DLH Holdings Corp. 10-K

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Forward Looking and Cautionary Statements You should read the following discussion in conjunction with the consolidated financial statements and the notes to those statements included elsewhere in this Annual Report on Form 10-K for the year ended September 30, 2023. This discussion contains certain statements that are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. Certain statements contained in this Management’s Discussion and Analysis are forward-looking statements that involve risks and uncertainties. In addition, any statements that refer to expectations, projections or other characterizations of future events or circumstances are forward-looking statements. The forward-looking statements are not historical facts, but rather are based on current expectations, estimates, assumptions and projections about our industry and business. Our actual results could differ materially from the results contemplated by these forward-looking statements. Business Overview: DLH is a holding company operating through a number of operating subsidiaries. In December 2022, we acquired Grove Resource Solutions, LLC ("GRSi"), which provides research and development, systems engineering and integration, and digital transformations solutions to federal agencies, notably the National Institutes of Health ("NIH"), U.S. Navy and U.S. Marine Corps. We deliver improved health and cyber readiness solutions for federal government customers through digital transformation, science research and development, and systems engineering and integration. We derive 99% of our revenue from agencies of the Federal government, providing services to several agencies including the HHS, VA, DoD, and DHS. The following table summarizes the revenues by customer for the years ended September 30, 2023 and 2022, respectively (in thousands): 2023 2022 Revenue Percent of total revenue Revenue Percent of total revenue Department of Health and Human Services $ 161,311 42.9 % $ 102,201 25.9 % Department of Veterans Affairs 138,862 37.0 % 126,106 31.9 % Department of Defense 70,325 18.7 % 33,612 8.5 % Department of Homeland Security 919 0.2 % 126,576 32.0 % Customers with less than 10% share of total revenue 4,455 1.2 % 6,678 1.7 % Revenue $ 375,872 100.0 % $ 395,173 100.0 % The following table summarizes revenues by our markets for the years ended September 30, 2023 and 2022, respectively (in thousands): 2023 2022 Revenue Percent of total revenue Revenue Percent of total revenue Defense and Veteran Health Solutions $ 209,187 55.7 % $ 159,719 40.4 % Human Services and Solutions 110,068 29.3 % 165,970 42.0 % Public Health and Life Sciences 56,617 15.0 % 69,484 17.6 % Revenue $ 375,872 100.0 % $ 395,173 100.0 % 24 Forward Looking Business Trends: Our mission is to expand our position as a trusted provider of technology-enabled healthcare and public health services, medical logistics, and readiness enhancement services to active duty personnel, veterans, and civilian populations and communities. Our primary focus within the defense agency markets includes cyber security, military service members' and veterans' requirements for telehealth services, behavioral healthcare, medication therapy management, process management, clinical systems support, and healthcare delivery. Our primary focus within the civilian agency markets includes digital transformation, IT modernization, healthcare and social programs delivery and readiness. These include compliance monitoring on large scale programs, technology-enabled program management, consulting, and digital communications solutions ensuring that education, health, and social standards are being achieved within underserved and at-risk populations. We believe these business development priorities will position the Company to expand within top national priority programs and funded areas. Federal budget outlook for fiscal year 2024 : The President’s budget proposal for fiscal year ("FY") 2024 outlines many initiatives that include investments to rebuild our country’s physical infrastructure, strengthen supply chains, combat inflation, expand economic opportunity, respond to the changing climate, sustain and strengthen national defense, and bolster America's public health infrastructure. Specifically, the investment in public health infrastructure involves improving the nation’s readiness for future pandemics and other biological threats, expanding access to vaccines and healthcare, and defeating diseases and epidemics such as, but not limited to, the opioid and HIV/AIDS epidemics. The budget's initiatives are further reflected in the budget requests for the HHS, VA, and DoD. While Congress has not completed the final appropriation bills for the government’s 2024 fiscal year, the Company continues to believe that its key programs benefit from bipartisan support and does not expect a material impact on its current business base from budget negotiations. If the appropriations bills are not timely enacted, government agencies operate under a continuing resolution ("CR"), which may negatively impact our business due to delays in new program starts, delays in contract award decisions, and other factors. On November 16, 2023, the President signed a CR providing funds to the federal government through January 19, 2024 for several agencies and through February 2, 2024 for the remaining. When a CR expires, unless appropriations bills have been passed by Congress and signed by the President, or a new CR is passed and signed into law, the government must cease operations, or shutdown, except in certain emergency situations or when the law authorizes continued activity. We continuously review our operations in an attempt to identify programs potentially at risk from CRs so that we can consider appropriate contingency plans. Our customer's missions have received broad support from the legislative and executive branches of the federal government. As such, we do not anticipate or expect any significant changes to our operations. Department of Veterans Affairs The VA is requesting a total of $325.1 billion for FY 2024, an increase of $16.6 billion above the FY 2023 enacted level. It includes $142.8 billion in discretionary funding, an increase of $3.0 billion, and $182.3 billion in mandatory funding, an increase of $13.6 billion from FY 2023 enacted. The VA research program is expected to allocate increased funding to advance the Department’s understanding of the impact of traumatic brain injury and toxic exposure(s) on long-term health outcomes, coronavirus related research and impacts, and precision oncology. The FY 2024 budget request for the VA's research enterprise is $938.0 million, an increase of $22.0 million from the FY 2023 budget, excluding mandatory funding. In addition, the FY 2024 budget estimates $4.9 billion will be spent on telehealth treatment in FY 2024, an increase of $78.0 million from the FY 2023 estimate. The VA is continuing to expand this program because of its ability to leverage VA providers and provide better services to veterans. Department of Health and Human Services The FY 2024 budget request proposes $144.3 billion in discretionary budget authority for HHS and $1.7 trillion in mandatory funding for the department. The budget proposes $48.6 million in discretionary and mandatory resources for NIH, an increase of $920.0 million above FY 2023 enacted, to address the opioid crisis and ending HIV crises, make new investments in pandemic preparedness and nutrition research, and drive biomedical innovations. The budget also requests $45.0 million for telehealth, which is an increase of $7.0 million above FY 2023 enacted, to promote health services with telehealth technologies. The budget also provides for investment in programs that improve the health and well-being of young children and their families. This includes $13.1 billion for the Office of Head Start, principally to expand eligibility for participation in the program. 25 Department of Defense The Military Health System ("MHS") is one of the largest health care systems, serving over 9.5 million beneficiaries. As a part of the DoD, the Defense Health Agency ("DHA") manages a global health care network of military and civilian medical professionals, military hospitals and clinics around the world, and supports the delivery of integrated health services to MHS beneficiaries. The funding and personnel to support MHS’s mission is referred to as the Unified Medical Budget ("UMB"). The FY 2024 UMB request for the Defense Health Program ("DHP") is $58.7 billion, an increase of 0.5% from FY 2023 enacted. It is anticipated that COVID-19 costs will decrease in FY 2024, driving a reduction in the budget request for DHP In Direct Care and Private Sector Care. Industry consolidation among federal government contractors: There has been active consolidation and a strong increase in merger and acquisition activity among federal government contractors over the past few years that we expect to continue, fueled by public companies leveraging strong balance sheets. Companies often look to acquisitions that augment core capabilities, contracts, customers, market differentiators, stability, cost synergies, and higher margin and revenue streams. Potential impact of federal contractual set-aside laws and regulations: The Federal government has an overall goal of 23% of prime contracts flowing through small businesses. As previously reported, various agencies within the federal government have policies that support small business goals, including the adoption of the “Rule of Two” by the VA, which provides that the agency shall award contracts by restricting competition for the contract to service-disabled or other veteran-owned businesses. To restrict competition pursuant to this rule, the contracting officer must reasonably expect that at least two of these businesses, which are capable of delivering the services, will submit offers and that the award can be made at a fair and reasonable price that offers best value to the U.S, When two qualifying small businesses cannot be identified, the VA may proceed to award contracts following a full and open bid process. The Company believes that its past performance in this market and track record of success provide a competitive advantage. However, the effect of set-aside provisions may limit our ability to compete for prime contractor positions on programs that we recompete or that we have targeted for growth. In these cases, the Company may elect to join a team with an eligible contractor as prime for specific pursuits that align with our core markets and corporate growth strategy. 26 Results of Operations Fiscal Year Ended September 30, 2023 as Compared to Fiscal Year Ended September 30, 2022 The following table summarizes, for the years indicated, consolidated statements of operations data expressed (in thousands except for per share amounts, and as percentages of revenue): Year Ended September 30, 2023 2022 Change Revenue $ 375,872 100.0 % $ 395,173 100.0 % $ (19,301) Cost of operations Contract costs 296,016 78.8 % 322,886 81.8 % (26,870) General and administrative costs 37,795 10.1 % 30,730 7.8 % 7,065 Impairment loss of long-lived asset 7,673 2.0 % — — % 7,673 Corporate development costs 1,735 0.5 % 614 0.1 % 1,121 Depreciation and amortization 15,562 4.1 % 7,665 1.9 % 7,897 Total operating costs 358,781 95.5 % 361,895 91.6 % (3,114) Income from operations 17,091 4.5 % 33,278 8.4 % (16,187) Interest expense 16,271 4.3 % 2,215 0.6 % 14,056 Income before provision for income tax (benefit) expense 820 0.2 % 31,063 7.8 % (30,243) Provision for income tax (benefit) expense (641) (0.2) % 7,775 2.0 % (8,416) Net income $ 1,461 0.4 % $ 23,288 5.8 % $ (21,827) Net income per share - basic $ 0.11 $ 1.82 $ (1.71) Net income per share - diluted $ 0.10 $ 1.64 $ (1.54) Revenue For the year ended September 30, 2023 revenue was $375.9 million, a decrease of $19.3 million or 4.9% over the prior year period. The decrease in revenue is due primarily to the completion of two task orders awarded under a FEMA contract to support Alaska with its response to COVID-19. The revenue contribution from those task orders in fiscal year 2022 was $125.8 million. Included in fiscal 2023 revenue is $107.0 million contributed from GRSi subsequent to the acquisition. Cost of Operations Contract costs primarily include the costs associated with providing services to our customers. These costs are generally comprised of direct labor and associated fringe benefit costs, subcontract cost, other direct costs, and the related management and infrastructure costs. For the year ended September 30, 2023, the contract costs decreased as compared to the prior fiscal year by $26.9 million to approximately $296.0 million primarily due to completion of the FEMA task orders, offset by the contribution from the acquisition of GRSi. General and administrative costs are for employees and third parties not directly providing services to our customers, including but not limited to executive management, bid and proposal, accounting, and human resources. These costs increased as compared to the prior fiscal year by $7.1 million to approximately $37.8 million primarily due to the acquisition of GRSi. Impairment loss of long-lived assets is a loss associated with a reduction of the fair value of an asset during the fourth quarter of fiscal 2023, DLH reduced its leased office space requirement by consolidating underutilized premises as part of a 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 of $7.7 million. Corporate development costs are incremental due diligence costs, such as legal and accounting fees. Fiscal year 2023 and 2022 costs were associated with the acquisition of GRSi. 27 For the year ended September 30, 2023, depreciation and amortization costs were approximately $0.8 million and $14.8 million, respectively, as compared to approximately $1.1 million and $6.6 million, respectively for the prior fiscal year, an aggregate increase of $7.9 million which is primary due to the acquisition of GRSi during the fiscal year. Interest Expense Interest expense includes items such as interest expense and amortization of deferred financing costs on debt obligations. For the year ended September 30, 2023, interest expense was $16.3 million compared to interest expense, net of $2.2 million in the prior year, an increase of approximately $14.1 million over the prior year period. The increase in interest expense was primarily due to the increase in long-term debt associated with the acquisition of GRSi during the fiscal year. Provision for Income Taxes Provision for Income taxes for the fiscal year ended September 30, 2023 was a reduction of tax by $0.6 million, a decrease of approximately $8.4 million from the prior fiscal year. The effective tax rate was a negative 72.2% for the fiscal year ending September 30, 2023 and 24.8% for the fiscal year ending September 30, 2022. Non-GAAP Financial Measures for Fiscal 2023 and 2022 The Company is presenting certain non-GAAP measures regarding its financial performance for the fiscal years ended September 30, 2023 and 2022. The measures presented are Adjusted Revenue, Adjusted Operating Income, Adjusted Net Income, Adjusted Diluted Earnings Per Share ("EPS"), Earnings Before Interest Taxes Depreciation and Amortization (“EBITDA”), EBITDA Margin on Revenue, Adjusted EBITDA, and Adjusted EBITDA Margin on Adjusted Revenue. In calculating these measures, we have added the corporate development costs associated with completing the GRSi acquisition to our results for fiscal year 2023 and 2022, removed the impairment loss on certain real estate assets, and removed the contribution from the FEMA task orders from the results for fiscal year 2022. These resulting measures present our financial performance compared to results delivered in the prior year period. Definitions of these additional non-GAAP measures are set forth below. We have prepared these additional non-GAAP measures to eliminate the impact of items that we do not consider indicative of ongoing operating performance due to their inherently unusual or extraordinary nature. These non-GAAP measures of performance are used by management to conduct and evaluate its business during its review of operating results for the periods presented. Management and the Company's Board utilize these non-GAAP measures to make decisions about the use of the Company's resources, analyze performance between periods, develop internal projections and measure management performance. We believe that these non-GAAP measures are useful to investors in evaluating the Company's ongoing operating and financial results and understanding how such results compare with the Company's historical performance. These supplemental performance measurements may vary from and may not be comparable to similarly titled measures by other companies in our industry. Adjusted Revenue, Adjusted Operating Income, Adjusted Net Income, Adjusted Diluted EPS, EBITDA, Adjusted EBITDA, EBITDA Margin on Revenue, and Adjusted EBITDA Margin on Adjusted Revenue are not recognized measurements under accounting principles generally accepted in the United States, or GAAP, and when analyzing our performance investors should (i) evaluate each adjustment in our reconciliation to the nearest GAAP financial measures and (ii) use the aforementioned non-GAAP measures in addition to, and not as an alternative to, revenue, operating income, net income or diluted EPS, as measures of operating results, each as defined under GAAP. We have defined these non-GAAP measures as follows: “Adjusted Revenue” represents revenue less the contribution to revenue from the short-term FEMA task orders. “Adjusted Operating Income” represents operating income plus the corporate development costs associated with completing the GRSi acquisition in fiscal 2023 and 2022 and the impairment loss on the right of use asset incurred only in fiscal 2023, less the contribution from the FEMA task orders, which occurred only in fiscal 2022. “Adjusted Net Income” represents net income including the corporate development costs associated with completing the acquisition, the impairment loss on the right of use asset, as well as the FEMA task orders. “Adjusted Diluted EPS” represents diluted EPS calculated using Adjusted Net Income as opposed to net income. "EBITDA" represents net income before income taxes, interest, depreciation and amortization. 28 “Adjusted EBITDA” represents net income before income taxes, interest, depreciation and amortization and the corporate costs associated with completing the acquisition, and the impairment loss on the right of use asset less the contribution from FEMA task orders. “Adjusted EBITDA Margin on Adjusted Revenue” is calculated as Adjusted EBITDA divided by Adjusted Revenue. Below is a reconciliation of Adjusted Revenue, Adjusted Operating Income, Adjusted Net Income, Adjusted Diluted EPS, EBITDA, Adjusted EBITDA, EBITDA Margin on Revenue and Adjusted EBITDA Margin on Adjusted Revenue reported for the fiscal years ended September 30, 2023 and 2022 compared to the most directly comparable financial measure calculated and presented in accordance with GAAP as follows (in thousands, except for per share amounts): 29 2023 2022 Change Adjusted Revenue Revenue $ 375,872 $ 395,173 $ (19,301) Less: FEMA task orders to support Alaska (a) — 125,773 (125,773) Adjusted Revenue $ 375,872 $ 269,400 $ 106,472 Adjusted Operating Income Operating Income $ 17,091 $ 33,278 $ (16,187) Impairment loss of long-lived asset (c) 7,673 — 7,673 Corporate development costs (b) 1,735 614 1,121 Less: FEMA task orders to support Alaska (d) — 12,479 (12,479) Adjusted Operating Income $ 26,499 $ 21,413 $ 5,086 Adjusted Net income (e) Net Income $ 1,461 23,288 $ (21,827) Impairment loss of long-lived asset (c) 7,673 — 7,673 Corporate development costs (b) 1,735 614 1,121 Less: FEMA task orders to support Alaska (d) — 12,479 (12,479) Adjustment for tax effect (g) (2,993) 3,007 (6,000) Adjusted Net Income $ 7,876 $ 14,430 $ (6,554) Adjusted Diluted Earnings Per Share (f) Weighted average diluted shares outstanding 14,431 14,179 252 Diluted earnings per share $ 0.10 $ 1.64 $ (1.54) Adjusted Diluted Earnings Per Share $ 0.55 $ 1.01 $ (0.46) EBITDA, Adjusted EBITDA, EBITDA Margin on Revenue & Adjusted EBITDA Margin on Adjusted Revenue Net Income $ 1,461 $ 23,288 $ (21,827) Interest expense 16,271 2,215 14,056 Depreciation and amortization 15,562 7,665 7,897 Provision for income taxes (641) 7,775 (8,416) EBITDA $ 32,653 $ 40,943 $ (8,290) Corporate development costs (b) 1,735 614 1,121 Impairment loss of long-lived asset (c) 7,673 — 7,673 Less: FEMA task order to support Alaska (d) — 12,479 (12,479) Adjusted EBITDA $ 42,061 $ 29,078 $ 12,983 Net income margin on Revenue 0.4% 5.9% EBITDA Margin on Revenue 8.7% 10.4% Adjusted EBITDA Margin on Adjusted Revenue 11.2% 10.8% (a): Represents revenue adjusted to exclude revenue from the short-term FEMA task orders during the fiscal year ended September 30, 2022. 30 (b): Represents corporate development costs we incurred to complete the GRSi transaction. These costs primarily include legal counsel, financial due diligence, customer market analysis and representation and warranty insurance premiums. (c): Represents impairment loss of certain long-lived real estate assets 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. (d):Adjusted operating income represents the Company’s consolidated operating income, determined in accordance with GAAP, adjusted to add the corporate development costs associated with the GRSi acquisition for fiscal year 2023, adjusted to add back the impairment loss of certain real estate assets and adjusted to exclude the operating income derived from the FEMA task orders. Operating income for the FEMA task orders for the fiscal year ended September 30, 2022, is derived by subtracting from the revenue attributable to the tasks orders of $125.8 million the following amounts associated with such task orders: contract costs $112.1 million and general & administrative costs of $1.2 million. (e) Adjusted net income represents the Company’s consolidated net income, determined in accordance with GAAP, adding back the impairment loss of long-lived assets and corporate development costs as defined, less the net income derived from the FEMA task orders. There was no net income derived from the FEMA task orders during the fiscal year ended September 30, 2023. For the fiscal year ended September 30, 2022, net income for the FEMA task orders is derived by subtracting from the revenue attributable to the tasks orders of $125.8 million the following amounts associated with such task orders: contract costs of $112.1 million, general & administrative costs of $1.2 million, and provision for income taxes of $3.2 million. (f) Adjusted diluted earnings per share (adjusted diluted EPS) is calculated by adding back the effect on the Company's diluted EPS determined in accordance with GAAP, of the impairment loss of long-lived assets and corporate development costs as defined, as well as their tax effect as defined, and subtracting the effect on diluted EPS for the FEMA task orders. (g) Tax effect is the impact the tax expense per the tax provision Liquidity and Capital Management The Company generated operating income of approximately $17.1 million and $33.3 million for the years ended September 30, 2023 and 2022, respectively and net income of approximately $1.5 million and $23.3 million for the years ended September 30, 2023 and 2022 respectively. Cash flows from operations totaled approximately $31.0 million and $1.2 million for the years ended September 30, 2023 and 2022, respectively. The increase in cash from operations was principally a result of a decrease in accounts receivable. We used $181.2 million and $0.9 million of cash in investing activities during fiscal years 2023 and 2022, respectively. The cash utilized was predominantly due to the acquisition of GRSi and capital expenditures in fiscal years 2023 and 2022, respectively. Cash used provided by financing activities during the fiscal year ended September 30, 2023 was approximately $150.2 million and cash used in financing activities during the fiscal year ended September 30, 2022 was $24.2 million, respectively. The cash provided by financial activities during the fiscal year ended September 30, 2023, was primarily due to the debt incurred to finance the acquisition of GRSi during the fiscal year. The activity in the fiscal year ended September 30, 2022 was primarily due to the early repayment of principal on our secured term loan. During the years ended September 30, 2023 and 2022, the Company repaid approximately $20.2 million and $24.8 million of secured term loan principal, respectively. We expect to continue to use the operating cash flow to pay outstanding debt. 31 A summary of the change in cash is presented below for the years ended September 30, 2023 and 2022 (in thousands): 2023 2022 Net cash provided by operating activities $ 31,033 $ 1,243 Net cash used in investing activities (181,197) (872) Net cash provided by (used in) financing activities 150,151 (24,194) Net change in cash $ (13) $ (23,823) Sources of Cash As of September 30, 2023, our immediate sources of liquidity include cash of approximately $0.2 million, accounts receivable, and access to our secured revolving line of credit. This credit facility provides us with access of up to $70.0 million, subject to certain conditions including eligible accounts receivable. As of September 30, 2023, we had unused borrowing capacity of $32.0 million. The Company's present operating liabilities are largely predictable and consist of vendor and payroll related obligations. We believe that our current investment and financing obligations are adequately covered by cash generated from profitable operations and that planned operating cash flow should be sufficient to support our operations for twelve months from the date of issuance of these consolidated financial statements. Credit Facilities A summary of our credit facilities as of September 30, 2023 is as follows (in millions): Lender Arrangement Loan Balance Interest * Maturity Date First National Bank of Pennsylvania Secured term loan (a) $ 169.8 SOFR 1 + 4.1% December 8, 2027 First National Bank of Pennsylvania Secured revolving line of credit (b) $ 9.5 SOFR 1 + 4.1% December 8, 2027 1 Secured Overnight Financing Rate ("SOFR") as of September 30, 2023 was 5.3%. 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. The remaining outstanding balance of our secured term loan is subject to interest rate fluctuations. (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 December 8, 2027. (b) The secured revolving line of credit has a ceiling of up to $70.0 million and a maturity date of December 8, 2027. The Company accessed funds from the secured revolving line of credit during the year, but had $9.5 million outstanding balance at September 30, 2023. The secured term loan and secured revolving line of credit are secured by liens on substantially all of the assets of the Company. The provisions of the secured term loan and secured revolving line of credit, including financial covenants, are fully described in Note 8 to the consolidated financial statements. 32 Contractual Obligations as of September 30, 2023 Payments Due By Period Next 12 2-3 4-5 More than 5 (Amounts in thousands) Total Months Years Years Years Debt obligations $ 179,359 $ 8,313 $ 38,000 $ 133,046 $ — Facility operating leases 23,489 3,501 7,962 5,668 6,358 Equipment operating lease 50 50 — — — Contractual obligations $ 202,898 $ 11,864 $ 45,962 $ 138,714 $ 6,358 Critical Accounting Policies and Estimates Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the U.S.requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates include valuation of goodwill and intangible assets, and stock-based compensation. In addition, the Company estimates overhead charges and allocates such charges throughout the year. Actual results could differ from those estimates. Revenue Recognition We recognize revenue over time when there is a continuous transfer of control to our customer. For our U.S. government contracts, this continuous transfer of control to the customer is supported by clauses in the contract that allow the U.S. government to unilaterally terminate the contract for convenience, pay us for costs incurred plus a reasonable profit and take control of any work in process. When control is transferred over time, revenue is recognized based on the extent of progress towards completion of the performance obligation. For service contracts, we satisfy our performance obligations as services are rendered. We use cost-based input and time-based output methods to measure progress. For time-and-materials contracts, revenue is recognized to the extent of billable rates times hours delivered plus materials and other reimbursable costs incurred. Revenue for cost-reimbursable contracts is recorded as reimbursable costs are incurred, including an estimated share of the applicable contractual fees earned. 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. Contract costs are expensed as incurred. Estimated losses are recognized when identified. Refer to Note 5 of the accompanying notes to our consolidated financial statements contained elsewhere in this Annual Report on Form 10-K for discussion relative to the Company's revenue recognition in accordance with ASC-606. Long-lived Assets Our long-lived assets include equipment and improvements, right-of-use assets, intangible assets, and goodwill. The Company continues to review its long-lived assets for possible impairment or loss of value at least annually or more frequently upon the occurrence of an event or when circumstances indicate that a reporting unit’s carrying amount is greater than its fair value. Equipment and improvements are stated at cost, less accumulated depreciation and amortization. Depreciation and amortization are provided using the straight-line method over the estimated useful asset lives (P3Y to P7Y) and the shorter of the initial lease term or estimated useful life for leasehold improvements. Costs incurred to place the asset in service are capitalized and costs incurred after implementation are expensed. Amortization expense is recorded when the software is placed in service on a straight-line basis over the estimated useful life of the software. Right-of-use assets are measured at the present value of future minimum lease payments, including all probable renewals, plus lease payments made to the lessor before or at lease commencement and indirect costs, less incentives received. Our right-of-use assets include long-term leases for facilities and equipment and are amortized over their respective lease terms. 33 Intangible assets are originally recorded at fair value and amortized on a straight-line basis over their assessed useful lives. The assessed useful lives of the assets are P10Y. Goodwill The Company continues to review its goodwill for possible impairment or loss of value at least annually or more frequently upon the occurrence of an event or when circumstances indicate that a reporting unit’s carrying amount is greater than its fair value. At September 30, 2023, we performed an internal goodwill impairment evaluation with a qualitative assessment of factors to determine whether it was necessary to perform the goodwill impairment test. Based on the results of the work performed, the Company has concluded that no impairment loss was warranted at September 30, 2023, as no change in business conditions occurred which would have a material adverse effect on the valuation of goodwill. Provision for Income Taxes The Company accounts for income taxes in accordance with the liability method, whereby deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities, using enacted tax rates in effect for the year in which the differences are expected to reverse. Deferred tax assets are reflected on the consolidated balance sheet when it is determined that it is more likely than not that the asset will be realized. This guidance also requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some or all of the deferred tax assets will not be realized. The Company has fully utilized its net operating loss carryforwards. Stock-based Equity Compensation The Company uses the fair value-based method for stock-based equity compensation. Options issued are designated as either an incentive stock or a non-statutory stock option. No option may be granted with a term of more than P10Y from the date of grant. 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. Any consideration paid by the option holders to purchase shares is credited to capital stock. New Accounting Pronouncements A discussion of recently issued accounting pronouncements is described in Note 3 of the accompanying notes to our consolidated financial statements contained elsewhere in this Annual Report, and we incorporate such discussion by reference.