DLH Holdings Corp. 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA Consolidated Financial Statements Page Report of Independent Registered Public Accounting Firm (PCAOB ID Number 100) 36 Consolidated Statements of Operations for the years ended September 30, 2023 and 2022 39 Consolidated Balance Sheets as of September 30, 2023 and 2022 40 Consolidated Statements of Cash Flows for the years ended September 30, 2023 and 2022 41 Consolidated Statements of Changes in Shareholders' Equity for the years ended September 30, 2023 and 2022 42 Notes to Consolidated Financial Statements 43 35 Report of Independent Registered Public Accounting Firm To the Board of Directors and Shareholders of DLH Holdings Corp. Opinion on the Consolidated Financial Statements and Internal Control Over Financial Reporting We have audited the accompanying consolidated balance sheets of DLH Holdings Corp. and Subsidiaries (the “Company”) as of September 30, 2023 and 2022, the related consolidated statements of operations, cash flows, and changes in shareholders’ equity for each of the years in the two-year period ended September 30, 2023, and the related notes (collectively referred to as the "consolidated financial statements"). 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 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 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. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. 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 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. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. Definition and Limitations of Internal Control Over Financial Reporting 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. 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. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. 36 Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. Workers' Compensation Claims Liabilities Critical Audit Matter Description The Company uses a combination of insured and self-insurance programs to cover workers’ compensation claims. Workers’ compensation claims 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, 2023 required an increased audit effort. 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. Response: 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 parties 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 liability. 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 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. (“GRSi”). 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. Response: 37 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 We have served as the Company's auditor since 2007. East Brunswick, New Jersey December 6, 2023 PCAOB ID Number 100 38 DLH HOLDINGS CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Amounts in thousands except per share amounts) Year Ended September 30, 2023 2022 Revenue $ 375,872 $ 395,173 Cost of Operations Contract costs 296,016 322,886 General and administrative costs 37,795 30,730 Impairment loss of long-lived asset 7,673 — Corporate development costs 1,735 614 Depreciation and amortization 15,562 7,665 Total operating costs 358,781 361,895 Income from operations 17,091 33,278 Interest expense 16,271 2,215 Income before provision for income taxes 820 31,063 Provision for income tax (benefit) expense ( 641 ) 7,775 Net income $ 1,461 $ 23,288 Net income per share - basic $ 0.11 $ 1.82 Net income per share - diluted $ 0.10 $ 1.64 Weighted average common shares outstanding Basic 13,704 12,830 Diluted 14,431 14,179 The accompanying notes are an integral part of these consolidated financial statements. 39 DLH HOLDINGS CORP. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Amounts in thousands except par value of shares) September 30, 2023 September 30, 2022 ASSETS Current assets: Cash $ 215 $ 228 Accounts receivable 59,119 40,496 Other current assets 3,067 2,878 Total current assets 62,401 43,602 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 Total assets $ 339,841 $ 169,012 LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities: 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: 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 Total liabilities 237,402 76,952 Shareholders' equity: Common stock, $ 0.001 par value; authorized 40,000 shares; issued and outstanding 13,950 and 13,047 at September 30, 2023 and 2022, respectively 14 13 Additional paid-in capital 99,974 91,057 Retained earnings 2,451 990 Total shareholders’ equity 102,439 92,060 Total liabilities and shareholders' equity $ 339,841 $ 169,012 The accompanying notes are an integral part of these consolidated financial statements. 40 DLH HOLDINGS CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in thousands) Year Ended September 30, 2023 2022 Operating activities Net income $ 1,461 $ 23,288 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 15,562 7,665 Amortization of deferred financing costs charged to interest expense 2,182 664 Stock-based compensation expense 1,922 2,608 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 assets 1,757 1,387 Accrued payroll ( 3,477 ) 319 Deferred revenue — ( 22,273 ) Accounts payable and accrued liabilities ( 75 ) ( 5,855 ) Other liabilities 1,787 131 Net cash provided by operating activities 31,033 1,243 Investing activities Business acquisition, net of cash acquired ( 180,572 ) — Purchase of equipment and improvements ( 625 ) ( 872 ) Net cash used in investing activities ( 181,197 ) ( 872 ) 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 Repayments of debt obligations ( 20,188 ) ( 41,750 ) Payments of deferred financing costs ( 7,666 ) — Proceeds from issuance of common stock upon exercise of options and warrants 1,108 837 Payment of tax obligations resulting from net exercise of stock options ( 650 ) ( 281 ) Net cash provided by (used in) financing activities 150,151 ( 24,194 ) Net change in cash ( 13 ) ( 23,823 ) Cash - beginning of year 228 24,051 Cash - end of year $ 215 $ 228 Supplemental disclosures of cash flow information Cash paid during the year for interest $ 14,153 $ 1,528 Cash paid during the year for income taxes $ 5,604 $ 9,282 Supplemental disclosures of non-cash activity Common stock surrendered for the exercise of stock options $ 238 $ 256 The accompanying notes are an integral part of these consolidated financial statements. 41 DLH HOLDINGS CORP. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY For the years ended September 30, 2023 and 2022 (Amounts in thousands) Common Stock Additional Paid-In Capital Retained Earnings (Accumulated Deficit) Total Shareholders' Equity Shares Amount Year Ended September 30, 2023 Balance at September 30, 2022 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-based compensation — — 1,204 — 1,204 Stock issued for director restricted stock units 50 — — — Exercise of stock options 393 — 1,107 — 1,107 Common stock surrendered for the exercise of stock options ( 67 ) — ( 650 ) — ( 650 ) Net income — — — 1,461 1,461 Balance at September 30, 2023 13,950 $ 14 $ 99,974 $ 2,451 $ 102,439 Common Stock Additional Paid-In Capital Accumulated Deficit Total Shareholders' Equity Shares Amount Year Ended September 30, 2022 Balance at September 30, 2021 12,714 $ 13 $ 87,893 $ ( 22,298 ) $ 65,608 Expense related to director restricted stock units — — 648 — 648 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 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 Balance at September 30, 2022 13,047 $ 13 $ 91,057 $ 990 $ 92,060 The accompanying notes are an integral part of these consolidated financial statements. 42 DLH HOLDINGS CORP. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS September 30, 2023 1. Basis of Presentation and Principles of Consolidation The accompanying consolidated financial statements include the accounts of DLH Holdings Corp. 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. The accompanying financial statements have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP") and with the instructions to Form 10-K, Regulation S-X, and Regulation S-K. 2. Significant Accounting Policies Use of Estimates 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. The results of these estimates form the basis for making judgments about the carrying values of assets and liabilities as well as identifying and assessing the accounting treatment with respect to commitments and contingencies. We revise material accounting estimates if changes occur, such as more experience is acquired, additional information is obtained, or there is new information on which an estimate was or can be based. Actual results could differ from those estimates. Revenue 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. 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. 606, "Revenue from Contracts with Customers" ("Topic 606"). We recognize revenue over time when there is a continuous transfer of control to our customer as performance obligations are satisfied. For our U.S. government contracts, this continuous transfer of control to the customer is transferred over time and revenue is recognized based on the extent of progress toward completion of the performance obligation. We consider control to transfer when we have a right to payment. In some instances, the Company commences providing services prior to formal approval to begin work from the customer. The Company considers these factors, the risks associated with commencing work, and legal enforceability in determining whether a contract exists under Topic 606. Contract modification can occur throughout the life of the contract and can affect the transaction price, extend the period of performance, adjust funding, or create new performance obligations. We review each modification to assess the impact of these contract changes to determine if it should be treated as part of the original performance obligation or as a separate contract. Contract modifications impact performance obligations when the modification either creates new or changes the existing enforceable rights and obligations. The effect of a contract modification on the transaction price and our measure of progress for the performance obligation to which it relates is recognized as an adjustment to revenue and profit cumulatively. Furthermore, a significant change in one or more estimates could affect the profitability of our contracts. We recognize adjustments in estimated profit on contracts in the period identified. 43 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 based on the contract type. • Time and material - We bill the customer per labor hour and per material, and revenue is recognized in the amount invoiced as the amount corresponds directly to the value of our performance to date. Revenue is recognized to the extent of billable rates times hours delivered plus materials and other reimbursable costs incurred. • 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. Contract costs generally include direct costs such as labor, materials, subcontract costs, and indirect costs identifiable with or allocable to a specific contract. Costs are expensed as incurred and include an estimate of the contractual fees earned. Contract costs incurred for U.S. government contracts, including indirect costs, are subject to audit and adjustment by various government audit agencies. Historically, our adjustments have not been material. Contract assets - Amounts are invoiced as work progresses in accordance with agreed-upon contractual terms. In part, revenue recognition occurs before we have the right to bill, resulting in contract assets. These contract assets are reported within Accounts receivable, net on our consolidated balance sheets and are invoiced in accordance with payment terms defined in each contract. Period end balances will vary from period to period due to agreed-upon contractual terms. Contract liabilities - Amounts are a result of billings in excess of costs incurred or prepayment for services to be rendered. Fair Value of Financial 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. Long-lived Assets Our long-lived assets include equipment and improvements, intangible assets, right-of-use assets, and goodwill. The Company continues to review its long-lived assets for possible impairment or loss of value at least annually or more frequently upon the occurrence of an event or when circumstances indicate that a reporting unit’s carrying amount is greater than its fair value. Equipment and improvements are stated at cost. Depreciation and amortization are provided using the straight-line method over the estimated useful asset lives ( 3 to 7 years) and the shorter of the initial lease term or estimated useful life for leasehold improvements. Intangible assets (other than goodwill) are originally recorded at fair value and are amortized on a straight-line basis over their estimated useful lives of 10 years. Maintenance and repair costs are expensed as incurred. Right-of-use assets are measured at the present value of future minimum lease payments, including all probable renewals, plus lease payments made to the lessor before or at lease commencement and indirect costs paid, less incentives received. Our right-of-use assets include long-term leases for facilities and equipment and are amortized over their respective lease terms. Our right-of-use-assets are recognized as the present value of the future minimum lease payments over the lease term less unamortized lease incentives and the balance remaining in deferred rent liability under ASC 840. Lease Liabilities 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. Our lease payments consist of fixed and in-substance fixed amounts attributable to the use of the underlying asset over the lease term. Variable lease payments that do not depend on an index rate or are not in-substance fixed payments are excluded in the measurement of right-of-use assets and lease liabilities and are expensed in the period incurred. The incremental borrowing rate on our secured term loan is used in determining the present value of future minimum lease payments. Some of our lease agreements include options to extend the lease term or terminate the lease. These options are accounted for in our right-of-use assets and lease liabilities when it is reasonably certain that the Company will extend the lease term or terminate the lease. The Company does not have any finance leases. As of September 30, 2023, operating leases for facilities and equipment have remaining lease terms of less than 1 year to 8 years. 44 Goodwill At September 30, 2023, we performed an internal goodwill impairment evaluation on the year-end carrying value of approximately $ 138.2 million. We performed a qualitative assessment of factors to determine whether it was necessary to perform the goodwill impairment test. Based on the results of the work performed, the Company has concluded that no impairment loss was warranted at September 30, 2023, as no change in business conditions occurred which would have a material adverse effect on the valuation of goodwill. Notwithstanding this evaluation, factors including non-renewal of a major contract or other substantial changes in business conditions could have a material adverse effect on the valuation of goodwill in future periods and the resulting charge could be material to future periods’ results of operations. Similarly, there were no impairments during the prior year ended September 30, 2022. Provision for Income Taxes The Company accounts for income taxes in accordance with the asset and 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. We account for uncertain tax positions by recognizing the financial statement effects of a tax position only when, based upon the technical merits, it is more-likely-than-not that the position will be sustained upon examination. We had no uncertain tax positions at either September 30, 2023 and 2022. We report interest and penalties as a component of provision for income taxes. For the years ended September 30, 2023 and 2022, we recognized no interest and no penalties related to income taxes. Stock-based Compensation The Company uses the fair value-based method for stock-based equity compensation. Options issued are designated as either an incentive stock or a non-statutory stock option. No option may be granted with a term of more than 10 years from the date of grant. Option awards may depend on 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 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. 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 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 We consider all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents. We maintain cash balances at financial institutions that are insured by the Federal Deposit Insurance Corporation (“FDIC”) up to $ 250,000 . Deposits held with financial institutions may exceed the $ 250,000 limit. Receivables Receivables include amounts billed and currently due from customers where the right to consideration is unconditional and amounts unbilled. 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 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. 45 Earnings Per Share Basic earnings per share is calculated by dividing income available to common shareholders by the weighted average number of common stock outstanding and restricted stock grants that vested or are likely to vest during the period. Diluted earnings per share is calculated by dividing income available to common shareholders by the weighted average number of basic common shares outstanding, adjusted to reflect potentially dilutive securities. Diluted earnings per share is calculated using the treasury stock method. Treasury Stock The Company periodically purchases its own common stock that is traded on public markets as part of announced stock repurchase programs. The repurchased common stock is classified as treasury stock on the consolidated balance sheets and held at cost. As of September 30, 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, 2023 and 2022, the Company has not issued any preferred stock. Interest Rate Swap The Company uses derivative financial instruments to manage interest rate risk associated with its variable debt. The Company's objective in using these interest rate derivatives is to manage its exposure to interest rate movements and reduce volatility of interest expense. The gains and losses due to changes in the fair value of the interest rate swap agreements completely offset changes in the fair value of the hedged portion of the underlying debt. Offsetting changes in fair value of both the interest rate swaps and the hedged portion of the underlying debt are recognized in interest expense in the consolidated statements of operations. The Company does not hold or issue any derivative instrument for trading or speculative purposes. Risks & Uncertainties Management 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. 3. New Accounting Pronouncements In March 2020 and January 2021, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2020-04, "Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting” and ASU No. 2021-01, “Reference Rate Reform (Topic 848): Scope,” respectively (collectively, “Topic 848”). 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. 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. 4. 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: 46 • borrowings of $ 181.5 million under the Company’s amended and restated credit facility; and • 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: Cash 747 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 115,339 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. 47 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 5. Revenue Recognition The following table summarizes the contract balances recognized within the Company's consolidated balance sheets at September 30, 2023 and 2022 (in thousands): 2023 2022 Contract assets $ 20,542 $ 7,682 Disaggregation of revenue from contracts with customers We disaggregate our revenue from contracts with customers by customer, contract type, as well as whether the Company acts as prime contractor or subcontractor. We believe these categories best depict how the nature, amount, timing and uncertainty of our revenue and cash flows are affected by economic factors. The following series of tables presents our revenue disaggregated by these categories: Revenue by customer for the years ended September 30, 2023 and 2022 (in thousands): 2023 2022 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 Revenue $ 375,872 $ 395,173 48 Revenue by contract type for the years ended September 30, 2023 and 2022 (in thousands): 2023 2022 Time and Materials $ 209,951 $ 308,944 Cost Reimbursable 81,797 46,231 Firm Fixed Price 84,124 39,998 Revenue $ 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): 2023 2022 Prime Contractor $ 356,792 $ 366,571 Subcontractor 19,080 28,602 Revenue $ 375,872 $ 395,173 6. Leases The following table summarizes lease balances presented on our consolidated balance sheets at September 30, 2023 and 2022 (in thousands): 2023 2022 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 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): 2023 2022 Operating $ 3,911 $ 3,548 Short-term 287 114 Variable 95 120 Sublease income (a) ( 282 ) ( 258 ) Lease costs $ 4,011 $ 3,524 (a): The Company subleases a portion of one of its leased facilities. The sublease is classified as an operating lease with respect to the underlying asset. The sublease term is 5 years and includes two additional 1 -year term extension options. 49 The Company's future minimum lease payments as of September 30, 2023 are as follows (in thousands): For the Fiscal Year Ending September 30, 2024 $ 4,612 2025 3,928 2026 3,700 2027 2,627 2028 2,377 Thereafter 6,295 Total future minimum lease payments $ 23,539 Less: imputed interest ( 4,168 ) Present value of future minimum lease payments $ 19,371 Less: current portion of operating lease liabilities ( 3,463 ) Long-term operating lease liabilities $ 15,908 At September 30, 2023, the weighted-average remaining lease term and weighted-average discount rate are 6.3 years and 6.3 %, respectively. The calculation of the weighted-average discount rate was determined based on borrowing terms from our secured term loan. Other information related to our leases is as follows for the years ending September 30, 2023 and 2022 (in thousands): 2023 2022 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 7. Supporting Financial Information Accounts receivable The following table summarizes accounts receivable presented on our consolidated balance sheets at September 30, 2023 and 2022 (in thousands): 2023 2022 Billed receivables $ 38,577 $ 32,814 Contract assets 20,542 7,682 Allowance for doubtful accounts — — Accounts receivable $ 59,119 $ 40,496 Other current assets The following table summarizes other current assets presented on our consolidated balance sheets at September 30, 2023 and 2022 (in thousands): 2023 2022 Prepaid licenses and other expenses $ 1,330 $ 1,196 Prepaid insurance and benefits 743 737 Other receivables 994 945 Other current assets $ 3,067 $ 2,878 50 Goodwill 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 ) Goodwill $ 138,161 Ref (a); The Company has completed its valuation assessment of the GRSi acquisition. Please refer to Note 4 for more information. Intangible assets, net The following table summarizes intangible assets, net presented on our consolidated balance sheets at September 30, 2023 and 2022 (in thousands): 2023 2022 Intangible assets Customer contracts and related customer relationships $ 113,622 $ 47,044 Backlog 37,249 15,237 Trade names 13,034 3,051 Covenants-not-to-compete 637 522 Total intangible assets $ 164,542 $ 65,854 Less accumulated amortization: Customer contracts and related customer relationships ( 29,929 ) ( 19,731 ) 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, 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 2025 16,456 2026 15,721 2027 14,694 2028 14,694 Thereafter 46,756 Amortization expense $ 124,777 51 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): 2023 2022 Furniture and equipment $ 1,790 $ 893 Computer equipment and software 6,479 6,723 Leasehold improvements 1,614 1,614 Total equipment and improvements $ 9,883 $ 9,230 Less: 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 The following table summarizes accounts payable and accrued liabilities presented on our consolidated balance sheets at September 30, 2023and 2022 (in thousands): 2023 2022 Accounts payable $ 12,603 $ 11,886 Accrued benefits 6,414 3,857 Accrued bonus and incentive compensation 4,719 3,625 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): 2023 2022 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 52 Debt obligations The following table summarizes debt obligations presented on our consolidated balance sheets at September 30, 2023 and 2022 (in thousands): 2023 2022 Secured revolving line of credit $ 9,546 $ — Secured term loan 169,813 22,000 Less: unamortized deferred financing costs ( 7,024 ) ( 1,584 ) Net bank debt obligations $ 172,335 $ 20,416 Less: 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, 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 ended September 30, 2023 and 2022 (in thousands): 2023 2022 Interest expense (a) $ 14,153 $ 1,574 Interest income (b) ( 64 ) ( 23 ) Amortization of deferred financing costs (c) 2,182 664 Interest expense $ 16,271 $ 2,215 (a): Interest expense on borrowing (b): Interest income (c): Amortization of expenses related to secured term loan and secured revolving line of credit. 8. Credit Facilities A summary of our credit facilities as of September 30, 2023 and 2022 is as follows (in millions): 2023 2022 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 % 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 % 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. 53 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. Among other matters, we must comply with limitations on: granting liens; incurring other indebtedness; maintenance of assets; investments in other entities and extensions of credit; mergers and consolidations; and changes in nature of business. The loan agreement also requires us to comply with certain quarterly financial covenants including: (i) a minimum fixed charge coverage ratio of at least 1.25 to 1.00, and (ii) a 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. The loan agreement states that an excess cash flow recapture payment must be made equal to (a) 75 % of the excess cash flow for the immediately preceding fiscal year in which indebtedness to consolidated EBITDA ratio is greater than or equal to 2.50 :1.00; (b) 50 % of the excess cash flow for the immediately preceding fiscal year in which the funded indebtedness to consolidated EBITDA Ratio is less than 2.50 :1.00 but greater than or equal to 1.50 :1.00; or (c) 0 % of the excess cash flow for the immediately preceding fiscal year in which the funded indebtedness to consolidated EBITDA Ratio is less than 1.50 :1.00. In addition, the Company must make additional mandatory prepayment of amounts outstanding based on proceeds received from asset sales and sales of certain equity securities or other indebtedness. Due to the voluntary prepayment of term debt, there was no excess cash flow payment required. For additional information regarding the schedule of future payment obligations, please refer to Note 1 1 Commitments and Contingencies . (b) The secured revolving line of credit has a ceiling of up to $ 70.0 million; as of September 30, 2023, we had unused borrowing capacity of $ 32.0 million, which is net of outstanding letters of credit. 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, 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. 9. Stock-based Compensation and Equity Grants Stock-based compensation expense Options issued under equity incentive plans were designated as either an incentive stock or a non-statutory stock option. No option was granted with a term of more than 10 years from the date of grant. Exercisability of option awards may depend on achievement of certain performance measures determined by the Compensation Committee of our Board. Shares issued upon option exercise are newly issued shares. As of September 30, 2023, there were 1.0 million shares available for grant. 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): 54 2023 2022 DLH employees (a) $ 1,204 $ 1,960 Non-employee directors (b) 718 648 Stock option expense $ 1,922 $ 2,608 (a): 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. Volatility 50% 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 3 $ 2.92 Notes: Results based on 100,000 simulations (b): 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 Unrecognized stock-based compensation expense is presented in the table below for the years ending September 30, 2023 and 2022 (in thousands): 2023 2022 Unrecognized expense for DLH employees (a) $ 7,107 $ 5,214 Unrecognized expense $ 7,107 $ 5,214 (a): On a weighted average basis, this expense is expected to be recognized within the next 4.20 years. Stock option activity for the year ended September 30, 2023 : The aggregate intrinsic value in the table below represents the total pretax intrinsic value (i.e., the difference between the Company’s closing stock price on the last trading day of the period and the exercise price, times the number of shares) that would have been received by the option holders had all option holders exercised their in the money options on those dates. This amount will change based on the fair market value of the Company’s stock. A summary of the Company's stock option awards is as follows: 55 Weighted Weighted Average Average Remaining Aggregate Number of Exercise Contractual Intrinsic Shares Price Term Value (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 — — 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 (a): 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: Vesting Expected Strike Stock Threshold Term Calculated Grant Date Price Price Price (Years) Fair Value 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 Note: Results based on 100,000 simulations Stock options shares outstanding, vested and unvested for the years ended September 30, 2023 and 2022 (in thousands): Number of Shares 2023 2022 Vested and exercisable 1,608 2,117 Unvested (a) 670 275 Options outstanding 2,278 2,392 (a): Certain awards vest upon satisfaction of certain performance criteria. 10. Earnings Per Share Basic earnings per share is calculated by dividing income available to common shareholders by the weighted average number of common shares outstanding and restricted stock grants that vested or are likely to vest during the period. Diluted earnings per share is calculated by dividing income available to common shareholders by the weighted average number of basic common shares outstanding, adjusted to reflect potentially dilutive securities. Diluted earnings per share is calculated using the treasury stock method. Earnings Per Share information is presented in the table below for the years ending September 30, 2023 and 2022 (in thousands except for per share amounts): 56 2023 2022 Numerator: Net income $ 1,461 $ 23,288 Denominator: Denominator for basic net income per share - weighted-average outstanding shares 13,704 12,830 Effect of dilutive securities: Stock options and restricted stock 727 1,349 Denominator for diluted net income per share - weighted-average outstanding shares $ 14,431 $ 14,179 Net income per share - basic $ 0.11 $ 1.82 Net income per share - diluted $ 0.10 $ 1.64 11. Commitments and Contingencies Contractual Obligations as of September 30, 2023 (in thousands): Payments Due Per Fiscal Year Total 2024 2025 2026 2027 2028 Thereafter Debt obligations $ 179,359 $ 8,313 $ 19,000 $ 19,000 $ 23,750 $ 109,296 $ — Facility operating leases 23,489 4,560 3,928 3,700 2,627 2,377 6,297 Equipment operating leases 50 50 — — — — — Contractual obligations $ 202,898 $ 12,923 $ 22,928 $ 22,700 $ 26,377 $ 111,673 $ 6,297 Legal Proceedings As a commercial enterprise and employer, the Company is subject to various claims and legal actions in the ordinary course of business. These matters can include professional liability, employment-relations issues, workers’ compensation, tax, payroll and employee-related matters, other commercial disputes arising in the course of its business, and inquiries and investigations by governmental agencies regarding our employment practices or other matters. The Company is not aware of any pending or threatened litigation that it believes is reasonably likely to have a material adverse effect on its results of operations, financial position or cash flows. 12. Related Party Transactions The Company has determined that for the years ended September 30, 2023 and 2022 and through the filing date of this report, there were no significant related party transactions that have occurred which require disclosure through the date that these consolidated financial statements were issued. 57 13. Provision for Income Taxes The significant components of provision for income taxes from continuing operations are summarized as follows for the years ending September 30, 2023 and 2022 (in thousands): 2023 2022 Current expense $ 3,823 $ 7,351 Deferred expense ( 4,464 ) 424 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): 2023 2022 Income taxes at the federal statutory rate $ 187 $ 6,523 State taxes, net ( 536 ) 1,158 Other permanent items ( 292 ) 94 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): 2023 2022 Deferred tax assets: Net operating loss carry forwards, net $ 855 $ 296 Stock based compensation 708 668 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 Less: valuation allowance ( 847 ) ( 262 ) Total deferred tax assets, net $ 8,053 $ 2,810 Deferred tax liabilities: Depreciation on fixed assets ( 418 ) ( 458 ) Amortization on identified intangibles and goodwill ( 4,050 ) ( 3,375 ) Accrued expenses ( 515 ) ( 407 ) Right of use liability — ( 104 ) Total deferred tax liabilities $ ( 4,983 ) $ ( 4,344 ) Net deferred tax assets (liabilities) $ 3,070 $ ( 1,534 ) 14. Employee Benefit Plans As of September 30, 2023, the Company maintains a 401(k) Plan (the "401(k) Plan"), a defined contribution and supplemental pension plan for the benefit of its eligible employees. 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 $ 2.6 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. 58 15. Subsequent Events Management has evaluated subsequent events through the date that the Company's consolidated financial statements were issued. Based on this evaluation, the Company has determined that no further subsequent events have occurred which require disclosure through the date that these consolidated financial statements were issued. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.