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Item 8. Financial Statements and Supplementary Data

2023-12-06 compared with 2022-12-05 · 271 added, 192 removed, 464 unchanged (50% of the section changed)

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To the Board of Directors and Shareholders of DLH Holdings Corp.

Opinion on the Financial Statements and Internal Control Over Financial Reporting

Opinion on the Consolidated Financial Statements and Internal Control Over Financial Reporting

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

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We also have audited the Company’s internal control over financial reporting as of September 30, 2023, based on the criteria established in 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of September 30, 2022 and 2021, and the results of its operations and its cash flows for each of the years in the two-year period ended September 30, 2022, in conformity with accounting principles generally accepted in the United States of America.

Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of September 30, 2022, based on criteria established in Internal Control—Integrated Framework (2013) issued by the COSO.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company and its subsidiaries as of September 30, 2023 and 2022, and the results of their operations and their cash flows for each of the years in the two-year period ended September 30, 2023, in conformity with accounting principles generally accepted in the United States of America.

Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of September 30, 2023, based on criteria established in 2013 Internal Control—Integrated Framework issued by COSO.

Basis for Opinion

The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying management’s report on internal control over financial reporting.

Our responsibility is to express an opinion on the Company’s financial statements and an opinion on the Company’s internal control over financial reporting based on our audits.

The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying management’s report on internal control over financial reporting.

Our responsibility is to express an opinion on the Company’s consolidated financial statements and an opinion on the Company’s internal control over financial reporting 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 audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

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

Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that responds 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 audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk.

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A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.

An entity’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the entity;

(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of the entity are being made only in accordance with authorizations of management and directors of the entity;

and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the entity’s assets that could have a material effect on the financial statements.

A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;

(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company;

and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.

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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 4 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 subjective auditor judgment on the assessment of completion of the contract performance obligations in the contracts that have a continuous transfer of control.

Auditing these assumptions involved a degree of judgment and subjectivity as changes in these assumptions could have an 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 and weekly invoices for accuracy and completeness and reviewing key provisions and deliverables within customer contracts.

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, which corroborated management's assessment towards the completion of the performance obligation;

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.

Workers' Compensation Claims Liabilities

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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.

Workers’ compensation claims liability represents management’s estimate of future amounts necessary to pay claims and related expenses related to workplace injuries that have occurred as of the balance sheet date.

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

The process of arriving at an estimate of unpaid claims and estimated future losses 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.

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, 2022 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.

As a result, we identified the Company’s workers’ compensation claims liability 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 obtained an understanding, evaluated the design and tested the operating effectiveness of the controls over the Company’s accounting for workers’ compensation under accounting principles generally accepted in the United States of America.

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

We compared prior years' estimated losses to the subsequent actual losses by insurance year to evaluate the Company's estimation process.

We tested the mathematical accuracy of the accrual as of September 30, 2023.

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.

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

Business Combination

Critical Audit Matter Description

As disclosed in Note 4 to the consolidated financial statements, effective December 8, 2022, the Company acquired the business operations of Grove Resource Solutions Inc.

The Company applied the acquisition method of accounting for the GRSi business combination.

This methodology requires the Company to record assets acquired and liabilities assumed at their respective fair values at the date of acquisition.

Any amount of the purchase price paid that is in excess of the estimated fair value of the net assets acquired is recorded as goodwill.

We identified the Company's business combination as a critical audit matter because of the significant estimates and judgment used in determining the fair values assigned to acquired assets, especially those utilizing management’s assumptions in determining estimated future cash flows, and the significant auditor effort to audit these assumptions.

The Company determines fair value using widely accepted valuation techniques, primarily discounted cash flow models and market-multiple analyses.

These types of analyses require assumptions and estimates regarding industry and economic factors, the profitability of future business strategies, discount rates, weighted average cost of capital, weighted average return analysis, contributory asset charges, as well as future revenue, including revenue growth rates, gross margins, operating expenses, and cash flows.

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

We obtained an understanding, evaluated the design and tested the operating effectiveness of the controls over the Company’s accounting for the business combination under accounting principles generally accepted in the United States of America, and tested the estimates of the fair value of the acquired assets and assumed liabilities.

We determined that the business combination was accounted for in accordance with accounting principles generally accepted in the United States of America.

We obtained a schedule of, and related documentation for, the allocation of the purchase price to the assets acquired and liabilities assumed, including amounts assigned to goodwill and intangible assets, and performed a test of details on the underlying key data and information related to the business combination and fair value estimates.

We evaluated the appropriateness of specific key inputs supporting management’s estimates, comprising estimated future revenue, including revenue growth rates, gross margins, operating expenses, and cash flows.

Additionally, with the assistance of our internal valuation specialists, we evaluated the appropriateness of unobservable inputs such as weighted average cost of capital, weighted average return analysis, discount rates, and contributory asset charges.

/s/ WithumSmith+Brown, PC

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General and administrative costs 37,795 30,730

Impairment loss of long-lived asset 7,673 —

Corporate development costs 1,735 614

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Income before provision for income taxes 820 31,063

Provision for income taxes 7,775 3,294

Provision for income tax (benefit) expense ( 641 ) 7,775

Net income $ 1,461 $ 23,288

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Total current assets 62,401 43,602

Equipment and improvements, net 1,704 1,912

Operating lease right-of-use-assets 16,851 19,919

Goodwill 138,161 65,643

Intangible assets, net 124,777 40,884

Operating lease right-of-use assets 9,656 16,851

Deferred taxes, net 3,070 —

Equipment and improvements, net 1,590 1,704

Other long-term assets 186 328

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Current liabilities:

Operating lease liabilities - current $ 2,235 $ 2,261

Accrued payroll 9,444 9,125

Deferred revenue — 22,273

Accounts payable and accrued liabilities $ 29,704 $ 26,862

Debt obligations - current, net of deferred financing costs 17,188 —

Accrued payroll 13,794 9,444

Operating lease liabilities - current 3,463 2,235

Other current liabilities 638 —

Total current liabilities 64,787 38,541

Long-term liabilities:

Deferred taxes, net 1,534 1,176

Operating lease liabilities - long-term 16,461 19,374

Debt obligations - long-term, net of deferred financing costs 155,147 20,416

Operating lease liabilities - long-term 15,908 16,461

Deferred taxes, net — 1,534

Other long-term liabilities 1,560 —

Total long-term liabilities 172,615 38,411

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Additional paid-in capital 99,974 91,057

Retained earnings (accumulated deficit) 990 ( 22,298 )

Retained earnings 2,451 990

Total shareholders’ equity 102,439 92,060

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Deferred taxes, net ( 4,604 ) 358

Impairment loss of long-lived asset 7,673 —

Changes in operating assets and liabilities

Accounts receivable 6,845 ( 7,049 )

Other current assets 1,387 ( 766 )

Other assets 1,757 1,387

Accrued payroll ( 3,477 ) 319

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Accounts payable and accrued liabilities ( 75 ) ( 5,855 )

Other long-term assets and liabilities 131 486

Other liabilities 1,787 131

Net cash provided by operating activities 31,033 1,243

Investing activities

Business acquisition adjustment — 59

Business acquisition, net of cash acquired ( 180,572 ) —

Purchase of equipment and improvements ( 625 ) ( 872 )

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Financing activities

Proceeds from revolving line of credit 205,268 —

Repayment of revolving line of credit ( 195,721 ) —

Proceeds from debt obligations 168,000 17,000

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Payment of tax obligations resulting from net exercise of stock options ( 650 ) ( 281 )

Net cash used in financing activities ( 24,194 ) ( 22,927 )

Net cash provided by (used in) financing activities 150,151 ( 24,194 )

Net change in cash ( 13 ) ( 23,823 )

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Common stock surrendered for the exercise of stock options $ 238 $ 256

Cancellation of common stock $ — $ 68

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

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13,047 $ 13 $ 91,057 $ 990 $ 92,060

Issuance and fair value adjustment of common stock in business combination 527 1 6,538 — 6,539

Expense related to director restricted stock units — — 718 — 718

Expense related to employee stock options — — 1,960 — 1,960

Expense related to employee stock-based compensation — — 1,204 — 1,204

Stock issued for director restricted stock units 50 — — —

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Common stock surrendered for the exercise of stock options ( 67 ) — ( 650 ) — ( 650 )

Exercise of stock warrants 54 — 200 — 200

Net income — — — 1,461 1,461

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Expense related to employee stock options — — 1,960 — 1,960

Stock issued for director restricted stock units 53 — — — —

Exercise of stock options 257 — 637 — 637

Cancellation of common stock ( 6 ) — ( 68 ) — ( 68 )

Common stock surrendered for the exercise of stock options ( 31 ) — ( 281 ) — ( 281 )

Exercise of stock warrants 54 — 200 — 200

Net income — — — 23,288 23,288

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The accompanying consolidated financial statements include the accounts of DLH Holdings Corp.

and its subsidiaries (together with its subsidiaries, "DLH" or the "Company" and also referred to as "we," "us," and "our"), all of which are wholly-owned.

and its subsidiaries ("DLH" or the "Company" and also referred to as "we," "us," and "our"), all of which are wholly-owned.

All significant intercompany balances and transactions have been eliminated in consolidation.

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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 amounts reported in our prior year consolidated financial statements have been reclassified to conform to current year presentation.

Significant Accounting Policies

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles in the United States (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods.

The most significant of these estimates and assumptions relate to estimating revenues and costs including overhead and its allocation, estimating progress toward the completion of performance obligations, assessing fair value of acquired assets and liabilities accounted for through business acquisitions, valuing and determining the amortization periods for long-lived intangible assets, interest rate swaps, stock-based compensation, right-of-use assets and leases liabilities, and loss development on workers' compensation claims.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods.

The most significant of these estimates and assumptions relate to costs including overhead and its allocation, assessing fair value of acquired assets and liabilities accounted for through business acquisitions, valuing and determining the amortization periods for long-lived intangible assets, interest rate swaps, stock-based compensation, right-of-use assets and leases liabilities, and 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.

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The Company's revenues from contracts with customers are derived from offerings that include technology-enabled business process outsourcing, program management solutions, and public health research and analytics, substantially within the U.S.

government and its agencies, and to a lesser extent, subcontractors.

The Company has various types of contracts of which include time-and-materials contracts, cost-reimbursable contracts, and firm-fixed-price contracts.

government and its agencies.

The Company has various types of contracts including time-and-materials contracts, cost-reimbursable contracts, and firm-fixed-price contracts.

We consider a contract with a customer to exist when there is a commitment by both parties (customer and Company), payment terms are determinable, there is commercial substance, and collectability is probably in accordance with Accounting Standards Codification ("ASC") No.

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• Cost reimbursable - We record reimbursable costs as incurred, including an estimated share of the contractual fee earned.

• Firm fixed price - We recognize revenue over time using a straight-line measure of progress or 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 terms.

• Firm fixed price - We recognize revenue over time using a straight-line measure of progress.

Contract costs generally include direct costs such as labor, materials, subcontract costs, and indirect costs identifiable with or allocable to a specific contract.

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Contract liabilities - Amounts are a result of billings in excess of costs incurred or prepayment for services to be rendered.

Contract liabilities are primarily due to contract start-up funding provided under a contract awarded at the end of the fiscal year 2021, for which all performance obligations were completed by March 31, 2022.

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 carrying amounts of the Company's cash and cash equivalents, accounts receivable, contract assets, contract liabilities, 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.

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Lease Liabilities

We have leases for facilities and office equipment.

The Company has 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.

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The Company does not have any finance leases.

As of September 30, 2022, operating leases for facilities and equipment have remaining lease terms of 0.2 to 8.5 years.

As of September 30, 2023, operating leases for facilities and equipment have remaining lease terms of less than 1 year to 8 years.

At September 30, 2023, we performed an internal goodwill impairment evaluation on the year-end carrying value of approximately $ 138.2 million.

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Based on the results of the work performed, the Company has concluded that no impairment loss was warranted at September 30, 2023, 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.

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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.

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 assets 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.

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For the years ended September 30, 2023 and 2022, we recognized no interest and no penalties related to income taxes.

Stock-based Equity Compensation

Stock-based Compensation

The Company uses the fair value-based method for stock-based equity compensation.

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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.

Option awards may depend on the achievement of certain performance measures determined by the Compensation Committee of our Board.

Shares issued upon option exercise are newly issued common shares.

All awards to employees and non-employees are recorded at fair value on the date of the grant and expensed over the period of vesting.

The Company uses a Monte Carlo method to estimate the fair value of each stock option at the date of grant.

The Company uses the Monte Carlo method 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.

Compensation Expense

Compensation expense for the portion of equity awards for which the requisite service has not been rendered is recognized as the requisite service is rendered.

The compensation expense for that portion of awards has been based on the grant-date fair value of those awards as calculated for recognition purposes under applicable guidance.

Stock-based Compensation Expense

Stock-based Compensation expense for the portion of equity awards for which the requisite service has not been rendered is recognized as the requisite service is rendered.

The stock-based compensation expense for that portion of awards has been based on the grant-date fair value of those awards as calculated for recognition purposes under applicable guidance.

For options that vest based on the Company’s common stock achieving and maintaining defined market prices, the Company values the awards with a Monte Carlo method that utilizes various probability factors and other criterion in establishing fair value of the grant.

The related compensation expense is recognized over the service period.

The related stock-based compensation expense is recognized over the service period.

Stock based compensation is reliant on continued employment with the Company.

These arrangements are forfeited upon employee separation and accounted for as they occur.

Cash and Cash Equivalents

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Both billed and unbilled amounts are non-interest bearing, unsecured, and recognized at an estimated realizable value that include costs and fees, and are generally expected to be billed and received within a single year.

We evaluate our receivables on a quarterly basis and determine whether an allowance is appropriate based on specific collection issues.

We evaluate our receivables for expected credit losses and estimate expected credit losses if appropriate based on customers collections.

No allowance for doubtful accounts was deemed necessary at either September 30, 2023 or September 30, 2022.

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

As of September 30, 2022 and 2021, the Company did no t hold any treasury stock.

As of September 30, 2023 and 2022, the Company did not 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, 2022 and 2021, the Company has no t issued any preferred stock.

As of September 30, 2023 and 2022, the Company has not issued any preferred stock.

Interest Rate Swap

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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 consolidated financial position and the results of its operations, the specific impact is not readily determinable as of the date of these consolidated financial statements.

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

Management evaluates the impact of global markets and economic factors on our industry and the potential for adverse effects on the Company's consolidated financial position and its operations.

As of September 30, 2023, there was no indication of any global or economic impacts to our industry.

New Accounting Pronouncements

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Topic 848 provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions that reference the London Interbank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued because of reference rate reform.

The optional expedients and exceptions provided by Topic 848 can be applied for all entities

as of March 12, 2020 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 December 2022, FASB issued ASU 2022-06 "Reference Rate Reform (Topic 848):

Deferral of the Sunset Date of Topic 848" which defers the end date for electing the relief provided in Topic 848 from December 31, 2022 to December 31, 2024.

In the first quarter of fiscal 2023, the Company adopted the optional expedients and exceptions provided in Topic 848.

The adoption did not have a material impact on the Company’s consolidated financial statements.

DLH adopted the standard in fiscal year 2023 by virtue of the loan modification on December 8, 2022 that converted the basis of the interest rate from LIBOR to Secured Overnight Financing Rate ("SOFR").

DLH had no other contracts or offerings that used LIBOR as a basis for rates.

Business Combination

Acquisition of Grove Resource Solutions, LLC

On December 8, 2022, the Company acquired 100 % of the equity interests of GRSi for a purchase price of $ 188 million, inclusive of the working capital adjustment completed and paid.

The acquisition was financed through a combination of:

• borrowings of $ 181.5 million under the Company’s amended and restated credit facility;

• common stock issued of approximately 0.5 million shares, which were valued at $ 6.5 million in the aggregate, based on the shares issued to the previous owners as determined by the equity purchase agreement and the stock price on the acquisition date.

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

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

The Company has 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 purchase price for GRSi was $ 188 million adjusted to reflect acquired cash, assumed liabilities and net working capital adjustments.

The Purchase Agreement contains customary representations, warranties and covenants by the parties.

Subject to certain limitations and conditions, the seller and the equity holders of the seller do not have indemnity obligation for damages resulting from breaches or inaccuracies of the representations, warranties, and covenants of the seller, GRSi and the equity holders as set forth in the Purchase Agreement.

The Purchase Agreement also provided for the establishment of an escrow account in order to satisfy (i) any downward adjustment of the purchase price base on GRSi's net working capital at the closing and (ii) certain specified indemnification obligations of the seller and equity holders that may arise following the closing.

The escrow account is funded by an aggregate amount of approximately $ 4.3 million and the stock consideration.

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 representations and warranties of the seller, GRSi and the equity holders.

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

In accordance with ASU 2017-01, the Company evaluated the transaction as an acquisition of a business.

The Company has assessed the acquisition price to the fair value of the assets and liabilities of GRSi at the acquisition date.

We accounted for the total acquisition consideration and allocation of fair value of the related assets and liabilities at December 8, 2022 as follows (in thousands):

Purchase price for GRSi $ 187,997

Purchase price allocation:

Accounts receivable 25,468

Other current assets 1,354

Equipment and improvements, net 463

Intangible assets 98,688

Accounts payable and accrued expenses ( 2,449 )

Payroll liabilities ( 7,826 )

Other current liabilities ( 325 )

Other long-term assets and liabilities ( 781 )

Identifiable net assets acquired

Goodwill $ 72,658

All operating units are aggregated into a single reportable segment.

The acquisition of GRSi 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.

During the year ended September 30, 2023, following the completion of the acquisition, GRSi contributed approximately $ 107.0 million of revenue and $ 4.4 million of income from operations, which includes $ 8.2 million of non-cash intangible asset amortization expense.

The unaudited pro forma information below 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 GRSi 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 recording GRSi's intangible asset amortization.

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

• The removal of legacy GRSi director's fees.

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

The following table presents certain unaudited results for the year ended September 30, 2023 as though the acquisition of GRSi had occurred on October 1, 2022 (in thousands):

Twelve Months Ended

September 30,

Pro forma results 2023 2022

Revenue $ 402,958 $ 507,251

Net income 2,054 18,912

Number of shares outstanding - basic 13,704 12,830

Number of shares outstanding - diluted 14,431 14,179

Basic earnings per share $ 0.15 $ 1.47

Diluted earnings per share $ 0.14 $ 1.33

Revenue Recognition

1 unchanged sentence

Contract assets $ 20,542 $ 7,682

Contract liabilities $ — $ 22,473

Disaggregation of revenue from contracts with customers

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Revenue by customer for the years ended September 30, 2023 and 2022 (in thousands):

Department of Homeland Security $ 126,576 $ 2,485

Department of Veterans Affairs 126,106 110,078

Department of Health and Human Services $ 161,311 $ 102,201

Department of Veterans Affairs 138,862 126,106

Department of Defense 70,325 33,612

Department of Homeland Security 919 126,576

Other 4,455 6,678

Total Revenue $ 395,173 $ 246,094

$ 375,872 $ 395,173

Revenue by contract type for the years ended September 30, 2023 and 2022 (in thousands):

2 unchanged sentences

Firm Fixed Price 84,124 39,998

Total Revenue $ 395,173 $ 246,094

$ 375,872 $ 395,173

Revenue by whether the Company acts as a prime contractor or a subcontractor for the years ended September 30, 2023 and 2022 (in thousands):

1 unchanged sentence

Subcontractor 19,080 28,602

Total Revenue $ 395,173 $ 246,094

$ 375,872 $ 395,173

The following table summarizes lease balances presented on our consolidated balance sheets at September 30, 2023 and 2022 (in thousands):

Operating lease right-of-use assets $ 16,851 $ 19,919

Operating lease right-of-use assets (a) $ 9,656 $ 16,851

Operating lease liabilities, current $ 3,463 $ 2,235

Operating lease liabilities, long-term 15,908 16,461

Total operating lease liabilities $ 18,696 $ 21,635

Operating lease liabilities

$ 19,371 $ 18,696

(a) Impairment loss of long-lived assets is a loss associated with a reduction of the fair value of an asset prompted by a triggering event.

During the fourth quarter of fiscal 2023, DLH reduced its leased office space requirement by consolidating underutilized premises as part of an ongoing facility rationalization effort, to accurately reflect the operational needs of the business.

As a result, the Company has determined that its Right of Use Assets experienced a reduction in fair value below its associated carrying value and recorded a $ 7.7 million loss of fair value.

For the years ended September 30, 2023 and 2022, total lease costs for our operating leases are as follows (in thousands):

3 unchanged sentences

Sublease income (a) ( 282 ) ( 258 )

Total lease costs $ 3,524 $ 3,535

$ 4,011 $ 3,524

The Company subleases a portion of one of its leased facilities.

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The sublease term is 5 years and includes two additional 1 -year term extension options.

The Company's future minimum lease payments as of September 30, 2022 are as follows:

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

The Company's future minimum lease payments as of September 30, 2023 are as follows (in thousands):

For the Fiscal Year Ending September 30,

Thereafter 6,295

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Cash paid for amounts included in the measurement of lease liabilities $ 4,468 $ 3,411

New lease liabilities, net of new right-of-use-assets 120 —

Other lease information

$ 4,588 $ 3,411

Supporting Financial Information

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The following table summarizes other current assets presented on our consolidated balance sheets at September 30, 2023 and 2022 (in thousands):

Prepaid licenses and other expenses $ 1,330 $ 1,196

Prepaid insurance and benefits 743 737

Other receivables 994 945

Prepaid expenses 1,196 2,615

Other current assets $ 3,067 $ 2,878

Equipment and improvements, net

The following table summarizes Equipment and improvements, net presented on our consolidated balance sheets at September 30, 2022 and 2021 (in thousands):

Furniture and equipment $ 893 $ 958

Computer equipment 2,316 1,262

Computer software 4,407 4,353

Leasehold improvements 1,614 1,595

Total equipment and improvements 9,230 8,168

accumulated depreciation and amortization ( 7,526 ) ( 6,256 )

Equipment and improvements, net $ 1,704 $ 1,912

Depreciation and amortization was $ 1.1 million and $ 1.5 million for the years ended September 30, 2022 and 2021, respectively.

The change in the carrying amount of goodwill as follows presented on our consolidated balance sheets at September 30, 2023 and 2022 (in thousands):

Balance at September 30, 2022 $ 65,643

Increase from GRSi acquisition (a) 72,658

Tax Adjustment GRSI acquisition ( 140 )

The Company has completed its valuation assessment of the GRSi acquisition.

Please refer to Note 4 for more information.

Intangible assets, net

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Customer contracts and related customer relationships $ 113,622 $ 47,044

Covenants-not-to-compete 522 522

Backlog 37,249 15,237

Trade names 13,034 3,051

Covenants-not-to-compete 637 522

Total intangible assets $ 164,542 $ 65,854

1 unchanged sentence

Customer contracts and related customer relationships ( 29,929 ) ( 19,731 )

Covenants-not-to-compete ( 316 ) ( 264 )

Backlog ( 7,273 ) ( 3,875 )

Trade names ( 2,185 ) ( 1,048 )

Covenants-not-to-compete ( 378 ) ( 316 )

Total accumulated amortization $ ( 39,765 ) $ ( 24,970 )

Intangible assets, net $ 124,777 $ 40,884

Total amount of amortization expense for each of the years ended September 30, 2022 and 2021 was $ 6.6 million.

As of September 30, 2022, the estimated annual amortization expense is as follows:

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

Total amount of amortization expense for each of the years ended September 30, 2023 and 2022 was $ 14.8 million and $ 6.6 million, respectively.

As of September 30, 2023, the estimated annual amortization expense is as follows (in thousands):

For the Fiscal Year Ending September 30,

2024 $ 16,456

Thereafter 46,756

Total amortization expense $ 40,884

Amortization expense $ 124,777

At September 30, 2023, the weighted-average remaining amortization period in total was 8.3 years.

At September 30, 2023, the weighted-average amortization period for customer contracts and related customer relationships, backlog, trade names and covenants-not-to-compete was 8.2 years, 8.3 years, 8.7 years, 6 years, respectively.

Equipment and improvements, net

The following table summarizes equipment and improvements, net presented on our consolidated balance sheets at September 30, 2023 and 2022 (in thousands):

Furniture and equipment $ 1,790 $ 893

Computer equipment and software

Leasehold improvements 1,614 1,614

Total equipment and improvements $ 9,883 $ 9,230

accumulated depreciation and amortization ( 8,293 ) ( 7,526 )

Equipment and improvements, net $ 1,590 $ 1,704

Depreciation and amortization was $ 0.8 million and $ 1.1 million for the years ended September 30, 2023 and 2022, respectively.

Accounts payable and accrued liabilities

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Accrued workers' compensation insurance 2,369 4,880

Accrued Interest 1,309 —

Other accrued expenses 2,290 2,614

Accounts payable and accrued liabilities $ 29,704 $ 26,862

Accrued payroll

The following table summarizes accrued payroll presented on our consolidated balance sheets at September 30, 2023 and 2022 (in thousands):

Accrued Leave

$ 9,621 $ 6,345

Accrued payroll 2,487 1,946

Accrued payroll taxes 1,173 411

Accrued severance 513 742

Accrued payroll $ 13,794 $ 9,444

Debt obligations

The following table summarizes debt obligations presented on our consolidated balance sheets at September 30, 2023 and 2022 (in thousands):

Secured revolving line of credit $ 9,546 $ —

Secured term loan 169,813 22,000

unamortized deferred financing costs ( 7,024 ) ( 1,584 )

Net bank debt obligations $ 172,335 $ 20,416

current portion of debt obligations, net of deferred financing costs (a) ( 17,188 ) —

Long-term portion of debt obligations, net of deferred financing costs $ 155,147 $ 20,416

As of September 30, 2022 and 2021, we had no outstanding balance on our secured revolving line of credit and have satisfied mandatory principal payments on our secured term loan for the next twelve months.

As of September 30, 2023, we have satisfied mandatory principal payments on our secured term loan.

(a) Current portion comprises term loan amortization of $ 8.3 million and the $ 9.5 million outstanding balance on the secured revolving line of credit, net of $ 7.0 million of unamortized deferred financing costs.

Interest expense

The following table summarizes Interest expense presented on our consolidated statements of operations for the years ending September 30, 2022 and 2021 (in thousands):

The following table summarizes interest expense presented on our consolidated statements of operations for the years ended September 30, 2023 and 2022 (in thousands):

Interest expense (a) $ 14,153 $ 1,574

Amortization of deferred financing costs (b) 664 792

Interest income (b) ( 64 ) ( 23 )

Amortization of deferred financing costs (c) 2,182 664

Interest expense $ 16,271 $ 2,215

Interest expense on borrowing

Interest income

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

1 unchanged sentence

A summary of our credit facilities as of September 30, 2023 and 2022 is as follows (in millions):

Arrangement Loan Balance Interest Loan Balance Interest

Arrangement Loan Balance Interest Arrangement Loan Balance Interest

Secured term loan (a) due December 8, 2027

$ 169.8 SOFR 1 + 4.1 %

Secured term loan (a) due September 30, 2025 $ 22.0 LIBOR 2 + 2.5 %

$ 46.8 LIBOR* + 3.5 %

Secured revolving line of credit (b) due December 8, 2027

$ 9.5 SOFR 1 + 4.1 %

Secured revolving line of credit (b) due September 30, 2025 $ — LIBOR 2 + 2.5 %

$ — LIBOR* + 3.5 %

*LIBOR rate as of September 30, 2022 and 2021 was 2.52 % and 0.08 %, respectively.

As of September 30, 2022 and 2021, our LIBOR rate is subject to a minimum floor of 0.5 %.

(a) Represents the principal amounts payable on our secured term loan, which is secured by liens on substantially all of the assets of the Company.

The principal of the secured term loan is payable in quarterly installments with the remaining balance due on September 30, 2025.

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

2 LIBOR rate as of September 30, 2022 was 2.52 %.

(a) Represents the principal amounts payable on our term loan, which is secured by liens on substantially all of the assets of the Company.

The principal of the term loan is payable in quarterly installments with the remaining balance due on December 8, 2027.

On 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 on September 30, 2023 is $ 16.2 million and matures in 2024 and the fixed rate of 1.61 %.

On January 31, 2023, we executed an additional floating-to-fixed interest rate swap with FNB;

the notional amount as of September 30, 2023 is $ 96.0 million, it matures in January 2026, and the fixed rate is 4.10 %.

The total floating-to-fixed swap balance as of September 30, 2023 is $ 112.2 million.

As a result of entering these agreements, for the twelve months ended September 30, 2023, interest expense has been decreased by approximately $ 0.9 million.

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, and (ii) a Funded Indebtedness to Adjusted EBITDA ratio not exceeding the ratio of 3.75 :1.0 to 2.75 :1.0 through maturity.

Adjusted EBITDA ratio is calculated by dividing the Company's total interest-bearing debt by net income adjusted to exclude (i) interest and other expenses, (ii) provision for or benefit from income taxes, if any, (iii) depreciation and amortization, and (iv) non-recurring charges, losses or expenses to include transaction and non-cash equity expense.

The secured term loan has an interest rate spread range from 2.5 % to 4.5 % depending on the funded indebtedness to adjusted EBITDA ratio.

We are in compliance with all loan covenants and restrictions.

We are required to pay quarterly amortization payments commencing in December 2020 through September 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 through 2025, with the remaining unpaid loan balance due at maturity in September 2025.

The quarterly payments are in equal installments.

As of September 30, 2022, the Company made voluntary prepayments of $ 34.0 million, bringing the total amount paid on the secured term loan to $ 48.0 million.

As of September 30, 2022, we have satisfied mandatory principal amortization until September 30, 2025.

(i) a minimum fixed charge coverage ratio of at least 1.25 to 1.00, and (ii) a total leverage ratio not exceeding the ratio of 4.50 :1.00 to 2.00 :1.00 through maturity.

The total leverage ratio is calculated by dividing the Company's total interest-bearing debt by net income adjusted to exclude (i) interest and other expenses, (ii) provision for or benefit from income taxes, if any, (iii) depreciation and amortization, and (iv) non-cash charges, losses or expenses, including stock-based compensation, and (v) non-recurring charges, losses or expenses to include transaction and non-cash equity expense.

We are in compliance with all loan covenants and restrictions as of September 30, 2023.

We are required to pay quarterly amortization payments, which commenced in December 2022.

The annual amortization amounts are $ 14.3 million each for fiscal years 2023 and 2024, $ 19.0 million each for fiscal years 2025 and 2026, and $ 23.8 million for fiscal year 2027, with the remaining unpaid loan balance due at maturity in December 2027.

The quarterly payments are equal installments.

The Company made a mandatory payment of $ 3.6 million and voluntary prepayments of $ 5.9 million during the quarter ended September 30, 2023 bringing the outstanding principal balance on the secured term loan to $ 169.8 million.

We have satisfied the mandatory principal payment the quarter ended December 31, 2023 and partially satisfied the mandatory prepayment for the quarter ended March 31, 2024.

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.

5 unchanged sentences

For additional information regarding the schedule of future payment obligations, please refer to Note 1 1 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 on September 30, 2022 is $ 16.2 million and matures in 2024.

The remaining outstanding balance of our secured 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, 2022, interest expense increased by approximately $ 0.2 million.

(b) The secured revolving line of credit has a ceiling of up to $ 70.0 million;

1 unchanged sentence

Borrowing on the secured revolving line of credit is secured by liens on substantially all of the assets of the Company.

The Company accessed funds from the secured revolving line of credit during the year, but has no outstanding balance at September 30, 2022.

The Company's total borrowing availability, based on eligible accounts receivables at September 30, 2022, was $ 25.0 million.

The Company accessed funds from the secured revolving line of credit during the year, which had a $ 9.5 million outstanding balance at September 30, 2023.

As part of the secured revolving line of credit, the lenders agreed to a sublimit of $ 10.0 million for letters of credit for the account of the Company, subject to applicable procedures.

The secured 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.

Stock-based Compensation and Equity Grants

5 unchanged sentences

As of September 30, 2023, there were 1.0 million shares available for grant.

Stock-based compensation expense, presented in the table below, is recorded in general and administrative expenses included in our consolidated statements of operations for the years ending September 30, 2022 and 2021 (in thousands):

Total stock-based compensation expense, presented in the table below, is recorded in general and administrative expenses included in our consolidated statements of operations for the years ended September 30, 2023 and 2022 (in thousands):

DLH employees (a) $ 1,204 $ 1,960

Non-employee directors (b) 718 648

Total stock option expense $ 2,608 $ 1,660

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, and stock option grants to NEO and non-NEO company employees.

The restricted stock units totaled 140,404 restricted stock units issued and outstanding at September 30, 2022.

In the first quarter of fiscal year 2022, we issued 53,510 restricted stock units to the Company's non-employee directors, all of which vested as of September 30, 2022.

The shares of common stock underlying such restricted stock units were issued on September 30, 2022.

Stock option expense

$ 1,922 $ 2,608

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

The RSUs issued and outstanding totaled 211,228 and 140,404 at September 30, 2023 and 2022, respectively.

During the fiscal year ended September 30, 2023, 197,174 RSUs were granted to Executive Officers.

Of the RSUs granted, 141,892 have performance-based vesting criteria and the remaining 55,282 have service-based vesting criteria.

At a 50 % volatility and assumptions of a 3-year term and the performance vesting criteria results in an indicated a fair value.

The RSUs granted during the fiscal year ended September 30, 2023, as follows using the Monte Carlo Method.

Grant Date Performance Vesting Base Performance Vesting Criteria (Years) Calculated Fair Value

January 27, 2023 Revenue Revenue increase at the end of the performance period as compared to the year ended September 30, 2022 3 $ 3.51

January 27, 2023 Stock price Stock price is at least $ 33.21 per share average for the 30 days prior to the end of the performance period

Results based on 100,000 simulations

Equity grants of RSUs were made in accordance with DLH compensation policy for non-employee directors and a total of 50,367 and 53,510 restricted stock units were issued and outstanding at September 30, 2023 and 2022, respectively.

These grants have service-based vesting criteria and vest at the end of this fiscal year.

Unrecognized stock-based compensation expense

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Unrecognized expense for DLH employees (a) $ 7,107 $ 5,214

Unrecognized expense

$ 7,107 $ 5,214

On a weighted average basis, this expense is expected to be recognized within the next 4.20 years.

2 unchanged sentences

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

Weighted Average (in thousands)

(in thousands) Average Remaining Aggregate

A summary of the Company's stock option awards is as follows:

Weighted Average

Average Remaining Aggregate

Number of Exercise Contractual Intrinsic

Shares Price Term Value

Options outstanding, September 30, 2021 2,374 $ 5.60 5.6 $ 15,899

(in thousands) (in years) (in thousands)

Outstanding, September 30, 2022 2,392 $ 7.05 5.4 $ 13,566

Granted (a) 470 11.57 — —

Exercised ( 393 ) 3.42 — —

Options outstanding, September 30, 2022 2,392 $ 7.05 5.4 $ 13,566

Cancelled ( 191 ) 9.54 — —

Outstanding, September 30, 2023 2,278 $ 8.40 5.8 $ 8,693

Vested and exercisable, September 30, 2023 1,608 $ 6.43 4.3 $ 8,648

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, 2023, as follows using the Monte Carlo method:

2 unchanged sentences

Grant Date Price Price Price (Years) Fair Value

November 8, 2021 $ 16.01 $ 16.01 Service 10 $ 9.68

November 8, 2021 $ 16.01 $ 16.01 $ 24.00 10 $ 9.68

November 8, 2021 $ 16.01 $ 16.01 $ 28.00 10 $ 9.64

November 8, 2021 $ 16.01 $ 16.01 $ 32.00 10 $ 9.58

January 26, 2023 $ 11.66 $ 11.66 $ 15.00 10 $ 7.41

August 31, 2023 $ 11.08 $ 11.08 $ 14.25 10 $ 7.41

August 31, 2023 $ 11.08 $ 11.08 $ 16.50 10 $ 7.41

Results based on 100,000 simulations

1 unchanged sentence

Number of Shares

Vested and exercisable (a) 2,117 1,662

Unvested (b) 275 712

Vested and exercisable 1,608 2,117

Unvested (a) 670 275

Options outstanding 2,278 2,392

Weighted average exercise price of vested and exercisable shares was $ 5.86 and $ 3.91 at September 30, 2022 and 2021, respectively.

Aggregate intrinsic value was approximately $ 13.6 million and $ 13.9 million at September 30, 2022 and 2021, respectively.

Weighted average contractual term remaining was 4.9 years and 4.0 years at September 30, 2022 and 2021, respectively.

Certain awards vest upon satisfaction of certain performance criteria.

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Equipment operating leases 50 50 — — — — —

Total contractual obligations $ 45,542 $ 3,299 $ 3,156 $ 24,995 $ 3,092 $ 2,487 $ 8,513

Workers' Compensation

We accrue workers' compensation expense based on claims submitted, applying actuarial loss development factors to estimate the costs incurred but not yet recorded.

Our accrued liability for claims development as of September 30, 2022 and September 30, 2021 was approximately $ 4.9 million and $ 7.0 million, respectively.

Contractual obligations

$ 202,898 $ 12,923 $ 22,928 $ 22,700 $ 26,377 $ 111,673 $ 6,297

Legal Proceedings

8 unchanged sentences

Deferred expense ( 4,464 ) 424

Total expense $ 7,775 $ 3,294

Income tax (benefit) expense $ ( 641 ) $ 7,775

The following table presents the significant differences between our income taxes at the federal statutory rate and the Company's effective tax rate for continuing operations for the years ending September 30, 2023 and 2022 (in thousands):

2 unchanged sentences

Other permanent items ( 292 ) 94

Total $ 7,775 $ 3,294

Income tax (benefit) expense $ ( 641 ) $ 7,775

An analysis of the Company's deferred tax assets and liabilities at September 30, 2023 and 2022 is as follows (in thousands):

3 unchanged sentences

Accrued compensation 2,094 2,108

Capitalized transaction costs 973 —

Right of use asset/liability 1,669 —

Interest limitation 2,601 —

Total deferred tax assets $ 8,900 $ 3,072

2 unchanged sentences

Deferred tax liabilities:

Equipment and intangible assets ( 3,833 ) ( 3,507 )

Depreciation on fixed assets ( 418 ) ( 458 )

Amortization on identified intangibles and goodwill ( 4,050 ) ( 3,375 )

Accrued expenses ( 515 ) ( 407 )

1 unchanged sentence

Total deferred tax liabilities $ ( 4,983 ) $ ( 4,344 )

Net deferred tax liability $ ( 1,534 ) $ ( 1,176 )

Quarterly Financial Data (Unaudited)

A summary of quarterly information is as follows (in thousands, except per share data)

2022 Quarters

Revenue $ 152,801 $ 108,699 $ 66,440 $ 67,233

Income from operations 11,219 10,254 7,114 4,691

Interest expense ( 672 ) ( 554 ) ( 512 ) ( 477 )

Income before provision for income taxes 10,547 9,700 6,602 4,214

Provision for income taxes 2,743 2,522 1,738 772

Net income $ 7,804 $ 7,178 $ 4,864 $ 3,442

Earnings per share:

Basic $ 0.61 $ 0.56 $ 0.38 $ 0.27

Diluted $ 0.55 $ 0.50 $ 0.34 $ 0.24

2021 Quarters

First Second Third Fourth

Revenue $ 57,852 $ 61,506 $ 61,555 $ 65,182

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

Interest expense ( 1,080 ) ( 1,004 ) ( 893 ) ( 808 )

Income before provision for income taxes 2,555 3,616 4,046 3,222

Provision for income taxes 741 1,049 1,166 339

Net income $ 1,814 $ 2,567 $ 2,880 $ 2,883

Earnings per share:

Basic $ 0.15 $ 0.20 $ 0.23 $ 0.23

Diluted $ 0.13 $ 0.19 $ 0.21 $ 0.21

a Results for the company’s sustaining business less the FEMA task orders was presented annually in Item 7 and on a quarterly basis within the quarterly report (10Q) for fiscal year 2022's first, second and third quarters.

Net deferred tax assets (liabilities) $ 3,070 $ ( 1,534 )

Employee Benefit Plans

1 unchanged sentence

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 $ 2.2 million and $ 1.5 million for the years ending September 30, 2022 and 2021.

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

The Company recorded related expense of $ 2.6 million and $ 2.2 million for the years ending September 30, 2023 and 2022, respectively.

Participants are always fully vested in their elective contributions and vest 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 8. Financial Statements and Supplementary Data