What changed in this filing

/stocks — the workspaceLOADING

Item 9A. Controls and Procedures

2021-12-06 compared with 2020-12-07 · 192 added, 262 removed, 677 unchanged (40% of the section changed)

6 unchanged sentences

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.

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.

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’s Report on Internal Control over Financial Reporting

17 unchanged sentences

OTHER INFORMATION

As previously reported, certain entities affiliated with Wynnefield Capital, Inc., the Company’s largest stockholder, owned warrants to purchase 53,619 shares of common stock exercisable at a price of $3.73 until November 2021.

In October 2021, the holders of the warrants exercised such warrants in full for 53,619 shares of common stock.

The shares of common stock issued upon exercise of the warrants were issued in reliance on the exemption from registration provided by Section 4(a)(2) of the Securities Act of 1933, as amended.

The Information required by Items 10, 11, 12, 13 and 14 of Part III of Form 10-K has been omitted in reliance on General Instruction G(3) and is incorporated herein by reference to our proxy statement to be filed with the SEC pursuant to Regulation 14A promulgated under the Securities Exchange Act of 1934, as amended, as set forth below:

34 unchanged sentences

Form of Warrant issued to Subordinated Lenders (filed as Exhibit 4.4 to Current Report on Form 8-K filed May 6, 2016).

* Description of Securities.

* Description of Securities (filed as Exhibit 4.3 to Annual Report on Form 10-K filed on December 7, 2020).

# Form of Stock Option Award under 2006 Long Term Incentive Plan (filed as Exhibit 10.6 to Quarterly Report on Form 10-Q filed on February 16, 2010).

4 unchanged sentences

# Amendment to Employment Agreement with Kevin Wilson (filed as Exhibit 10.1 to Current Report on Form 8-K filed October 2, 2015).

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

# 2016 Omnibus Equity Incentive Plan, as amended (incorporated by reference to Appendix A to the Company’s definitive Proxy Statement dated January 28, 2021).

# 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).

# 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).

4 unchanged sentences

Parker dated October 11, 2019 (filed as Exhibit 10.1 to Current Report on 8-K filed on October 17, 2019).

# Employment Offer Letter with Kevin Beverly dated October 18, 2019 (filed as Exhibit 10.1 to Current Report on 8-K filed on October 22, 2019).

# Change in Control, Severance and Covenant Agreement with Kevin Beverly dated October 18, 2019 (filed as Exhibit 10.2 to Current Report on 8-K filed on October 22, 2019).

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

7 unchanged sentences

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)

# Form of Performance Restricted Stock Units granted December 9, 2020 granted under the 2016 Omnibus Equity Incentive Plan (filed as Exhibit 10.1 to Quarterly Report on Form 10-Q for the fiscal quarter ended December 31, 2020, filed February 2, 2021).

# Employment Offer Letter between the Company and G.

Maliek Ferebee

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

Maliek Ferebee

* Subsidiaries of Registrants.

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Filed electronically herewith.

104.0 Cover Page Interactive Data File.

(formatted as Inline XBRL tags and contained in Exhibit 101)

FORM 10-K SUMMARY

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WASSERMAN Chairman of the Board December 6, 2021

/s/ AUSTIN J.

YERKS III Director December 7, 2020

ALLEN Director December 6, 2021

/s/ MARTIN J.

DELANEY Director December 6, 2021

/s/ ELDER GRANGER Director December 6, 2021

2 unchanged sentences

Frances Murphy

ALLEN Director December 7, 2020

/s/ MARTIN J.

DELANEY Director December 7, 2020

/s/ AUSTIN J.

YERKS III Director December 6, 2021

/s/ STEPHEN J.

17 unchanged sentences

We have audited the accompanying consolidated balance sheets of DLH Holdings Corp.

and Subsidiaries (the “Company”) as of September 30, 2020 and 2019, the related consolidated statements of operations, cash flows, and shareholders’ equity, for each of the two years in the period ended September 30, 2020, and the related notes (collectively referred to as the "consolidated financial statements").

In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company as of September 30, 2020 and 2019, and the consolidated results of its operations and its cash flows for each of the two years in the period ended September 30, 2020, in conformity with accounting principles generally accepted in the United States of America.

and Subsidiaries (the “Company”) as of September 30, 2021 and 2020, the related consolidated statements of operations, cash flows, and changes in shareholders’ equity, for each of the two years in the period ended September 30, 2021, and the related notes (collectively referred to as the "consolidated financial statements").

In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company as of September 30, 2021 and 2020, and the consolidated results of its operations and its cash flows for each of the two years in the period ended September 30, 2021, in conformity with accounting principles generally accepted in the United States.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company's management.

Our responsibility is to express an opinion on the Company's consolidated financial statements based on our audits.

These financial statements are the responsibility of the Company's management.

Our responsibility is to express an opinion on the Company's financial statements based on our audits.

We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S.

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We conducted our audits in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.

The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.

As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control over financial reporting.

As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.

Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements.

Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.

Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements.

We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that:

(1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Revenue Recognition

Critical Audit Matter Description:

As described in Note 5 to the consolidated financial statements, the Company generally recognizes revenue over time as services are provided, as most of its contracts involve a continuous transfer of control to the customer.

This continuous transfer of control to the customer is supported by clauses in the contract that allow the customer to unilaterally terminate the contract for convenience, pay the Company 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, the Company satisfies performance obligations as services are rendered.

We identified the Company’s revenue recognition as a critical audit matter because of certain significant assumptions management makes when

estimating progress over time and subjective auditor judgement on completion of the contract performance obligations.

Auditing these assumptions involved a high degree of judgement and subjectivity as changes in these assumptions could have a significant impact on the amount of revenue recognized.

The following are the primary procedures we performed to address this critical audit matter.

To test the recognition of revenue, our audit procedures included among others, testing the internal controls over the proper accumulation of labor costs by contract as well as the approval of monthly invoices for accuracy and completeness, reviewing key provisions and deliverables within customer contracts, and comparing actual results to prior management estimates.

We evaluated management’s application of their revenue recognition policies in the determination of revenue recognition conclusions.

We selected a sample of revenue transactions, and performed the following procedures:

we reviewed the signed contract;

we reviewed the recorded timesheet data related to the selected invoices;

and we reviewed the signed contract related to the selected invoice, noting each task has an agreed upon unit price per contract and the unit price matched what was shown on the invoice.

We also tested for proper revenue recognition cut off and assessed the adequacy of the reserve for subsequent credits granted.

Workers' Compensation Claims Liabilities

Critical Audit Matter Description:

The Company uses a combination of insured and self-insurance programs to cover workers’ compensation claims.

Workers’ compensation claims liabilities represent management’s estimate of future amounts necessary to pay claims and related expenses with respect to workplace injuries that have occurred as of a given reporting date.

The estimated liability of workers’ compensation claims is based on an evaluation of information provided by the Company’s third-party administrators for workers’ compensation claims, coupled with an actuarial estimate of future adverse loss development with respect to reported claims and incurred but not reported claims (together, IBNR).

The process of arriving at an estimate of unpaid claims and claims adjustment expense involves a high degree of judgment and is affected by both internal and external events, including the Company's claims experience.

The Company’s estimates are based on informed judgment, derived from individual experience and expertise applied to multiple sets of data and analyses.

As noted in Note 7 to the consolidated financial statements, workers’ compensation claims liabilities as of September 30, 2021 were approximately $7.0 million.

Given the high degree of judgment required to estimate the value of the workers’ compensation claims liabilities, performing audit procedures to evaluate the workers’ compensation claims liabilities recorded as of September 30, 2021 required an increased extent of effort.

As a result, we identified the Company’s workers’ compensation claims liabilities as a critical audit matter because of certain significant assumptions management makes when estimating future incurred but not reported claims using both internal and external events to drive the accruals.

Auditing these assumptions involved a high degree of judgement and subjectivity as changes in these assumptions could have a significant impact on the accruals recorded to estimate unpaid claims and the related expenses.

The following are the primary procedures we performed to address this critical audit matter.

We assessed whether there were any changes to the Company’s estimation process during the current year.

We assessed whether any changes in the business or environment, including any changes to claims handling practices, were appropriately considered in the reserve setting process as well.

We tested the underlying data that served as inputs into the Company’s analysis, including historical claims from third party and claims paid, to evaluate whether inputs and assumptions were reasonable.

We compared management’s prior-year assumptions of expected claims development and ultimate loss to actuals incurred during the current year to identify and evaluate potential management bias in the determination of the workers’ compensation claims liabilities.

We compared the estimated ultimate loss per each insurance year to prior years estimated ultimate loss by year to reassess the Company’s estimation process.

We tested the mathematical accuracy of the accrual as of September 30, 2021.

We reviewed supporting vendor documentation related to the current year’s base premiums.

We also analyzed the qualifications of the Company’s third-party administrators for their expertise in this area.

/s/ WithumSmith+Brown, PC

11 unchanged sentences

General and administrative costs 25,054 24,195

Acquisition costs 930 1,391

Corporate development costs 1,088 930

Depreciation and amortization 8,115 7,003

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Equipment and improvements, net 1,912 3,339

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

Operating lease right-of-use-assets 19,919 22,427

Deferred taxes, net — 37

8 unchanged sentences

Accrued payroll 9,125 10,611

Deferred revenue 22,273 —

Accounts payable, accrued expenses, and other current liabilities 32,717 28,578

1 unchanged sentence

Long-term liabilities:

Deferred taxes, net 1,176 —

Operating lease liabilities - long-term 19,374 21,620

Debt obligations - long-term, net of deferred financing costs 44,636 60,544

Other long-term liabilities — 573

Total long-term liabilities 65,186 82,164

17 unchanged sentences

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

Depreciation and amortization expense 7,003 3,956

Amortization of deferred financing costs 721 982

Depreciation and amortization 8,115 7,003

Amortization of deferred financing costs charged to interest expense 792 721

Stock based compensation expense 1,660 910

Deferred taxes, net 1,213 2,308

Non-cash gain from lease modification ( 121 ) —

Gain from lease modification — ( 121 )

Changes in operating assets and liabilities

2 unchanged sentences

Accrued payroll ( 1,486 ) 489

Deferred revenue 22,273 —

Accounts payable, accrued expenses, and other current liabilities 4,139 7,188

Other long-term assets/liabilities 839 ( 805 )

Other long-term assets and liabilities 486 839

Net cash provided by operating activities 45,665 19,451

4 unchanged sentences

Financing activities

Borrowing on senior debt 33,000 70,000

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

Proceeds from debt obligations — 33,000

Repayment of debt obligations ( 23,250 ) ( 19,000 )

Repurchase of common stock — ( 211 )

1 unchanged sentence

Proceeds from issuance of common stock upon exercise of options 366 55

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

Net cash (used in)/provided by financing activities ( 22,927 ) 12,946

Net change in cash and cash equivalents 22,694 ( 433 )

4 unchanged sentences

Cash paid during the year for income taxes $ 936 $ 917

Supplemental disclosures of non-cash activity

Non-cash cancellation of common stock $ 68 $ 211

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

11 unchanged sentences

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

Cumulative-effect adjustment for adoption of ASC 842

— — — — — ( 2 ) ( 2 )

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

Expense related to director restricted stock units 141 — — — 467 — 467

Expense related to employee stock options — — — — 1,193 — 1,193

12 unchanged sentences

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

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

Cumulative-effect adjustment for adoption of ASC 842

— — — — — ( 2 ) ( 2 )

Expense related to director restricted stock units 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

21 unchanged sentences

A major customer is defined as a customer from whom the Company derives at least 10% of its revenues.

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.

Our three largest customers are the Department of Veteran Affairs ("VA"), the Department of Health and Human Services ("HHS"), and the Department of Defense ("DoD").

The following table summarizes the revenues by customer for the years ended September 30, 2021 and 2020, respectively:

September 30,

(Amounts in thousands) Revenue Percent of total revenue Revenue Percent of total revenue

Department of Veterans Affairs $ 110,078 45 % $ 100,204 48 %

Department of Health and Human Services 91,543 37 % 95,026 45 %

Department of Defense 30,930 13 % 1,303 1 %

Customers with less than 10% share of total revenue 13,543 5 % 12,652 6 %

Total revenue $ 246,094 100 % $ 209,185 100 %

New Accounting Pronouncements

In February 2016, the FASB issued new accounting guidance included in Accounting Standard Codification ("ASC") 842 related to leases.

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.

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.

Instead, if the carrying amount of a reporting unit exceeds its fair value, an impairment loss shall be recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit.

ASU 2017-04 also clarifies that an entity should consider income tax effects from any tax-deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable.

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

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.

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.

2 unchanged sentences

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.

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 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.

In fiscal year 2021, 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.

17 unchanged sentences

Long-lived Assets

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

Our long-lived assets include equipment and improvements, intangible assets, right-of-use 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.

34 unchanged sentences

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 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.

1 unchanged sentence

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.

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

As of September 30, 2021, the Company did no t hold any treasury stock.

19 unchanged sentences

For services contracts, we satisfy our performance obligations as services are rendered.

We use a cost-based input method to measure progress.

We use cost-based input and time-based output methods to measure progress.

Contract costs include labor, material and allocable indirect expenses.

9 unchanged sentences

Revenue for cost-reimbursable contracts is recorded as reimbursable costs are incurred, including an estimated share of the applicable contractual fees earned.

For firm-fixed-price contracts, the consideration received for our performance is set at a predetermined price.

Revenue for our firm-fixed-price contracts is recognized over time using a straight-line measure of progress or using the percentage-of-completion method whereby progress toward completion is based on a comparison of actual costs incurred to total estimated costs to be incurred over the contract term.

Contract costs are expensed as incurred.

2 unchanged sentences

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.

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.

Contract liabilities - Amounts are a result of billings in excess of costs incurred.

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

(in thousands)

September 30, September 30, September 30,

2020 2019 2018

The following table summarizes the contract balances recognized within the Company's consolidated balance sheets (in thousands):

September 30, September 30,

Ref 2021 2020

Contract assets $ 7,307 $ 7,943

Contract liabilities $ 200 $ 92 $ —

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.

Contract liabilities (a) $ 22,473 $ 200

The increase in contract liabilities is primarily due to contract start up funding provided under a contract awarded at the end of the fiscal year.

Disaggregation of revenue from contracts with customers

2 unchanged sentences

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

Revenue by customer:

(in thousands)

Revenue by customer (in thousands):

September 30,

1 unchanged sentence

Department of Health and Human Services 91,543 95,026

Department of Defense 30,930 1,303

Other 13,543 12,652

Total Revenue $ 246,094 $ 209,185

Revenue by contract type:

(in thousands)

Revenue by contract type (in thousands):

September 30,

3 unchanged sentences

Total Revenue $ 246,094 $ 209,185

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

(in thousands)

Revenue by whether the Company acts as a prime contractor or a subcontractor (in thousands):

September 30,

11 unchanged sentences

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 .

As of September 30, 2021, operating leases for facilities and equipment have remaining lease terms of 1.2 to 9.5 years.

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

(in thousands)

September 30, 2020

The following table summarizes lease balances on our consolidated balance sheet at September 30, 2021 and 2020 (in thousands):

September 30, September 30,

Operating lease right-of-use assets $ 19,919 $ 22,427

4 unchanged sentences

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)

The sublease term is 5 years and ends June 2025.

The sublease includes two additional 1 year term extension options.

For the years ended September 30, 2021 and 2020, total lease costs for our operating leases are as follows (in thousands):

September 30,

1 unchanged sentence

Short-term 103 155

Variable 81 63

Sublease income ( 302 ) ( 271 )

Total lease costs $ 3,535 $ 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)

At September 30, 2021, the weighted-average remaining lease term and weighted-average discount rate are 8.3 years and 6.0 %, respectively.

The calculation of the weighted-average discount rate was determined based on borrowing terms from our senior credit facility.

Other information related to our leases is as follows (in thousands):

September 30,

Cash paid for amounts included in the measurement of lease liabilities $ 3,306 $ 3,586

New lease liabilities, net of new right-of-use-assets $ — $ 229

Lease liabilities arising from obtaining right-of-use-assets $ — $ 7,822

7 unchanged sentences

Long-term operating lease liabilities $ 19,374

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

34 unchanged sentences

Ref 2021 2020

Intangible assets (a)

Intangible assets

Customer contracts and related customer relationships $ 62,281 $ 45,600

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Trade name 3,051 2,109

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

Acquired intangibles - IBA acquisition — 16,223

Total intangible assets 65,854 64,412

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Total accumulated amortization ( 18,385 ) ( 11,800 )

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

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.

Intangible assets, net (a) $ 47,469 $ 52,612

Total amount of amortization expense for the years ended September 30, 2021 and 2020 was $ 6.6 million and $ 4.8 million, respectively.

Estimated amortization expense for future years:

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Balance at September 30, 2019 $ 52,758

Increase from S3 acquisition 26,769

Preliminary increase from IBA acquisition 14,386

Balance at September 30, 2020 67,144

Preliminary increase from IBA acquisition (a) 14,386

Total adjustments from IBA acquisition (a) ( 1,501 )

Balance at September 30, 2021 $ 65,643

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.

The adjustments were determined based on third party valuations.

Accounts payable, accrued expenses, and other current liabilities

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Bank term loan $ 46,750 $ 70,000

Less unamortized deferred financing cost ( 2,729 ) ( 2,371 )

Net bank debt obligation 67,271 53,629

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

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

unamortized deferred financing costs ( 2,114 ) ( 2,729 )

Net bank debt obligations 44,636 67,271

current portion of bank debt obligations, net of deferred financing costs — ( 6,727 )

Long-term portion of bank debt obligations, net of deferred financing costs $ 44,636 $ 60,544

Interest expense

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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

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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

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

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

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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 annual amortization amounts are $ 7.0 million each for fiscal years 2021 and 2022 and $ 8.75 million each for fiscal years 2023 - 2025.

The quarterly payments are in equal installments.

During the year ended September 30, 2021, the Company made voluntary prepayments of $ 16.3 million, bringing the total amount paid on the secured loan term loan to $ 23.3 million.

As of September 30, 2021, we have satisfied mandatory principal amortization until December 31, 2023.

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.

Due to the voluntary prepayment of term debt, there was no excess cash flow payment required.

For additional information regarding the schedule of future payment obligations, please refer to Note 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 notional amount in the floating-to-fixed interest rate swap on September 30, 2021 is $ 22.8 million and matures in 2024.

The notional amount was $ 28.8 million at the end prior fiscal year.

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.

As a result, for the year ended September 30, 2021, interest expense increased by approximately $ 0.4 million.

(b) The secured revolving line of credit has a ceiling of up to $ 25.0 million.

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Ref September 30,

DLH employees $ 563 $ 263

Non-employee directors (a) 347 527

DLH employees (a) $ 1,193 $ 563

Non-employee directors (b) 467 347

Total stock option expense $ 1,660 $ 910

Included in this amount are equity grants of restricted stock units to Named Executive Officers ("NEO"), which were issued in accordance with the DLH long-term incentive compensation policy in this fiscal year, and stock option grants to NEO and non-NEO company employees.

The restricted stock units totaled 147,431 restricted stock units issued and outstanding at September 30, 2021.

In the first quarter of fiscal 2021, we issued 63,177 restricted stock units to the Company's non-employee directors, all of which vested as of September 30, 2021.

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.

The shares of common stock underlying such restricted stock units were issued on September 30, 2021.

Unrecognized stock-based compensation expense

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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.

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 4.70 years.

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price threshold results in an indicated range of value of the Options granted during the year ended September 30, 2021,

as follows using the Monte Carlo and Black Scholes methods.

as follows using the Monte Carlo method.

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

Grant Date Price Price Price (Years) Fair Value

December 15, 2020 $ 10.05 $ 10.05 $ 13.00 10 $ 5.83

July 30, 2021 $ 10.75 $ 10.75 $ 14.00 10 $ 5.83

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)

Stock options shares outstanding, vested and unvested for the years ended September 30, 2021 and 2020 (in thousands):

Number of Shares

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Weighted average exercise price of vested and exercisable shares was $ 3.91 and $ 2.25 at September 30, 2021 and 2020, respectively.

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

Aggregate intrinsic value was approximately $ 13.9 and $ 6.1 million at September 30, 2021 and 2020, respectively.

Weighted average contractual term remaining was 6.0 years and 4.6 years at September 30, 2021 and 2020, respectively.

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Commitments and Contingencies

Contractual Obligations as of September 30, 2020:

Contractual Obligations as of September 30, 2021 (in thousands):

Payments Due Per Fiscal Year

Contractual obligations

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

Total 2022 2023 2024 2025 2026 Thereafter

Debt obligations $ 46,750 $ — $ — $ 8,250 $ 38,500 $ — $ —

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The Company has determined that for the years ended September 30, 2021 and 2020 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.

Under this method, 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 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 will also set up a valuation allowance, reducing the carrying value of deferred tax assets if it is more likely than not that some or all of the deferred tax asset will not be realized, based on estimated future taxable income.

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

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

The Company utilized approximately $ 11.5 million of federal net operating losses to offset taxes otherwise currently due in 2020.

The federal NOLs begin to expire in 2030 and continue to expire through 2033.

The Company has no material state net operating losses carryforward.

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.

An analysis of the Company's deferred tax assets and liabilities is as follows:

September 30,

(amounts in thousands) 2020 2019

Deferred income tax assets:

Net operating loss carry forwards $ 1,554 $ 3,926

AMT credit carryforward — 183

Stock based compensation 140 140

Accrued expenses 1,698 1,666

Other items, net 258 45

Total deferred tax asset 3,650 5,960

Deferred tax liability:

Equipment and intangible assets ( 3,613 ) ( 3,615 )

Net deferred tax asset $ 37 $ 2,345

The significant components of income tax expense for income taxes from continuing operations are summarized as follows:

The significant components of income tax expense for income taxes from continuing operations are summarized as follows (in thousands):

September 30,

(amounts in thousands) 2020 2019

Current expense $ 2,081 $ 598

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Total expense $ 3,294 $ 2,906

The following table indicates the significant differences between our income taxes at the federal statutory rate and the Company's effective tax rate for continuing operations:

The following table indicates the significant differences between our income taxes at the federal statutory rate and the Company's effective tax rate for continuing operations (in thousands):

September 30,

(amounts in thousands) Ref 2020 2019

Federal statutory rate $ 2,822 $ 2,104

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Total $ 3,294 $ 2,906

We file income tax returns in the U.S.

federal jurisdiction and in various state jurisdictions.

We are no longer subject to income tax examinations for years before 2015.

An analysis of the Company's deferred tax assets and liabilities is as follows (in thousands):

September 30,

Deferred income tax assets:

Net operating loss carry forwards, net $ 29 $ 1,554

Stock based compensation 508 140

Accrued expenses 1,944 1,698

Other items, net — 258

Total deferred tax asset 2,481 3,650

Deferred tax liability:

Equipment and intangible assets ( 3,507 ) ( 3,613 )

Right of use liability ( 150 ) —

Total deferred tax liability ( 3,657 ) ( 3,613 )

Net deferred tax (liability)/asset $ ( 1,176 ) $ 37

Quarterly Financial Data (Unaudited)

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Ref First Second Third Fourth

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

Revenue (a) $ 57,852 $ 61,506 $ 61,555 $ 65,182

Income from operations 3,635 4,620 4,939 4,030

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2020 Quarters

Ref First Second Third Fourth

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

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 (loss) $ 1,690 $ 1,265 $ 803 $ 1,565

Earnings (loss) per share:

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

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

Given its closing on the final day of fiscal year 2020, IBA has no impact to fiscal 2020 quarterly results and is fully included in each of the quarters of fiscal 2021.

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 $ 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 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 $ 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 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 IBA was $ 32 million adjusted to reflect acquired cash, assumed liabilities and preliminary net working capital 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 IBA as set forth in the Purchase Agreement.

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

The Company does not expect to draw on these funds as both the buyer and seller have agreed on the final purchase price.

A representations and warranties insurance policy has been purchased by the Company in connection with the Purchase Agreement, under which the Company may seek recourse for breaches of the seller’s representations and warranties to supplement the indemnity escrow.

The representations and warranties insurance policy is subject to certain customary exclusions and a deductible.

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 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)

Preliminary purchase price for IBA $ 32,706

Net assets acquired

Cash and cash equivalents $ 28

Accounts receivable 3,907

Other current assets 124

Total current assets 4,059

Accounts payable and accrued expenses ( 758 )

Payroll liabilities ( 1,269 )

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

Goodwill and other identifiable intangible assets 30,609

Net assets acquired $ 32,706

All operating units are aggregated into a single reportable segment.

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 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 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 transaction costs incurred by IBA for the acquisition.

(in thousands)

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

Number of shares outstanding - basic 12,282 12,018

Number of shares outstanding - diluted 13,105 13,041

Basic earnings per share (loss) $ 0.58 $ 0.21

Diluted earnings per share (loss) $ 0.55 $ 0.19

The Company recorded related expense of $ 1.5 million in fiscal 2021 and $ 1.2 million in fiscal year 2020.

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

Participants are always fully vested in their elective contributions and vests in Company matching contributions over a four year period.

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