WILLIAM H.

December 11, 2019

WASSERMAN Chairman of the Board December 7, 2020

/s/ AUSTIN J.

December 11, 2019

/s/ ELDER GRANGER

December 11, 2019

YERKS III Director December 7, 2020

/s/ ELDER GRANGER Director December 7, 2020

Elder Granger

December 11, 2019

/s/ FRANCES MURPHY Director December 7, 2020

Frances Murphy

ALLEN Director December 7, 2020

/s/ MARTIN J.

DELANEY Director December 7, 2020

/s/ STEPHEN J.

ZELKOWICZ Director December 7, 2020

/s/ ZACHARY C.

Chief Executive Officer, President and Director

December 11, 2019

PARKER Chief Executive Officer, President and Director December 7, 2020

/s/ KATHRYN M.

Chief Financial Officer and Principal Accounting Officer

December 11, 2019

JOHNBULL Chief Financial Officer and Principal Accounting Officer December 7, 2020

DLH Holdings Corp.

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September 30,

Revenue $ 209,185 $ 160,391

Cost of Operations

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Income tax expense 2,906 2,171

Net income $ 7,114 $ 5,324

Net income per share - basic $ 0.58 $ 0.44

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Weighted average common shares outstanding

Basic 12,282 12,018

Diluted 13,105 13,041

The accompanying notes are an integral part of these consolidated financial statements.

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Equipment and improvements, net 3,339 5,343

Operating leases right-of-use-assets 22,427 —

Deferred taxes, net 37 2,345

Goodwill 67,144 52,758

Intangible assets, net 52,612 41,208

Other long-term assets 606 757

Total assets $ 183,562 $ 129,258

LIABILITIES AND SHAREHOLDERS’ EQUITY

Current liabilities:

Debt obligations - current, net of deferred financing costs $ 6,727 $ —

Operating lease liabilities - current 2,045 —

Accrued payroll 10,611 8,852

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Total current liabilities 47,961 29,485

Long-term liabilities:

Operating lease liabilities - long-term 21,620 —

Debt obligations - long term, net of deferred financing costs 60,544 53,629

Other long-term liabilities — 573

Total long-term liabilities 82,164 54,202

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authorized 40,000 shares;

issued and outstanding 12,036 and 11,899 at September 30, 2019 and September 30, 2018, respectively

issued and outstanding 12,404 and 12,036 at September 30, 2020 and 2019, respectively

Additional paid-in capital 85,868 85,114

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Operating activities

Net income $ 7,114 $ 5,324

Adjustments to reconcile net income to net cash provided by operating activities:

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Deferred taxes, net 2,308 1,792

Non-cash gain from lease modification ( 121 ) —

Changes in operating assets and liabilities

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Repayments of senior debt ( 19,000 ) ( 21,708 )

Repurchase of common stock ( 211 ) —

Payment of deferred financing costs ( 898 ) ( 3,451 )

Proceeds from issuance of common stock upon exercise of options 55 39

Net cash provided by (used in) financing activities

Net cash provided by financing activities 12,946 44,880

Net change in cash and cash equivalents ( 433 ) ( 4,565 )

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Cash paid during the year for income taxes $ 917 $ 543

Non-cash issuance of stock upon exercise of options

Derivative warrant liability reclassified as equity

The accompanying notes are an integral part of these consolidated financial statements.

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(Amounts in thousands)

Total Shareholders' Equity

Common Stock Treasury Stock Additional

Capital Accumulated

Deficit Total Shareholders' Equity

Shares Amount Shares Amount

Year Ended September 30, 2020

Balance at September 30, 2019

Stock-based compensation

12,036 $ 12 — $ — $ 85,114 $ ( 39,555 ) $ 45,571

Cumulative-effect adjustment for adoption of ASC 842

— — — — — ( 2 ) ( 2 )

Expense related to director restricted stock unit 90 — — — 347 — 347

Expense related to employee stock options — — — — 563 — 563

Exercise of stock options 395 — — — 55 — 55

Repurchase of common stock — — 28 ( 113 ) — — ( 113 )

Cancellation of common stock ( 117 ) — ( 28 ) 113 ( 211 ) — ( 98 )

Net income — — — — — 7,114 7,114

Balance at September 30, 2020

Total Shareholders' Equity

12,404 $ 12 — $ — $ 85,868 $ ( 32,443 ) $ 53,437

Common Stock Treasury Stock Additional

Capital Accumulated

Deficit Total Shareholders' Equity

Shares Amount Shares Amount

Year Ended September 30, 2019

Balance at September 30, 2018

Stock-based compensation

11,899 $ 12 — $ — $ 84,285 $ ( 44,879 ) $ 39,418

Expense related to director restricted stock unit 102 — — — 527 — 527

Expense related to employee stock options — — — — 263 — 263

Exercise of stock options 35 — — — 39 — 39

Change in accounting principle - reclassification of warrant liability

Net income — — — — — 5,324 5,324

Balance at September 30, 2019

12,036 $ 12 — $ — $ 85,114 $ ( 39,555 ) $ 45,571

The accompanying notes are an integral part of these consolidated financial statements

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generally accepted accounting principles ("GAAP") and with the instructions to Form 10-K, Regulation S-X, and Regulation S-K.

Certain reclassifications have been made to the prior year’s consolidated financial statements to conform to the current year presentation.

Business Overview

The Company is a full-service provider of technology-enabled health and human services company providing solutions to three market focus areas:

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.

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We employ over 2,200 skilled employees working in more than 30 locations throughout the United States and one location overseas.

On June 7, 2019, the Company acquired Social & Scientific Systems, Inc.

(“S3”), which provides clinical and biomedical research, epidemiology, health policy, and program evaluation services in the public health market.

S3 utilizes advanced

research (including longitudinal studies), data analytics, and secure IT platform services to assist public health agencies within the Department of Health and Human Services including the National Institutes of Health ("NIH") and the Centers for Medicare and Medicaid Services ("CMS").

The acquisition expands our ability to provide complementary services across multiple government markets.

For more information, please refer to Note 15 Business Combinations .

At present, the Company derives 98 % 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 the Company derives at least 10% of its revenues.

Our largest customer is the VA, which comprised approximately 57% and 63% of revenue for the years ended September 30, 2019 and 2018 , respectively.

Our second largest customer, HHS, comprised approximately 39% and 34% of revenue for the years ended September 30, 2019 and 2018 , respectively.

The recent acquisition of S3 furthers the Company's reach into HHS, and we expect HHS to surpass the VA as our largest customer in fiscal 2020 as measured in revenue volume.

Our two largest customers are the Department of Veteran Affairs ("VA") and the Department of Health and Human Services ("HHS").

The VA comprised approximately 48 % and 57 % of revenue for the years ended September 30, 2020 and 2019, respectively, and HHS comprised approximately 45 % and 39 % of revenue for the years ended September 30, 2020 and 2019, respectively.

New Accounting Pronouncements

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This new accounting guidance is intended to improve financial reporting about leasing transactions.

This accounting standard will require organizations that lease assets, referred to as “Lessees”, to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases with terms of more than twelve months.

An organization is to provide disclosures designed to enable users of financial statements to understand the amount, timing, and uncertainty of cash flows arising from leases.

These disclosures include qualitative and quantitative requirements concerning additional information about the amounts recorded in the financial statements.The recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a finance or operating lease.

However, unlike current GAAP which requires only capital leases to be recognized on the balance sheet, new guidance will require both types of leases (i.e., operating and finance) to be recognized.

Finance leases will be accounted for in substantially the same manner as capital leases.

Public companies will be required to adopt the new leasing standard for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018.

Early adoption is permitted for all companies and organizations.

Accounting Standard Update ("ASU") 2018-11 allows companies to elect not to recast comparative periods presented when transitioning to ASC 842.

The Company expects an impact in balance sheet net assets and liabilities resulting from the adoption of this new lease accounting guidance of approximately $32.7 million of lease obligations as of September 30, 2019 that will be further evaluated as the implementation of this guidance becomes effective.

This accounting standard will require organizations that lease assets, referred to as “Lessees”, to recognize on the balance sheet the assets and liabilities.

Per ASU 2016-02, Leases (Topic 842), we determine if a contract contains a lease by identifying an asset and determining if we have the right to control the use of the identified asset for a period of time in exchange for consideration.

A contract conveys the right to control the use of an identified asset when the lessee has the right to direct the use of the identified asset and obtain substantially all economic benefits from its use, throughout the period of its use.

We also determine if a lease qualifies as an operating or finance lease.

All Company leases at adoption were operating leases.

The ASU also requires lessees to identify and separate lease and non-lease components.

Per a practical expedient provided in the ASU, the Company elected not to separate lease and non-lease components.

Upon lease commencement, the lease liability and right-of-use asset are recorded on the balance sheet.

The lease liability is measured as the present value of future minimum lease payments, including all probable renewals, to be made during the lease term.

The right-of-use asset is measured as the present value of future minimum lease payments to be made during the lease term, including all probable renewals, plus lease payments made to the lessor before or at lease commencement and indirect costs paid less incentives received.

DLH adopted this standard on October 1, 2019 and recognized initial right of use assets and lease liabilities of $ 17.4 million and $ 18.0 million, respectively.

At adoption, the Company elected several practical expediencies to facilitate the implementation of the new standard and did not recast comparative prior year information.

As such, we did not reassess and include initial direct costs in the measurement of right-of-use assets, capitalize leases with terms of 12 months or less, nor reassess lease classification of existing leases.

In June 2016, the FASB issued 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.

becomes effective for the Company in the first quarter of fiscal year 2021.

We do not expect a material impact to our operating results, financial position, or cash flows as a result of adopting this new standard.

In January 2017, the FASB issued ASU 2017-04, Simplifying the Test for Goodwill Impairment, which simplifies the accounting for goodwill impairments by eliminating step two from the goodwill impairment test.

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The new standard is effective for fiscal years beginning after December 15, 2019 for both interim and annual reporting periods.

The Company is currently assessing the potential impact of the adoption of ASU 2017-04 on its consolidated financial statements.

In May 2017, the FASB issued Accounting Standards Update ASU 2017-09, Compensation-Stock Compensation (Topic 718):

Scope of Modification Accounting.

ASU 2017-09 provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718.

The Company adopted this standard in the first quarter of fiscal 2019 and adoption did not have a material impact on the Company’s consolidated financial statements.

In June 2018, the FASB issued ASU 2018-07 Improvements to Nonemployee Share-Based Payment Accounting, which simplifies the accounting for share-based payments granted to nonemployees for goods and services.

Under the ASU, most of the guidance on such payments to nonemployees would be aligned with the requirements for share-based payments granted to employees.

The amendments are effective for fiscal years beginning after December 15, 2018, including interim periods.

Early adoption is permitted, but no earlier than an entity’s adoption date of Topic 606.

The Company is currently assessing the potential impact on the Company’s consolidated financial statements and related disclosures.

The Company adopted this standard in the first quarter of fiscal 2020 and adoption did not have an impact on the Company's consolidated financial statements.

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 references 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.

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 .

Significant Accounting Policies

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 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 would 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, contract assets, accrued expenses, and accounts payable approximate fair value due to the short-term nature of these instruments.

The fair values of the Company's debt instruments approximate fair value because the underlying interest rates approximate market rates that the Company could obtain for similar instruments at the balance sheet dates.

Long-Lived Assets

Our long-lived assets include equipment and improvements, intangible assets, and goodwill.

The Company continues to review its long-lived assets for possible impairment or loss of value at least annually or more frequently upon the occurrence of an event or when circumstances indicate that a reporting unit’s carrying amount is greater than its fair value.

Equipment and improvements are stated at cost.

Depreciation and amortization are provided using the straight-line method over the estimated useful asset lives ( 3 to 7 years) and the shorter of the initial lease term or estimated useful life for leasehold improvements.

Intangible assets (other than goodwill) are originally recorded at fair value and are amortized on a straight-line basis over their estimated useful lives of 10 years.

Maintenance and repair costs are expensed as incurred.

Right-of-use assets are measured at the present value of future minimum lease payments, including all probable renewals, plus lease payments made to the lessor before or at lease commencement and indirect costs paid, less incentives received.

Our right-of-use assets include long-term leases for facilities and equipment and are amortized over their respective lease terms.

At September 30, 2020, we performed a goodwill impairment evaluation on the year-end carrying value of approximately $ 67.1 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, 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 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.

Similarly, there were no impairments during the prior year ended September 30, 2019.

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 September 30, 2020 and 2019.

We report interest and penalties as a component of income tax expense.

For the years ended September 30, 2020 and 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 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 binomial and Black Scholes option pricing model 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.

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.

Treasury Stock

The Company periodically purchases its own common stock that is traded on public markets as part of announced stock repurchase programs.

The repurchased common stock is classified as treasury stock on the consolidated balance sheets and held at cost.

As of September 30, 2020, the Company did no t hold any treasury stock.

Preferred Stock

Our certificate of incorporation authorizes the issuance of "blank check" preferred stock with such designations, rights and preferences as may be determined from time to time by our board of directors up to an aggregate of 5,000,000 shares of preferred stock.

As of September 30, 2020, the Company has no t issued any preferred stock.

Interest Rate Swap

The Company uses derivative financial instruments to manage interest rate risk associated with its variable debt.

The Company's objective in using these interest rate derivatives is to manage its exposure to interest rate movements and reduce volatility of interest expense.

The gains and losses due to changes in the fair value of the interest rate swap agreements completely offset changes in the fair value of the hedged portion of the underlying debt.

Offsetting changes in fair value of both the interest rate swaps and the hedged portion of the underlying debt are recognized in interest expense in the Consolidated Statements of Operations.

The Company does not hold or issue any derivative instrument for trading or speculative purposes.

Risks & Uncertainties

Management continues to evaluate the impact of the COVID-19 pandemic on the industry and has 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.

The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Revenue Recognition

On October 1, 2018, we adopted ASC 606, Revenue from Contracts with Customers using the modified retrospective method.

ASC 606 outlines a five-step model whereby revenue is recognized as performance obligations within the contract are satisfied.

ASC 606 also requires new, expanded disclosures regarding revenue recognition.

We recognized the impact of adopting ASC 606, but did not record an entry as the impact was immaterial at less than $10 thousand .

Results for reporting periods beginning after October 1, 2018 are presented under ASC 606, while prior period amounts were not adjusted and will continue to be reported under ASC 605, the accounting standards in effect for those periods.

In past periods, the Company recognized and recorded revenue on government contracts when:

(a) persuasive evidence of an arrangement existed;

(b) the services had been delivered to the customer;

and (d) collectibility was reasonably assured.

We account for a contract when both we and the customer approve and commit;

our rights and those of the customer are identified;

payment terms are identified;

the contract has commercial substance;

and collectability of consideration is probable.

At contract inception, we identify the distinct goods or services promised in the contract, referred to as performance obligations.

At September 30, 2019 we have identified a single performance obligation for completed and in-process contracts.

Then we determine the total transaction price for the contract;

which is the total consideration which we can expect in exchange for the promised goods or services in the contract.

The transaction price may include fixed or variable amounts.

Due to our contracts being predominantly time and material, the Company does not have variable consideration.

The transaction price is allocated to each distinct performance obligation, using our best estimate of the standalone selling price for each service promised in the contract.

The primary method used to estimate standalone selling price is the hourly billing rate for each labor category identified in the contract with the customer.

Revenue is recognized when, or as, the performance obligation is satisfied.

We recognize revenue over time when there is a continuous transfer of control to our customer.

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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, which are typically 30 days , defined in each contract.

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.

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(in thousands)

September 30,

September 30, September 30, September 30,

2020 2019 2018

Contract assets $ 7,943 $ 4,302 $ 214

Contract liabilities $ 200 $ 92 $ —

The change in contract asset and liability balances at September 30, 2019 was due to the S3 acquisition, which contributed contracts assets of $3.1 million and contract liabilities of $0.1 million .

The increase in contract assets and contract liabilities is primarily due to the acquisitions of Social & Scientific Systems, Inc ("S3") on June 7, 2019 and Irving Burton Associates, LLC.

("IBA") on September 30, 2020.

Disaggregation of revenue from contracts with customers

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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:

The following series of tables present our revenue disaggregated by these categories:

Revenue by customer:

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Department of Health and Human Services 95,026 62,000

Other 13,955 6,442

Total revenue $ 209,185 $ 160,391

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September 30,

Prime contractor $ 193,448 $ 154,207

Subcontractor 15,737 6,184

Total revenue $ 209,185 $ 160,391

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 is used in determining the present value of future minimum lease payments.

Some of our lease agreements include options to extend the lease term or terminate the lease.

These options are accounted for in our right-of-use assets and lease liabilities when it is reasonably certain that the Company will extend the lease term or terminate the lease.

The Company does not have any finance leases.

Upon the adoption of ASC 842, we recorded operating lease right-of-use assets of $ 17.4 million, current and long-term operating lease liabilities of $ 3.6 million and $ 14.4 million, and a $ 2 thousand cumulative adjustment to accumulated deficit.

The impact of adopting the standard on our consolidated balance sheet at October 1, 2019 is as follows:

(in thousands) Ref September 30, 2019 ASC 842 Adjustments October 1, 2019

Long-term assets:

Operating leases right-of-use assets $ — $ 17,398 $ 17,398

Current liabilities:

Deferred rent liability - short-term (a) 44 ( 44 ) —

Operating leases liabilities - current — 3,645 3,645

Long-term liabilities:

Deferred rent liability - long-term (b) 276 ( 276 ) —

Unamortized tenant improvement allowance (c) 297 ( 297 ) —

Operating leases liabilities - long-term — 14,372 14,372

Shareholders' equity:

Accumulated deficit ( 39,555 ) ( 2 ) ( 39,557 )

The balance of short-term deferred rent liability presented in our annual 10K report within accounts payable, accrued expenses, and other accrued liabilities on our consolidated balance sheet at September 30, 2019.

The balance of long-term deferred rent liability presented in our annual 10K report within other long-term liabilities on our consolidated balance sheet at September 30, 2019.

The balance of unamortized tenant improvement allowance presented in our annual 10K report within other long-term liabilities on our consolidated balance sheet at September 30, 2019.

The Company executed a modification of a lease during the fiscal quarter ending December 31, 2019 and recognized adjustments to the right-of-use asset and lease liabilities in accordance with ASC 842.

As a result of the modification, a gain of $ 0.1 million was recognized.

The gain represents the difference between the change in values of the right-of-use-asset and lease liabilities, which were $ 7.3 million and $ 7.2 million, respectively.

For the year ended September 30, 2020, the increase to right-of-use assets and lease liabilities related to the modification was $ 24.7 million and $ 25.2 million, respectively.

For more information, refer to Note 7.

Supporting Financial Information .

Accounts receivable

As of September 30, 2020, operating leases for facilities and equipment have remaining lease terms of 0.6 to 10.5 years.

The following table summarizes lease balances in our consolidated balance sheet at September 30, 2020:

(in thousands)

September 30, 2020

Operating lease right-of-use assets $ 22,427

Operating lease liabilities, current $ 2,045

Operating lease liabilities - long-term 21,620

Total operating lease liabilities $ 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 in fiscal 2019.

During the year ended September 30, 2020, the sublease was amended with the new terms commencing in July 2020.

The sublease term is 5 years with two additional 1 year term extension options.

The Company's lease costs are included within general and administrative costs in our Consolidated Statements of Operations.

For the year ended September 30, 2020, total lease costs for our operating leases are as follows:

(in thousands)

September 30, 2020

Operating $ 4,236

Short-term 155

Sublease income ( 271 )

Total lease costs $ 4,183

Other information related to our leases are as follows:

Ref September 30, 2020

Weighted-average remaining lease term 9.1 years

Weighted-average discount rate (a) 5.99 %

Calculation based off of borrowing terms from senior credit facility.

(in thousands)

September 30, 2020

Cash paid for amounts included in the measurement of lease liabilities $ 3,586

Lease liabilities arising from obtaining right-of-use-assets $ 229

The Company's future minimum lease payments as of September 30, 2020 are as follows:

For the Fiscal Year Ending September 30, (in thousands)

Thereafter 14,684

Total future minimum lease payments 31,311

imputed interest ( 7,646 )

Present value of future minimum lease payments 23,665

current portion of operating lease liabilities ( 2,045 )

Long-term operating lease liabilities $ 21,620

Under ASC 840, the Company's future minimum lease payments for the prior fiscal year ended September 30, 2019 were as follows:

For the Fiscal Year Ending September 30, (in thousands)

Thereafter 16,945

Total future minimum lease payments $ 32,882

Supporting Financial Information

Accounts receivable

(in thousands)

September 30, September 30,

Ref 2020 2019

Billed receivables $ 24,598 $ 18,924

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Total accounts receivable 32,541 23,226

Allowance for doubtful accounts

Allowance for doubtful accounts (a) — —

Accounts receivable, net $ 32,541 $ 23,226

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(in thousands)

September 30,

September 30, September 30,

Prepaid insurance and benefits $ 665 $ 495

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(in thousands)

September 30,

September 30, September 30,

Ref 2020 2019

Furniture and equipment $ 958 $ 1,262

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Less accumulated depreciation and amortization ( 4,726 ) ( 2,542 )

Equipment and improvements, net

Equipment and improvements are stated at cost.

Maintenance and repair costs are expensed as incurred.

Equipment and improvements, net (a) $ 3,339 $ 5,343

Depreciation and amortization was $ 2.2 million and $ 1.2 million for the years ended September 30, 2020 and 2019, respectively.

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(in thousands)

September 30,

Intangible assets

September 30, September 30,

Ref 2020 2019

Intangible assets (a)

Customer contracts and related customer relationships $ 45,600 $ 45,600

Covenants not to compete 480 480

Trade name 2,109 2,109

Acquired intangibles - IBA acquisition (b) 16,223 —

Total intangible assets 64,412 48,189

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Covenants not to compete ( 212 ) ( 164 )

Trade name ( 438 ) ( 227 )

Total accumulated amortization ( 11,800 ) ( 6,981 )

Intangible assets, net $ 52,612 $ 41,208

Intangible assets are amortized on a straight-line basis over their estimated useful lives of 10 years.

Total amount of amortization expense for the year ended September 30, 2020 and 2019 was $ 4.8 million and $ 2.7 million, respectively.

The Company is currently valuing the acquired intangible assets from the IBA acquisition.

The balances provided are an estimate and subject to revision.

Please refer to Note 16 for more information.

Estimated amortization expense for future years:

(in thousands)

Fiscal 2021 $ 6,441

Fiscal 2022 6,441

Fiscal 2023 6,441

Fiscal 2024 6,441

Fiscal 2025 6,441

Thereafter 20,407

Total amortization expense $ 52,612

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Balance at September 30, 2018 $ 25,989

Increase from acquisition

Increase from S3 acquisition 26,769

Balance at September 30, 2019 52,758

Increase from acquisition

Preliminary increase from IBA acquisition (a) 14,386

Balance at September 30, 2020 $ 67,144

Refer to Note 15, Business Combinations for more information of the recent acquisition on June 7, 2019.

The Company is currently valuing the goodwill from the IBA acquisition.

The balance provided is an estimate and subject to revision.

Please refer to Note 16 for more information.

Accounts payable, accrued expenses, and other current liabilities

(in thousands)

September 30,

September 30, September 30,

Accounts payable $ 14,645 $ 10,054

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(in thousands)

September 30,

September 30, September 30,

Bank term loan $ 70,000 $ 56,000

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Net bank debt obligation 67,271 53,629

Less current portion of bank debt obligations

Less current portion of term loan debt obligations ( 6,727 ) —

Long-term portion of bank debt obligation $ 60,544 $ 53,629

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September 30,

Interest expense

Amortization of deferred financing costs

Other income (expense), net

Ref 2020 2019

Interest expense (a) $ ( 2,841 ) $ ( 1,512 )

Amortization of deferred financing costs (b) ( 721 ) ( 982 )

Other income (expense), net (c) 121 21

Interest expense, net $ ( 3,441 ) $ ( 2,473 )

Interest expense on borrowing

Amortization of expenses related to securing financing

Amortization of expenses related to term loan and revolving line of credit.

For 2019, amortization included write-off of remaining deferred financing costs related to prior loan agreement that was terminated early.

Gain on lease modification due to a lease amendment

Credit Facilities

A summary of our loan facilities and subordinated debt financing as of September 30, 2019 is as follows:

A summary of our loan facility as of September 30, 2020 is as follows:

($ in Millions)

As of September 30, 2020

Maturity Date

First National Bank of Pennsylvania

Secured term loan (a)

LIBOR* + 4.0%

First National Bank of Pennsylvania

Secured revolving line of credit (b)

LIBOR* + 4.0%

Lender Arrangement Loan Balance Interest Maturity Date

First National Bank of Pennsylvania Secured term loan (a) $ 70.0 LIBOR* + 3.5 %

First National Bank of Pennsylvania Secured revolving line of credit (b) $ — LIBOR* + 3.5 %

*LIBOR rate as of September 30, 2020 was 0.16 %.

As of September 30, 2020, our LIBOR rate is subject to a minimum floor of 0.5 %.

The floor affects interest payments for the periods after September 30, 2020

(a) Represents the principal amounts payable on our secured term loan.

The $ 70.0 million secured term loan 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 June 7, 2024 .

The Company made voluntary prepayments of term debt of $12.7 million in the year ending September 30, 2019, which satisfies mandatory principal amortization until March 31, 2022.

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.

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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 commencing with the quarter ending September 30, 2019, and for all subsequent periods, and (ii) a Funded Indebtedness to Adjusted EBITDA ratio not exceeding the ratio of 4.25 :1.0 to 3.25 :1.0 through maturity.

(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.

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We are in compliance with all loan covenants and restrictions.

We are required to pay quarterly amortization payments commencing in December 2020 through September 2025.

The annual amount of principal amortization is based on a percentage of the loan balance at September 30, 2020.

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 in 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.

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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.

On September 30, 2019, we executed a floating-to-fixed interest rate swap with First National Bank as counter party.

The notional amount in the floating-to-fixed interest rate swap is $36 million ;

the remaining outstanding balance of our term loan is subject to interest rate fluctuations.

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 is $ 36 million that matures in 2024.

The remaining outstanding balance of our term loan is subject to interest rate fluctuations and the minimum LIBOR floor.

On the notional amount, the Company pays a base fixed rate of 1.61 %, plus applicable credit spread.

As a result, for the year ended September 30, 2020, interest expense 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 did not access funds from the revolving credit facility at the closing, and such facility will be available to support future cash needs.

The Company accessed funds from the revolving credit facility during the year, but has no outstanding balance at September 30, 2020.

The Company's total borrowing availability, based on eligible accounts receivables at September 30, 2020, was $ 24.8 million.

We had unused borrowing capacity of $16.3 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.

The revolving line of credit has a maturity date of June 7, 2024 and is subject to loan covenants as described above.

The revolving line of credit has a maturity date of September 30, 2025 and is subject to loan covenants as described above.

The Company is fully compliant with those covenants.

Significant Accounting Policies

Use of Estimates

Significant estimates include valuation of goodwill and intangible assets, measurement of prepaid workers’ compensation, valuation allowances established against deferred tax assets, measurement of contingent liabilities, accounts payable, workers’ compensation claims, and accrued expenses and the valuation of derivative financial instruments associated with debt agreements.

In addition, the Company estimates overhead charges and allocates such charges throughout the year.

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.

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.

Fair Value of Financial Instruments

The carrying amounts of the Company's cash and cash equivalents, accounts receivable, unbilled receivables, contract assets, accrued expenses, and accounts payable approximate fair value due to the short-term nature of these instruments.

Goodwill and other intangible assets

We have used the acquisition method of accounting for the S3 transaction, whereby the assets acquired and liabilities assumed are recognized based upon their estimated fair values at the acquisition date.

The fair values of assets acquired and liabilities assumed are based on all available information.

Final values of purchase price allocation are shown under Note 15, Business Combinations .

The Company recognized amortization expense of approximately $1.0 million for the acquired identifiable intangible assets of S3.

The Company continues to review its goodwill and other intangible 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.

At September 30, 2019 , we performed a goodwill impairment evaluation on the year-end carrying value of approximately $52.8 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, 2019 , as no change in business conditions occurred which would have a material adverse effect on the valuation of goodwill.

Similarly, there were no impairments during the prior year ended September 30, 2018 .

Long Lived Assets

Equipment and improvements are stated at cost.

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 had no uncertain tax positions at either September 30, 2019 and 2018 .

We report interest and penalties as a component of income tax expense.

In the years ended September 30, 2019 and 2018 , 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 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 binomial option pricing model 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.

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

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 such as common stock warrants and stock options.

Diluted earnings per share is calculated using the treasury stock method.

Stock-based Compensation and Equity Grants

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Shares issued upon option exercise are newly issued shares.

As of September 30, 2019 , there were 1.5 million shares available for grant under the Company's 2016 Omnibus Equity Incentive Plan.

Stock-based compensation expense, shown in the table below, is recorded in general and administrative expenses included in our consolidated statement of operations:

As of September 30, 2020, there were 0.9 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:

(in thousands)

September 30,

Ref September 30,

DLH employees $ 563 $ 263

Non-employee directors

Non-employee directors (a) 347 527

Total stock option expense $ 910 $ 790

Represents equity grants issued, in accordance with DLH compensation policy for non-employee directors on November 9, 2018, an aggregate of 101,667 shares of Common Stock of the Company were issued to the non-employee members of the Company's Board of Directors, in accordance with the Company's compensation policy for non-employee directors.

During the fiscal year ended September 30, 2019 , the Company revised its Board compensation policy to provide that equity grants were earned ratably throughout the year rather than retrospectively in the quarter following the completion of the fiscal year and in December 2018 we issued 90,000 restricted stock units to the Company's non-employee directors, all of which vested as of September 30, 2019.

The shares of common stock underlying such restricted stock units were issued on November 7, 2019.

In the first quarter of fiscal 2019, we issued 90,000 restricted stock units to the Company's non-employee directors, all of which vested as of September 30, 2020.

The shares of common stock underlying such restricted stock units were issued on October 5, 2020.

Equity grants of restricted stock units, in accordance with DLH compensation policy for non-employee directors, were made in the first quarter of fiscal 2020 totaling 63,177 restricted stock units.

The restricted stock units were granted on October 1, 2020.

Unrecognized stock-based compensation expense

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September 30,

Unrecognized expense for DLH employees

Ref 2020 2019

Unrecognized expense for DLH employees (a) $ 2,633 $ 631

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.

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This amount will change based on the fair market value of the Company’s stock.

(in thousands)

Weighted Average (in thousands)

(in thousands) Average Remaining Aggregate

Number of Exercise Contractual Intrinsic

Ref Shares Price Term Value

Options outstanding, September 30, 2019 2,134 $ 4.36 5.9 $ 4,815

Exercised or canceled

Granted (a) 750 $ 6.74 — —

Exercised ( 395 ) $ 0.99 — —

Cancelled ( 360 ) $ 2.89 — —

Options outstanding, September 30, 2020 2,129 — 7.4 $ 6,583

The weighted average value for the shares granted in fiscal 2019 was estimated to be $3.82 per share.

Stock options shares outstanding, vested and unvested for the period ended:

Utilizing a volatility of 50 % along with assumptions of a 10-year term and the aforementioned 10-day stock

price threshold results in an indicated range of value of the Options granted during the year ended September 30, 2020,

as follows using the Monte Carlo and Black Scholes methods.

Vesting Expected

Strike Stock Threshold Term Calculated

Grant Date Ref Price Price Price (Years) Fair Value

July 13, 2020 (a) $ 8.02 $ 8.02 Service 10 $ 4.69

July 13, 2020 $ 8.02 $ 8.02 $ 12.00 10 $ 4.79

July 13, 2020 $ 8.02 $ 8.02 $ 14.00 10 $ 4.76

July 13, 2020 $ 8.02 $ 8.02 $ 16.00 10 $ 4.76

Results based on 100,000 simulations

Options granted vest after completion of a one-year service period.

Stock options shares outstanding, vested and unvested for the years ended:

(in thousands)

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September 30,

Vested and exercisable

Ref 2020 2019

Vested and exercisable (a) 1,213 1,300

Unvested (b) 916 834

Options outstanding 2,129 2,134

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Aggregate intrinsic value was approximately $ 6.1 million and $ 3.9 million at September 30, 2020 and 2019, respectively.

Weighted average contractual term remaining was 3.8 years years and 4.5 years at September 30, 2019 and 2018, respectively.

Weighted average contractual term remaining was 4.6 years and 3.8 years at September 30, 2020 and 2019, respectively.

Certain awards vest upon satisfaction of certain performance criteria.

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September 30,

Net income $ 7,114 $ 5,324

Denominator for basic net income per share - weighted-average outstanding shares 12,282 12,018

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Contractual Obligations as of September 30, 2020:

Payments Due By Period

Payments Due Per Fiscal Year

Contractual obligations

(Amounts in thousands)

(Amounts in thousands) Total 2021 2022 2023 2024 2025 Thereafter

Debt obligations $ 70,000 $ 7,000 $ 7,000 $ 8,750 $ 8,750 $ 38,500 $ —

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Related Party Transactions

The Company has determined that for the year ended September 30, 2019 and 2018 and through the filing date of this report, there were no significant related party transactions that have occurred which require disclosure through the date that these financial statements were issued.

The Company has determined that for the years ended September 30, 2020 and 2019 and through the filing date of this report, there were no significant related party transactions that have occurred which require disclosure through the date that these consolidated financial statements were issued.

The Company accounts for income taxes in accordance with the liability method.

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Presently, the Company has no deferred tax asset valuation allowances.

During the fiscal year ending September 30, 2018, the Company recognized a $3.4 million write-down of deferred tax assets from revaluation of our net operating loss carryforwards from the previously recognized federal income tax rate of 34% to the 21% rate in the 2017 Tax Act enacted in December 2017.

In addition to this discrete item the Company recognized $2.4 million of income tax expense associated with current operations resulting in total income tax expense of $5.8 million for the 2018 fiscal year.

The fiscal year 2018 effective tax rate, excluding the discrete item associated with the deferred tax asset write-down was 32.2% as compared to the prior year effective tax rate of 39.1% .

The effective tax rate for fiscal 2019 was 29% .

At September 30, 2020 and 2019, respectively, the Company had federal net operating losses of approximately $ 7.4 million and $ 18.9 million.

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The Company has no material state net operating losses carryforward.

A provision of the 2017 Tax Act repealed the alternative minimum tax (AMT).

Additionally, prior AMT paid is either creditable against regular tax liability or refundable.

For tax years beginning after 2017 and before 2022, 50 percent of AMT credits are refundable;

from 2022, the credits are fully refundable.

However, the Coronavirus Aid, Relief, and Economic Security (CARES) Act modifies the credit for prior-year minimum tax liability of corporations, including to accelerate the recovery of remaining minimum tax credits of a corporation for its 2019 taxable year from its 2021 taxable year and to permit a corporation to elect instead to recover 100 percent of any of its remaining minimum tax credits in its 2018 taxable year.

The Company has AMT credits of $ 366 thousand as of the year ended September 30, 2020, of which 100 percent has been established as an income tax receivable in current assets.

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September 30,

(amounts in thousands)

(amounts in thousands) Ref 2020 2019

Federal statutory rate $ 2,104 $ 1,574

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Deferred tax estimate adjustment 88 99

Discrete item

Write-down of deferred tax assets due to change in federal income tax rate from the 2017 Tax Act.

Total $ 2,906 $ 2,171

We file income tax returns in the U.S.

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2020 Quarters

Ref First Second Third Fourth

Revenue $ 52,238 $ 54,798 $ 51,459 $ 50,691

Income from operations 3,126 3,837 3,800 2,698

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Income tax expense 634 855 863 554

Net income $ 1,551 $ 2,076 $ 2,124 $ 1,363

Earnings per share:

Basic $ 0.13 $ 0.17 $ 0.17 $ 0.11

Diluted $ 0.12 $ 0.16 $ 0.16 $ 0.10

2019 Quarters

Ref First Second Third Fourth

Revenue (a) $ 33,752 $ 33,756 $ 38,700 $ 54,183

Income from operations 2,557 2,327 1,690 3,394

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Earnings (loss) per share:

_______________________________________________________________________________

The third and fourth quarters of fiscal 2019 include the results of operations of S3.

Refer to Note 12, Income Taxes , for a detailed explanation of the $3.4 million income tax discrete charge in fiscal year 2018, related to the 2017 Tax Cut and Jobs Act.

Basic $ 0.14 $ 0.11 $ 0.07 $ 0.13

Diluted $ 0.13 $ 0.10 $ 0.06 $ 0.12

The inclusion of S3 for Fiscal 2019 impacts part of quarter three and all of quarter four versus the full year for Fiscal 2020.

Employee Benefit Plans

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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 $577 thousand in fiscal 2019 and $222 thousand in fiscal year 2018 .

The Company recorded related expense of $ 1.2 million in fiscal 2020 and $ 577 thousand in fiscal year 2019.

The increase was primarily due to headcount growth from the S3 acquisition.

A participant is always fully vested in his or her elective contributions and vests in Company matching contributions over a four year period.

Business Combinations:

Acquisition of Social and Scientific Systems, Inc.

On June 7, 2019, the Company acquired 100% of the equity interests of S3 for a net purchase price of $67.1 million , or $70.1 million inclusive of cash acquired of $3.0 million .

Acquisition of Irving Burton Associates, LLC

On September 30, 2020, the Company acquired 100 % of the equity interests of IBA for a net preliminary purchase price of $ 32.7 million, inclusive of the preliminary working capital adjustment.

The acquisition was financed through a combination of:

borrowings of $70 million under the Company’s new senior credit facility

• borrowings of $ 33 million under the Company’s amended senior credit facility

• cash on hand to pay transaction expenses and financings costs of $ 1.8 million

The acquisition of S3 is consistent with the Company’s growth strategy, as it provided contract diversification, addition of key capabilities and increased presence in the public health market.

The acquisition of IBA is consistent with the Company’s growth strategy, as it provided contract diversification, addition of key capabilities and increased presence in the military health market.

The estimated goodwill derived from this transaction is primarily due to these attributes.

We have used the acquisition method of accounting for this transaction, whereby the assets acquired and liabilities assumed are recognized based upon their estimated fair values at the acquisition date.

The preliminary base purchase price for S3 was $70 million adjusted to reflect acquired cash, assumed liabilities and preliminary net working capital adjustments.

The final purchase price of $70.1 million was determined based on S3’s final debt, transaction costs, net working capital, and other adjustments, as determined in accordance with the Purchase Agreement.

The Company has remitted all necessary payments to the seller as a result of purchase price adjustments.

Subject to certain limitations and conditions, the Company will be indemnified by the seller for damages resulting from breaches or inaccuracies of the representations, warranties, and covenants of the seller and S3 as set forth in the Purchase Agreement.

The preliminary base purchase price for IBA was $ 32 million adjusted to reflect acquired cash, assumed liabilities and preliminary net working capital adjustments.

The Purchase Agreement further provides that escrow funds of an aggregate amount of approximately $ 0.4 million were established at closing.

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In accordance with ASU 2017-01, which was previously adopted, the Company is accounting for this transaction as an acquisition of a business.

We have completed the process of allocating the acquisition price to the fair value of the assets and liabilities of S3 at the acquisition date.

The purchase price and its allocation are shown below.

Based on the unaudited financial statements of S3 on June 7, 2019, we accounted for the total acquisition consideration and allocation of fair value to the related assets and liabilities as follows:

We have not completed the process of allocating the acquisition price to the fair value of the assets and liabilities of IBA at the acquisition date.

We are awaiting the fair values of the intangibles assets from the third party valuation firm.

The preliminary purchase price and its allocation are shown below.

Based on the unaudited financial statements of IBA on September 30, 2020, we accounted for the total acquisition consideration and allocation of fair value to the related assets and liabilities on a preliminary basis as follows:

(Amounts in thousands)

Final purchase price for S3

Preliminary purchase price for IBA $ 32,706

Net assets acquired

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Payroll liabilities ( 1,269 )

Long term liabilities

Other current liabilities ( 177 )

Net working capital 1,855

Equipment and improvements, net 28

Other long-term assets/liabilities 214

Net identifiable assets acquired 2,097

Customer contracts and related customer relationships

Intangible assets acquired

Goodwill and other identifiable intangible assets 30,609

Net assets acquired $ 32,706

During the year ended September 30, 2019, S3 contributed approximately $24.3 million of revenue and $1.3 million of income from operations.

All operating units are aggregated into a single reportable segment.

The acquisition of S3 did not create an additional reportable segment as all operations report to a single Chief Operating Decision Maker (CODM), serve a similar customer base, and provide similar services within a common regulatory environment.

The acquisition of IBA did not create an additional reportable segment as all operations report to a single Chief Operating Decision Maker (CODM), serve a similar customer base, and provide similar services within a common regulatory environment.

The goodwill represents intellectual capital and the acquired workforce, of which both do not qualify as a separate intangible asset.

The tax deductible goodwill is $26.8 million .

The following table presents certain results for the years ended September 30, 2019 and 2018 as though the acquisition of S3 had occurred on October 1, 2017.

The unaudited pro forma information is presented for informational purposes only and is not

necessarily indicative of our results if the acquisition had taken place on that date.

The pro forma information was prepared by combining our reported historical results with the historical results of S3 for the pre-acquisition periods.

The tax deductible goodwill is in the process of being calculated.

The following table presents certain results for the years ended September 30, 2019 as though the acquisition of IBA had occurred on October 1, 2018.

The unaudited pro forma information is presented for informational purposes only and is not necessarily indicative of our results if the acquisition had taken place on that date.

The pro forma information was prepared by combining our reported historical results with the historical results of IBA for the pre-acquisition periods.

In addition, the reported historical amounts were adjusted for the following items, net of associated tax effects:

• The impact of acquisition financing.

The removal of certain S3 operations due to completed and nonrecurring contracts.

The removal of the legacy S3 Employee Stock Ownership Plan ("ESOP") expenses.

The removal of S3's historical goodwill amortization.

The impact of recording S3's intangible asset amortization.

The removal of S3's historical debt-related interest expense.

• The removal of certain IBA operations due to completed and nonrecurring contracts.

• The impact of recording IBA's intangible asset amortization.

• The impact of interest expense for the new credit facility.

The removal of legacy S3 director's fees.

The removal of transaction costs for the acquisition incurred by S3.

• The removal of transaction costs incurred by IBA for the acquisition.

(in thousands)

September 30,

Year ended Year ended

September 30, September 30,

Pro forma results 2020 2019

Revenue $ 234,443 $ 228,117

Net income (loss) 7,170 2,464

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Diluted earnings per share (loss) $ 0.55 $ 0.19

Fiscal 2018 results include the impact of writing down the deferred tax asset by $3.4 million .

The write down

is further described in Note 12 - Income Taxes .

Subsequent Events

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 9A. Controls and Procedures